Milk in the Northeast and Other Marketing Areas; Final Decision on Proposed Amendments to Marketing Agreements and Orders and Termination of a Portion of the Proceeding, 9247-9279 [2013-02623]
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Vol. 78
Thursday,
No. 26
February 7, 2013
Part IV
Department of Agriculture
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Agricultural Marketing Service
7 CFR Part 1000
Milk in the Northeast and Other Marketing Areas; Final Decision on
Proposed Amendments to Marketing Agreements and Orders and
Termination of a Portion of the Proceeding; Proposed Rule
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Federal Register / Vol. 78, No. 26 / Thursday, February 7, 2013 / Proposed Rules
DEPARTMENT OF AGRICULTURE
Agricultural Marketing Service
7 CFR Part 1000
[Doc. No. AMS–DA–07–0026; AO–14–A77 et
al.; DA–07–02]
Milk in the Northeast and Other
Marketing Areas; Final Decision on
Proposed Amendments to Marketing
Agreements and Orders and
Termination of a Portion of the
Proceeding
Agricultural Marketing Service,
USDA.
ACTION: Proposed rule.
AGENCY:
This document is the final
decision proposing to permanently
adopt changes to the manufacturing cost
allowances and the butterfat yield factor
used in Class III and Class IV productprice formulas applicable to all Federal
milk marketing orders. These
amendments were adopted by an
interim final rule issued on, July 25,
2008, that became effective on October
1, 2008. This document also terminates
the proceeding with regard to additional
proposals that addressed the collection
of manufacturing cost information, the
use of an energy cost adjustor and
providing for a cost add-on feature to
Class III and Class IV product-price
formulas. The orders amended by this
decision require producer approval.
Referenda will be conducted in three
markets and dairy farmer cooperatives
will be polled in the other seven
markets to determine whether dairy
farmers approve the issuance of the
orders as amended.
FOR FURTHER INFORMATION CONTACT:
William Francis, Director, Order
Formulation and Enforcement Division,
USDA/AMS/Dairy Programs, Order
Formulation and Enforcement, Stop
0231—Room 2971–S, 1400
Independence Avenue SW.,
Washington, DC 20250–0231, (202) 720–
7183, email address:
william.francis@ams.usda.gov.
SUMMARY:
This final
decision proposes to permanently adopt
amendments to the manufacturing
(make) allowances for cheese, butter,
nonfat dry milk (NFDM) and dry whey
contained in the Class III and Class IV
product price formulas (Proposal 1).
Specifically, this decision proposes to
permanently adopt the following make
allowances: $0.2003 per pound of
cheese; $0.1715 per pound of butter;
$0.1678 per pound of nonfat dry milk
(NFDM); and $0.1991 per pound of dry
whey. This decision also proposed to
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SUPPLEMENTARY INFORMATION:
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permanently increase the butterfat yield
factor in the butterfat price formula from
1.20 to 1.211 (Proposal 6). These makeallowances and butterfat yield factor
have been in use since October 1, 2008,
following producer approval of the
tentative final decision (73 FR 51352).
This decision also addresses
proposals published in the hearing
notice as Proposals 3, 4, 5, 6, 7, 8, 9, 10,
11, 12, 13, 14, 15, 16 and 18 that seek
to change various features of the Class
III and Class IV product-price formulas.
This document also terminates the
proceeding with regard to Proposals 2,
17 and 20.
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
amendments would not preempt any
state or local laws, regulations, or
policies, unless they present an
irreconcilable conflict with this rule.
The Agricultural Marketing
Agreement Act of 1937 (Act), as
amended (7 U.S.C. 604–674), provides
that administrative proceedings must be
exhausted before parties may file suit in
court. Under section 608c(15)(A) of the
Act, any handler subject to an order may
request modification or exemption from
such order by filing with the U.S.
Department of Agriculture (USDA) a
petition stating that the order, any
provision of the order, or any obligation
imposed in connection with the order is
not in accordance with the law. A
handler is afforded the opportunity for
a hearing on the petition. After a
hearing, USDA would rule on the
petition. The Act provides that the
district court of the United States in any
district in which the handler is an
inhabitant, or has its principal place of
business, has jurisdiction in equity to
review the USDA’s ruling on the
petition, provided a bill in equity is
filed not later than 20 days after the date
of the entry of the ruling.
Regulatory Flexibility Act and
Paperwork Reduction Act
In accordance with the Regulatory
Flexibility Act (5 U.S.C. 601–612), the
Agricultural Marketing Service has
considered the economic impact of this
action on small entities and has certified
that this proposed rule will not have a
significant economic impact on a
substantial number of small entities. For
the purpose of the Regulatory Flexibility
Act, a dairy farm is considered a small
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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 farms, it should be an inclusive
standard for most small dairy farms. For
purposes of determining a handler’s size
of operation, if the plant is part of a
larger company operating multiple
plants that collectively exceed the 500employee limit, the plant will be
considered a large business even if the
local plant has fewer than 500
employees.
For the month of February 2007, the
month the initial public hearing was
held, the milk of 49,712 dairy farms was
pooled on the Federal order system. Of
the total, 46,729 dairy farms, or 94
percent, were considered small
businesses. During the same month, 352
plants were regulated by or reported
their milk receipts to be pooled and
priced on a Federal order. Of the total,
186 plants, or 53 percent, were
considered small businesses.
This decision proposes to
permanently amend the make
allowances contained in the formulas
used to compute component prices and
the minimum class prices in all Federal
milk orders that were implemented
October 1, 2008, on an interim basis,
without change. Specifically, the make
allowance for cheese continues to be
$0.1715 per pound (initially increased
from $0.1682 per pound); the make
allowance for NFDM continues to be
$0.1678 per pound (initially increased
from $0.1570); the make allowance for
butter continues to be $0.1715 per
pound (initially increased from
$0.1202); and the make allowance for
dry whey continues to be $0.1991
(initially increased from $0.1956). The
butterfat yield factor in the butterfat
price formulas continues to be 1.211
(initially increased from 1.20).
The make allowances serve to
approximate the average cost of
producing cheese, butter, NFDM and
dry whey for manufacturing plants
located in Federal milk marketing areas.
The established criteria for the make
allowance changes are applied in an
identical fashion to both large and small
businesses and will not have any
different impact on those businesses
producing manufactured milk products.
An economic analysis has been
performed that discusses impacts of the
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proposed amendments on industry
participants including producers and
manufacturers. It can be found on the
AMS Web site at www.ams.usda.gov/
dairy. Based on that economic analysis,
the proposed amendments will not have
a significant economic impact on a
substantial number of small entities.
The Agricultural Marketing Service
(AMS) is committed to complying with
the E-Government Act, to promote the
use of the Internet and other
information technologies to provide
increased opportunities for citizen
access to Government information and
services, and for other purposes.
This decision does not require
additional information collection that
needs clearance by the Office of
Management and Budget (OMB) beyond
currently approved information
collection. The primary sources of data
used to complete the forms are routinely
used in most business transactions. The
forms require only a minimal amount of
information that can be supplied
without data processing equipment or a
trained statistical staff. Thus, the
information collection and reporting
burden is relatively small. Requiring the
same reports for all handlers does not
significantly disadvantage any handler
that is smaller than the industry
average.
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Economic Analysis
In order to assess the impact of the
proposed changes in Federal order
product price formulas, the Department
conducted an economic analysis. This
analysis was discussed in the tentative
partial final decision (73 FR 35306) and
remains unchanged. The complete
analysis is available on the Dairy
Programs Web site which can be
accessed at www.ams.usda.gov/dairy.
Prior documents in this proceeding
Notice of Hearing: Issued February 5,
2007; published February 9, 2007 (72 FR
6179).
Supplemental Notice of Hearing:
Issued February 14, 2007; published
February 20, 2007 (72 FR 7753).
Notice to Reconvene Hearing: Issued
March 15, 2007; published March 21,
2007 (72 FR 13219).
Notice to Reconvene Hearing: Issued
May 2, 2007; published May 8, 2007 (72
FR 25986).
Tentative Partial Final Decision:
Issued June 16, 2008; published June 20,
2008 (73 FR 35306).
Interim Final Rule: Issued July 25,
2008; published July 31, 2008 (73 FR
44617).
Delay of Effective Date: Issued August
28, 2008; published September 3, 2008
(73 FR 51352).
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Preliminary Statement
Notice is hereby given of the filing
with the Hearing Clerk of this final
decision and termination of proceeding
with respect to the proposed adopted
amendments to the tentative marketing
agreements and the orders regulating the
handling of milk in the Northeast and
other marketing areas. This notice is
issued pursuant to the provisions of the
Act and 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
agreements and the orders regulating the
handling of milk in the Northeast and
other marketing areas. The hearing was
held, pursuant to the provisions of the
Act, as amended (7 U.S.C. 601–674),
and the applicable rules of practice and
procedure governing the formulation of
marketing agreements and marketing
orders (7 CFR part 900.)
The proposed amendments set forth
below are based on the record of the
first session of a public hearing held in
Strongsville, Ohio, on February 26–
March 2, 2007, pursuant to a notice of
hearing issued February 5, 2007,
published February 9, 2007 (72 FR
6179); a second session of a public
hearing held in Indianapolis, Indiana,
on April 9–13, 2007, pursuant to a
reconvened hearing notice issued March
15, 2007, published March 21, 2007 (72
FR 13219); and a third session of a
public hearing held in Pittsburgh,
Pennsylvania, on July 9–11, 2007,
pursuant to a reconvened hearing notice
issued May 2, 2007, published May 8,
2007 (72 FR 25986).
The material issues on the record of
the hearing relate to:
A. Amending the product-price
formulas used to compute Class III and
Class IV prices.
B. Terminating the proceeding with
respect to proposals 2, 17 and 20.
Findings and Conclusions
A. Amending the Product-Price
Formulas Used To Compute Class III
and Class IV Prices
This final decision proposes to adopt
a proposal published in the hearing
notice as Proposal 1 which seeks to
amend the manufacturing allowances
for butter, cheese, NFDM and dry whey
using the most currently available data,
and a portion of Proposal 6 that
increases the butterfat yield in the
butterfat price formula. The provisions
contained herein were adopted on an
interim basis and became effective
October 1, 2008. Specifically, this
decision finalizes the following
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manufacturing allowances: Cheese—
$0.2003 per pound, butter—$0.1715 per
pound, NFDM—$0.1678 per pound and
dry whey—$0.1991 per pound. This
decision also increases the butterfat
yield factor in the butterfat price
formula from 1.20 to 1.211.
The Federal Milk Marketing Order
(FMMO) program uses wholesale
product-price formulas to compute
prices handlers must account for in the
marketwide pooling of milk used in the
four classes of products. These formulas
rely on the price of finished products to
determine the minimum classified
prices handlers pay for raw milk. In
addition, the Class III and Class IV
prices form the base from which Class
I and Class II prices are determined.
This end-product pricing system was
implemented on January 1, 2000
(published February 12, 1999; 64 FR
70868).
The product-price formulas are
computed by using component values
from Agricultural Marketing Service
(AMS) surveyed prices of manufactured
dairy products.1 The pricing system
determines butterfat prices for milk
used in products in each of the four
classes from a surveyed butter price;
protein and other solids prices for milk
used in Class III products from surveyed
cheese and dry whey prices; and a
nonfat solids price for milk used in
Class II and Class IV products from
surveyed nonfat dry milk product
prices.2 The skim milk portion of the
Class I price may be derived from either
the protein and other solids price, or
from the nonfat dry milk price
depending on the relationship between
the Class III and IV price. The butterfat,
protein, other solids and nonfat solids
prices are all derived in a similar
manner: Average AMS survey price
minus a manufacturing (make)
allowance times a yield factor. The yield
factor is an approximation of the
quantity of a specific product that can
be made from a hundredweight (cwt) of
milk. The yield factors were last
amended on April 1, 2003 (published
February 12, 2003; 68 FR 7063).
The make allowance factor represents
the cost manufacturers incur in
processing raw milk into one pound of
product. Federal milk order pricing
1 Official Notice is taken of a Final Rule (77 FR
8717) published February 15, 2012. Effective April
1, 2012, USDA’s AMS began collecting and
reporting wholesale dairy product prices. This was
previously managed by the National Agricultural
Statistic Service (NASS).
2 Official Notice is taken of a Notice (77 FR 2282)
published April 13, 2012. Effective April 18, 2012,
AMS surveyed prices are used in the price
discovery mechanism for the component values of
raw milk. These component prices are then used to
determine FMMO minimum classified prices.
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formulas currently contain the following
make allowances: Cheese—$0.2003 per
pound, butter—$0.1715 per pound,
NFDM—$0.1678 per pound and dry
whey—$0.1991 per pound. These make
allowances were adopted on July 25,
2008, (73 FR 44617) and became
effective on October 1, 2008, on an
interim basis as a result of this
proceeding. The make allowances were
determined on the basis of California
Department of Food and Agriculture
(CDFA) and Cornell Program on Dairy
Markets and Policy (CPDMP) surveys of
product manufacturing costs. The
current make allowances for butter and
nonfat dry milk were determined by
using a weighted average of the CDFA
and CPDMP surveys over national
production volumes. The cheese make
allowance was determined by relying on
the CDFA 2006 survey average cheese
manufacturing cost and the dry whey
make allowance was determined by
relying on the CPDMP 2006 survey. All
make allowances were adjusted for
marketing costs.
Nineteen proposals were published in
the hearing notice for this proceeding.
Proposals 4, 5 and 11 were withdrawn
at the hearing by proponents in support
of other noticed proposals. No further
reference to these proposals will be
made.
A proposal published in the hearing
notice as Proposal 1, offered by AgriMark Cooperative (Agri-Mark), seeks to
amend the Class III and Class IV make
allowances by using the most current
plant cost survey data available. AgriMark is a Capper-Volstead cooperative
with approximately 1,400 memberowners throughout New England and
New York, and operates 4
manufacturing plants.
Agri-Mark was also the proponent of
Proposal 2 that seeks to amend the Class
III and Class IV product price formulas
to annually update the manufacturing
allowances using an annual
manufacturing cost survey of cheese,
whey powder, butter, and nonfat dry
milk plants (located outside of
California). The proposed amendments
would grant authority to Market
Administrators to administer the survey,
select the sample plants, and collect,
audit, and assemble cost information.
A proposal published in the hearing
notice as Proposal 3, offered by Dairy
Producers of New Mexico (DPNM),
seeks to amend the manufacturing
allowances contained in the Class III
and Class IV product price formulas.
Specifically, this proposal seeks to set
the make allowances at the following
levels: $0.1108 per pound for butter;
$0.1638 per pound for cheese; $0.1410
per pound for NFDM; and $0.1500 per
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pound for dry whey. DPNM is an
association of dairy producers located in
New Mexico and West Texas.
DPNM was the proponent of
Proposals 6, 7 and 8 that seek to amend
the yield factors and the butterfat
recovery rate of the Class III and Class
IV product price formulas. Proposal 6
seeks to amend the butter price formula
by increasing the butterfat yield factor
from 1.20 to 1.211 and to amend the
protein price formula by increasing the
butterfat recovery rate from 90 percent
to 94 percent. Proposal 7 seeks to
eliminate the farm-to-plant shrinkage
and butterfat shrinkage adjustments of
all yield factors. Proposal 8 seeks to
increase the nonfat solids yield factor
from 0.99 to 1.02, and increase the
protein price yield factor for cheese
from 1.383 to 1.405 and for butterfat
from 1.572 to 1.653.
Proposal 9 was offered by the
International Dairy Foods Association
(IDFA). Proposal 9 seeks to amend the
Class III and Class IV product-price
formulas by adjusting the protein price
formula to reflect the lower value and
reduced volume of butterfat recoverable
as whey cream. IDFA is a trade
association with 530 members
representing manufacturers, marketers,
distributors, and suppliers of fluid milk
and related products.
Proposal 10 was submitted on behalf
of Agri-Mark. Proposal 10 seeks to
amend the Class III and Class IV
product-price formulas by reducing the
protein price to reflect the lower selling
price of whey butter.
Proposal 12 was offered by IDFA.
Proposal 12 seeks to amend the Class III
and Class IV product price formulas by
eliminating the 3-cent cost adjustment
for cheese manufacturing of 500-pound
barrels contained in the protein price
formula.
Proposal 13 was offered by Dairy
Farmers of America, Inc. (DFA) and the
Northwest Dairy Association (NDA).
Proposal 13 seeks to amend the Class III
and Class IV product-price formulas by
removing the barrel cheese price as a
cost component of the protein price
formula. DFA is a Capper-Volstead
cooperative with 13,500 memberowners producing milk in 49 states.
NDA is a Capper-Volstead cooperative
with approximately 610 memberowners, and operates 6 manufacturing
plants and 4 distributing plants in the
western United States.
Proposal 14 was advanced by AgriMark. Proposal 14 seeks to amend the
Class III and Class IV product price
formulas by using a combination of the
weekly NASS and Chicago Mercantile
Exchange (CME) cheese price series to
determine the cheese price contained in
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the Class III and Class IV product-price
formulas.
Proposal 15 was offered by DPNM.
This proposal seeks to replace the NASS
commodity price surveys with CME
commodity prices in each of the price
formulas except for the other solids
formula. The dry whey price in the
other solids formulas would continue to
be derived from the NASS dry whey
price survey.
Proposal 16 was offered by National
All-Jersey, Inc. (NAJ). Proposal 16 seeks
to amend the Class III and Class IV
product-price formulas by eliminating
the other solids price and adding the
equivalent value of dry whey to the
protein price formula. NAJ is a breed
organization with more than 1,000
members.
Proposal 17 was offered by the
National Milk Producers Federation
(NMPF). The proposal seeks to amend
the Class III and Class IV product-price
formulas to incorporate a monthly
energy cost adjustment based on
monthly changes in the manufacturing
price indices for industrial natural gas
and industrial electricity as published
by the Bureau of Labor Statistics. NMPF
is an association consisting of 33 dairyfarmer cooperative members
representing nearly three-quarters of
U.S. dairy farmers.
Proposal 18 was offered by the Maine
Dairy Industry Association (MDIA).
Proposal 18 seeks to amend the Class III
and Class IV product-price formulas by
incorporating a factor to account for any
monthly spread between component
price calculations for milk and a
competitive pay price for equivalent
Grade A milk. MDIA is an association
that represents all of Maine’s 350 dairy
farmers.
A proposal published in a
supplemental hearing notice as Proposal
20 was submitted on behalf of Dairylea
Cooperative, Inc. (Dairylea). Proposal 20
seeks to amend the Class III and Class
IV price formulas by establishing costof-production add-ons that
manufacturers could include in the
selling price of their products but would
not be included in the determination of
the NASS survey prices. Dairylea is a
Capper-Volstead cooperative with 2,400
member-owners located in seven
northeastern states.
To provide order to the hearing
testimony, post-hearing briefs and
comments and exceptions to the
tentative final decision, the summary of
testimony is organized as follows:
1. Make Allowances: Proposals 1, 2 and 3
2. Product Yields and Butterfat Recovery
Percentage: Proposals 6, 7 and 8
3. Value of Butterfat in Whey: Proposals 9
and 10
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4. Barrel Cheese Price: Proposals 12 and 13
5. Product Price Series: Proposals 14, 15 and
18
6. Other Solids Price: Proposal 16
7. Energy Cost Adjuster; Proposal 17
8. Cost-of-Production Add-on; Proposal 20
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1. Make Allowances
A witness from Cornell University
(Cornell witness) testified regarding the
2006 manufacturing cost survey (2006
survey) conducted by the Cornell
Program on Dairy Markets and Policy
(CPDMP), to assess the manufacturing
costs of plants producing cheddar
cheese, dry whey, butter and NFDM.
The witness did not testify in support of
or in opposition to any proposal
presented at the hearing. The witness
explained that an earlier study, the
CPDMP 2005 manufacturing cost survey
(2005 survey), was contracted in part by
USDA and was presented at a 2006
rulemaking hearing (71 FR 52502), and
was a factor considered by USDA in
developing the make allowances that
became effective March 1, 2007, (71 FR
78333). The witness said that some
manufacturing plants that participated
in the 2005 survey requested a new
survey to reflect more current cost
information.
The Cornell witness said that the
plants that participated in the 2005
survey were asked to participate in the
2006 survey. The witness stated that 21
plants agreed to participate and of those
plants, 19 were deemed to have
acceptable data to be included in the
2006 survey. Plants submitted data
corresponding to their most recent fiscal
year; most of the data observations
occurred in calendar year 2006, the
witness said. The data was not audited
by the witness. The witness explained
that if a plant produced multiple
products they were asked to allocate
manufacturing costs for each product.
However, if they failed to do so the
witness allocated costs on a per pound
of solids basis in the finished product.
The average manufacturing costs
detailed in the study were on a per
pound of finished product basis and
were not adjusted for moisture content,
the witness said.
The Cornell witness said that 11
cheese plants participated in the 2006
survey compared with 16 cheese plants
in the 2005 survey. Eight of those plants
(one classified as a large plant and the
other seven as small plants) also
participated in the 2005 survey; the
three remaining plants that participated
in the 2006 survey were asked to
participate in 2005 but submitted data
too late for inclusion. The witness
testified that five small cheese plants
that were included in the 2005 survey
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opted not to participate in the 2006
survey. Of the 11 plants, the witness
classified 7 as small plants and the
remaining 4 as large volume plants. The
witness testified that the weighted
average manufacturing cost of the 2006
cheese plant sample was $0.1584 per
pound, a decrease of $0.0054 per pound
from 2005. The witness said that
comparing the costs for the 8 plants that
participated in both surveys revealed a
weighted average cost increase of $0.017
per pound between the 2005 and 2006
surveys. The total pounds covered by
the 2006 survey increased from
approximately 60 million pounds in
2005 to nearly 119 million pounds in
2006. The Cornell witness asserted that
the 2005 survey over-sampled small
plants while the 2006 survey oversampled large plants. The witness noted
that the average packaging cost for
cheese in the 2006 survey was only for
40-pound block production. If a plant
produced barrel cheese the witness
assigned it an average 40-pound block
packaging cost before computing the
average manufacturing costs for the
entire sample.
The Cornell witness said that 7 whey
plants participated in the 2006 survey
and their weighted average cost was
$0.1976 per pound—an increase of
$0.0035 per pound from the 2005
survey. According to the witness, the 7
participating whey plants were
associated with cheese plants that were
also included in the 2006 survey. The
witness noted that 12 whey plants
participated in the 2005 survey.
The Cornell witness said that 4 butter
plants participated in the 2006 survey;
3 of the plants also participated in the
2005 survey. The weighted average cost
of the 4 plants was $0.1846 per pound,
an increase of $0.0738 per pound over
the 2005 survey. The survey accounted
for 57.6 million pounds of butter. The
witness testified that significant cost
allocation problems and data quality
problems with the 2005 butter data were
major reasons for the large increase in
the weighted average cost from 2005 to
2006. The witness testified that the 2005
survey butter data was not accurate, but
asserted that the allocation problems
were corrected in the 2006 survey.
While maintaining that the 2006 survey
data was reliable, the witness said that
a larger sample size would have been
preferred. The witness also noted that
the manufacturing costs submitted by
one of the butter plants in the 2006
survey did include the cost of
transporting cream from its drying plant
to its butter plant.
The Cornell witness said that the 2006
survey for NFDM consisted of 7 of the
8 NFDM plants that participated in the
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2005 survey. According to the witness,
the weighted average cost of the 7 plants
was $0.1662 per pound, an increase of
$0.0239 per pound from 2005. The
witness explained that the weighted
average cost increase is partially
explained by increases in real costs
(labor, packaging, etc.), but also partly
because of a change in the methodology
of indirectly allocating costs between
butter and NFDM. According to the
witness, there were flaws in the method
used to indirectly allocate costs for
NFDM in the 2005 study that resulted
in understating the cost of processing
NFDM. The witness claimed that an
attempt was made in the 2006 survey to
correct this understated processing cost.
The witness did not explain the
reported flawed methodology in the
2005 survey or the methodological
changes for the 2006 survey. According
to the witness, the 2006 survey
accounted for 70.1 million pounds of
NFDM, an increase of 15 million
pounds.
A witness appearing on behalf of
Agri-Mark testified in support of
Proposals 1 and 2. The witness
explained that Proposal 1 seeks to
update the make allowances adopted on
an interim final basis (71 FR 78333),
effective March 1, 2007, using 2005
CDFA data. The witness asserted that
this update would increase the butter,
NFDM and cheese make allowances by
$0.0014, $0.0092 and $0.0029 per
pound, respectively. The witness was of
the opinion that the dry whey make
allowance should incorporate the 2005
CDFA data which reflects an average
cost of $0.2851 per pound.
The witness reiterated Agri-Mark’s
position expressed in comments to a
previous tentative final decision (71 FR
67467) that proposed adoption of the
make allowances that were adopted in
2006. The witness concluded that using
this weighting methodology (including a
$0.0015 per pound marketing cost
factor) the resulting make allowances
should be: $0.1780 per pound for
cheese, $0.1351 per pound for butter,
$0.1510 for NFDM and $0.2090 per
pound for dry whey.
The Agri-Mark witness conceded that
increasing the make allowances would
assist high-cost plants in covering their
costs while creating a financial windfall
for low-cost plants. In turn, the witness
said, the low cost plants could use the
additional revenue to sell products at a
lower cost, pay producers a higher
price, or increase their financial returns.
The witness said that any financial
gains low-cost plants in the
southwestern region earn from a high
make allowance would not harm highcost plants in the Northeast because it
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is too costly to transport milk from the
southwestern U.S. to the northeast
region. The witness believed that
competitive issues resulting from high
make allowances would only arise if a
low-cost plant was located next door to
a high-cost plant that competes for the
same milk supply.
The Agri-Mark witness advanced
Proposal 2 seeking to establish an
annual manufacturing cost survey,
administered by USDA that would
automatically update make allowances
without requiring a rulemaking
proceeding. On brief, Agri-Mark
withdrew the automatic updating
portion of this proposal. The witness
explained that manufacturing input
prices fluctuate in the short-run and an
annual survey would ensure more
timely recognition of these fluctuations
in make allowances. The witness said
that the CPDMP survey should provide
the basic methodology needed to
conduct the survey and that any
changes to the methodology should be
done through the formal rulemaking
process. The witness asserted that the
survey should be administered by
Market Administrator audit personnel
and the plant sample, preferably larger
than the CPDMP sample, should be
selected by random sampling. The
witness also supported auditing
surveyed plants and asserted that this
function should be funded by payments
from the Market Administrator’s
administrative assessment funds. The
witness said that if the survey was
audited, the use of CDFA cost data
would no longer be necessary in
determining make allowances. The
witness also supported addressing the
proposed manufacturing cost survey in
a recommended decision to allow for
public comments.
The Agri-Mark witness was of the
opinion that based on the CPDMP 2006
survey the make allowances should be
set at the higher of: (1) A level that
would allow a minimum of 80 percent
of the producer milk used by Class III
and Class IV plants to cover their costs;
or (2) A level that would allow a
minimum of 25 percent of the producer
milk volume used by Class III and Class
IV plants in any specific Federal order
annually pooling at least 4 billion
pounds of milk to cover their costs. The
Agri-Mark witness opposed Proposal 3.
A witness appearing on behalf of
Land O’Lakes (LOL) testified in support
of Proposals 1 and 2. According to the
witness, LOL is a Capper-Volstead
cooperative with over 3,000 members
that owns 4 manufacturing plants in the
United States. The witness supported
updating the current make allowances
with CDFA manufacturing cost data as
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advanced in Proposal 1. The witness
advocated that the audited CDFA whey
manufacturing cost data be included in
the whey make allowance computation.
The witness asserted that the make
allowances should be recalculated by
weighting the CDFA and CPDMP data
by the survey sample volumes, not
national product volumes which the
witness argued was not statistically
valid. The witness concluded that the
new make allowances (using LOL’s
proposed weighting) should be as
follows: $0.1780 for cheese; $0.2090 for
dry whey; $0.1560 for NFDM; and
$0.1351 for butter.
The LOL witness supported the
annual cost survey offered in Proposal
2, with technical modifications. The
witness stated that the authority for
collecting plant cost data should be
granted to the AMS Administrator, that
the plant sample be limited to plants
located outside of California that receive
pooled (producer) milk, and that the
survey results be combined with the
CDFA data to determine appropriate
Federal order make allowance levels.
The witness opposed the portion of
Proposal 2 that would set make
allowances at a level that would cover
the cost of manufacturing for the highest
cost Federal order marketing area. The
witness said that classified prices are
determined on a national, not a regional
basis, and therefore relying on regional
costs is inappropriate. The witness was
of the opinion that USDA should clearly
identify the target product volume and
percentage of plants that should be
covered by new make allowances that
result from this proceeding.
The LOL witness opposed Proposal 3
seeking to exclude CDFA manufacturing
cost data when computing new make
allowances. The witness argued that
since 2000 the Department has
continuously considered CDFA
manufacturing cost data when
determining new make allowance levels
and asserted that there is no justification
to modify that policy. The witness
elaborated that classified prices are
determined using a national survey that
includes California plants and therefore
including California plant costs when
determining make allowance levels is
appropriate.
A witness testifying on behalf of
Michigan Milk Producers Association
(MMPA) testified in support of
Proposals 1 and 2, and in opposition to
Proposal 3. According to the witness,
MMPA is a Capper-Volstead cooperative
with approximately 2,400 members that
markets 3.5 billion pounds of milk
annually and operates 2 manufacturing
plants. The witness offered support for
Proposal 1 to update the make
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allowances based on the most currently
available data. The MMPA witness
stressed support for Proposal 2’s annual
survey of manufacturing costs that
would be administered by AMS through
its Market Administrators.
A witness appearing on behalf of NDA
testified regarding the CPDMP 2005
survey that was used to determine 2006
make allowance levels. The witness said
that NDA participated in the study and
that costs for its NFDM plants were
incorrectly allocated. The witness
estimated that NDA’s NFDM production
represented approximately 54 percent of
the total volume contained in the
CPDMP 2005 survey for NFDM. In the
survey, cream costs were allocated on a
butterfat solids basis rather than as a
percent of total solids, the witness said.
However, according to the witness
NDA’s NFDM plants separate the cream
that is stored in silos to be sold or
transported to its butter manufacturing
plant resulting in an over-allocation of
costs to cream in the CPDMP 2005
survey. According to the witness, this
misallocation inaccurately lowered
NDA’s NFDM manufacturing costs by
$0.036 per pound. The witness asserted
that after correcting for this error, the
CPDMP 2005 survey for NFDM
weighted average cost should have been
$0.019 per pound higher. The witness
urged USDA to issue an emergency
decision addressing make allowances
because of the errors contained in the
CPDMP 2005 survey.
A post-hearing brief was filed on
behalf of Agri-Mark, Foremost Farms
USA, LOL, MMPA, NDA and Associated
Milk Producers, Inc. (Agri-Mark et al.).
The members of Agri-Mark et al. are all
Capper-Volstead cooperatives who
market their members’ milk in the
Federal order system and operate
manufacturing plants.
The Agri-Mark et al. brief emphasized
support for product-price formulas
because, in their opinion, no truly
independent competitive price series
exists to determine milk prices. The
brief summarized the evolution of the
Federal order pricing system and
asserted that USDA’s past policy has
been to set make allowances at levels
that cover the processing costs for most
Federal order plants. The brief
expressed the opinion that USDA
deviated from this policy when
determining current make allowance
levels.
The Agri-Mark et al. brief supported
adoption of Proposal 1 and argued that
make allowances should be updated
using the 2005 CDFA and the CPDMP
2006 surveys. Agri-Mark et al. was of
the opinion that USDA should continue
to use the same national product
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volume weighting methodology that
determined the current make
allowances, incorporate CDFA whey
cost data, use the CPDMP 2005 survey
cheese plant population average cost
instead of the sample average cost and
continue to include a marketing cost
factor of $0.0015 per pound in each
make allowance.
In their post-hearing brief, Agri-Mark
et al. proposed that the cheese make
allowance be set at $0.2154 per pound.
Agri-Mark et al. wrote that the CPDMP
2005 survey cheese plant population
average of $0.2028 per pound was most
representative of average size plants and
is therefore the best available
information to determine an appropriate
cheese make allowance. Agri-Mark et al.
endorsed the methodology explained in
the IDFA brief that derived a cheese
make allowance of $0.2154 per pound.
The Agri-Mark et al. brief proposed a
dry whey make allowance of $0.2080
per pound by combining the 2005 CDFA
and 2006 CPDMP surveys. Using this
same methodology, the brief proposed a
butter make allowance of $0.1725 per
pound and the NFDM make allowance
of $0.1782 per pound (though
stipulating that the CDFA medium-sized
plant cost should be used for NFDM.)
The brief summarized the Cornell
witness’ testimony regarding the errors
with the 2005 butter and NFDM survey
methodology and concluded that the
current make allowances that were
determined with this data are
unrepresentative of actual costs. AgriMark et al. requested that Proposal 1 be
adopted on an emergency basis to
rectify the current unrepresentative
make allowances.
In their brief, Agri-Mark et al.
expressed support for the portion of
Proposal 2 that would authorize USDA
to develop and conduct periodic
manufacturing cost surveys of plants
located outside of California. The brief
explained that this data could then be
relied upon in future rulemaking
proceedings to amend the product price
formulas.
Comments and exceptions to the
tentative partial final decision
submitted on behalf of Agri-Mark et al.
expressed support for the proposed
make allowances. According to AgriMark et al. the proposed make
allowances reasonably reflect the record
evidence of 2006 surveyed plant cost
data. However, they argued that the
make allowances should incorporate a
one-time adjustment for energy costs
because energy costs have significantly
increased from 2006 through June 2008.
Based on energy cost data from the
Bureau of Labor Statistics, Agri-Mark et
al. proposed that the following
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adjustment should be added to the make
allowances: $0.0036 for cheese, $0.0029
for butter, $0.0114 for NFDM and
$0.0105 for dry whey.
In its exceptions, Agri-Mark et al. also
stated that USDA had shifted policy
from adopting make allowances that
allow most manufacturing plants
receiving pooled milk to recover their
manufacturing costs to make allowances
that allow the manufacturing plants
receiving most of the pooled milk to
cover their manufacturing costs. Such a
policy shift, from covering ‘‘most
plants’’ to covering ‘‘most milk’’ noted
Agri-Mark et al. should be explained in
the final decision. Agri-Mark et al. also
requested that in the final decision
USDA reaffirm the exclusion of
balancing costs as a make allowance
factor.
A witness testified on behalf of
DPNM, Select Milk Producers, Inc., and
Continental Dairy Producers, Inc.
(DPNM et al.). The witness said that
Select and Continental are CapperVolstead cooperatives whose members
are located in New Mexico, Texas,
Kansas, Ohio, Michigan and Indiana.
According to the witness, the DPNM et
al. testimony was endorsed by Lone Star
Milk Producers and Zia Milk Producers,
Inc., who are also Capper-Volstead
cooperatives.
The DPNM et al. witness testified in
support of Proposal 3. The witness was
of the opinion that CDFA cost data
should not be used to determine new
make allowance levels because the data
are only representative of California
manufacturing plants which the witness
asserted have higher manufacturing
costs than the rest of the country. The
witness testified that CDFA data had
been utilized in the past when make
allowances were determined using
Rural Business Cooperative Service
(RBCS) cost data because the audited
CDFA data broadened the available data
and was used to verify the information
contained in the RBCS study. However,
the witness insisted that the CPDMP
cost surveys are far more representative
of the population of manufacturing
plants and should now be relied upon
as the sole determinant of make
allowances.
The DPNM et al. witness testified that
make allowances should be set at the
following levels: $0.1108 per pound for
butter; $0.1638 per pound for cheese;
$0.1410 per pound for NFDM; and
$0.1500 per pound for dry whey. The
witness stated that, except for dry whey,
the proposed make allowances are
identical to the weighted average costs
contained in the CPDMP 2005 survey.
The witness proposed that the dry whey
make allowance be determined by
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adding $0.0090 per pound to the NFDM
make allowance to account for the
additional energy needed to produce
dry whey. The witness estimated that if
the make allowances proposed by
DPNM et al. were adopted, blend prices
would increase by $0.22 per cwt.
A second witness, a dairy accountant
and dairy farmer appearing on behalf of
DPNM et al. testified regarding dairy
farm operating costs, accounting and
business analysis of large modern dairy
farm operations. According to the
witness, the firm provides accounting
and other business services to dairy
producer operations in 27 states whose
production volume represents about 10
percent of the milk produced in the
United States. The witness testified that
based on data collected during the
1990’s, large dairy farms in six Western
states had an average annual net profit
per cwt of $1.31. The witness testified
that based on 10 years’ worth of client
data, dairy farms in the west and eastern
states must earn a net income of $1.50
and $2.00 per cwt, respectively, for a
dairy farmer to collect a salary and retire
debt. The witness predicted that, for
2007, producer client gross income
would average $15.51 per cwt. At an
average cost of production of $15.17, the
witness went on to predict that their
clients would face a net profit of $0.34
per cwt. The witness said that this
amount is far from the $1.50 per cwt net
profit needed for their clients to reduce
debt or cover living expenses.
The second DPNM et al. witness
stated that low milk prices in 2005
reduced dairy farm client income to an
average of $206 per cow. The witness
noted that during the 1990’s, average
production cost per cwt in western
states was $11.87 but this has risen to
$13.50 for 2004–2005. The witness
testified that rising input costs
combined with lower milk prices in
2004–2005 made large-scale, highly
efficient dairy farming unprofitable,
even in low-cost operating areas such as
western Texas and New Mexico. The
witness provided additional testimony
to show that increasing make
allowances depressed dairy farmer
income during a period of increasing
costs and reduced opportunities for
profitability. The witness supported this
testimony with 2006 client data
showing that a farm milking 1,800 cows
would have lost $284,000. The witness
provided detailed client data showing
that the major higher-cost milk
production factors during 2005 and
2006 were increased energy and feed
costs.
A third witness, a dairy farmer,
appearing on behalf of DPNM et al.
testified in support of Proposal 3. The
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witness operates a farm in New Mexico
that milks approximately 3,800 cows
and testified that they have been
receiving $1.50 cwt below the
Southwest order’s blend price because
of hauling costs. The witness said that
over the last few years any increase in
producer milk prices have been
consumed by rapidly increasing
production costs. The witness
supported all proposals submitted by
DPNM and articulated opposition to
adoption of Proposals 1 and 2.
The DPNM et al. post-hearing brief
explained that its opposition to all other
proposals included in the hearing to
adjust the make allowances was based
on three principles: (1) The data used to
determine the appropriate level of
manufacturing allowances for
establishing Federal order prices should
be drawn from plants operating within
the Federal order system; (2)
adjustments to Federal order pricing
regulations should always be subject to
formal rulemaking; and (3) make
allowances should be set at a level
deemed appropriate by USDA, after
taking into consideration all statutorily
required factors and current milk
marketing conditions, rather than
prescribed geographic or volumetric
factors. The brief explained why the
CPDMP 2005 survey is the best data
available and met their criteria for use
in establishing Federal order make
allowances and why the 2006 survey is
flawed and should not be relied upon in
determining make allowances.
Exceptions filed by DPNM et al. in
response to the tentative partial final
decision argued that in proposing new
make allowances the Department failed
to consider producer costs of feed and
fuel in each marketing area as mandated
by the Food, Conservation and Energy
Act of 2008 (2008 Farm Bill). DPNM et
al. took exception with the Department’s
national Economic Analysis of the
proposed changes. It argued that Federal
orders do not encompass the entire
national market and therefore regional
economic analyses should also be
conducted.
DPNM et al. also took exception with
the use of 2006 CDFA manufacturing
cost data (released October 3, 2007) to
compute the make allowances without
input from interested parties about the
applicability of the new data. It
specifically took exception with the use
of the weighted average cheese
manufacturing cost and argued that the
record did not indicate if the number of
high-cost versus low-cost plants in the
California survey is similar to the plant
make-up of the rest of the country.
DPNM et al. also stated in their
comments that the Department has
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denied dairy farmers due process and
provided a list of examples. They also
took exception to the notion advanced
in the tentative partial final decision
that milk production costs are reflected
in the supply and demand conditions
for dairy products. Instead, DPNM et al.
argued that the cost of producing milk
is reflected in the supply and demand
conditions of the various inputs, such as
feed, labor and fuel. DPNM et al. stated
that contrary to the Department’s
findings, the increase in the number of
manufacturing plants from 2005 to 2007
indicates that make allowances were not
too low, and that only CPDMP 2005 data
(released in 2006) should be used to
determine new make allowance levels.
A witness appearing on behalf of
IDFA testified in support of Proposal 1
and the annual manufacturing cost
survey advanced in Proposal 2.
However, the witness did not support
adoption of the portion of Proposal 2
that would result in the automatic
update of make allowances. The witness
requested emergency adoption of
Proposal 1 and this request was
reiterated in IDFA’s post-hearing brief.
The IDFA witness testified that the
product-price formulas determine the
minimum prices manufacturers must
pay for their raw milk and that those
whose costs exceed the fixed make
allowances in the price formulas are
unable to recoup their higher costs. The
witness asserted that any increase in the
manufacturer’s end product prices
would only result in an increase in the
minimum raw milk price they must pay.
According to the witness, manufacturers
also face financial problems if any of the
product-price formula factors are
incorrect. The witness illustrated by
example the impacts of both inaccurate
product prices and inaccurate make
allowances on manufacturers.
The IDFA witness testified that before
January 1, 2000, the Federal order
system utilized a market-based pricing
system which automatically reflected
current market conditions. However,
under the end product pricing system,
market factors (e.g. yields, butterfat
retention) are set at a point in time and
can only be changed through the formal
rulemaking process, the witness said.
The IDFA witness espoused that
setting make allowances too high or
yield factors too low may result in low
milk prices but that should not be of
concern to USDA. In this regard, the
witness was of the opinion that the
Federal order system should only
determine minimum prices and allow
market responses through over-order
premiums to remedy any regulated
prices that are too low. However, the
witness conceded that if a plant can
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manufacture products at costs lower
than those reflected by the make
allowance levels then the difference
could be used to make plant
investments, secure a larger milk supply
to the detriment of higher-cost plants or
return higher margins to plant owners.
The IDFA witness testified in support
of updating the current make
allowances with the most current cost
data available (Proposal 1). The witness
was of the opinion that the CDFA dry
whey cost data should be a factor in
determining a new dry whey make
allowance for Federal orders. The
witness asserted that the CDFA average
dry whey plant size more closely
resembled the NASS average dry whey
plant size than did the CPDMP survey.
Furthermore, the witness asserted that
the CDFA dry whey data was skewed
toward low-cost plants, not high-cost
plants as asserted by USDA. The
witness maintained that using the CDFA
data in determining the dry whey make
allowance would not cause the make
allowance to be set too high. The
witness concluded that both the CDFA
and CPDMP dry whey weighted average
costs should be used to determine the
dry whey make allowance. This position
was reiterated in the IDFA post-hearing
brief.
Also in its post-hearing brief, IDFA
stated that any decision made by USDA
on the Class III and Class IV pricing
formulas should not directly consider
hearing testimony regarding dairy
farmer cost-of-production. The brief
asserted that it is already captured
indirectly through the supply and
demand for manufactured dairy
products and therefore should not be
given additional consideration in this
proceeding.
The IDFA witness testified that USDA
needs to correct for CPDMP’s stratified
cheese plant sampling which in IDFA’s
opinion over-represents low-cost cheese
plants. The witness highlighted the
testimony of the Cornell witness which
compared the 8 cheese plants that
participated in both surveys revealing
an average manufacturing cost increase
of 1.7 cents per pound. IDFA was of the
opinion that since the same cheese plant
sample was not used in the two CPDMP
surveys, the most appropriate method
for determining a new cheese make
allowance would be to use the weighted
average cost from the 2005 survey
($0.2028) plus 1.7 cents for a total of
$0.2198 per pound. In its brief, IDFA
concluded that the new make
allowances should be set no lower than
the following: $0.2154 per pound for
cheese; $0.1725 per pound for butter;
$0.1782 for NFDM; and $0.2080 for dry
whey.
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The IDFA witness supported adopting
an annual manufacturing cost survey as
contained in Proposal 2 but opposed
any automatic updating of make
allowances. The witness said that an
annual survey would provide industry
participants information regarding
trends in plant costs and such
information could be used in future
hearings to adjust make allowances.
However, the witness did not support
automatically updating make
allowances outside of the hearing
process because it would prohibit
industry input regarding how the data
should be utilized. IDFA reiterated these
views in its post-hearing brief.
The IDFA witness testified in
opposition to Proposal 3. The witness
argued that audited CDFA data should
continue to be included when
determining new make allowance
levels. The witness asserted that the
elimination of the CDFA data would
result in lower make allowances that, in
their opinion, are already too low. In its
post-hearing brief, IDFA asserted that
the proponents of Proposal 3 had
presented no evidence that
manufacturing costs have decreased to
levels similar to the manufacturing costs
reflected in make allowances that were
effective prior to February 1, 2007.
Comments and exceptions filed by
IDFA expressed support for the
proposed make allowances contained in
the tentative partial final decision. IDFA
also indicated support for comments
filed by Agri-Mark et al. requesting that
the make allowances be adjusted to
reflect increased energy costs through
June 2008. IDFA also continued to
support adoption of a manufacturing
cost survey (Proposal 2) as a means to
provide accurate and timely
manufacturing cost data for use at future
rulemaking proceedings, and expressed
continued support for the denial of
Proposal 3.
A witness appearing on behalf of
Lactalis American Group, Inc. (Lactalis)
testified in support of Proposal 1 and in
opposition to Proposal 3. According to
the witness, Lactalis operates six cheese
plants in the United States. The witness
expressed support for IDFA’s positions.
The witness said that the Class III and
Class IV product-price formulas should
be amended to give more flexibility to
market participants in establishing
market prices. The witness was of the
opinion that increasing make
allowances by adopting Proposal 1
would give processors the flexibility to
make short-term adjustments in
response to changing market conditions.
The witness argued that the increasing
milk supply, not make allowances
which are too high, is the cause of low
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milk prices received by dairy farmers.
Therefore, the witness opposed any
proposals that would result in lower
make allowances.
A witness appearing on behalf of
Leprino testified in opposition to
Proposal 3 stating that there is no basis
to set make allowances below current
levels. According to the witness,
Leprino operates nine manufacturing
plants throughout the United States that
produce Italian style cheeses. The posthearing brief filed by Leprino expressed
support for the make allowances
proposed in IDFA’s post-hearing brief.
Leprino was of the opinion that make
allowances should be set no lower than
the following: $0.2154 for cheese;
$0.2080 for dry whey; $0.1725 for
butter; and $0.1782 for NFDM.
A witness appearing on behalf of
Saputo Cheese USA (Saputo), a dairy
product manufacturer, testified in
support of IDFA’s positions. The
witness testified that Saputo opposed
any proposal which would add
complexity to the Federal milk order
system. The witness supported updating
the current make allowances to reflect
the most current available data as
sought in Proposal 1 and that updated
make allowances for dry whey should
use CDFA data.
A post-hearing brief filed on behalf of
Twin County Dairy (Twin County), an
Iowa-based cheese manufacturer,
expressed support for the proposals
offered by IDFA and Agri-Mark that seek
to increase make allowances. However,
the brief asserted that the proposals do
not go far enough to ensure that
medium-sized plants, such as the one
operated by Twin County, remain
profitable. The brief argued that the
proposed make allowances are heavily
weighted toward large, low-cost plants
and their adoption, especially the dry
whey make allowance, would cause
financial hardship for many cheese
manufacturing plants that are similar in
size to Twin County. Twin County
insisted that even though product-price
formulas are applied identically to large
and small plants, USDA should conduct
a regulatory impact analysis because in
Twin County’s opinion, product-price
formulas have a disproportionate impact
on small businesses compared with
larger entities that may benefit from
advantages of economies of scale.
A witness appearing on behalf of HP
Hood LLC (HP Hood) testified in
opposition to Proposals 1, 2 and 3.
According to the witness, HP Hood is a
manufacturer of Class I and Class II
dairy products that are distributed
nationally. The witness opposed
Proposals 1, 2 and 3 because their
adoption would change the Class III and
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Class IV milk pricing formulas that in
turn are used to determine the Class I
and Class II prices that HP Hood pays
for its raw milk supply. The witness
opposed adoption of any proposal that
would result in the automatic or
periodic updating of the Class III and
Class IV pricing formulas arguing that
such updates should be made through
the formal rulemaking process.
A witness appearing on behalf of NAJ
offered an amendment to Proposal 2.
The witness said the amendment would
expand the manufacturing cost survey
to include gathering manufacturing cost
data for whey protein concentrates
(WPC’s) and lactose. This inclusion was
reiterated in NAJ’s post-hearing brief.
A Michigan dairy farmer testified
regarding the profitability of dairy
farmers and in opposition to adopting
any proposals that would increase make
allowances. The witness was opposed to
increasing make allowances until the
price formulas are amended to recognize
a farmer’s cost of production. The
witness stated that on-farm fuel costs
were $35,000 in 2004 and had risen to
$70,000 in 2006. The witness asserted
that there are many Michigan dairy
farmers considering leaving the dairy
industry because of increased costs and
low milk prices. The witness also
expressed the opinion that NASS NFDM
prices were misreported or underreported during the prior 12 months.
A post-hearing brief submitted on
behalf of O–AT–KA Milk Products
Cooperative, Inc., (O–AT–KA) expressed
support for Proposals 1 and 2, and
opposition to Proposal 3. According to
the brief, O–AT–KA is a CapperVolstead cooperative located in New
York and its plant manufactures 600
million pounds of milk annually into
butter and NFDM. The brief stressed
that changes to the make allowances
and other factors of the product price
formulas need to accurately represent
the current manufacturing market. O–
AT–KA expressed support for Proposal
1 and was of the opinion that the
CPDMP 2006 survey should be
considered a minimum when setting
make allowances. According to the
brief, O–AT–KA’s plant manufacturing
costs are higher than the CPDMP 2006
survey weighted average NFDM cost. O–
AT–KA also wrote that they compete
directly with California plants and
requested that USDA keep the Class IV
and California Class 4a prices aligned if
it recommends any changes to the
product price formulas. O–AT–KA
noted support for Proposal 2, but not the
portion that calls for automatically
updating make allowances. The O–AT–
KA brief opposed adoption of Proposal
3 because it would inhibit their ability
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to provide balancing services to the
market and a fair return to its memberowners.
A joint post-hearing brief filed on
behalf of Dairylea and DFA (Dairylea et
al.), opposed adoption of Proposals 1
and 2. The brief expressed the opinion
that the current make allowances should
be used with the addition of the energy
adjustor advanced in Proposal 17 and
cost add-ons described in Proposal 20.
The Dairylea et al. brief supported the
NAJ modification of Proposal 2 to
expand the NASS product price survey
to include information on whey protein
concentrates.
Separate comments filed on behalf of
Grande Cheese Company (Grande),
Glanbia Foods, Inc. (Glanbia) and Kraft
Foods (Kraft) expressed support for the
proposed make allowances contained in
the tentative partial final decision.
Grande is a cheese manufacturer located
in Wisconsin processing over 1.5 billion
pounds of milk annually. Glanbia is a
cheese manufacturer with plants located
in Idaho and New Mexico. Kraft
operates numerous manufacturing
plants located throughout the country.
Grande, Glanbia and Kraft all endorsed
the comments and exceptions filed by
IDFA.
Grande’s comments also took
exception to the exclusive use of CDFA
data in determining the cheese make
allowance and the sole use of CPDMP
data to determine the dry whey make
allowance. Glanbia and Kraft urged
USDA to include CDFA dry whey cost
data in the make allowance computation
because CDFA has the only audited
whey cost data available. Grande,
Glaniba and Kraft also noted support for
adopting a manufacturing cost survey
(Proposal 2).
Comments filed by Leprino Foods in
response to the tentative final partial
decision expressed support for the
proposed make allowances. Leprino also
supported adoption of a one-time energy
cost adjustment as proposed by AgriMark et al.
Comments filed in response to the
tentative partial final decision
submitted on behalf of the Wisconsin
Cheese Makers Association (WCMA)
offered support for the make allowances
in the tentative partial final decision
and urged USDA to adopt the annual
manufacturing cost survey advanced in
Proposal 2. WCMA is an organization
representing 75 proprietary
organizations and cooperatives that
manufacture or process dairy products.
WCMA argued that because small- and
medium-sized plants typically do not
have whey drying capacity, they are
forced to pay more for the whey in their
producer milk than what can be
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recouped in the market. WCMA stated
that this is mostly because a plant’s
inability to dry whey for sale in the
market forces them to sell a lowervalued whey product such as wet whey.
According to WCMA, a higher whey
make allowance keeps small- and
medium-sized cheese plants from losing
revenue in times of high dry whey
prices. WCMA was of the opinion that
USDA should include CDFA dry whey
cost data in the make allowance
computation as it would provide a
higher make allowance than currently
proposed.
An Indiana dairy farmer took
exception with the increased make
allowances contained in the tentative
partial final decision. The dairy farmer
stated that producer paychecks should
not be reduced to cover the cost of
manufacturing milk into finished
products.
Comments filed in response to the
tentative partial final decision
submitted on behalf of the National
Family Farm Coalition (NFFC) and the
Ohio Farmers Union (OFU) opposed the
increased make allowances. NFFC and
OFU contend that the tentative partial
final decision did not take into account
farmers’ costs of production. The two
groups argued that make allowances
should not be increased during a time
when milk production costs also have
increased.
Exceptions to the tentative partial
final decision filed by St. Albans
Cooperative Creamery, Inc., (St. Albans)
requested USDA to consider dairy
farmer production costs before
permanently adjusting make
allowances. St. Albans is a dairy farmermember Capper-Volstead cooperative
that operates a milk manufacturing
plant. St. Albans was of the opinion that
the 2008 Farm Bill requires a dairy
farmer cost analysis before any final
adjustments to make allowances.
2. Product Yields and Butterfat
Recovery Percentage
A witness appearing on behalf of
DPNM et al. testified in support of
Proposals 6, 7 and 8. The witness
testified that before January 1, 2000, the
Federal milk order price discovery
mechanism took into account dairy
farmers’ cost of production when
determining minimum regulated prices.
If farmers’ cost of production increased,
the witness said that manufacturers
were able to pay farmers higher prices
because on-farm production costs could
be passed on to their customers.
However, under the current pricing
system, the witness argued, minimum
prices to dairy farmers are based on the
average prices of dairy products sold
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nationally during the month. As a
result, the witness asserted, dairy
farmers have experienced financial
hardship because they are unable to
pass on their higher costs to the
marketplace.
The DPNM et al. witness was of the
opinion that Proposals 6, 7 and 8 should
be considered jointly as coordinated
adjustments to the various yield factors
to ensure that dairy farmers receive a
fair minimum price. In its post-hearing
brief, DPNM et al. added that Proposals
3 and 15 should also be considered in
conjunction with Proposals 6, 7 and 8
because together they address all parts
of the current product price formulas.
The DPNM et al. witness testified in
support of Proposal 6 seeking to
increase the butterfat yield factor from
1.20 to 1.211. The witness said that this
change would correct for a
mathematical error in calculating farmto-plant shrinkage. The witness
explained that in the 2002 final decision
that established the current farm-toplant shrinkage factor, shrinkage
allocated to butterfat loss should have
been calculated on a per cwt of milk
basis, not on a per pound of butterfat
basis. DPNM et al. noted on brief that no
witnesses at the hearing disagreed with
this assertion.
The DPNM et al. witness also offered
a modification to Proposal 6 seeking to
amend the butterfat credit in the protein
price. The witness explained that when
USDA adjusted the butterfat yield factor
in the protein price formula to 1.572 in
2002 to account for farm-to-plant
shrinkage, the butterfat credit portion of
the protein formula was not adjusted to
an equivalent of 89.4 percent. The
witness estimated that increasing the
butterfat yield factor from 1.20 to 1.211
and decreasing the butterfat credit
portion of the protein formula from 90
to 89.4 percent would, on average, have
increased blend prices by $0.07 per cwt.
The DPNM et al. witness testified in
support of Proposal 7 seeking to
eliminate the farm-to-plant shrinkage
factor. The witness was of the opinion
that accounting for farm-to-plant
shrinkage allows producers and
processors to mask inefficiencies.
According to the DPNM et al. witness
their farm-to-plant shrinkage is well
below the 0.25 percent assumed in the
pricing formulas. The witness attributed
lower farm-to-plant shrinkage to large
producers who ship tanker loads of
milk. The witness insisted that
shrinkage is not a result of milk solids
being unrecoverable from the milk
tanker and hoses but rather the result of
imprecise measuring at the farm.
The DPNM et al. witness testified that
the yield factors in the product pricing
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formulas should be amended to reflect
current technology. The witness
proposed that the protein price formula
be changed to reflect a 94 percent
butterfat recovery in cheese
manufacturing, that the casein
percentage in milk be increased to 83.25
percent, and that the butterfat-to-protein
ratio in cheese be changed to 1.214 to
reflect average producer tests.
According to the witness, the adoption
of a 94 percent butterfat recovery rate
also implies that the butterfat yield
factor in the protein price should be
increased from 1.587 to 1.653 as
proposed in Proposal 8.
The DPNM et al. witness estimated
that increasing the butterfat recovery
rate from 90 to 94 percent would result
in a $0.105 increase in producer blend
prices. The witness said that the
currently assumed 90 percent butterfat
recovery rate is based on technology
that is more than 20 years old while
new technology enables manufacturers
to achieve a much higher recovery rate.
Using CDFA plant cost survey data for
2002 through 2005, the witness used a
mass balance analysis to estimate the
flow of milk components through a
cheddar cheese plant and the allocation
of milk components to products and byproducts. Through this analysis the
witness derived a 94 percent butterfat
recovery rate for plants participating in
the CDFA cost survey. The witness
estimated the butterfat recovery rate for
cheese plants that participated in the
2004 RBCS cost study to be 95.25
percent for all cheeses.
The DPNM et al. witness testified in
support of Proposal 8. The witness
argued that the percentage recovery
factor for casein in milk should be
increased from 82.2 to 83.25, to reflect
average producer tests, which would
result in a 2.3-cent per cwt increase in
producer blend prices. However, in
their post-hearing brief, DPNM et al.
stipulated that a casein recovery factor
of 83.10 percent was appropriate. DPNM
et al. explained in their brief that
changing the casein recovery factor
would raise the protein yield factor from
1.383 to 1.405; and increasing the
butterfat recovery rate to 94 percent
would change protein price formulas by
increasing the protein to butterfat ratio
from 1.17 to 1.214 and increasing the
butterfat yield from 1.587 to 1.653.
These changes would update the protein
price formula to reflect current industry
recovery standards and return revenue
to producers who, according to the
DPNM brief et al. have received lower
pay prices.
The DPNM et al. witness estimated
that increasing the butterfat-to-protein
ratio from 1.17 to 1.24 would result in
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a 3.7-cent increase in producer blend
prices. The witness said that the current
butterfat-to-protein ratio of 1.17
represents standardized milk tests at 3.5
percent butterfat and 2.9915 percent
true protein. However, according to the
witness the 2004 average producer milk
test for milk contained in the 2004
RBCS study was 3.69 percent butterfat
and 3.04 percent true protein which
more accurately represents a butterfatto-protein ratio of 1.214.
The DPNM et al. witness concluded
that the current butterfat to protein ratio
of standardized milk undervalues more
than one half of the producer milk
marketed on Federal orders. The
witness also stated that since plants
purchase milk at test, not at the
standardized values, it is more
appropriate to use weighted average
milk tests in the pricing formulas. In
brief, DPNM asserted that standardized
milk tests are lower than average
producer tests and result in yield factors
in the protein price formula that are
artificially low which in turn
understates what the protein price paid
to producers should be.
The DPNM et al. witness concluded
that if the DPNM et al. proposals to
change the butterfat recovery
percentage, butterfat-to-protein ratio,
and true protein in casein percentage
are adopted, producer blend prices
would increase by $0.20 per cwt.
The DPNM et al. witness also testified
that the NFDM yield factor should be
increased from .99 pounds of NFDM per
pound of solids nonfat (SNF) to 1.02
pounds of NFDM per pound of SNF.
The witness stressed that according to
current FDA standards of identity, one
pound of SNF can produce as much as
1.05 pounds of NFDM. The witness
elaborated that NFDM is often sold with
approximately 5 percent moisture,
whereas SNF is assumed to contain 0
percent moisture. Therefore, concluded
the witness, the current formula is
incorrect in assuming that one pound of
SNF actually produces less than one
pound of NFDM. The witness referred to
various studies conducted by CDFA and
CPDMP that demonstrated a combined
NFDM and buttermilk powder yield in
excess of 1.025 pounds per pound of
SNF. The witness was of the opinion
that after taking into account the lower
market value of buttermilk powder, a
NFDM yield of 1.02 is appropriate. The
witness estimated that this proposed
change would increase producer blend
prices by 4 cents.
The witness concluded that if all the
DPNM et al. yield changes were
adopted, blend prices would increase by
$0.42 per cwt and on average, producers
would receive $9,787 in additional
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9257
income per year. The witness was of the
opinion that any adjustment in yield
factors should also be accompanied by
an adjustment in make allowances
because the two are inherently linked.
Exceptions to the tentative partial
final decision filed on behalf of DPNM
et al. opposed the denial of the butterfat
recovery rate portion of Proposal 6, and
Proposals 7 and 8. DPNM et al.
reiterated their testimony presented at
the hearing that the butterfat recovery in
cheese is in excess of 90 percent. DPNM
et al. also argued that the USDA did not
properly evaluate the CDFA yield data
for cheese and the relevance of the
factors in determining butterfat
retention in cheese making. They
offered a calculation using the butterfat
tests, solids nonfat tests, cheese yield
and cheese moisture content for
California plants which purported to
show that those plants had a butterfat
retention rate in the range of 94 percent.
They also commented that similar
results were obtainable from the RBCS
data.
DPNM et al. noted in their comments
to the tentative partial final decision
that the farm-to-plant shrinkage
allowances should be removed from the
product-price formulas as advanced in
Proposal 7. DPNM et al. explained that
in the western part of the country,
where the producers it represents
operate, milk is delivered from the farmto-plant in full tanker loads and
therefore shrinkage is not a problem.
Accordingly, they argued that DPNM et
al. producers should not be penalized
through lower component prices for
being more efficient than producers who
ship smaller loads and therefore
experience farm-to-plant shrink.
Exceptions by DPNM et al. also
requested the Department to reconsider
adoption of Proposal 8. They argued
that yields contained in the productprice formulas should be based on
average producer tests, not on milk
standardized to 2.9915 percent protein
and 3.5 percent butterfat. They
expressed the view that since cheese
prices, butterfat prices and make
allowances are based on weighted
averages, yields should also be based on
the weighted average component tests of
producer milk. The exception also
reiterated their position that the casein
retention rate of 82.2 percent is
incorrect and that the factor should be
83.25 percent.
A witness appearing on behalf of
Leprino testified in opposition to
Proposals 6, 7 and 8. The witness
opposed the portion of Proposal 6
seeking to increase the butterfat
recovery rate in cheese manufacturing
from 90 to 94 percent. In the witness’
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opinion, the proponents for increasing
the butterfat recovery rate provided no
evidence to support this increase aside
from hypothetical examples. The
witness also opposed the amendment to
Proposal 6 to decrease the butterfat
credit in the protein formula below the
90 percent butterfat recovery rate that is
assumed in the cheese yield formula.
The witness explained that this would
cause cheese manufacturers to pay for
more butterfat than is actually contained
in the raw milk. The witness agreed that
there is an error regarding how butterfat
shrink is applied in the butterfat
formula. However, the Leprino witness
did not support increasing the butterfat
yield factor to 1.211 because of milk
component losses that occur in
cheesemaking that are not recognized in
the formula.
The Leprino witness testified in
opposition to elimination of the farm-toplant shrinkage factor advanced by
Proposal 7. The witness said that the
loss of milk when shipping from the
farm to the plant is well documented
and adjusting the Class III price to
reflect this loss is appropriate. The
witness said that Leprino experiences
farm-to-plant milk losses of
approximately 0.25 percent. The
witness disagreed with the rationale
offered by the proponent that increasing
farm sizes and single producers
shipping whole tanker loads of milk has
remedied farm-to-plant shrinkage. The
Leprino witness testified that deliveries
to the Leprino plant in Waverly, New
York, often have the milk of 15 to 18
producers per tanker. The witness
argued that milk losses from farm-toplant remain a reality that should
continue to be acknowledged in the
Class III price formula.
The Leprino witness testified in
opposition to increasing the cheese
protein yield factor from 1.383 to 1.405
(Proposal 8.) The witness said that the
proponent’s assumption of 83.25
percent casein in true protein content
that would lead to a cheese protein
yield factor of 1.405 was not based on
actual laboratory casein tests. Leprino’s
post-hearing brief reiterated its
opposition to Proposals 6, 7 and 8.
A witness appearing on behalf of
IDFA testified in opposition to
proposals seeking to increase yield
factors (Proposals 6, 7 and 8). The
witness was of the opinion that the
yield factors should actually be
decreased to reflect in-plant shrinkage
and the sale of lower-valued products
such as whey cream and buttermilk. In
its post-hearing brief, IDFA espoused
that proponents of increasing yield
factors made erroneous assumptions.
The brief stated that hearing evidence
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documents that farm-to-plant losses are
a marketplace reality and should
continue to be recognized in the product
price formulas. The brief also argued
that hearing evidence does not support
proponent’s claim that a 94 percent
butterfat recovery rate is achievable by
most cheese manufacturing plants.
Lastly, the brief insisted that the 83.25
percent casein in true protein assumed
by the proponents is not based on any
actual milk tests.
Comments and exceptions filed by
IDFA to the tentative partial decision
expressed continued support for the
denial of Proposal’s 6, 7 and 8.
A food technologist witness appearing
on behalf of IDFA testified regarding the
cheese manufacturing process and
specifically about cheese production at
Alto Dairy Cooperative (Alto Dairy)
during 1985—2003. The witness
discussed the evolution of cheese
processing technology and testified that
the greatest loss of milkfat during the
cheese making process occurs during
the cutting of the coagulum. The
witness estimated that in moving from
the use of traditional open vats to newer
horizontal enclosed vats, the loss of
milkfat during the cutting of the
coagulum was reduced from 9.6 percent
to 6 percent. However, the witness said,
this does not account for losses during
other stages of the cheesemaking
process. The witness was of the opinion
that the industry average butterfat
recovery rate in cheddar cheese is
approximately 90 percent.
A witness appearing on behalf of Kraft
testified in support of the positions and
proposals advocated by IDFA. The Kraft
witness opposed eliminating the farmto-plant shrinkage factor in the Class III
price formula (Proposals 7 and 8.) The
witness said that Kraft manufacturing
plants experience farm-to-plant milk
shrinkage and that this factor should
continue to be acknowledged in the
price formulas so that the butterfat
recovery percentages and yields are not
arbitrarily inflated.
A witness appearing on behalf of
Davisco Foods (Davisco) testified as
being unable to use whey cream in
standardized full-fat cheddar
production. The witness explained
Davisco sells whey cream to a butter
manufacturer at a price lower than that
reflected in the Class III pricing formula.
According to the witness, Davisco owns
and operates manufacturing plants in
Idaho, Minnesota and South Dakota.
A witness appearing on behalf of HP
Hood opposed adoption of increasing
yield factors. According to the witness,
the proposed yield factors are not
reflective of industry data provided in
record testimony. Furthermore, the
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witness said, the shrinkage factor
should remain in the pricing formulas
and claimed that HP Hood experiences
an average total shrinkage (farm-to-plant
and in-plant loss) of 1.5 percent.
A witness appearing on behalf of LOL
testified in opposition to Proposal 6.
The witness asserted that when
determining the current farm-to-plant
shrinkage factor USDA did not clearly
state if the butterfat loss was based on
product pounds or cwt of milk. The
witness said that an increase in the
butterfat yield would increase the raw
milk costs for manufacturers who
already contend with a make allowance
that does not cover their cost of
processing. The witness opposed
increasing the butterfat recovery
percentage to 94 percent and revealed
that the LOL cheese plant in Kiel,
Wisconsin, recently experienced an
average annual cheese yield of 10.21
pounds per cwt. According to the
witness, assuming a 90 percent butterfat
recovery rate and applying the plant’s
average milk tests, the Van Slyke
formula estimates a cheese yield of
10.16 pounds. The witness indicated
that the theoretical Van Slyke result and
observed plant yield validates the
continued use of the 90 percent butterfat
recovery rate in the Class III price
formula.
The LOL witness also testified in
opposition to Proposals 7 and 8 seeking
to amend the yield factors by
eliminating farm-to-plant and butterfat
shrinkage factors. The witness said
proponents’ claim that minimal
comingled milk in the Florida,
Southwest, Arizona and Pacific
Northwest orders fails to recognize that
comingled milk in the Northeast and
Upper Midwest is commonplace given
that the milk of 10 or more producers
is commonly comingled on a single
load. According to the witness, this
makes farm-to-plant shrinkage between
farm and plant weights inevitable. The
witness indicated that in 2006, the LOL
butter and NFDM plant in Carlisle,
Pennsylvania, experienced an average
difference of 0.343 percent between
farm and plant weights and a 0.511
percent butterfat shrinkage. The witness
insisted that the LOL shrinkage
percentages validate the continued
incorporation of farm-to-plant and
butterfat shrinkage factors in the pricing
formulas.
A witness appearing on behalf of
MMPA testified in opposition to
Proposal 7 seeking to eliminate the
farm-to-plant shrinkage factor. The
witness elaborated that even though
MMPA pays its farmers based on farm
weights and tests, some milk solids are
lost during transportation of milk from
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the farm to the plant. According to the
witness, MMPA plants experience
approximately a 0.3 percent loss of milk
from farm-to-plant. Without the farm-toplant shrinkage factor in the product
price formulas, the witness said that
MMPA would have to pay farmers for
milk that is lost in transport and cannot
be manufactured into a saleable
product.
The MMPA witness also opposed
Proposals 6 and 8 that seek to amend
the Class IV NFDM and butter yield
factors. The witness provided evidence
that MMPA experiences butter and
NFDM plant yields that are slightly
lower than those used by the Class IV
formula. The MMPA witness claimed
that their yields typically generate a
milk value of $11.11 per cwt, while the
assumed yields in the product price
formulas generate a milk value of $11.06
per cwt. The witness asserted that this
$0.05 per cwt advantage is eliminated
because of the off-grade products it
produces and sells at discounted prices.
The witness concluded that the current
Class IV yield factors are appropriate
and that the current calculation is
superior to the complicated alternatives
in Proposals 6, 7 and 8.
A witness appearing on behalf of
Foremost testified regarding cheese
production at Foremost’s manufacturing
plants. The witness entered a
declaration for the record describing the
types of cheese produced by Foremost
and the specific butterfat retention rate
achieved at its cheese manufacturing
plant in Marshfield, Wisconsin. Using a
mass balance analysis, the witness
stated that in 2006 the Marshfield plant
had an average butterfat retention rate of
90.25 percent. The witness said that
Foremost considered investing in more
modern cheese vats that would yield a
higher butterfat retention rate but chose
not to do so because it would take at
least 13 years to recoup any return on
such a large investment.
The Agri-Mark et al. post-hearing brief
expressed opposition to the adoption of
Proposals 6, 7 and 8. The brief argued
that the proponent’s methodology in
computing product yields was flawed
because it ignored that milk solids and/
or cream are sometimes added to farm
milk during processing resulting in
increased vat yields. Therefore, AgriMark et al. concluded that the product
yields advanced in Proposals 6 through
8 are not representative of the volume
of products that can be produced from
a hundredweight of milk. Agri-Mark et
al. also took exception to proponent’s
statements that dairy farmers are paying
for the costs of new plant equipment
designed to increase yields through
increased make allowances and reduced
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producer income. Agri-Mark et al.
argued that enhanced yields increase
production thus lower manufacturing
costs per pound of product from which
make allowances are derived. Agri-Mark
et al. also opposed the elimination of a
farm-to-plant shrinkage factor used in
the product price formulas.
The Agri-Mark et al. brief stated that
increasing the butterfat recovery rate
from 90 percent to 94 percent is not
justified. Agri-Mark et al. insisted that
the proponent’s claim that cheese plants
recycle their whey cream into the
cheese vat and are then able to achieve
a 94 percent butterfat recovery was
contradicted by many witnesses at the
hearing. Agri-Mark et al. also wrote that
the record lacks sufficient evidence to
justify increasing the NFDM yield factor
from .99 to 1.02. The brief supported
USDA’s reasoning for relying on the
current NFDM yield factor and said that
the farm-to-plant shrinkage factor is still
valid.
In comments and exceptions to the
tentative partial final decision, AgriMark et al. expressed support for
amending the butterfat yield factor, and
to the denial of the portion of Proposal
6 seeking to increase the butterfat
recovery rate and the entirety of
Proposals 7 and 8.
The post-hearing brief filed on behalf
of Dairylea et al. agreed with proponents
of Proposal 6 that an arithmetic error in
calculating the shrinkage factor in the
butterfat yield had been made by USDA.
Therefore, the brief advocated that the
butterfat yield factor in the butterfat
price formula be increased to 1.211. The
brief also discussed the butterfat
recovery percentage in the protein price
formula and supported increasing the
butterfat retention factor in cheese
manufacturing but did not specify a
factor. The brief explained that
currently the formula assumes that 90
percent of the butterfat in the cheese vat
ends up in the finished product. The
brief emphasized the importance of
recognizing that the butterfat retention
factor is based on butterfat going into
the vat, not butterfat coming from the
farm. The brief asserted that a 90
percent recovery rate of butterfat going
into the cheese vat is equivalent to 89.4
percent of the butterfat coming from
farms going into the finished product
after accounting for farm-to-plant
shrinkage. The brief detailed that the
cheese manufacturers who testified to
achieving a butterfat recovery
percentage of 90.25 percent on the basis
of farm tests actually experienced a
butterfat recovery of 90.9 percent of fat
that entered the cheese vat. The brief
concluded that this evidence, combined
with additional testimony regarding
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available technology, makes higher
butterfat recovery possible and should
be reflected in the protein price formula.
The Dairylea et al. brief opposed the
elimination of the farm-to-plant
shrinkage factor as advanced in
Proposal 7. The brief asserted that while
some production areas are dominated by
large farms, a large portion of the
country is dominated by small farms
where farm-to-plant shrinkage is
prevalent. However, the brief noted that
farm-to-plant shrinkage is reflected in
the product-price formulas because
yield data provided by manufacturers is
commonly based on farm weights and
tests.
The post-hearing brief submitted on
behalf of O–AT–KA stated that the
hearing record does not justify adoption
of Proposals 6, 7 and 8, and that the
proposed changes to yield factors would
increase its raw milk costs and inhibit
its ability to provide balancing services
to the market. O–AT–KA was of the
opinion that Proposal 6 should only be
adopted if USDA simultaneously
amends the product-price formulas to
account for in-plant losses and off-grade
products that are sold at a discount.
Comments to the tentative partial
final decision filed separately by
Grande, Glanbia, Kraft, Leprino and
WCMA expressed continued support for
the denial of Proposals 7 and 8.
3. Value of Butterfat in Whey
A witness appearing on behalf of
IDFA testified in support of Proposal 9
seeking to adjust the protein price
formula to reflect the lower value and
volume of butterfat recoverable from
whey cream and was of the opinion that
Proposal 9 was superior to Proposal 10.
The witness asserted that the current
Class III price formula values the
butterfat not captured in the cheese at
the Grade AA butter price even though
it is sold as whey butter which has a
lower value in the marketplace. In its
brief, IDFA supported the testimony of
the Leprino witness regarding saleable
volume and the value whey cream has
in the marketplace. The brief also
highlighted testimony that some
processors do not return whey cream
back into their cheese vats. The brief
concluded that the butterfat adjustment
contained in the protein price formula
should be reduced by $0.016 to account
for the lower value and saleable volume
of whey cream.
Comments filed by IDFA in response
to the tentative partial final decision
took exception with the denial of
Proposal 9. IDFA argued that record
evidence demonstrates that whey cream
has a lower value in the marketplace
than butterfat used to produce Grade
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AA butter. According to IDFA,
opponents of Proposal 9 speculated as
to how much whey cream is re-used in
cheese manufacturing but did not
provide any specific examples where
the whey cream is valued at or above
the value of butterfat in Grade AA
butter. IDFA referenced hearing
testimony from numerous cheese
manufacturers who testified that they
did not use whey cream in the cheese
manufacturing process.
The witness appearing on behalf of
Agri-Mark supported adoption of
adjusting the Class III protein price
component to account for the lower
value of whey butter (Proposal 10). The
witness estimated that 0.42 pounds of
whey butter is made from a
hundredweight of milk and is sold at a
price below the Grade AA butter price.
According to the witness, Agri-Mark
sells its whey butter for $0.074 per
pound less than its Grade AA butter.
The witness was unaware of any public
data or published reports on market
prices for whey butter and was of the
opinion that there are very few
manufacturers making whey butter in
the United States.
The post-hearing brief filed on behalf
of Agri-Mark et al. contended that the
product price formulas should recognize
the lower value and saleable volume of
whey cream and urged the adoption of
Proposal 9. The brief summarized
record evidence regarding plant whey
cream prices and volumes and insisted
that lower whey cream values are a
market reality that should be reflected
in the product-price formulas. AgriMark et al. reiterated this view in
comments and exceptions filed in
response to the tentative partial final
decision. Agri-Mark et al. stated that
despite a lack of widely available whey
cream price data, USDA should still
make an adjustment to the price
formulas to recognize its lower market
value.
A witness appearing on behalf of
Leprino testified in support of Proposal
9. The Leprino witness reviewed the
derivation of the current cheese yield
per pound of fat in the Class III productprice formula using a Van Slyke formula
with an assumed butterfat recovery rate
of 90 percent and a moisture content of
38 percent. The witness asserted that
the Class III formula implies that 0.035
pounds of butterfat per cwt of milk is
recoverable as whey cream but is valued
in the Class III pricing formula as if it
was used to produce 0.042 pounds of
Grade AA butter. However, the witness
asserted that all whey cream is used to
produce Grade B butter which has a
lower value than Grade AA butter.
Based on testimony from Agri-Mark,
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LOL and NDA, the witness estimated
that under the Class III price formula,
cheese manufacturers in the Northeast
and Pacific Northwest are being charged
12.5 and 20.4 cents, respectively, per
pound of butterfat in the whey cream
more than what these products can be
sold for in the marketplace. The witness
was unaware of any publicly available
data on national whey cream production
volumes and prices.
The Leprino witness testified that the
Class III formula also overestimates the
volume of butterfat recoverable as whey
cream. With an assumed 90 percent
butterfat recovery rate, the witness said
that the formulas infer the remaining 10
percent of butterfat is captured as whey
cream. However, the witness explained
that only 7.8 percent of the butterfat is
actually recoverable because some
butterfat is incorporated into dry whey
or the skim portion of the salt whey that
must be disposed.
The Leprino witness testified that
Proposal 9 would amend the Class III
formula to better account for
overvaluing the theoretical volumes and
market values of whey cream. The
witness explained that the butterfat
credit in the protein portion of the Class
III formula should be increased from 90
to 92.20 percent to acknowledge and
correct for the 7.8 percent of butterfat
that is recoverable as whey cream. In
addition, the witness maintained that
the butterfat portion of the Class III
formula should be reduced by $0.016 to
account for the lower price
manufacturers receive for Grade B
butter. The witness estimated that these
changes would have lowered the Class
III price by $0.169 per cwt over the last
five years. The witness revealed that
Leprino uses all of its whey cream in its
cheese production and therefore is able
to recoup the cheese value for all its
milk components.
A post-hearing brief filed on behalf of
Leprino stressed that the butterfat
portion of the Class III formula should
actually be reduced by $0.021 because
hearing testimony from other witnesses
revealed that 2007 whey prices in the
Pacific Northwest were significantly
lower than those in 2005 and 2006. The
brief highlighted testimony that the
2005–2006 Pacific Northwest average
whey cream sale price was 94.4 percent
of the average Grade AA butter price
while the 2005–2007 average whey
price fell to 89.4 percent of the Grade
AA butter price.
Comments to the tentative partial
final decision filed by Leprino took
exception to the denial of Proposal 9.
Leprino reiterated arguments made
during the hearing that the market value
and volume of whey cream recoverable
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in the cheesemaking process is
overvalued in the product-price
formulas, and that the decision ignored
record evidence demonstrating these
market realities. Leprino wrote that
opponents of Proposal 9 did not offer
any evidence of other higher-valued
uses for whey cream, but they did
acknowledge that whey cream for use in
Grade B butter has a lower market value.
Leprino also argued that even if there
are higher-valued end uses for whey
cream, that the ultimate use of whey
cream is irrelevant. According to
Leprino, if whey cream is sold at a
discount to regular cream, then that
should be reflected in the price
formulas.
A witness appearing on behalf of Kraft
supported adoption of Proposal 9. The
witness indicated that on average, Kraft
receives $0.10 per pound less for whey
butter than for Grade AA butter.
Comments to the tentative partial
final decision filed by Kraft took
exception to the denial of Proposal 9.
Kraft argued that Proposal 9 should be
adopted because the record
demonstrates that whey cream has a
lower market value than cream used to
produce Grade AA butter.
A witness appearing on behalf of
Saputo testified that the Class III pricing
formula wrongly presumes that all
cheese manufacturers have dry whey
processing capabilities and can obtain a
high value for dry whey in the
marketplace. In reality, the witness said,
manufacturers sell whey as whey
protein concentrates, whey protein
isolates or in liquid form that have
widely disparate market values.
According to the witness, assumptions
regarding the production of dry whey
may financially harm cheese
manufacturers and could result in the
accelerated consolidation of milk
manufacturing. For these reasons, the
witness supported the adoption of
Proposal 9.
A witness appearing on behalf of
Great Lakes Cheese (GLC) testified in
support of adoption of Proposal 9.
According to the witness, GLC is a
cheese manufacturer whose plant in
Adams, New York, annually processes
410 million pounds of milk into
American style cheeses and byproducts. The witness said that because
milk components are lost in many stages
of the cheesemaking process, the
Federal order system should not have
class prices that require manufacturers
to pay for milk components that they are
unable to use and sell. The witness
illustrated by example the in-plant milk
losses incurred from sanitizing
equipment and the removal of sludge
from the whey separator. In the
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example, the witness estimated that in
2006, GLC lost $23,770 worth of whey
solids in the desludging process.
The GLC witness said that GLC’s
Adams facility produces one million
pounds of whey cream annually and
usually sells it for the Grade AA butter
market price. In 2006, the witness
stated, GLC received $1.2425 per pound
of whey cream fat and the average CME
AA butter price was $1.2405. However,
the witness explained, because the
average Class III butterfat price was
$1.3185 per pound (a $0.076 price
difference), it had to pay a higher price
for the butterfat in raw milk than it
could recover in the market.
A witness appearing on behalf of NDA
testified that Federal orders should
establish fair minimum prices for
producer milk while ensuring that the
product-price formulas reflect the true
value of dairy products in the market.
The witness stated that NDA receives
significantly less for its whey cream
sales than it does for sweet cream sales
and that Proposal 9 or Proposal 10
should be adopted to reflect this reality
in the product-price formulas. The
witness estimated that, on average, from
2005 through 2007, on a butterfat basis,
NDA sold its whey cream for 36 percent
less than it sold its sweet cream and
$0.0244 per pound less than the Class
III butterfat price. Therefore, the witness
said, NDA supports IDFA’s proposal to
adjust the protein price to reflect the
lower value of whey cream.
The NDA witness also explained that
its average selling price for
manufactured products is less than its
reported prices to NASS because some
of its production does not meet NASS
specifications. The witness testified that
products not meeting NASS
specifications are either products made
to meet specific customer orders or offgrade production such as cheese fines.
The witness said that in fiscal year
2007, 3.98 percent of NDA’s cheese
production did not meet NASS
specifications either by design or error.
The volume was sold for a weighted
average price of $0.0218 per pound less
than its NASS reported cheddar—
lowering NDA’s total average cheese
price for the year by $0.009 per pound,
the witness said. The witness described
similar scenarios for NDA’s whey,
NFDM and buttermilk production.
The NDA witness revealed that in
fiscal year 2007, NDA’s Sunnyside,
Washington, plant, which uses modern
horizontal cheese vats, experienced a
cheese yield of 10.22 pounds of cheese
per cwt of milk with an average
moisture content of 38 percent and a
butterfat recovery rate of 92 percent.
The witness noted that NDA’s yield
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reflects the use of whey cream added to
the cheese vats.
A witness for Twin County testified in
support of adopting Proposal 9. The
witness asserted that the Class III price
formula and current make allowances
for cheese and dry whey overvalue milk
components, particularly other solids,
leading to reduced plant profitability.
As a result, explained the witness,
manufacturers are required to account to
the marketwide pool for some
components at the Class III price of milk
even though they receive less than the
Class III price for them in the
marketplace.
The witness explained that Twin
County produces cheddar cheese that
meets particular customer specifications
which do not allow for returning whey
cream into its cheese-making process.
Consequently, the witness said that
Twin County invested in a whey
processing facility to process its skim
whey into whey protein concentrates
(WPC), ultra filtered milk and permeate.
According to the witness, Twin County
sells all of its whey cream in the
marketplace for approximately the
Grade AA butter price times a multiplier
of 1.12. The witness said that Twin
County does fortify its cheese vats with
additional milk solids when it is
economically feasible and its average
cheese yield (including fortification) is
seasonal and ranges from nine to ten
pounds of cheese per 100 pounds of
milk. The witness said that while Twin
County is required to account to the
marketwide pool for all milk
components at the Class III price, it sells
the whey produced at a reduced price
in the market resulting in a net loss to
the company for those components.
Additionally, while the current make
allowances (effective March 2007) did
improve the profitability of Twin
County, the witness insisted that the
whey make allowance is still inadequate
in covering the whey manufacturing
costs of the plant.
The Twin County witness conceded
that the premiums it pays for milk could
be adjusted downward to offset revenue
losses. However, the witness indicated,
renegotiating premiums with suppliers
may have the unintended consequence
of impeding or damaging long-standing
relationships with suppliers and disrupt
their ability to procure milk as needed.
The witness appearing on behalf of
HP Hood also supported adoption of
Proposal 9 or 10.
The post-hearing brief submitted on
behalf of Dairylea et al. opposed the
adoption of Proposals 9 or 10. The brief
did not dispute that whey cream has a
lower value in the marketplace, but
noted that there are also higher valued
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uses for butterfat that are not recognized
in the butterfat price. The brief
concluded that it would be
inappropriate to amend the butterfat
value to recognize lower-valued whey
cream without also recognizing highervalued butterfat uses.
The post-hearing brief submitted on
behalf of DPNM et al. opposed adoption
of Proposals 9 or 10. The brief stressed
that there is no publicly announced
information regarding prices and
volumes for whey cream or whey butter.
The brief argued that record evidence
demonstrates that a significant portion
of whey cream is returned to the cheese
vat and not sold as whey cream in the
market. Exceptions to the tentative
partial final decision filed by DPMN et
al. expressed their continuing
opposition to Proposal 9.
The post-hearing brief submitted on
behalf of NAJ also expressed opposition
to the adoption of Proposals 9 or 10. The
brief said that if the value of whey
butter is as low as the proponents claim,
then a separate whey butterfat price
should be established in lieu of
lowering the protein price.
Separate comments to the tentative
partial final decision submitted on
behalf of Grande and Glanbia each took
exception to the denial of Proposal 9.
Grande and Glanbia both argued that
record evidence indicates that whey
cream has a lower market value than
cream processed into Grade AA butter.
Glanbia further insisted that while
opponents to Proposal 9 claimed that
other higher-value uses for whey cream
exist, they provided no examples.
Grande and Glanbia comments
concluded that Proposal 9 should be
adopted so cheese manufacturers will
not be required to pay more for whey
cream than can be recouped in the
market.
Comments filed by WCMA also took
exception with the denial of Proposal 9
in the tentative partial final decision.
WCMA argued that whey cream is overvalued in the current product-price
formulas because it is made into lower
valued Grade B butter. WCMA was of
the opinion that NASS should collect
data on end uses and values of whey
cream.
4. Barrel-Block Cheese Price
The witness appearing on behalf of
IDFA testified in support of eliminating
the current 3-cent barrel-block price
adjustment (Proposal 12). The witness
maintained that there is no cost
difference between block and barrel
production, therefore the 3-cent
adjustment should be eliminated.
Furthermore, the witness said, the
CPDMP data used to determine the
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current make allowances takes into
account the manufacturing cost
difference between barrels and blocks.
Maintaining the 3-cent adjustment
would, the witness said, result in
double counting of any purported cost
difference. In its post-hearing brief,
IDFA reiterated the need to eliminate
the 3-cent barrel-block price adjustment.
Comments filed by IDFA in response
to the tentative partial final decision
opposed the denial of Proposal 12. IDFA
argued that because cost data contained
in the record demonstrates no difference
in packaging costs between block and
barrel cheese production, elimination of
the 3-cent barrel-block spread is
warranted.
A witness appearing on behalf of
Davisco testified in support of Proposal
12. The witness offered evidence on
Davisco’s manufacturing costs for 40pound block and 500-pound barrel
cheese production at its LeSueur,
Minnesota, plant. The witness
explained that the LeSueur plant has
separate block and barrel production
lines that enable Davisco to easily
isolate and compare packaging and
capital costs. After discussing the
differences in packaging and equipment
needed to produce block cheese and
barrel cheese, the witness testified that
Davisco spends $0.0012 per pound more
to produce block cheese. According to
the witness, its de minimis cost
differences in producing block and
barrel cheese warrant eliminating the 3cent adjustment.
The witnesses appearing on behalf of
Kraft, NDA and Saputo expressed
support for adoption of Proposal 12. The
Kraft witness testified that the 3-cent
adjustment historically represented the
additional cost of producing blocks
instead of barrels. However, the Kraft
witness asserted, the gross return
between blocks and barrels (adjusted to
38 percent moisture) is approximately
$0.0075 per pound. Therefore,
concluded the Kraft witness, it is no
longer necessary to add 3-cents to the
barrel cheese price because that cost
difference is being recouped in the
marketplace.
Separate comments filed by Grande
and Kraft in response to the tentative
partial final decision opposed the denial
of Proposal 12. Grande and Kraft argued
that record evidence demonstrates that
there is no processing cost difference
between block and barrel cheese. Kraft
elaborated that the cost data contained
in this hearing record is the first actual
cost data contained in any hearing
record that addressed the 3-cent barrel
adjustment. Therefore, Grande and Kraft
urged USDA to adopt Proposal 12 in the
final decision.
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While no testimony was received
from proponents DFA and NDA
regarding Proposal 13, a witness
appearing on behalf of Kraft testified in
opposition to eliminating the barrel
cheese price from the Class III price
formula (Proposal 13). The witness
asserted that since 2000, the NASS
cheese price survey represented
approximately 57 percent barrels and 43
percent blocks. Therefore, the witness
was of the opinion that it would be
inappropriate to eliminate the barrel
price from the Class III price formula
because it would not reflect the actual
prices of such a large part of the
national cheese market.
The witness appearing on behalf of
Leprino supported eliminating the 3cent block-barrel adjustment. The
witness asserted that the adjustment
was originally added to the barrel
cheese price because it was considered
the standard cost difference between
producing block and barrel cheese. The
witness testified that the 3-cent
adjustment was no longer necessary
because the CPDMP cheese
manufacturing cost survey used to
derive the current make allowances
already accounts for the cost difference.
The witness explained that keeping the
3-cent adjustment would be double
counting cost differences that may exist.
According to the witness, the 3-cent
adjustment was never based on actual
cost data; rather it was a generally
accepted valuation of the average
production cost difference between
producing 40 pound blocks and 500
pound barrel cheese at a 39 percent
moisture standard. However, the
witness noted that after January 2001
the barrel cheese price was adjusted to
a 38 percent moisture standard. The
witness asserted that this moisture
standard change, on average, increased
the barrel cheese price 2.2 cents per
pound during the last 5 years. The
witness estimated that eliminating the
3-cent barrel-block adjustment would
reduce the Class III price by $0.1624 per
cwt.
The Leprino witness also opposed
adoption of Proposal 13 because it
would reduce the amount of data used
to compute the classified milk prices.
The witness said that the barrel cheese
price should continue as a factor in
computing the Class III price because of
the additional cheese volume for which
it accounts.
Comments to the tentative partial
final decision submitted by Leprino
opposed the denial of Proposal 12.
Leprino disagreed with the reasoning
advanced in the tentative partial final
decision that differences in selling
prices have no causal relationship to
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differences in manufacturing costs.
Leprino argued that the 3-cent cost addon was originally incorporated into the
product-price formulas because
historically the selling price difference
between blocks and barrels was 3-cents.
This difference in selling prices,
Leprino asserted, has always been
attributed to manufacturing cost
differences. Regardless, Leprino added
that the Davisco plant cost data
contained in the record proves that the
difference in packaging costs between
blocks and barrels is negligible;
therefore Proposal 12 should be
adopted. Leprino’s comments were
endorsed by Glanbia.
The post-hearing brief submitted on
behalf of Agri-Mark et al. maintained
that the 3-cent barrel adjustment should
be eliminated and supported the views
of the IDFA witness and its post-hearing
brief urging the adoption of Proposal 12.
Agri-Mark et al. reiterated this view in
its comments and exceptions on the
tentative partial final decision. AgriMark et al. argued that proponents of
the elimination of the 3-cent add-on had
provided enough record evidence to
meet their administrative burden. AgriMark et al. summarized the regulatory
history of the 3-cent barrel adjustment.
They argued that record evidence by the
Davisco witness demonstrated that the
packaging cost difference between block
and barrel cheese is negligible, and
maintained that opponents of its
elimination offered no rebuttal
evidence.
The post-hearing brief submitted on
behalf of Dairylea et al. opposed
eliminating the 3-cent per pound barrelblock cheese adjustment as advanced in
Proposal 12. The brief expressed the
opinion that cost data from one cheese
plant offered by Davisco Foods is not
adequate to support adopting the
proposed change. According to the brief,
cost data presented by Davisco Foods
only compared packaging and capital
costs for producing barrel and block
cheese. The brief argued that despite
Davisco’s belief that total manufacturing
costs before packaging were the same,
there may be differences in other
processing costs because block and
barrels are produced at different
moisture contents. The brief asserted
that if Davisco Foods cost data is
adjusted to reflect average moisture
content for blocks (37.75 percent) and
barrels (34 percent), the cost of capital
and packaging for blocks would be 10
percent higher than for barrels.
The Dairylea et al. brief also
addressed the proponents’ assertion that
incorporating CPDMP data into the
determination of new make allowances
provides the necessary recognition of
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the cost difference between block and
barrel production. The brief argued that
CDFA data only includes cost data from
block production and its continued use
would mean that new make allowances
would be too heavily weighted towards
block production. The brief also
asserted that evidence showing the
market price relationship between
blocks and barrels does not provide a
basis to conclude that similar cost
changes have occurred in the
manufacturing costs of block and barrel
cheese.
In its brief, DPNM et al. opposed the
reduction or elimination of the 3-cent
barrel price adjustment (Proposal 12)
unless Proposal 15 was adopted. The
brief explained that Proposal 15 (using
the CME to determine product prices) is
intended to use only the CME block
cheese price, not an average of the 500pound barrel and 40-pound block
prices. If Proposal 15 is adopted as
intended, DPNM et al. wrote, the 3-cent
barrel adjustment would no longer be
necessary.
Comments filed by DPNM et al. in
response to the tentative partial final
decision supported the continued use of
the 3-cent barrel price adjustment if
USDA continues to use both block and
barrel survey prices in the Class III price
formulas.
5. Product Price Series
A witness appearing on behalf of
Agri-Mark testified in support of
Proposal 14. The witness said that the
proposed price series would use a
combination of the NASS and CME
cheese prices in the Class III productprice formula. The witness said that
Proposal 14 seeks to incorporate current
CME data to reduce the monthly
differences between prices that most
manufacturers sell their cheese and the
cheese price from which the
manufacturers cost of raw milk is
determined. The witness said that
cheese manufacturers use the CME
cheese price to set their base cheese
price which is then reflected in the
NASS cheese price announced two
weeks later. The witness explained by
example that the two week lag between
CME and NASS price releases was a
problem in 2004 when cheese prices
were rapidly changing from week-toweek causing the two price series to
vary by more than 10 cents per pound
during seven months of the year.
According to an analysis conducted by
the witness from January 2000 until
February 2007, 98 percent of the
variation in the NASS block cheese
price and 87 percent of the variation of
the NASS barrel cheese price could be
explained by the CME price.
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The Agri-Mark witness provided an
example to illustrate how Proposal 14
could be administered. The witness
explained that the cheese price in the
Class III formula for April 2007 would
be calculated as follows: (1) Compute
the average CME cheese price for the
four weeks in April; (2) add the average
NASS cheese price for the last two
weeks of March and the first two weeks
of April; and (3) subtract the average
CME cheese price for the four weeks of
March. The Agri-Mark witness
explained that the cheese price used to
determine the advanced Class I price
should be as follows: (1) Compute the
average CME cheese price for the second
and third weeks of March; (2) add the
average NASS cheese price for the first
and second weeks of March; and (3)
subtract the average CME cheese price
for the last two weeks of February. The
witness was of the opinion that these
new formulas would enable USDA to
use current CME prices while in the
long-run the NASS price series would
continue as the primary determinant of
cheese prices. The witness was of the
opinion that the resulting ‘‘hybrid
price’’ would reduce large monthly
price variations like those experienced
in 2004. The witness said that AgriMark does not support the sole use of
CME prices in the price formulas
because of low trading volume and the
possibility of price manipulation.
The Agri-Mark witness indicated that
adopting this hybrid price would not
significantly change the average USDA
cheese prices or FMMO producer blend
prices. The witness estimated that the
average Class III prices would have been
approximately $0.005 per pound less
and the Northeast order producer blend
prices would have averaged $0.003 per
cwt less using this hybrid price during
2003–2006. The witness did not see a
need to compute a hybrid price for
butter because the lag between the CME
and NASS price reporting is not a
problem.
In their post-hearing brief, Agri-Mark
et al. reiterated their support for
adoption of Proposal 14 and opposition
to adopting Proposals 15 and 18, both of
which are discussed subsequently.
In their comments and exception to
the tentative partial final decision, AgriMark et al. expressed support for
USDA’s decision to deny Proposals 14,
15 and 18.
A witness appearing on behalf of
DPNM et al. testified in support of using
CME product prices in the FMMO price
formulas as advanced in Proposal 15.
The witness was of the opinion that the
CME is a superior price discovery
mechanism. The witness asserted that
the time lag associated with the NASS
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price survey has, at times, created huge
differences between the advanced Class
I and Class II prices and the monthly
prices that are incorporated into the
Class III and Class IV formulas. The
witness opined that the time lag
associated with using the NASS price
survey sends incorrect price signals to
producers and that it creates a
disincentive for manufacturers to seek
higher product prices in the market as
it results in increased raw milk costs.
The DPNM et al. witness testified that
NASS product prices track closely with
CME prices for cheese and butter.
However, the witness said, the NASS
NFDM price does not reflect the current
cash market. The witness stated that the
NFDM market is unique because there
are only a few sellers and they tend to
use the previous week’s NASS NFDM
price to sell their products. The witness
stated that there has been a growing
price disparity between the NASS
NFDM price and the NFDM price
reported by Dairy Market News.
According to the witness, during the
first quarter of 2007, the monthly NASS
NFDM prices averaged $0.12 per pound
less than what was reported as the
average Western Mostly NFDM price by
Dairy Market News. The witness
calculated that this resulted in Class II
and Class IV prices that were $1.03 per
cwt lower. The witness asserted that the
price discrepancy could be a reporting
error, noting that NASS does not have
the authority to audit its surveyed price
data.
The DPNM et al. witness testified that
CME product prices could become the
preferred price discovery mechanism
because they originate in a public
market that, since 1997, has expanded
trading times and the number of dairy
products traded. The witness stressed
that CME product prices are more
reflective of the current market for
cheese, butter and dry whey because
many manufacturers refer to the current
CME product price when making their
sales. The witness added that the
involvement of the Commodity Futures
Trading Commission (CFTC) provides
for regulatory oversight. However, the
witness testified that NFDM is not
actively traded on the CME because
packaging specifications require that
NFDM traded on the CME be in
government-specified bags. The witness
was of the opinion that if the packaging
requirement was changed, then the CME
would become a viable market for
NFDM.
The brief submitted by DPNM et al.
expressed support for adoption of
Proposal 15 and reiterated the position
that NASS product price surveys should
be replaced by CME product prices in
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each of the price formulas except for the
other solids formula. According to the
brief, since the other solids formula uses
the NASS dry whey price and the CME
does not have a cash traded dry whey
price, continued use of the NASS dry
whey price is appropriate. The brief
indicated that the use of CME prices
would alleviate timing and circularity
issues associated with relying on NASS
survey prices. The brief noted that this
position is supported in a June 2007
General Accountability Office (GAO)
study.
The DPNM et al. brief expressed
support for using a competitive pay
price series to establish classified
Federal order milk prices. However, the
brief expressed the opinion that
Proposal 18 needs to be more fully
developed. It further requested that
USDA investigate the use of a
competitive pay price and convene a
hearing to consider it as an alternative
to NASS survey price information.
DPNM et al. exceptions to the
tentative partial final decision stated
their opposition to the denial of
Proposal 15. They reiterated arguments
made in their hearing testimony that the
NASS survey is vulnerable to
manipulation. Consequently, DPNM et
al. advocated use of the CME prices in
the product-price formulas to provide
for transparent market signals.
A witness appearing on behalf of the
Maine Dairy Industry Association
(MDIA) testified in support of Proposal
18. According to the witness, MDIA is
an association that represents all of
Maine’s 350 dairy farmers. The witness
said that Proposal 18 seeks to establish
an average competitive pay price for
milk by incorporating a factor into the
other solids portion of the Class III price
formula to account for any monthly
spread between the component prices
for milk and a competitive pay price for
equivalent Grade A milk. The witness
was of the opinion that a competitive
pay price is a superior method to
product-price formulas in determining
the value of milk used to set regulated
minimum prices. The witness
contended that butter, NFDM, cheese
and dry whey each have a separate
market that responds to unique supply
and demand factors. The witness
explained that in a competitive pay
price system, buyers pay for raw milk
according to the supply and demand
conditions of the particular market in
which they operate.
The MDIA witness stated that USDA
has previously considered competitive
pay price mechanisms for pricing Class
III milk. The witness explained that a
1994–1996 simulated analysis
conducted by USDA revealed several
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difficulties with competitive pay prices,
such as: (1) The inability to eliminate
the influence of regulated minimum
prices; (2) inadequate vigorous
competition among buyers of milk; and
(3) the problems associated with using
a competitive pricing scheme based on
the competitive situation for milk in
Minnesota and Wisconsin. The witness
explained that these limitations formed
the basis for Proposal 18.
The MDIA witness explained how
Proposal 18’s competitive pay price
would be administered. The witness
said that geographic areas where an
adequate level of competition for milk
exists should be determined by
computing a Herfindahl index for each
county. The witness said this index is
a measurement of market
competitiveness wherein a low
Herfindahl index indicates more
competition for milk. For example,
competition for milk in a county with a
value of 0.3450 is greater than in a
county with a value of 0.3500. The
witness proposed that competitive price
zones be determined by aggregating
clusters of ten or more contiguous
counties with values below 0.33. The
witness said that an ideal situation
would be if at least a third of the
manufacturing milk in Federal order
marketing areas were competitive price
zones. The witness explained that
handlers purchasing milk within these
zones would be exempt from paying
minimum classified prices, but would
still be required to pay current
differentials for Class I and Class II milk.
According to the witness, these
differentials would be pooled and
producers within the competitive price
zones would receive a 12-month rolling
average producer price differential
(PPD). Handlers would still pay
regulated classified prices for milk
produced outside of these zones, the
witness said.
According to the MDIA witness,
market administrators would collect
actual payment data from handlers for
milk purchased within the competitive
price zones for the preceding month and
estimated payments for the current
month. The market administrators
would then compute a weighted average
price and deduct from that price the 12month rolling average PPD for the
month. This residual would be the value
of manufacturing milk in the
competitive price zone. A national
average competitive manufacturing milk
price would then be computed by
aggregating the average price and
volume data from all reporting
competitive price zones. This result
would become the new minimum Class
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III price for milk purchases outside of
the competitive price zones.
The MDIA witness said that the
computation of protein and fat prices
would be unchanged under its
competitive price proposal. However,
the other solids price would be the
residual value of the Class III price once
the values of butterfat and protein were
deducted. The witness explained that
indirect compensation to farmers, such
as hauling charges, would not be
included in the computation of a
weighted average price. However, the
witness also noted that Class III milk
prices could potentially be decreased if
manufacturers choose to exploit a
‘‘loophole’’ and shift more monies into
hauling subsidies.
The MDIA witness asserted that, over
the long run, producers located inside
competitive price zones would receive
the same revenue for their milk as
producers located outside of
competitive price zones. The witness
did not know if Proposal 18’s pricing
method would generate higher or lower
prices to all producers than the prices
generated by the current end-product
pricing system.
The MDIA witness was of the opinion
that the largest group of counties in
competitive price zones would be in the
Upper Midwest (UMW) marketing area
because of the large number of cheese
plants competing for a milk supply. The
witness predicted that this would most
likely lead to a weighted average
competitive pay price that is heavily
influenced by prices paid by UMW
plants that historically have been higher
than Federal order minimum prices.
The witness conceded that a
competitive pay price heavily weighted
to conditions in the UMW would not
reflect national supply and demand
conditions.
A Maine dairy farmer appearing on
behalf of the MDIA testified in support
of Proposal 18. The witness testified
that Maine is not an area regulated by
the Federal milk marketing order
program, but that producer prices in
Maine are heavily influenced by those
established under the Northeast order.
The witness stated that, in the face of
Federal minimum prices that are too
low and driven by unpredictable price
swings for dairy products, Maine dairy
farmers have had to turn to alternative
sources of income including state
subsidies and increased equity
financing to keep their farms operating.
After adjusting USDA cost of production
information for Vermont to account for
lower labor and feed costs, the MDIA
witness estimated the cost of production
for a Maine dairy farmer in 2004, 2005
and 2006, to be $19 per cwt, $20 per cwt
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and $24 per cwt, respectively. The
witness compared this price to the
Northeast Federal order mailbox prices
of $16.29 per cwt, $15.39 per cwt and
$13.22 per cwt in 2004, 2005 and 2006,
respectively. Using the Vermont cost
data and the Northeast Federal order
price data, the witness estimated that for
a medium-sized Maine dairy farm with
150 cows, average net income fell by
$70,000 in 2004, $140,000 in 2005, and
$320,000 in 2006. The witness asserted
that this increasing difference between
revenue and costs illustrates why the
Federal order pricing system needs to be
amended to more fully reflect dairy
farmer cost-of-production.
The MDIA witness also testified
regarding two programs operated by the
State of Maine. One program boosts
revenue to Maine dairy farmers by
distributing an over-order price
payment determined by the Maine Milk
Commission, and a second program
provides for a subsidy payment from the
State’s general fund. However, the
witness said that during recent months
these payments have not been enough to
make up for the difference between
declining milk prices and increasing
production costs. The witness was of
the opinion that, in the long-run, these
State programs cannot be relied upon to
provide a stable marketplace for dairy
farmers.
A post-hearing brief filed on behalf of
MDIA reiterated the position that endproduct pricing does not result in high
enough prices for the dairy farmers of
the northeastern region of the United
States. MDIA stated that Proposal 18 is
‘‘a good starting point’’ from which to
develop a competitive price scheme that
would replace the current scheme
which derives prices from the values of
manufactured dairy products. The brief
acknowledged that MDIA’s proposal is
complex and lacks much of the detail
needed for its adoption. However, MDIA
reiterated its position that the adoption
of a competitive pay price system would
improve the valuation of producer milk
and the subsequent determination of
minimum classified prices.
The MDIA brief argued that price
discovery based on competitive
conditions for milk is superior to milk
prices derived from the market prices of
manufactured dairy products. The brief
insisted that prices derived using sound
economic principles and accurate
market data are crucial to accurate price
determination. The brief stressed that
ending a competitive pay price series for
milk has harmed dairy farmers,
especially in the northeastern,
midwestern and southeastern regions of
the country. The brief attributed
observed price volatility in milk prices
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to the use of end-product price
formulas. The brief asserted that the
product-price formulas and the logic
underlying component pricing do not
meet the articulated policy of the
AMAA. The brief argued that the
AMAA’s paramount objectives are the
stabilization and enhancement of
producer income.
Exceptions to the tentative partial
final decision filed by MDIA opposed
the denial of MDIA’s motion to reopen
the hearing. The witness appearing on
behalf of Dairylea supported using the
CME cheese and butter prices as
substitutes for the NASS surveyed
prices as advanced in Proposal 15. The
witness said that the industry already
uses the CME to set base selling prices.
The witness asserted that using NASS
surveys to set minimum prices has
resulted in disorderly market conditions
because the time lag of NASS product
price reporting results in short-term
manufacturing losses. According to the
witness, using the CME prices for butter
and cheese to set minimum classified
milk prices would eliminate the time lag
issue and price circularity issues.
A post-hearing brief submitted on
behalf of Dairylea et al. opposed
adoption of Proposal 18 based on the
conclusion that the record evidence is
insufficient to support its adoption.
Their post-hearing brief specifically
expressed support for the portion of
Proposal 15 proposing the use of CME
prices for cheese and butter in the
product price formulas. This was not
supported by DFA. While Dairylea’s
brief expressed the opinion that using
CME prices would address the issue of
price circularity inherent in the NASS
price survey, they did not support the
use of CME prices for dry whey and
NFDM.
In a separate post-hearing brief, DFA
specifically expressed support for
adoption of the hybrid price series
advanced in Proposal 14. DFA
emphasized that the hybrid price series
would transmit more timely market
signals to processors and producers by
aligning the purchase price of milk with
the market prices of milk products.
The witness appearing on behalf of
IDFA testified in opposition to adoption
of Proposal 14. The witness was of the
opinion that using the proposed hybrid
price would result in unnecessarily
complex price formulas that would
provide no tangible benefit to the
industry. The witness acknowledged the
problems associated with the time-lag of
the NASS price series, but stated that
there are alternative ways to address the
lag adding complexity to the price
formulas. Similar arguments were
offered in IDFA’s post-hearing brief.
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The IDFA witness also testified in
opposition to adoption of Proposal 15.
The witness stated that the NASS
product price survey provides the
largest possible sample of wholesale
prices and should continue to be relied
upon in the product price formulas. The
witness said that USDA’s reasoning for
relying on the NASS price survey in the
Federal order reform decision is still
relevant. The witness was of the opinion
that many of the complaints associated
with the NASS price series could be
remedied if price reporting to NASS
were electronic, mandatory and audited.
IDFA insisted in its post-hearing brief
that using the CME to determine
product prices could result in product
prices unrepresentative of actual market
sale prices and could encourage product
trading on the CME solely to manipulate
the minimum classified milk prices
established under Federal orders.
The IDFA witness also testified in
opposition to adopting a competitive
pay price series as advanced in Proposal
18. The witness indicated that currently
no reliable unregulated milk supply of
adequate size exists to become the basis
for a competitive pay price series.
The witness appearing on behalf of
Kraft opposed adoption of Proposal 15
and supported the continued use of the
NASS price survey to determine
classified prices. The witness explained
that the NASS price survey is national
in scope and represents a significantly
larger proportion of national cheese
production than does the CME. The
witness was of the opinion that if CME
prices are used to determine classified
prices, the growing volume of cheese
production and sales in the western
states would not be adequately
represented. Therefore, the witness
concluded, NASS survey prices best
reflect the settled sales prices at the
plants. The witness acknowledged the
time lag between CME prices and the
NASS survey prices and insisted that a
better solution to the time lag problem
would be to require timelier reporting of
prices to NASS rather than abandon the
NASS price survey.
The witness appearing on behalf of
Saputo opposed the adoption of
Proposals 14 or 15 and indicated
support for the continued use of the
NASS price survey. The witness was of
the opinion that timelier reporting of
prices to NASS would counter asserted
problems associated with the lag
between the CME and NASS survey
prices. The Saputo witness opposed
using the CME to set minimum prices
because, in the witness’ opinion, the
CME is too thin a market to provide
accurate market signals.
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The witness appearing on behalf of
Leprino testified in opposition to
Proposal 15 because of the low volume
of cheese that is traded on the CME as
compared to the volume of cheese
production that is represented in the
NASS survey. The witness also testified
that Leprino is not concerned with the
time lag between the CME prices and
the NASS price survey. The witness was
of the opinion that the time lag is
predictable and manageable for
manufacturers.
The witness appearing on behalf of
LOL testified in opposition to Proposal
15. The witness was of the opinion that
the more appropriate solution to the
problem of increased manufacturing
costs is a more timely method of
updating make allowances and not the
use of the CME to derive classified
prices. The witness argued that the
NASS price survey is more
representative of the national cheese
market while the CME continues to
remain a thinly traded market.
The witness appearing on behalf of
HP Hood opposed adoption of Proposal
18 because of the lack of analysis
available to determine its utility.
A post-hearing brief filed on behalf of
O–AT–KA stated that Proposal 18 may
warrant further consideration but it
should not be adopted in this
proceeding.
Comments to the tentative final
partial decision filed separately by
IDFA, Grande, Glanbia, Kraft, Leprino
and WCMA expressed support for the
denial of Proposals 14, 15 and 18.
6. Other Solids Price
A witness appearing on behalf of NAJ
testified in support of adopting Proposal
16. The witness was of the opinion that
the value of dry whey should be derived
primarily from its protein content,
rather than its other solids content as it
is currently computed. The witness
acknowledged that from August 2006 to
February 2007 the NASS dry whey price
more than doubled from 29.65 cents per
pound to 60.05 cents per pound and the
lactose price reported in Dairy Market
News increased from 33.89 cents per
pound to 59.34 cents per pound. The
witness was of the opinion that the
recent increase in lactose prices is
reflective of a shortage in lactose
processing capacity and not a lack of
available lactose. The witness believed
that the higher dry whey and lactose
prices prior to the fall of 2006 justify
valuing dry whey on a protein rather
than on an other solids basis. According
to the NAJ witness, if Proposal 16 had
been in place from April 2003 to
September 2006, the Class III price
would have been one-cent per cwt
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higher and only marginally higher since
September 2006.
The NAJ witness testified that from
2003 to 2006 dry whey production only
increased 1.5 percent, while the
increased production of whey protein
concentrates (WPCs) ranged from 6.6
percent to 45.5 percent depending on
the percent protein in the WPC. The
witness concluded that purchasers of
whey solids prefer WPC products that
are high in protein. It is this preference
that led the witness to conclude that dry
whey should be priced on a protein
basis.
Using Dairy Market News’ monthly
prices since January 2000, the witness
discussed the costs of buying a pound
of protein (protein parity) and a pound
of lactose (lactose parity) in dry whey or
WPC–34 (34 percent protein). The
witness concluded that, in all months,
the average price per pound of protein
in dry whey or WPC–34 exceeded the
average price per pound of lactose. The
witness also asserted that the cost per
pound of lactose in WPC–34 is higher
than if lactose were purchased
separately. According to the witness,
this price relationship reveals that
buyers of dry whey and WPCs are
purchasing these products for their
protein content rather than for their
lactose content. The witness also
emphasized that the value of protein in
dry whey and WPC–34 more closely
reflect each use than does lactose value
contained in the two products.
The NAJ witness also offered a
modification to Proposal 16 such that
the NASS price surveys would be
expanded to include collection and
reporting of market prices for various
WPC’s and lactose. The witness said
this would build a dataset for use in
future rulemakings to consider the
appropriate valuation of whey solids.
A post-hearing brief filed on behalf of
NAJ reiterated positions given in
testimony. According to the brief, the
current other solids price formula does
not reasonably connect the market value
of whey solids which NAJ maintains is
based on its protein content and how
producers are paid for whey.
NAJ stated its opposition to the denial
of Proposal 16 in its exceptions to the
tentative partial final decision. NAJ
argued that counter to what USDA
found as a flaw in Proposal 16, one of
its strengths is its revenue neutrality.
NAJ was of the opinion that adoption of
Proposal 16 would give producers a
financial incentive to increase their milk
protein content. NAJ reiterated
arguments that Proposal 16 would allow
manufacturers to account to the pool for
protein, the component in whey that is
most valued, while also simplifying the
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product-price formulas. NAJ was also of
the opinion that USDA’s decision to
only make changes in the product-price
formulas to the make allowances and
the butterfat yield factor indicates its
unwillingness to amend other factors in
the formulas.
The witness appearing on behalf of
IDFA opposed adoption of Proposal 16
because it was too complex and would
inappropriately value whey based on its
protein content when it is comprised
mainly of other solids. The witness said
that USDA’s preliminary economic
analysis demonstrates that adoption of
Proposal 16 could increase the cost of
high protein milk while lowering the
cost of low protein milk. However,
milk’s other solids content (primarily
whey) does not change in relationship
to the protein content, the witness said.
The witness also stated it would be
inappropriate to price dry whey on its
protein content since protein does not
affect whey yields.
The witness appearing on behalf of
Leprino testified in opposition to
Proposal 16 because its adoption would
result in distorted milk component
values. The witness insisted that since
dry whey yields are primarily driven by
the lactose content of milk and the other
solids composition, it would be
inappropriate to price whey on its
protein content.
The post-hearing brief filed on behalf
of Agri-Mark et al. opposed adoption of
Proposal 16 arguing that the price of
other solids would then be determined
on its protein component which has no
impact on yield. The brief claimed that
since there is no standardized protein
content for whey, adoption of Proposal
16 could result in significant overvaluing of the protein in whey.
However, the brief supported NAJ’s call
for USDA to collect manufacturing cost
and price data for WPCs and lactose on
the basis that it would provide data on
how to appropriately value whey solids
for use in future proceedings.
The post-hearing brief filed on behalf
of Dairylea et al. opposed adoption of
Proposal 16 because it would not add
value or efficiency to the product price
formulas.
The post-hearing brief filed on behalf
of DPNM et al. opposed the adoption of
Proposal 16. However, the brief did
express support for NAJ’s call for USDA
collection of prices, manufacturing costs
and volumes for whey protein
concentrates and whey protein isolates.
Comments filed separately by AgriMark et al.; DPNM et al.; IDFA; Grande;
Glanbia; Kraft and Leprino in response
to the tentative partial final decision
expressed support for the denial of
Proposal 16.
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A witness from Pennsylvania State
University offered testimony on the use
of an econometric model framework to
analyze changes to the Federal milk
marketing orders from all the proposals
under consideration and provided the
results at the hearing. The testimony
was not given on behalf of the
Pennsylvania State University. The
witness testified neither in support of,
nor in opposition to, any proposals. The
witness explained that the model is a
short-run, supply-side model that does
not take into account changes in milk
demand. The witness said that the
model was used to analyze scenarios as
outlined in the USDA preliminary
economic analysis that was based on the
USDA Baseline Projections to 2015. The
witness concluded that the USDA
preliminary economic analysis did not
accurately reflect changes in the milk
supply because it did not adequately
account for the increase in feed prices
and the resulting effect on producer
decisions.
A witness testifying on behalf of the
Ohio Farmers Union (OFU), National
Farmers Union (NFU) and the National
Family Farm Coalition (NFFC) called for
the hearing to be terminated because
dairy farmers continuously face low
milk prices and high input costs, and
that these concerns were not being
addressed in this proceeding. The
witness was of the opinion that the
FMMO system was no longer
accomplishing its mission of returning
market power to dairy farmers.
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7. Energy Cost Adjuster
A witness from NMPF testified that
energy costs are the most volatile
manufacturing input cost in dairy
manufacturing. The witness asserted
that increases in energy costs have
countered many of the measures
manufacturers have taken to increase
productivity and efficiency.
The NMPF witness testified that the
current make allowance levels reliance
on a fixed energy cost derived from
information that existed at a single point
in time is no longer appropriate. The
witness said USDA should instead
adopt a monthly energy price adjuster to
capture the change in energy prices that
may occur from month to month. The
witness explained that the base energy
cost should be derived from surveyed
energy costs in the manufacturing cost
surveys used to determine the make
allowances. If two or more surveys were
used to determine make allowances,
then the energy costs of each survey
should be weighted accordingly, the
witness said. According to the witness,
an energy price adjustor would then be
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added (or subtracted) to the base energy
cost value.
The NMPF witness explained that the
energy price adjustor should be
computed using the Bureau of Labor
Statistics Producer Price Indexes for
Industrial Electricity and Industrial
Natural Gas (PPI). The witness said that
the time period selected for the energy
price adjustor should correspond with
the same time period of the
manufacturing cost survey data. The
witness suggested the use of the
monthly PPI series for several energy
products and proposed 2005 as the base
period from which percentage changes
would be calculated. The witness
stressed that if an energy price adjuster
is not adopted, then the make
allowances that are determined as a
result of the current proceeding may
become obsolete prior to
implementation.
The NMPF witness said that the
adoption of a monthly energy price
adjustor would help maintain equity
between producers and manufacturers
given that processors would not be
unduly harmed when energy prices rise
while producers would not be harmed
when energy prices fall. The witness
was of the opinion that it was not
necessary to establish monthly indexes
for other cost factors contained in the
make allowances.
The NMPF witness asserted that if an
annual manufacturing survey as offered
in Proposal 2 is adopted, then an energy
cost factor should be used in making
monthly adjustments to make
allowances. The witness was of the
opinion that even if make allowances
were updated on an annual basis,
manufacturing cost data as old as 24
months would be incorporated.
According to the witness, energy prices
vary so much over short time periods
that make allowances are essentially
using a fixed energy cost factor which
results in make allowances that are
neither timely nor accurate.
A post-hearing brief filed on behalf of
NMPF reiterated their testimony in
support of the adoption of Proposal 17.
NMPF’s brief offered various methods
USDA could use to determine an
appropriate base energy cost factor and
corresponding monthly energy price
adjustor.
The NMPF brief also addressed other
hearing participants’ objections that an
energy price adjustor would inhibit a
plant’s ability to use the futures markets
to hedge risk. The brief said that while
energy futures can be used to reduce
energy price volatility, a plant is more
likely to lock in a high energy price if
that plant predicts energy costs will rise
above levels covered by current make
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9267
allowances. The brief also argued that
the use of energy futures may not be
applicable for balancing plants facing
unpredictable energy costs due to large
seasonal fluctuations in product output.
A witness appearing on behalf of
MMPA testified in support of Proposal
17. The witness said that the large
fluctuations in gas and energy prices in
recent years demonstrate the need for an
energy price adjustor in the
determination of make allowances. The
witness also stated that adoption of the
adjustor would ensure that
manufacturers could recover increased
energy costs while also preventing
financial windfalls should energy prices
decrease. Agri-Mark, Dairylea and O–
AT–KA also offered support for
Proposal 17 in their post-hearing briefs.
The witness appearing on behalf of
IDFA testified in opposition to the
adoption of Proposal 17 and was of the
opinion that adoption of the proposal
would complicate manufacturers’ ability
to manage risk. IDFA reiterated these
arguments in its post-hearing brief.
Kraft, Lactalis, HP Hood and Leprino
supported IDFA’s position opposing the
adoption of Proposal 17.
With the exception of DPNM et al.,
Proposal 17 was supported by all
producer organizations that market the
milk of dairy farmers who participated
in this proceeding, including those who
manufacture NFDM and dry whey. The
record reflects that manufacturers of
NFDM and dry whey, in particular,
intensively use either natural gas or
electricity in their drying processes.
Accordingly, proponents favored the
ability of an energy cost adjustor to
reflect actual natural gas or electricity
prices in minimum prices paid for
producer milk. Supporters also testified
that this feature would account for
monthly energy price changes without
permanently decreasing the value of
producer milk until subsequent
rulemaking changes to make allowance
levels can be made.
Opposition to Proposal 17 was
universal among IDFA, along with its
member companies Saputo, Kraft, H.P.
Hood and Leprino, who testified at the
hearing. The central themes of their
opposition were that a monthly energy
adjuster would undermine the value of
existing risk management tools, and
increase the complexity of product price
formulas. DPNM et al. also opposed
adoption of Proposal 17 because, they
assert, it would add complexity to the
pricing system.
8. Cost-of-Production Add-on
A witness appearing on behalf of
Dairylea testified that manufacturing
plants would negotiate a price for the
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applicable product with wholesale
customers that included a factor
reflecting manufacturing costs not
reflected in the pricing formula make
allowances. The witness said that these
surcharges, or ‘‘add-ons,’’ would not be
included in the NASS price survey and
therefore would not affect Class III and
Class IV prices. According to the
witness, the negotiated add-ons would
be capped at a maximum amount to be
determined through a separate formal
rulemaking.
The Dairylea witness explained that
when a dairy manufacturer attempts to
pass on its higher manufacturing costs
by charging higher prices to its
customers, the price increase is
captured in the NASS price survey
which, in turn, increases a
manufacturer’s raw milk costs through
higher Class III and Class IV prices. The
witness described this as a ‘‘price
circularity’’ problem. The witness was
of the opinion that Proposal 20 provided
a method whereby dairy processors
could pass on higher manufacturing
costs not reflected in the product-price
formulas to customers without those
higher prices being reflected in the
NASS price survey. According to the
witness, classified prices would not be
affected by a change in manufacturing
costs.
The Dairylea witness acknowledged
that manufacturers have experienced
higher processing costs than those that
are represented by the current make
allowances. However, according to the
witness, higher make allowances cause
dairy farmers to receive lower prices for
their milk even though they also face
higher production costs. The witness
said that because dairy farmers are
unable to pass on their higher costs of
production, as a matter of fairness and
equity, processors should seek needed
manufacturing cost recovery through the
price they charge their customers, rather
than through the price they pay dairy
farmers for raw milk.
The Dairylea witness emphasized that
while the manufacturing cost add-ons
would not be included in the NASS
price survey, any amount a
manufacturer charged in excess of the
cost add-ons would be required to be
reported to NASS. The witness testified
that the maximum manufacturing cost
add-on should only be changed through
formal rulemaking and that the value of
a cost add-on should never be negative.
The witness was of the opinion that the
National Fluid Milk Processors
Promotion Program (MilkPEP) check-off
assessment administered by AMS and
the in-state over-order premium
program administered by the
Pennsylvania Milk Marketing Board are
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examples of successful programs
providing for surcharges.
The Dairylea witness viewed adoption
of an energy price adjustor to modify
make allowances as detailed in Proposal
17 to be a complement to Proposal 20.
The witness explained that any change
in the energy price adjustor should be
subtracted from the value of the
manufacturing cost add-on. For
example, the witness explained that for
a given month, if the manufacturing cost
add-on for cheese was determined to be
$0.0029 per pound and the energy price
adjustor was $0.0023 per pound, then
the maximum cheese manufacturing
cost add-on for that month would be
$0.0006 per pound. In months when the
energy price adjustment was greater
than the maximum cost add-on, then the
cost add-on for that month would be
zero, the witness said.
A joint post-hearing brief filed on
behalf of Dairylea and Dairy Farmers of
America (Dairylea et al.) reiterated that
adoption of the cost add-on would
address the price circularity problem
inherent to the NASS price survey. The
brief argued that the Federal order
system needs to evolve such that
manufacturing cost increases can be
fully passed on to consumers without
lowering the value of producer milk
used to make Class III and Class IV
products.
The Dairylea et al. brief emphasized
that opposition to the adoption of
Proposal 20 was based on the invalid
assumptions that: (1) Manufacturing
plants would not be able to negotiate
cost add-ons, and (2) manufacturing
plants regulated by Federal orders
would become disadvantaged. The brief
noted that a NFDM processor has been
successful in negotiating an energy cost
surcharge with its customers, despite
competition from non-pool NFDM
plants located in the United States and
abroad. The brief also countered
opposition arguments suggesting that a
buyer would simply purchase finished
products on a spot basis from the
Chicago Mercantile Exchange (CME) to
avoid paying a manufacturing cost addon. The brief asserted that
manufacturing plants, regardless of pool
status, would not give up the
opportunity to maximize profit by
charging a cost add-on.
The witness appearing on behalf of
HP Hood testified as being receptive to
the manufacturing cost add-on feature of
Proposal 20 without offering any further
details or justification.
The witness appearing on behalf of
IDFA testified in opposition to the
adoption of Proposal 20. The witness
disagreed with the assertion that all
manufacturers would be able to
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negotiate cost add-ons with their
customers. The witness insisted that
manufacturers unsuccessful in
negotiating the cost add-on would only
be able to recoup manufacturing costs
equal to the product-price formula’s
make allowances. The witness argued
that the examples of successfully
administered surcharges—the Milk PEP
check-off assessment and the
Pennsylvania Milk Marketing Board
over-order premiums—are misleading
because they involve regulated charges
that processors are required to pay. The
witness was of the opinion that
Federally regulated manufacturers
would be harmed by the adoption of
manufacturing cost add-ons because
customers would simply seek a lowercost product from other manufacturers
whose milk is not priced by an order or
would make spot purchases of product
from the CME.
In characterizing that all cheeses have
a price relationship in the market, the
IDFA witness strongly disagreed that a
commodity cheddar cheese
manufacturer could include a cost addon in its sales price. According to the
witness, cost add-ons change the price
relationship of commodity cheddar to
other cheese varieties in the
marketplace and as a result,
cheesemakers buying pooled milk
would be at a competitive disadvantage
to those buying non-pooled milk. IDFA
reiterated their opposition to the
adoption of Proposal 20 in their posthearing brief.
The witness appearing on behalf of
Lactalis found merit with the intent of
Proposal 20 but thought its method too
complex and impractical, and therefore
opposed its adoption. According to the
witness, Lactalis operates six cheese
plants in the United States. The witness
was of the opinion that Federally
regulated manufacturers would not be
able to consistently and successfully
negotiate a higher sales price with their
customers to compensate for higher
manufacturing costs.
In their post-hearing brief, Agri-Mark
et al. opposed adoption of Proposal 20
on the grounds that it assumes plants
can successfully negotiate
manufacturing cost add-ons to recoup
increased manufacturing costs. The brief
expressed the opinion that a
manufacturing cost add-on scheme
would only be successful if all plants,
including unregulated plants,
simultaneously increased prices and
clearly labeled the cost add-on on all
invoices so that the add-on would not
be included in the NASS price survey.
The brief asserted that unregulated
manufacturing plants have no incentive
to report a manufacturing cost add-on
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because NASS prices do not impact
their raw milk costs in the same way as
plants regulated by Federal orders. The
brief also stressed that if plants were
unsuccessful in negotiating a
manufacturing cost add-on, they would
likely be unable to obtain cost relief
elsewhere.
In their post-hearing brief, DPNM et
al. opposed the adoption of a
manufacturing cost add-on in an
attempt to eliminate the circularity
problem inherent to the NASS survey
(now administered by AMS). DPNM et
al. was of the opinion that USDA
resources should instead be
concentrated on developing a
competitive pay price to replace the
product-price formulas.
A post-hearing brief filed on behalf of
O-AT-KA stated that while Proposal 20
may warrant further consideration, it
should not be adopted in this
proceeding.
Discussion and Findings
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1. Amending the Product Price
Formulas
This proceeding offered a wide array
of proposals aimed at changing FMMO
end-product pricing formulas used to
establish classified prices in all orders.
The original 19 proposals noticed range
from those that seek to abandon the
current product-price formulas used to
compute minimum Class III and Class
IV prices to those that seek a variety of
changes to the product-price formulas
including manufacturing cost factors
(make allowances), yield factors,
technical factors and the authority to
separate a portion of manufactured
product sales prices from what
otherwise is used to establish
subsequent raw milk prices. The
diversity of proposals considered
indicates a lack of consensus within the
dairy industry concerning how the
Federal order program should set
minimum milk prices in general and
more specifically, how the many
features of the product-price formulas
should be altered.
Witnesses representing Agri-Mark,
NMPF, Leprino, Twin County and IDFA
provided evidence that energy,
transportation, labor and packaging
costs for manufacturing processors have
increased since the adoption of the
March 2007 make allowances. As
pointed out by IDFA, make allowances
account for manufacturing costs in the
Class III and Class IV price formulas but
do not change as those costs change,
therefore, increasing make allowances is
the only reasonable way that those
increased costs can be recovered.
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The ability of a manufacturer to offset
cost increases is limited by the level of
make allowances in the Class III and
Class IV price formulas. Manufacturing
processors are charged the FMMO
minimum price for producer milk used
to produce Class III and Class IV
products. However, plant manufacturing
cost increases may not be recovered
because Class III and Class IV productprice formulas use make allowances that
are fixed regardless of market conditions
and change only by regulatory action.
Simply put, when manufacturing cost
increases result in higher costs than
those provided for in the formula make
allowance factors, the value of milk
used to make those products may be
over-valued.
Product-price formulas are relied
upon to establish the minimum class
prices of raw producer milk used to
make Class III and Class IV products,
which in turn establish Class I and Class
II prices. The product-price formulas
use market prices collected by AMS for
cheddar cheese, Grade AA butter and
dry whey to set a minimum price for
Class III milk, and NFDM and Grade AA
butter to set a minimum price for Class
IV milk. No competitive pay price series
currently exists that can be relied upon
to establish a price for raw milk
nationally. While some proponents look
to the CME, the futures prices of the
CME use the FMMO minimum class
prices as the starting points for Class III
and Class IV milk futures contracts.
In the absence of a competitive pay
price series, product-price formulas
based on cheese, dry whey, NFDM and
butter serve as the only practical basis
that the value of raw producer milk
used in their production can be derived.
A raw milk value is, in part, derived
from sales price data collected by AMS
from manufacturers who produce and
market these commodity products. The
information is aggregated weekly and
reported in the AMS Dairy Product
Sales Repot. The Class III and Class IV
product-price formulas use, among
other factors, the wholesale market
prices of the manufactured products
from which make allowance factors are
subtracted. The remaining value, when
converted to a milk equivalent basis, is
the value of raw milk. Accordingly, the
accuracy of deriving the minimum value
of raw milk is dependent on the
accuracy of the commodity sale prices
reported and, in large part, the accuracy
of the manufacturing cost factors, or
make allowance factors, that are used in
the pricing formulas.
The Agri-Mark proposal, Proposal 1,
seeks to change make allowances used
in the Class III and Class IV product
formulas by relying on manufacturing
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9269
cost data contained in the record of this
proceeding and combining such data for
plants outside of California with the
most current manufacturing cost data
published by the CDFA.3 The two sets
of manufacturing costs for cheese,
NFDM, dry whey and butter would be
combined on a weighted average basis
in a manner consistent with the
development of the current make
allowances used in determining Class III
and Class IV prices. Other proponents
seek to use the most recently available
publications of the CDFA.4 This method
was used in earlier rulemakings to
develop the make allowances used in
the product-price formulas.5 6
Opponents of increasing make
allowances argue a number of points—
that they are already set at too high a
level, that dairy farmer production costs
also have increased significantly due to
higher energy and feed costs, that
processors should look beyond asking
dairy farmers to receive less for their
milk by charging more for manufactured
products, and that make allowance
increases should be made only when all
dairy farmer production costs are
captured in their milk pay price. These
are not valid arguments for opposing
how make allowances should be
determined or what levels make
allowances need to be in the Class III
and Class IV product-price formulas.
The record evidence demonstrates that
make allowance levels are not reflective
of the costs manufacturers incur in
processing raw milk into the finished
products of cheese, butter, NFDM and
dry whey.
Additionally, the Class III and Class
IV product-price formulas establish
derived classified prices for producer
3 Official Notices are taken of amendments to
make allowances and all related documentation by
the State of California in the Determinations,
Findings, Conclusions and Order of the Secretary of
Food and Agriculture, November 20, 2007, by the
Office of the California Secretary of Agriculture.
See: https://www.cdfa.ca.gov/dairy/
dairy_hearings_matrix.html, and https://
www.cdfa.a.gov/dairy_hearings.html. and Summary
of Weighted Average Manufacturing Costs, Butter,
Nonfat Dry Milk, Cheddar Cheese, and Dry Whey
Powder, Released September 18, 2007; See https://
www.cdfa.ca.gov/dairy/pdf/
manufcostexhibit2006.pdf.
4 Ibid
5 Official notice is taken of 67 FR 67906
November 7, 2002, and 68 FR 7063, February 12,
2003, final decision and final rule respectively, and
66 FR 54064, 65 FR 76832.
6 Official notice is taken of 71 FR 67467,
November 22, 2006, 71 FR, 78333, December 29,
2006, as well as hearing testimony, exhibits, and
post hearing briefs for the hearing and hearing
continuations originally noticed in 71 FR 545,
January 5, 2006, and related materials concerning
make allowances and dairy product manufacturing
costs, and published for the convenience of the
public on the USDA, AMS Dairy Programs Web site
at www.ams.usda.gov/dairy.
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milk that are used nationally in all
Federal milk orders. When dairy farmer
production costs exceed the value that
products are sold in the marketplace, no
source of revenue from the marketplace
is available to cover those costs.
In the aggregate, the costs of
producing milk are reflected in the
supply and demand conditions for the
dairy products. When the supply of
milk is insufficient to meet the demand
for Class III and Class IV products, the
prices for these products increase as do
regulated minimum milk prices paid to
dairy farmers because the milk is more
valuable and the greater value is
captured in the pricing formulas. Dairy
farmers face no regulatory minimums in
their costs and face no regulated
minimum payment obligation in the
way that regulated handlers must pay
dairy farmers for milk.
It is reasonable to conclude that the
make allowances used in the Class III
and Class IV product-price formulas
should be updated to reflect changes in
the costs manufacturers incur in
producing cheese, butter, dry whey and
NFDM. It is necessary to reflect changes
in manufacturing costs so that with the
prevailing market prices for
manufactured products, minimum
Federal order classified prices can be
set. In the record of this proceeding, the
evidence demonstrates that the
manufacturing costs of producing
cheese, dry whey, NFDM and butter
have increased since the
implementation of the make allowances
that were adopted on an interim basis,
effective March 1, 2007.7
The record reveals an absence of
industry consensus concerning the
method that make allowances should be
changed which in turn determines the
level of the make allowances used in the
Class III and Class IV product-price
formulas. The differing proposed make
allowance levels offered during this
proceeding represent the changes in
opinions concerning which
manufacturing costs, which
manufacturing cost survey(s) and which
other factors should be considered. For
example, some proponents seeking
higher make allowances argued that
only CPDMP survey data and/or RBCS
survey data volumes should be relied
upon as they are most reflective of costs
borne by plants that pay Federal order
prices.
Proposal 3, proposed by DPNM, was
offered in opposition to increasing make
allowances annually through a USDA
administered manufacturing cost
survey, as contained in Proposal 2
offered by Agri-Mark. DPNM argued that
because the CPDMP 2005 survey
represents manufacturing costs of plants
not located in California, it should be
relied upon exclusively in determining
new make allowances. This argument is
rejected. Proponents of increasing make
allowances have clearly demonstrated
that costs of producing Class III and
Class IV products have increased.
Continuing with the method previously
relied upon—relying on manufacturing
cost data from CPDMP’s cost survey and
CDFA in combination—has provided
effective and useable make allowances
in the pricing formulas.
At issue in this proceeding, in part, is
whether make allowance levels should
be increased and what method should
be relied upon to determine those
levels. On its face, the DPNM proposal
to rely only on the CPDMP 2005 survey
data in determining make allowances
may seem reasonable as the survey
excludes California plants. However, the
argument does not consider other
important factors that affect the
marketing conditions for milk and dairy
products represented by California’s
dairy sector and its impact on the
supply and demand for milk and dairy
products nationally. Cheese, butter, dry
whey and NFDM compete in a national
marketplace and as such, the prices
established under the Class III and Class
IV product-price formulas need to be
reflective of marketing conditions that
directly affect the determination of the
minimum value of raw milk.
Accordingly, Proposal 3 is not adopted.
Others participants supported the use
of CDFA data. However, CDFA data
represents a cost survey of only
California processing plants. Federal
order Class III and Class IV prices must
be derived, as much as possible, from
national estimates of manufacturing cost
information. AMS survey prices, used to
establish minimum Federal order prices,
include California processing plants.
Accordingly, it is reasonable to
conclude that appropriately combining
CDFA cost data with cost survey data of
manufacturing plants not located in
California will produce a measure of
national manufacturing costs. This
combination removes as much bias as
possible in manufacturing costs
measurements that may otherwise result
from the exclusive use of one set of cost
survey data over another.
While many hearing participants
support the general method of
determining make allowances proposed
to be adopted in this decision, the
record nevertheless reveals a lack of
industry consensus in determining the
specific factors to be used in the Class
III and Class IV product-price formulas.
This is illustrated by the information
presented in Table 1 below. The seven
sets of suggested make allowances
represent proposals from four different
groups at various points during this
proceeding. The Agri-Mark, LOL and
DPNM proposals were advanced by
producer groups with different milk
marketing and processing interests.
Regulated processors, including some
producer groups who are also regulated
in their capacity as processors, are
represented in this regard by the
proposals advanced by IDFA and
Leprino.
TABLE 1—PROPOSED MAKE ALLOWANCES
Cheese
$/lb
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Proponents
Agri-Mark et. al. (Brief Pg 20–24) ....................................................................
IDFA (Brief pg 11) ...........................................................................................
IDFA (Brief pg 12) ...........................................................................................
Leprino (Brief pg 2) ..........................................................................................
DPNM Proposal ...............................................................................................
DPNM Brief (pg 1) ...........................................................................................
DPNM Brief (pg 20) .........................................................................................
Butter
$/lb
0.2154
0.2154
0.2198
0.2154
0.1638
0.1638
0.1638
0.1725
0.1725
0.1846
0.1725
0.1108
0.1150
0.1108
7 Ibid. Official notice is taken of 72 FR 36341, July
3, 2007.
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NFDM
$/lb
0.1782
0.1782
0.1662
0.1782
0.1410
0.1410
0.1410
Dry whey
$/lb
0.2080
0.2080
0.1976
0.2080
0.1500
0.1590
0.1498
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The range of proposed make
allowances presented in Table 1 varies
more than 30 percent between the
highest and lowest proposed make
allowance levels for cheese and dry
whey and about 25 percent for NFDM.
Similarly, the range from highest to
lowest proposed make allowances for
butter varies by more than 60 percent.
This final decision continues to find
that it is appropriate to rely on the
CPDMP 2006 survey of manufacturing
costs in establishing the methodology of
how make allowances should be
determined. Its use is consistent with
the methodology relied upon in
determining the previous make
allowance levels (effective March 1,
2007) in the Class III and Class IV
product-price formulas that utilized the
CPDMP 2005 survey. The CPDMP 2006
survey results provide a new estimation
of manufacturing costs for plants not
located in California. The CPDMP 2006
survey results, when used in
conjunction with the most current
survey results from CDFA, improve the
estimation of manufacturing costs on a
national basis and is consistent with the
methodology relied upon in
determining the previously set make
allowances.
The CPDMP 2006 survey is essentially
a new cost survey. The manufacturing
cost data presented in the survey is
similar to CPDMP’s earlier cost survey
in that they both rely on cost
information provided from
manufacturing plants not located in
California. The surveys also are similar
in that they collect manufacturing cost
data for cheese, butter, NFDM and dry
whey. However, there are differences
with the most important one being the
use of different samples of plants.
In the CPDMP 2005 survey, 16 cheese
plants provided cost data that were
incorporated to represent the weighted
average costs to manufacture cheese.
The 2006 survey represents data from 11
cheese plants, 8 of which were among
the 16 plants that participated in the
2005 survey. For butter, 4 plants
provided cost data in both the 2006
survey and the 2005 survey, but the
surveys represent different collections
of sampled plants with different
production volumes. In addition, the
butter manufacturing cost data in the
2006 survey differs from the earlier
survey because it employed a different
method for allocating costs between
butter and NFDM production in plants
that jointly manufacture these products.
For NFDM, the plants sampled and
reported in the 2006 survey included 7
of the 8 plants sampled as part of the
2005 survey.
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The purpose of this proceeding, in
part, is to determine if make allowances
should be updated. Central to this
question is determining the proper
methodology for determining new make
allowances given the available public
data. Proponents of Proposal 1 argued
that both CDFA and CPDMP data were
used to determine the 2006 make
allowances and that they should
continue to be used because their
combination better reflects conditions in
the national marketplace. This decision
continues to find that incorporating
CDFA data into the make allowance
computations is justified to best reflect
the national market where dairy
commodity products are sold. AMS
prices used in the product-price
formulas incorporate sales from across
the country, including California.
Despite comments filed by DPNM et al.
this decision finds that it is appropriate
to rely on cost data from California
(CDFA survey) and the rest of the
country (CPDMP survey). It is also
appropriate, contrary to comments from
DPNM et al. to assess the economic
impact of the changes on the national
market. Consequently, the record
supports use of the 2006 CDFA data to
determine make allowances.
DPNM et al. also commented that the
Department failed to consider producer
feed and fuel costs as mandated by the
Food, Conservation and Energy Act of
2008 (2008 Farm Bill, (Pub. L. 110–
246)). At the hearing, official notice was
taken of USDA data pertaining to
various producer costs. This
information is part of the hearing record
and as such, was considered by the
Department in determining whether
make allowances should be amended.
Comments regarding the tentative
final decision from Agri-Mark et al.
request that make allowances be
updated to reflect energy costs through
June 2008. Their comments cite the
Bureau of Labor Statistics Producer
Price Indexes for Industrial Natural Gas
and Industrial Electric Power that
demonstrate an increase in these energy
prices through June 2008. Agri-Mark et
al. assert that energy prices would
remain high through 2009. Updating
energy costs would result in make
allowances that may give an
inappropriate weight to one cost factor
in an array of cost factors that are
considered in determining make
allowances. This would lock in an
artificially high make allowance based
solely on the costs of electricity and
natural gas. Accordingly, the request by
Agri-Mark’s et al. is denied. The
determination of the adopted make
allowances for cheese, butter, NFDM
and dry whey are discussed below. The
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make allowances proposed to be
permanently adopted represent national
manufacturing cost averages for cheese,
butter, NFDM and dry whey. As found
and determined in previous
rulemakings on this issue, an estimation
of manufacturing costs for national
application requires that national
production volumes of these
commodities be considered in
determining the level of make
allowances to be relied upon and used
in the Class III and Class IV productprice formulas. This is critical because
Class III and Class IV prices are the
same in all Federal milk marketing
orders.
Butter Make Allowance
The butter manufacturing cost data
presented in the CPDMP 2006 survey
reports weighted average costs based on
a sample of four plants. These data are
combined with the average cost data
from the most recent CDFA survey and
averaged over the 2006 national
production volume as published by
NASS. The combination of the weighted
average costs from the CPDMP and
CDFA surveys over the national
production volume plus a marketing
cost adjustment of $0.0015 yields a
make allowance $0.1715 per pound for
butter.
NFDM Make Allowance
The NFDM manufacturing cost data
presented in the CPDMP 2006 survey
reports weighted average costs based on
a sample of 7 non-California plants.
These data are combined with the
weighted average costs reported by
CDFA and averaged over the 2006
national NFDM production volume as
reported by NASS. The combination of
the weighted average costs from the
CPDMP and CDFA surveys by the
national production volume plus a
marketing cost adjustment of $0.0015
yields a make allowance $0.1678 per
pound of NFDM.
Cheese Make Allowance
The cheese manufacturing cost data
presented in the CPDMP 2006 survey
reports an average cost of producing a
pound of cheese of $0.1584 per pound.
This is significantly below the cost of
producing a pound of cheese reported
by the CPDMP 2005 survey. The cost
difference was explained by the
inclusion of fewer small plants in the
2006 survey. In addition, cheese
manufacturing costs of a larger plant
were included in the 2006 survey that
did not participate in the 2005 survey.
This led to 2006 survey results that are
heavily weighted towards larger volume
plants.
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The record reveals that eight cheese
plants participated in both the 2005 and
2006 surveys and that their costs
increased an average of $0.017 per
pound of cheese between the two survey
years. The Cornell researcher who
administered both surveys conceded
that this was the strongest conclusion
which can be drawn from the cheese
manufacturing data of the two surveys.
Supporters of relying on the $0.017
factor to compute a new make
allowance purport that this number can
simply be added to the 2005 CPDMP
plant average population cost of
$0.2028. This decision finds that
combining those two figures to compute
a new cheese make allowance is
procedurally incorrect. While a cost
increase of $0.017 is significant and may
be factually correct, it cannot be a factor
in determining a new make allowance
unless the original 2005 average
manufacturing cost of the eight plants is
included in the record. Therefore, use of
the $0.017 cost increase in determining
a new cheese make allowance is denied.
While the $0.017 cannot be used to
determine a new cheese make
allowance, the cost comparison between
the same samples of plants does reveal
that average manufacturing costs have
increased. However, comparing the
weighted average cheese costs of the
two CPDMP surveys indicates that
processing costs have actually declined
$0.0054 per pound. This decision finds
that the inconsistencies between the two
CPDMP surveys call into question
whether either survey is representative
of cheese manufacturing costs.
Accordingly, for the purpose of
determining a make allowance for
cheese, the CPDMP 2006 survey results
for cheese are rejected.
This decision finds that the CDFA
2006 survey of average cheese
manufacturing costs is the best available
information representing the
manufacturing cost of producing a
pound of cheddar cheese. Accordingly,
the make allowance proposed to be
permanently adopted for cheddar
cheese is $0.2003 per pound including
a $0.0015 per pound marketing cost
adjustment.
Dry Whey Make Allowance
Estimating the cost of manufacturing
dry whey presents a problem similar to
that for cheese. Despite exceptions to
the tentative partial final decision from
Kraft, Glanbia and WCMA that CDFA
whey data should be factored into
determining a dry whey make
allowance, this decision continues to
reject relying on CDFA data in
determining the dry whey make
allowance. The CDFA 2006
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manufacturing cost survey reveals that
CDFA was not satisfied with the
precision in estimating the average cost
per pound for whey products.
Accordingly, it is unreasonable to rely
on information that may not be
reflective of market conditions.
Adopting an artificially high make
allowance for dry whey would result in
the unwarranted decrease of producer
revenue. Accordingly, CDFA dry why
manufacturing cost data is not relied
upon in determining the dry whey make
allowance in the product-price
formulas.
This decision continues to rely on the
CPDMP 2006 survey of the average
manufacturing cost to produce a pound
of dry whey. Relying solely on the
CPDMP 2006 survey is identical to the
approach used in determining the make
allowance for dry whey used in the
Class III price formula effective March 1,
2007. The 2006 survey value of $0.1976
plus a marketing cost adjustment of
$0.0015 yields a dry whey make
allowance of $0.1991 per pound.
An issue was raised by Twin County
in its brief concerning an alleged
differential impact on small and large
businesses if make allowances or Class
III and IV price formulas are amended.
However, the purpose of the Class III
and IV price formulas and make
allowances is to set individual
minimum class prices for the Federal
milk order program on a national basis.
Butterfat Yield Factor
A proposal, published in the hearing
notice as Proposal 6, was included in a
package of proposals advanced by
DPNM seeking to amend the productprice formulas to more accurately
capture the use of modern
manufacturing technology and its
impact on milk value. A portion of
Proposal 6 seeks to amend the butterfat
yield factor in the butterfat price
formula from 1.20 to 1.211 to account
for what DPNM and other participants
in this proceeding characterized as a
misapplication of farm-to-plant
shrinkage when the Class III and Class
IV product-price formulas were adopted
in November 7, 2002 (67 FR 67906), and
became effective on April 1, 2003 (68 FR
7063).8
Specifically, DPNM explained that the
butterfat recovery factor of 1.20 used in
the butterfat pricing formula was the
result of the incorrect application of the
butterfat shrinkage factor of 0.015
percent on a per pound of butterfat basis
rather than on a per cwt basis. As
8 Official notice is taken of 67 FR 67906,
published November 7, 2002, and 68 FR 7063,
effective April 1, 2003.
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explained by DPNM, the shrinkage
factor was, however, properly applied to
the butterfat adjustment portion of the
protein price formula. Correction of this
mathematical error removes this
inconsistency between the butterfat
pricing formula and the protein price
formula.
This decision agrees with DPNM and
others who support correction of this
error. In the 2002 final decision
adopting the butterfat yield of 1.20,
USDA correctly explained that when
accounting for the farm-to-plant loss of
milk, there is a 0.25 percent butterfat
loss per pound of butterfat, plus an
additional loss of 0.015 pounds per cwt
of milk. However, when mathematically
accounting for the loss in the price
formulas, the additional 0.015 pound of
loss was applied on a per pound of
butterfat basis. This decision corrects
that error and proposes to permanently
adopt a butterfat yield of 1.211.
Opponents of amending this factor do
not dispute that the 1.20 butterfat yield
factor used in the pricing formulas was
in error. Rather, opposition rests on the
premise that manufacturing processors
are already paying too much for raw
milk and they attribute this to the inplant shrinkage of butterfat that cannot
be processed into a finished product.
Furthermore, adopting the 1.211 factor
would result, all other factors
unchanged, in a higher minimum price
for raw milk. This decision rejects such
arguments. The arguments are based on
an unwanted outcome and not on the
basis of the proper application of this
factor. The other features of Proposal 6
are not proposed to be adopted and
those features are discussed later in this
decision.
Other proposals considered in this
proceeding address the three major
elements of the product-price
formulas—end-product prices used in
the formulas, manufactured product
yield factors and other intra-formula
cost factors. A proposal (Proposal 18)
advanced to establish an alternative
approach to determining prices of raw
milk by attempting to develop a
competitive pay price also is
considered.
Product Yields and Butterfat Recovery
Percentage
A package of proposals, advanced by
DPNM, seek to amend the product-price
formulas to capture the use of more
modern manufacturing technology and
its impact on milk value (Proposals 6, 7,
and 8). As already discussed, a part of
Proposal 6 seeking to amend the
butterfat yield factor in the butterfat
price formula from 1.20 to 1.211 is
proposed to be permanently adopted.
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However, Proposal 6 also seeks to
increase the butterfat recovery
percentage in the protein price formula
from 90 percent to 94 percent. The
argument for increasing this factor is
that new cheese manufacturing
technology has increased the amount of
butterfat that manufacturers can
potentially recover when making
cheese. A 94 percent recovery rate also
will increase the blend price paid to
producers by $0.07 per cwt.
Opponents to increasing the butterfat
recovery rate, including LOL, NDA,
Sorrento, Leprino, MMPA, and H. P.
Hood presented evidence countering the
DPNM claim that a butterfat recovery in
excess of 90 percent is achievable
industry-wide. Many manufacturer
witnesses testified that their butterfat
recovery percentage in cheese is, on
average, 90 percent.
While the record contains evidence of
what butterfat recovery rate in cheese
production is possible through the use
of more modern manufacturing methods
and technology, the preponderance of
evidence reflects that many cheese
manufacturers generally achieve
butterfat recovery near 90 percent.
DPNM et al. failed to make a compelling
argument for an increase in the butterfat
recovery rate in their exceptions to the
tentative partial final decision. While
they did offer several references to
articles published by dairy scientists
providing examples of cheese yields
with higher butterfat retention rates,
they did not provide examples of
manufacturing facilities currently
experiencing those higher rates.
Furthermore, the use of advertisements
claiming that a specific cheese vat will
result in higher butterfat retention rates
does not merit the conclusion that those
rates are, on average, achieved. It is
important that the product-price
formulas reflect current plant
conditions, not plant conditions that
may be possible but not reflective of
general industry wide conditions.
Accordingly, this final decision
continues to reject adoption of this
feature of Proposal 6.
Proponents also commented that
plants whose butterfat recovery rate is
greater than 90 percent are not paying
for all of the protein used to make
cheese. This final decision rejects that
assertion. All of the protein contained in
producer milk, regardless of if its end
use in cheese or in the whey stream, is
priced at the protein price. The protein
price is not reduced to reflect a lower
value for the protein in the whey
stream.
A second proposal of the DPNM
package of proposals, Proposal 7, seeks
to eliminate the farm-to-plant shrink
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adjustment factors in the Class III and
Class IV product-price formulas. The
argument by proponents is that modern
measurement and milk-handling
techniques, and the trend of
transporting full loads of milk from
single producers negate the need to
retain the shrinkage adjustment factors.
Opponents argue that in many
marketing areas, milk shipments are
commonly assembled from multiple
farms and some farm-to-plant shrinkage
is inevitable.
Record evidence supports concluding
that farm-to-plant shrinkage remains a
reality for manufacturers. Numerous
witnesses testified regarding actual
average farm-to-plant shrinkage
experienced at their plants: LOL (0.343
percent); MMPA (0.3 percent); Leprino
(0.25 percent); and HP Hood (1.5
percent including in-plant losses).
While DPNM argued at the hearing and
in its exceptions that its members’ farmto-plant shrinkage is well below the 0.25
percent contained in the Class III and
Class IV product-price formulas, no
evidence was offered for examination as
an alternative other than its elimination.
Furthermore, while proponents assert
that shipping full tanker loads of milk
is common in the southwest where they
operate, record evidence does not
demonstrate this reality in the rest of the
country.
This final decision continues to find
that the Class III and Class IV productprice formulas should recognize the loss
of milk that occurs when milk is moved
from the farm to a receiving plant.
Record evidence demonstrates that
farm-to-plant shrinkage occurs, for
example, from imprecise stick readings
and sampling at the farm or from
product remaining on tanker walls after
emptying the load at the plant. In most
cases, producers are paid based on farm
weights and tests, in which case the
handler pays for product that is not
ultimately received. It is therefore
reasonable when determining
component prices charged to handlers
to make an adjustment for the lost
product. The 0.25 percent shrinkage
factor contained in the formulas is a
reasonable factor that represents the loss
of producer milk when shipped from
farm-to-plant. Accordingly, Proposal 7
is not proposed to be adopted.
A third proposal of the DPNM
package of proposals, Proposal 8, seeks
to increase the nonfat solids (NFS) yield
factor in the Class IV product price
formula and the yield factors for protein
and butterfat in the protein price
formula components of the Class III
product-price formula. Proponents
computed the proposed conversion
factors to be used in the protein price
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formula by assuming: a) that the
percentage of casein in true protein is
actually 83.25 percent (resulting in a
cheese yield per pound of protein of
1.405); b) the butterfat recovery rate in
cheese is 94 percent (resulting in a
cheese yield per pound of butterfat of
1.653); and c) that average producer
tests should be used in the price
formulas (resulting in a fat to protein
ratio of 1.214). The conversion factor for
computing the nonfat solids should be
1.02 based on actual nonfat dry milk
yield per pound of nonfat solids.
Opponents counter that the
methodology used to derive the
proposed yield factors are flawed and
that no actual studies were offered to
support their conclusion that product
yields are higher than those currently
provided in the formulas. This final
decision continues to find no record
evidence to support amending the yield
factors as proposed in Proposal 8.
Despite comments to the tentative
partial final decision by DPNM et al.,
record evidence does not support
making changes to the yield factors in
the protein price formula. Proponents
continue to argue that based on
producer tests, the actual percentage of
casein in true protein is 83.25 percent.
The formulas currently assume that the
percentage of casein in true protein is
82.2 percent. This factor, adopted in
2002 (67 FR 67928),9 was based on
evidence provided at that proceeding by
a university researcher whose studies
demonstrated a casein in true protein
range of 82.2 percent to 82.4 percent.
The record of this proceeding does not
contain data from any studies that
would indicate that the casein in true
protein percentage has increased.
Accordingly, this decision does not
propose increasing the percentage of
casein in true protein to 83.25.
In their exceptions DPNM et al.
reiterated its arguments that a butterfat
recovery rate of 94 percent should be
adopted. Its adoption would result in an
increase in the cheese yield per pound
of butterfat to 1.653. This final decision
has already discussed why a 94 percent
butterfat recovery rate is not proposed to
be adopted. Consequently, the butterfat
yield factor in the protein formulas is
not amended.
Proposal 8 also seeks to increase the
fat-to-protein ratio in the protein
formula to 1.214. Proponents claim that
the increased ratio reflects the use of
average producer milk tests of 3.04
percent true protein and 3.69 percent
butterfat. The current ratio of 1.17 was
computed using standardized milk tests
9 Official notice is taken of 67 FR 67928,
published November 7, 2002.
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of 2.9915 percent true protein and 3.5
percent butterfat. Record evidence does
not support using average producer tests
in determining yield factors. Proponents
claim that other yield factors were
determined using average producer
tests. This statement is incorrect. Other
yield factors in the product price
formulas take into account the amount
of the component in the product; there
is no consideration of average producer
tests. For example, the yield factor in
the butterfat price formula is 1.211. This
value was derived from the percentage
of butterfat in butter, and was later
adjusted for farm-to-plant shrinkage.
Weighted average producer tests have
no bearing on this yield number. This
final decision continues to find that
increasing the fat-to-protein ratio to
account for weighted average producer
tests is not justified.
The last portion of Proposal 8 seeks to
increase the nonfat solids yield factor
from .99 to 1.02. DPNM et al. claims that
it is impossible for 1 pound of solids
nonfat to yield less than one pound of
nonfat dry milk. In their exceptions,
DPNM et al. claims that the California
milk pricing formulas actually use a
yield factor of 1.02. According to a
December 2007 California Milk Pricing
Formulas publication release by CDFA,
California price formulas utilize a
nonfat solids yield factor of 1.10 The .99
yield factor currently contained in the
nonfat solids price formula was adopted
on April 1, 2003 (68 FR 7063).11 This
factor was reduced from 1.02 to account
for farm-to-plant shrinkage. USDA
continues to find it appropriate to
acknowledge farm-to-plant shrinkage in
the product price formulas. Therefore,
the nonfat solids yield factor is
unchanged.
Value of Butterfat in Whey
Two proposals advanced by IDFA and
Agri-Mark, Proposals 9 and 10
respectively, seek to change the protein
price formula feature of the Class III
product-price formula by reducing the
protein price to reflect the lower market
value of whey cream. Proposal 9 also
seeks to further lower the protein price
to reflect the reduced recoverable
volume of whey cream in the cheese
making process. (During the proceeding
Agri-Mark withdrew its support of
Proposal 10 in support of IDFA’s
Proposal 9.) The argument for seeking
these changes is that that the volume of
10 Official notice is taken of ‘‘California Milk
Pricing Formulas’’, December 2007, Dairy
Marketing Services Branch, California Department
of Agriculture: https://www.cdfa.ca.gov/dairy/pdf/
steps_for_calc_minprices.pdf.
11 Official notice is taken of 68 FR 7063, February
12, 2003.
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milkfat contained in whey cream is
currently valued at the Grade AA butter
price but can only be sold as whey
butter (Grade B butter) or for other uses
with values below the Grade AA butter
price. Record evidence does indicate
that Grade B is often marketed to
commercial food service establishments
such as bakeries and is marketed at a
discount to the Grade AA butter price.
Some hearing participants (NAJ) suspect
that the volumes of whey cream
produced and the extent of a secondary
market for whey butter are relatively
small. Record evidence contains very
limited data regarding plant sales of
whey cream or Grade B butter. More
importantly, there is no known
publically available data for U.S. market
prices and volumes of whey cream or
Grade B butter produced or sold.
Opponents (Dairylea et al.) to IDFA’s
proposal acknowledge that while whey
cream does have a lower value than that
reflected in the Grade AA butter price,
other higher-value uses for whey cream
exist that also are not recognized.
Opponents argue that it would be
inappropriate to amend the butterfat
value to reflect a selected measure of
whey cream value while not considering
whey cream value in other (possibly
higher-value) uses.
After considering the comments and
exceptions to the tentative partial final
decision for reducing the protein price
to reflect the lower market value of
whey cream, this decision continues to
reject this proposal. Whey cream may
have a lower market value, but without
publicly available market data that
provides whey cream volumes and
prices, no reasonable and objective
means is available to determine if or
how whey cream is distorting the
protein price formula feature contained
in the Class III product-price formula.
Supporters of Proposal 9 did not offer
market information that could be relied
upon as a basis for changing the protein
price. While there is record evidence
from some manufacturers as to their
individual saleable volumes and values
of whey cream, that limited data does
not provide for a reasonably complete
assessment of the national market for
whey cream and its various competing
uses. The lack of verifiable data
concerning whey cream and/or its
applicability to any additional costs or
value loss experienced by cheese
manufacturers across the industry is
unknown. Accordingly, Proposals 9 and
10 are not proposed to be adopted.
Barrel-Block Cheese Price Spread
Proposal 12 offered by IDFA and
supported by Leprino, DFA, NDA, AgriMark, and others, seeks to eliminate the
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3-cent addition to the barrel price in the
protein price formula. The argument for
elimination from the protein price
formula is that the average price
difference between block and barrel
cheese was 3-cents when first
incorporated into the formula but now
there is virtually no difference in the
packaging costs of blocks and barrels.
Proponents also argue that even if there
were a cost difference, that difference
would have been captured in the
CPDMP 2006 survey of manufacturing
costs. Other proponents add to the
argument that after the NASS barrel
cheese price was adjusted from 39
percent to 38 percent moisture content
in January 2001, the price difference
between barrels and blocks has averaged
$0.008 per pound.
The record contains only one cheese
manufacturer’s (Davisco) specific
packaging cost data for a single plant
located in Minnesota that produces
cheese in both blocks and barrels. That
plant’s average packaging cost for block
cheese was $0.0012 per pound more
than for barrels. Another cheese
manufacturer (Twin County) producing
cheese exclusively in barrels in Iowa
was unable to indicate whether it was
advantageous to their business to
support or oppose any change in the 3cent adjustment advanced in Proposal
12.
This final decision does not support
adoption of Proposal 12. The argument
that any packaging cost differences that
exist between barrel and block cheese is
captured in the CPDMP 2006 survey is
inadequately supported. The record
reveals that all packaging costs reported
in the CPDMP 2006 survey were for 40pound block cheese production. If a
surveyed plant produced barrel cheese,
an average packaging cost for 40-pound
blocks was assigned to the plant.
Additionally, proponents assert that
since the price difference between
blocks and barrels is almost zero, it can
be concluded that that any packaging
cost difference must also be nearly zero.
This decision does not find a causal
relationship between selling prices and
manufacturing costs. Even though the
price spread between blocks and barrels
has narrowed over time and recently
averaged near zero, the cost difference
between block and barrel packaging
cannot be assumed to also be zero.
Blocks and barrels have different supply
and demand functions. Comparing
average prices over a period of time
does not therefore automatically reflect
cost differences. Since barrel cheese
prices exceed block cheese prices at
certain times, due to different supply
and demand curves, average prices will
not in and of themselves indicate cost
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differences. While the record contains
packaging cost information for a single
plant that suggests similar packaging
costs of barrel and block cheese, such
evidence is insufficient to conclude that
this is representative across Federal
order manufacturing plants or should be
the basis for adopting the proposal.
Accordingly, Proposal 12 is denied.
The proposal by DFA and NDA,
Proposal 13, seeks to eliminate the
cheese barrel price from the protein
price formula feature of the Class III
product-price formula but no testimony
was given in support of this proposal. In
addition to NDA proponent support
during the hearing and DFA opposition
to the adoption of the proposal in their
post-hearing brief, significant
opposition from others was given.
Opponents argue that because barrel
cheese represents roughly half of the
NASS price survey cheese volume (now
captured in the AMS survey), removing
the barrel price from the protein price
formula would greatly reduce the total
AMS survey volume thereby making the
price survey less representative of the
cheddar cheese market.
This final decision continues to find
that retaining the cheese barrel price in
the protein price formula is necessary to
ensure that the protein price is
representative of the national cheese
market. The Class III product-price
formula needs to be reasonably
representative of the market for cheese
that determines the value of milk.
Record evidence reveals that barrel
production in the AMS survey is often
in excess of 50 percent of the total
cheese volume surveyed. Eliminating
the barrel price from the protein price
formula would significantly and
needlessly reduce the volume of cheese
used in the Class III product price
formula which could lead to protein
prices that are not as representative of
the national cheese market.
Accordingly, Proposal 13 is not
proposed to be adopted.
Product Price Series
Proposal 14, advanced by Agri-Mark,
seeks to change the price data used in
the Class III and protein price formula
by combining the NASS price survey
data for cheddar cheese (now the AMS
price survey data for cheddar cheese)
with the weekly average CME cheese
prices as a method that results in a
superior benchmark price for cheese.
The argument rests on the assertion that
the 2-week timing difference, or lag,
between the CME price and the AMS
price survey for cheese fails to capture
changes in market prices in the current
value of cheese and the near-actual
Class III value. The proponent also
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argues that adoption of this new price
series would reduce price volatility and
provide more up-to-date market
information than that provided by the
AMS price survey. In other words, more
current market information would be
transmitted through minimum Class III
prices and provide more accurate
pricing signals to processors and
producers.
Opponents to adoption of Agri-Mark’s
Proposal 14, including IDFA and its
members, collectively argue that
combining the CME price with the AMS
price would reduce the usefulness of
currently available risk management
tools. These tools include the use of
futures contracts and the use of forward
contracts. Opponents also note that (1)
the CME is a spot market representing
only about 4.1 percent of all cheddar
cheese traded and is not representative
of cheese being more commonly
produced and marketed on a longerterm contract basis, (2) it adds a degree
of complexity to a pricing-formula
which is already too complex without
any discernible benefit and (3) its
adoption would tend to bias price
reporting to the market conditions of the
Chicago area. All comments to the
tentative partial final decision regarding
Proposal 14 supported USDA’s denial of
the proposal.
It is reasonable to expect that adding
a degree of complexity may tend to
reduce transparency and lessen the
understanding of the Class III and Class
IV product-price formulas. Other than
assertions by the proponent, the record
lacks evidence that combining CME
prices with AMS survey prices would
improve price discovery or market
information or would offer superior
transmission of economic signals
through the minimum Class III price.
In addition, rulemaking action on
mandatory product price reporting
overtakes the need to consider adoption
of a new price series that combines CME
prices with AMS survey prices.
Improved mandatory price reporting
that provides for the auditing of prices
reported to AMS makes the accuracy,
but not the timing, of price data less of
an issue than envisioned throughout
this proceeding. Accordingly, Proposal
14 is not proposed to be adopted.
A proposal advanced by DPNM,
Proposal 15, seeking to replace the AMS
price series for cheese with the CME
price has similarities to that of Proposal
14. It seeks to eliminate the 2-week lag
between CME prices and AMS price
reporting. DPNM has argued throughout
this rulemaking proceeding that the use
of CME prices in the price formula for
cheese would provide producers,
marketers and manufacturers of cheddar
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cheese with more timely and
transparent prices as the CME
represents actual current cheese prices.
In opposition to the adoption of
Proposal 15, the opponents, including
IDFA, NDA, Agri-Mark and DFA, as in
their opposition to the adoption of
Proposal 14, argue that (1) The CME is
too thin a market to be relied upon for
use in the Class III product-price
formula, (2) the CME represents only
about 4.1 percent of all cheddar cheese
traded, (3) its exclusive use would tend
to bias and limit the price reporting for
cheese to the market conditions of the
Chicago market, and (4) being a spot
market for cheese, the CME ignores
other sales agreements and marketing
arrangements that account for more than
95 percent of the cheese marketed and
largely captured in the AMS price
survey.
This final decision continues to find
that cheese prices used in product-price
formulas should reflect broad markets
and not rely exclusively on a smaller
subset of cheese prices and spot
marketing conditions as represented by
the CME. The record also makes clear
that more industry confidence is placed
in AMS price surveys than in spot
market prices for cheese. Accordingly,
Proposal 15 is not adopted.
Other Solids Price
Proposal 16, advanced by NAJ, seeks
to eliminate the other solids price and
expand the protein price formulas to
include the value of dry whey because,
according to NAJ, the value of whey lies
in its protein content. The proponent
asserts that the other solids price
formula does not connect the market
value of whey solids to how producers
are paid for whey. Therefore, the
proponent advocates that the value of
dry whey in the price formulas be
determined on the basis of its protein
content which will make the other
solids price formula no longer
necessary.
IDFA and other opponents argue that
it would be inappropriate to value dry
whey on a component (protein) that has
no measurable effect on the product
yield. Except for comments filed by the
proponent, comments filed by both
producer and manufacturer groups in
response to the tentative partial final
decision expressed opposition to the
adoption of Proposal 16.
This decision continues to find that
Proposal 16 would add no additional
value arising from protein to the
marketwide pool. It would simply shift
the money attributed to other nonfat
solids into the protein price formula and
add a level of complexity to the product
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price formulas that would yield no
measurable benefit.
Record evidence regarding Proposal
16 does not support eliminating the
other nonfat solids prices and shifting
the value of dry whey into the protein
price formula. Other solids in milk are
composed primarily of lactose, whey
protein, ash and other non-protein
solids. Numerous component markets,
such as lactose and dry whey, were
evaluated during Federal order reform
to determine an appropriate market to
base the other solids price. It was
determined that because no reliable
lactose market existed, the dry whey
market was the next best alternative. At
this time, there is still no reliable market
for lactose on which the other solids
price could be based. Therefore, this
final decision finds that dry whey,
despite the opinion of NAJ, remains the
most relevant market on which to base
the other solids price. Accordingly,
Proposal 16 is not adopted.
Competitive Price Series
Proposal 18, advanced by the Maine
Dairy Industry Association (MDIA),
seeks to determine Class III and Class IV
prices with a competitive pay price
series rather than the current productprice formulas. The proposal seeks a
return to a competitive pay price used
by the FMMO program prior to 2000.
The proponent argues that adoption of
the proposed competitive pay price
series would eliminate the need for
establishing make allowances that,
when increased, reduce prices received
by dairy farmers.
A competitive pay price series
previously existed for nearly 40 years
and provided the foundation for all
classified prices set in the system of
milk marketing orders. A competitive
pay price series would negate the need
to directly consider manufacturing costs
and other factors such as product yields
and their relationship in deriving the
value of raw milk.
However, there are many details that
need resolution before the FMMO
program could return to using a
competitive pay price series. For
example, the proposed method is based
on geographic areas (zones) wherein
strong competition for raw milk
prevails. A competitive pay price would
be derived by averaging prices from all
the competitive price zones. As
conceded by the proponent, these areas
would most likely be surrounded by
Federal milk marketing areas where
minimum classified prices prevail. Milk
prices within the competitive price
zones would therefore be influenced by
milk priced under adjoining Federal
orders. Other considerations, including
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an accounting of various forms of inkind payments to producers, also need
to be addressed. Ignoring consideration
of such payments would allow plants to
increase (decrease) their hauling charges
as a way of reducing (increasing) the
actual pay price to dairy farmers.
Therefore, this final decision finds
that Proposal 18 cannot be implemented
as proposed and is herein denied
B. Termination of a Portion of the
Proceeding
Proposal 2, offered by Agri-Mark,
proposed to amend the Class III and
Class IV product formulas to annually
update the manufacturing allowances
using an annual manufacturing cost
survey of cheese, whey powder, butter
and non-fat dry milk plants. The
proposal would give authority for
selecting the sample and conducting the
survey to the market administrators. The
manufacturing cost data would then be
used to update manufacturing
allowances to prescribed levels. On
brief, Agri-Mark withdrew the
automatic-updating portion of the
proposal.
The record of hearing reflects a
mixture of support and opposition to
this proposal. This wide variance in
industry response clearly demonstrates
a lack of unity and policy direction.
Opposition to Proposal 2 tended to stem
primarily from the implementation of an
automatic adjuster to manufacturing
allowances, which was subsequently
withdrawn by Agri-Mark. However,
amongst supporters there was a clear
lack of consensus as to how and by
whom the survey should be
implemented, what regions should
comprise the survey sample, and
specifics as to how the survey data were
to be used. The only clear assertion
made by the record was that some
participants supported establishing a
manufacturing cost survey.
Proposal 17, advanced by NMPF,
would have amended the Class III and
Class IV product price formulas to
incorporate a monthly energy cost
adjustment based on monthly changes
in the producer price indices for
industrial natural gas and electricity as
published by the Bureau of Labor
Statistics. Proponents argued that the
implementation of an energy price
adjuster would update make allowances
in response to fluctuating energy prices.
As mentioned earlier, this proposal was
broadly supported by producer
organizations, many of which
manufacture NFDM and dry whey.
These two products, in particular,
require the use of energy-consuming
driers in their production processes.
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Opponents to Proposal 17 were
overwhelmingly manufacturers of dairy
products. They argued that the
inclusion of an energy cost adjuster in
the make allowance would complicate
the milk pricing system and reduce the
effectiveness of certain risk management
tools.
Proposal 20, advanced by Dairylea,
would amend the Class III and Class IV
product price formulas by establishing
cost-of-production add-ons that
manufacturers could include in the
selling price of their products, but
which would not be included as part of
the NASS (now AMS) dairy product
price survey. Proponents noted that
increases in wholesale prices on dairy
products are captured by product price
surveys and subsequently drive up the
costs of raw milk, through higher Class
III and Class IV prices. The proposed
mechanism, they argued, would break
the existing price circularity, allowing
processors to increase wholesale prices
without affecting input costs.
Opponents, many of whom are dairy
processors, argued that it would be
difficult to negotiate cost add-ons with
wholesalers. Those handlers unable to
successfully negotiate a higher cost addon would be limited to the cost
allowance included in the
manufacturing allowance. Similarly,
handlers operating outside of the
Federal order system could potentially
gain market share over regulated
competitors. Additionally, opponents
noted, the implementation of a cost addon would further complicate the
existing price discovery mechanism
used by the Federal order system.
In the time following the
implementation of the interim final rule
(73 FR 44617), the Department received
a request, which has been made part of
the Official Record, from the Greater
Northeast Milk Marketing Agency
(GNEMMA) to finalize those proposals
from this proceeding implemented on
an interim basis and terminate the
remainder (Proposals 2, 17 and 20).
GNEMMA is a marketing agency in
common comprised of: Agri-Mark, Inc.;
Dairy Farmers of America, Inc.; Dariylea
Cooperative, Inc.; Dairy Marketing
Services, LLC; Land O’Lakes, Inc.;
Maryland and Virginia Milk Producers
Cooperative Association, Inc.; St.
Albans Cooperative Creamery, Inc.; and
Upstate Niagara Cooperative, Inc.
GNEMMA members market in excess of
64 percent of all milk in the Northeast
milk marketing area. The petitioners
argue that certain market conditions
have changed in the time since the
hearing and certain data reflected in the
record of hearing in regards to Proposals
2, 17 and 20 are no longer valid.
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Other proposals proposed to be
permanently adopted by this decision
have already been implemented on an
interim basis. This decision continues to
support their adoption, and in essence
the status quo.
While evidence regarding Proposals 2,
17 and 20 was collected during the
hearing, the Department has never
issued a decision on their merits. The
hearing was initially held in 2007. The
hearing record reflects marketing
conditions at that time. Marketing
conditions since the 2007 hearing have
changed. Accordingly, given these
circumstances, it is reasonable to
terminate the proceeding in regards to
Proposals 2, 17 and 20 in their entirety.
In view of the foregoing, it is hereby
determined that the proceeding with
respect to Proposals 2, 17 and 20 should
be and are hereby terminated.
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Rulings on Motions
A motion for official notice of a
publication 12 and a final decision 13 by
the CDFA was submitted by Agri-Mark
et al. joined by Twin County Dairy, Inc.,
(Twin County) and supported by IDFA.
This decision takes official notice of
these publications.
In their comments to the tentative
partial final decision, Agri-Mark et al.
and Twin County also filed a motion for
official notice of specific energy price
statistics and projections of the U.S.
Department of Labor and the U.S.
Department of Energy. This motion was
supported by IDFA. The motion
advocated use of this data for a one-time
energy cost adjustment to the
manufacturing allowances adopted in
the final decision. Previous publications
of these statistics were officially noticed
during the hearing. This final decision
takes official notice of these
publications through March 2009.
A motion and supplemental
information in support of the motion
seeking a continuance of the hearing for
the limited purpose of offering
additional data and analysis in
advancing Proposal 18 were submitted
by MDIA. A counter motion opposed to
MDIA’s motion was made by IDFA.
Offering new data and analysis by
continuing or re-opening the hearing for
the limited purpose of reconsidering
Proposal 18 would put all other hearing
participants advancing or opposing
12 California Department of Food and Agriculture:
Summary of Weighted Average Manufacturing
Costs, Butter, Nonfat Dry Milk, Cheddar Cheese,
and Dry Whey Powder, Released September 18,
2007.
13 California Department of Food and Agriculture:
Final Results for Class 4a and 4b Pricing Formula
Hearing of October 10, 2007, released November 20,
2007.
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proposals during the proceeding at a
disadvantage. This proceeding lasted for
3 weeks over a 6 month period from
February 2007 through July 2007. It also
was preceded by an information session
in December 2006. The tentative final
decision found that sufficient time was
made available to all known parties to
develop and present noticed proposals
and the motion was denied.
Exceptions to the tentative partial
final decision filed by MDIA requested
that USDA reconsider their original
motion for a continuance of the hearing.
MDIA argued that because a decision
has yet to be issued on three other
noticed proposals, the hearing—in
regard to those proposals—remains
open. Therefore, concluded MDIA,
USDA has the latitude to grant MDIA’s
motion for a continuance on Proposal
18. MDIA also stated that in denying its
first motion, USDA did not give proper
weight to the support for the basic
concept of Proposal 18 (a competitive
pay price series) expressed in numerous
post-hearing briefs that were submitted
by various hearing participants.
MDIA also took exception with the
tentative partial final decision’s
characterization that the MDIA’s
witness conceded problems with the
proposed competitive pay price series.
MDIA wrote that Proposal 18 was
designed to be a beginning framework
for a functioning competitive pay price
series that would be superior to endproduct pricing formulas. MDIA argued
that it intended to use the hearing
process as a method for determining
concerns with the proposal and then
recommend to the Department a
procedure for further development of
the proposal.
MDIA’s motion for a continuance
continues to be denied. Though a
continuation might allow for further
development of Proposal 18 with USDA
and industry participants, there is a
necessity to proceed with finalizing the
rulemaking on the Class III and Class IV
price formulas. While MDIA’s motion is
denied, this does not prevent future
consideration of a competitive pay price
system.
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
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9277
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 Northeast and
other marketing orders were first issued
and when they were 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
agreements and the orders, 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 milk in the marketing areas, and the
minimum prices specified in the
tentative marketing agreements and the
orders, 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
agreements and the orders, 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, marketing agreements upon
which a hearing has been held.
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 is one document: A Marketing
Agreement regulating the handling of
milk. The order amending the order
regulating the handling of milk in the
Northeast and other marketing areas was
approved by producers and published
in the Federal Register on July 31, 2008
(73 FR 44617), as an Interim Final Rule.
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Both of these documents have been
decided upon as the detailed and
appropriate means of effectuating the
foregoing conclusions.
It is hereby ordered that this entire
final decision and the Marketing
Agreement 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 referenda 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 procedure for the
conduct of referenda (7 CFR 900.300–
311), to determine whether the issuance
of the orders as amended and as hereby
proposed to be amended, regulating the
handling of milk in the Upper Midwest,
Mideast, and Northeast marketing areas
is approved or favored by producers, as
defined under the terms of the orders (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 areas.
The representative period for the
conduct of such referenda is hereby
determined to be May 2012.
The agents of the Secretary to conduct
such referenda are hereby designated to
be the respective market administrators
of the aforesaid orders.
Determination of Producer Approval
and Representative Period for All Other
Orders
May 2012 is hereby determined to be
the representative period for the
purpose of ascertaining whether the
issuance of the orders, as amended and
hereby proposed to be amended,
regulating the handling of milk in the
Appalachian, Florida, Southeast,
Central, Pacific Northwest, Arizona, and
Southwest areas is approved or favored
by producers, as defined under the
terms of each of these orders 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 areas.
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List of Subjects in 7 CFR Part 1000
Milk marketing orders.
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Order Amending the Orders Regulating
the Handling of Milk in the Northeast
and Other Marketing Areas
This order shall not become effective
until the requirements of 7 CFR section
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 orders were
first issued and when they were
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
agreements and to the orders regulating
the handling of milk in the Northeast
and other marketing areas. The hearing
was held pursuant to the provisions of
the Agricultural Marketing Agreement
Act of 1937, 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 orders 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 orders as hereby
amended regulate 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
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handling of milk in the Northeast and
other marketing areas 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 interim
amendment of the order issued by the
Administrator, Agricultural Marketing
Service, on July 25, 2008, and published
in the Federal Register on July 31, 2008
(73 FR 44617), are adopted without
change and shall be and are the terms
and provisions of this order.
[Note: The following will not appear
in the Code of Federal Regulations.]
Marketing Agreement Regulating the
Handling of Milk in Certain Marketing
Areas
The parties hereto, in order to
effectuate the declared policy of the Act,
and in accordance with the rules of
practice and procedure effective
thereunder (7 CFR part 900), desire to
enter into this marketing agreement and
do hereby agree that the provisions
referred to in paragraph I hereof, as
augmented by the provisions specified
in paragraph II hereof, shall be and are
the provisions of this marketing
agreement as if set out in full herein.
I. The findings and determinations,
order relative to handling, and the
provisions of § llll to llll all
inclusive, of the order regulating the
handling of milk in the llllll
marketing area (7 CFR part llll);
and
II. The following provisions:
§ llllll Record of milk handled
and authorization to correct
typographical errors.
(a) Record of milk handled. The
undersigned certifies that he/she
handled during the month of
llllll, llllll
hundredweight of milk covered by this
marketing agreement.
(b) Authorization to correct
typographical errors. The undersigned
hereby authorizes the Deputy
Administrator, or Acting Deputy
Administrator, Dairy Programs,
Agricultural Marketing Service, to
correct any typographical errors which
may have been made in this marketing
agreement.
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Effective date. This marketing
agreement shall become effective upon
the execution of a counterpart hereof by
the Department in accordance with
Section 900.14(a) of the aforesaid rules
of practice and procedure.
In Witness Whereof, The contracting
handlers, acting under the provisions of
the Act, for the purposes and subject to
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the limitations herein contained and not
otherwise, have hereunto set their
respective hands and seals.
Signature
By (Name) lllllllllllll
(Title) lllllllllllllll
(Address)
lllllllllllll
(Seal)
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Attest
9279
lllllllllllllll
Dated: February 1, 2013.
David R. Shipman,
Administrator, Agricultural Marketing
Service.
[FR Doc. 2013–02623 Filed 2–6–13; 8:45 am]
BILLING CODE 3410–02–P
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Agencies
[Federal Register Volume 78, Number 26 (Thursday, February 7, 2013)]
[Proposed Rules]
[Pages 9247-9279]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-02623]
[[Page 9247]]
Vol. 78
Thursday,
No. 26
February 7, 2013
Part IV
Department of Agriculture
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Agricultural Marketing Service
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7 CFR Part 1000
Milk in the Northeast and Other Marketing Areas; Final Decision on
Proposed Amendments to Marketing Agreements and Orders and Termination
of a Portion of the Proceeding; Proposed Rule
Federal Register / Vol. 78, No. 26 / Thursday, February 7, 2013 /
Proposed Rules
[[Page 9248]]
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DEPARTMENT OF AGRICULTURE
Agricultural Marketing Service
7 CFR Part 1000
[Doc. No. AMS-DA-07-0026; AO-14-A77 et al.; DA-07-02]
Milk in the Northeast and Other Marketing Areas; Final Decision
on Proposed Amendments to Marketing Agreements and Orders and
Termination of a Portion of the Proceeding
AGENCY: Agricultural Marketing Service, USDA.
ACTION: Proposed rule.
-----------------------------------------------------------------------
SUMMARY: This document is the final decision proposing to permanently
adopt changes to the manufacturing cost allowances and the butterfat
yield factor used in Class III and Class IV product-price formulas
applicable to all Federal milk marketing orders. These amendments were
adopted by an interim final rule issued on, July 25, 2008, that became
effective on October 1, 2008. This document also terminates the
proceeding with regard to additional proposals that addressed the
collection of manufacturing cost information, the use of an energy cost
adjustor and providing for a cost add-on feature to Class III and Class
IV product-price formulas. The orders amended by this decision require
producer approval. Referenda will be conducted in three markets and
dairy farmer cooperatives will be polled in the other seven markets to
determine whether dairy farmers approve the issuance of the orders as
amended.
FOR FURTHER INFORMATION CONTACT: William Francis, Director, Order
Formulation and Enforcement Division, USDA/AMS/Dairy Programs, Order
Formulation and Enforcement, Stop 0231--Room 2971-S, 1400 Independence
Avenue SW., Washington, DC 20250-0231, (202) 720-7183, email address:
william.francis@ams.usda.gov.
SUPPLEMENTARY INFORMATION: This final decision proposes to permanently
adopt amendments to the manufacturing (make) allowances for cheese,
butter, nonfat dry milk (NFDM) and dry whey contained in the Class III
and Class IV product price formulas (Proposal 1). Specifically, this
decision proposes to permanently adopt the following make allowances:
$0.2003 per pound of cheese; $0.1715 per pound of butter; $0.1678 per
pound of nonfat dry milk (NFDM); and $0.1991 per pound of dry whey.
This decision also proposed to permanently increase the butterfat yield
factor in the butterfat price formula from 1.20 to 1.211 (Proposal 6).
These make-allowances and butterfat yield factor have been in use since
October 1, 2008, following producer approval of the tentative final
decision (73 FR 51352).
This decision also addresses proposals published in the hearing
notice as Proposals 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16 and
18 that seek to change various features of the Class III and Class IV
product-price formulas. This document also terminates the proceeding
with regard to Proposals 2, 17 and 20.
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 amendments would not preempt
any state or local laws, regulations, or policies, unless they present
an irreconcilable conflict with this rule.
The Agricultural Marketing Agreement Act of 1937 (Act), as amended
(7 U.S.C. 604-674), provides that administrative proceedings must be
exhausted before parties may file suit in court. Under section
608c(15)(A) of the Act, any handler subject to an order may request
modification or exemption from such order by filing with the U.S.
Department of Agriculture (USDA) a petition stating that the order, any
provision of the order, or any obligation imposed in connection with
the order is not in accordance with the law. A handler is afforded the
opportunity for a hearing on the petition. After a hearing, USDA would
rule on the petition. The Act provides that the district court of the
United States in any district in which the handler is an inhabitant, or
has its principal place of business, has jurisdiction in equity to
review the USDA's ruling on the petition, provided a bill in equity is
filed not later than 20 days after the date of the entry of the ruling.
Regulatory Flexibility Act and Paperwork Reduction Act
In accordance with the Regulatory Flexibility Act (5 U.S.C. 601-
612), the Agricultural Marketing Service has considered the economic
impact of this action on small entities and has certified that this
proposed rule will not have a significant economic impact on a
substantial number of small entities. For the purpose of the Regulatory
Flexibility Act, a dairy farm is considered a small business if it has
an annual gross revenue of less than $750,000, and a dairy products
manufacturer is a small business if it has fewer than 500 employees.
For the purposes of determining which dairy farms are small
businesses, the $750,000 per year criterion was used to establish a
production guideline of 500,000 pounds per month. Although this
guideline does not factor in additional monies that may be received by
dairy farms, it should be an inclusive standard for most small dairy
farms. For purposes of determining a handler's size of operation, if
the plant is part of a larger company operating multiple plants that
collectively exceed the 500-employee limit, the plant will be
considered a large business even if the local plant has fewer than 500
employees.
For the month of February 2007, the month the initial public
hearing was held, the milk of 49,712 dairy farms was pooled on the
Federal order system. Of the total, 46,729 dairy farms, or 94 percent,
were considered small businesses. During the same month, 352 plants
were regulated by or reported their milk receipts to be pooled and
priced on a Federal order. Of the total, 186 plants, or 53 percent,
were considered small businesses.
This decision proposes to permanently amend the make allowances
contained in the formulas used to compute component prices and the
minimum class prices in all Federal milk orders that were implemented
October 1, 2008, on an interim basis, without change. Specifically, the
make allowance for cheese continues to be $0.1715 per pound (initially
increased from $0.1682 per pound); the make allowance for NFDM
continues to be $0.1678 per pound (initially increased from $0.1570);
the make allowance for butter continues to be $0.1715 per pound
(initially increased from $0.1202); and the make allowance for dry whey
continues to be $0.1991 (initially increased from $0.1956). The
butterfat yield factor in the butterfat price formulas continues to be
1.211 (initially increased from 1.20).
The make allowances serve to approximate the average cost of
producing cheese, butter, NFDM and dry whey for manufacturing plants
located in Federal milk marketing areas. The established criteria for
the make allowance changes are applied in an identical fashion to both
large and small businesses and will not have any different impact on
those businesses producing manufactured milk products.
An economic analysis has been performed that discusses impacts of
the
[[Page 9249]]
proposed amendments on industry participants including producers and
manufacturers. It can be found on the AMS Web site at www.ams.usda.gov/dairy. Based on that economic analysis, the proposed amendments will
not have a significant economic impact on a substantial number of small
entities.
The Agricultural Marketing Service (AMS) is committed to complying
with the E-Government Act, to promote the use of the Internet and other
information technologies to provide increased opportunities for citizen
access to Government information and services, and for other purposes.
This decision does not require additional information collection
that needs clearance by the Office of Management and Budget (OMB)
beyond currently approved information collection. The primary sources
of data used to complete the forms are routinely used in most business
transactions. The forms require only a minimal amount of information
that can be supplied without data processing equipment or a trained
statistical staff. Thus, the information collection and reporting
burden is relatively small. Requiring the same reports for all handlers
does not significantly disadvantage any handler that is smaller than
the industry average.
Economic Analysis
In order to assess the impact of the proposed changes in Federal
order product price formulas, the Department conducted an economic
analysis. This analysis was discussed in the tentative partial final
decision (73 FR 35306) and remains unchanged. The complete analysis is
available on the Dairy Programs Web site which can be accessed at
www.ams.usda.gov/dairy.
Prior documents in this proceeding
Notice of Hearing: Issued February 5, 2007; published February 9,
2007 (72 FR 6179).
Supplemental Notice of Hearing: Issued February 14, 2007; published
February 20, 2007 (72 FR 7753).
Notice to Reconvene Hearing: Issued March 15, 2007; published March
21, 2007 (72 FR 13219).
Notice to Reconvene Hearing: Issued May 2, 2007; published May 8,
2007 (72 FR 25986).
Tentative Partial Final Decision: Issued June 16, 2008; published
June 20, 2008 (73 FR 35306).
Interim Final Rule: Issued July 25, 2008; published July 31, 2008
(73 FR 44617).
Delay of Effective Date: Issued August 28, 2008; published
September 3, 2008 (73 FR 51352).
Preliminary Statement
Notice is hereby given of the filing with the Hearing Clerk of this
final decision and termination of proceeding with respect to the
proposed adopted amendments to the tentative marketing agreements and
the orders regulating the handling of milk in the Northeast and other
marketing areas. This notice is issued pursuant to the provisions of
the Act and 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
agreements and the orders regulating the handling of milk in the
Northeast and other marketing areas. The hearing was held, pursuant to
the provisions of the Act, as amended (7 U.S.C. 601-674), and the
applicable rules of practice and procedure governing the formulation of
marketing agreements and marketing orders (7 CFR part 900.)
The proposed amendments set forth below are based on the record of
the first session of a public hearing held in Strongsville, Ohio, on
February 26-March 2, 2007, pursuant to a notice of hearing issued
February 5, 2007, published February 9, 2007 (72 FR 6179); a second
session of a public hearing held in Indianapolis, Indiana, on April 9-
13, 2007, pursuant to a reconvened hearing notice issued March 15,
2007, published March 21, 2007 (72 FR 13219); and a third session of a
public hearing held in Pittsburgh, Pennsylvania, on July 9-11, 2007,
pursuant to a reconvened hearing notice issued May 2, 2007, published
May 8, 2007 (72 FR 25986).
The material issues on the record of the hearing relate to:
A. Amending the product-price formulas used to compute Class III
and Class IV prices.
B. Terminating the proceeding with respect to proposals 2, 17 and
20.
Findings and Conclusions
A. Amending the Product-Price Formulas Used To Compute Class III and
Class IV Prices
This final decision proposes to adopt a proposal published in the
hearing notice as Proposal 1 which seeks to amend the manufacturing
allowances for butter, cheese, NFDM and dry whey using the most
currently available data, and a portion of Proposal 6 that increases
the butterfat yield in the butterfat price formula. The provisions
contained herein were adopted on an interim basis and became effective
October 1, 2008. Specifically, this decision finalizes the following
manufacturing allowances: Cheese--$0.2003 per pound, butter--$0.1715
per pound, NFDM--$0.1678 per pound and dry whey--$0.1991 per pound.
This decision also increases the butterfat yield factor in the
butterfat price formula from 1.20 to 1.211.
The Federal Milk Marketing Order (FMMO) program uses wholesale
product-price formulas to compute prices handlers must account for in
the marketwide pooling of milk used in the four classes of products.
These formulas rely on the price of finished products to determine the
minimum classified prices handlers pay for raw milk. In addition, the
Class III and Class IV prices form the base from which Class I and
Class II prices are determined. This end-product pricing system was
implemented on January 1, 2000 (published February 12, 1999; 64 FR
70868).
The product-price formulas are computed by using component values
from Agricultural Marketing Service (AMS) surveyed prices of
manufactured dairy products.\1\ The pricing system determines butterfat
prices for milk used in products in each of the four classes from a
surveyed butter price; protein and other solids prices for milk used in
Class III products from surveyed cheese and dry whey prices; and a
nonfat solids price for milk used in Class II and Class IV products
from surveyed nonfat dry milk product prices.\2\ The skim milk portion
of the Class I price may be derived from either the protein and other
solids price, or from the nonfat dry milk price depending on the
relationship between the Class III and IV price. The butterfat,
protein, other solids and nonfat solids prices are all derived in a
similar manner: Average AMS survey price minus a manufacturing (make)
allowance times a yield factor. The yield factor is an approximation of
the quantity of a specific product that can be made from a
hundredweight (cwt) of milk. The yield factors were last amended on
April 1, 2003 (published February 12, 2003; 68 FR 7063).
---------------------------------------------------------------------------
\1\ Official Notice is taken of a Final Rule (77 FR 8717)
published February 15, 2012. Effective April 1, 2012, USDA's AMS
began collecting and reporting wholesale dairy product prices. This
was previously managed by the National Agricultural Statistic
Service (NASS).
\2\ Official Notice is taken of a Notice (77 FR 2282) published
April 13, 2012. Effective April 18, 2012, AMS surveyed prices are
used in the price discovery mechanism for the component values of
raw milk. These component prices are then used to determine FMMO
minimum classified prices.
---------------------------------------------------------------------------
The make allowance factor represents the cost manufacturers incur
in processing raw milk into one pound of product. Federal milk order
pricing
[[Page 9250]]
formulas currently contain the following make allowances: Cheese--
$0.2003 per pound, butter--$0.1715 per pound, NFDM--$0.1678 per pound
and dry whey--$0.1991 per pound. These make allowances were adopted on
July 25, 2008, (73 FR 44617) and became effective on October 1, 2008,
on an interim basis as a result of this proceeding. The make allowances
were determined on the basis of California Department of Food and
Agriculture (CDFA) and Cornell Program on Dairy Markets and Policy
(CPDMP) surveys of product manufacturing costs. The current make
allowances for butter and nonfat dry milk were determined by using a
weighted average of the CDFA and CPDMP surveys over national production
volumes. The cheese make allowance was determined by relying on the
CDFA 2006 survey average cheese manufacturing cost and the dry whey
make allowance was determined by relying on the CPDMP 2006 survey. All
make allowances were adjusted for marketing costs.
Nineteen proposals were published in the hearing notice for this
proceeding. Proposals 4, 5 and 11 were withdrawn at the hearing by
proponents in support of other noticed proposals. No further reference
to these proposals will be made.
A proposal published in the hearing notice as Proposal 1, offered
by Agri-Mark Cooperative (Agri-Mark), seeks to amend the Class III and
Class IV make allowances by using the most current plant cost survey
data available. Agri-Mark is a Capper-Volstead cooperative with
approximately 1,400 member-owners throughout New England and New York,
and operates 4 manufacturing plants.
Agri-Mark was also the proponent of Proposal 2 that seeks to amend
the Class III and Class IV product price formulas to annually update
the manufacturing allowances using an annual manufacturing cost survey
of cheese, whey powder, butter, and nonfat dry milk plants (located
outside of California). The proposed amendments would grant authority
to Market Administrators to administer the survey, select the sample
plants, and collect, audit, and assemble cost information.
A proposal published in the hearing notice as Proposal 3, offered
by Dairy Producers of New Mexico (DPNM), seeks to amend the
manufacturing allowances contained in the Class III and Class IV
product price formulas. Specifically, this proposal seeks to set the
make allowances at the following levels: $0.1108 per pound for butter;
$0.1638 per pound for cheese; $0.1410 per pound for NFDM; and $0.1500
per pound for dry whey. DPNM is an association of dairy producers
located in New Mexico and West Texas.
DPNM was the proponent of Proposals 6, 7 and 8 that seek to amend
the yield factors and the butterfat recovery rate of the Class III and
Class IV product price formulas. Proposal 6 seeks to amend the butter
price formula by increasing the butterfat yield factor from 1.20 to
1.211 and to amend the protein price formula by increasing the
butterfat recovery rate from 90 percent to 94 percent. Proposal 7 seeks
to eliminate the farm-to-plant shrinkage and butterfat shrinkage
adjustments of all yield factors. Proposal 8 seeks to increase the
nonfat solids yield factor from 0.99 to 1.02, and increase the protein
price yield factor for cheese from 1.383 to 1.405 and for butterfat
from 1.572 to 1.653.
Proposal 9 was offered by the International Dairy Foods Association
(IDFA). Proposal 9 seeks to amend the Class III and Class IV product-
price formulas by adjusting the protein price formula to reflect the
lower value and reduced volume of butterfat recoverable as whey cream.
IDFA is a trade association with 530 members representing
manufacturers, marketers, distributors, and suppliers of fluid milk and
related products.
Proposal 10 was submitted on behalf of Agri-Mark. Proposal 10 seeks
to amend the Class III and Class IV product-price formulas by reducing
the protein price to reflect the lower selling price of whey butter.
Proposal 12 was offered by IDFA. Proposal 12 seeks to amend the
Class III and Class IV product price formulas by eliminating the 3-cent
cost adjustment for cheese manufacturing of 500-pound barrels contained
in the protein price formula.
Proposal 13 was offered by Dairy Farmers of America, Inc. (DFA) and
the Northwest Dairy Association (NDA). Proposal 13 seeks to amend the
Class III and Class IV product-price formulas by removing the barrel
cheese price as a cost component of the protein price formula. DFA is a
Capper-Volstead cooperative with 13,500 member-owners producing milk in
49 states. NDA is a Capper-Volstead cooperative with approximately 610
member-owners, and operates 6 manufacturing plants and 4 distributing
plants in the western United States.
Proposal 14 was advanced by Agri-Mark. Proposal 14 seeks to amend
the Class III and Class IV product price formulas by using a
combination of the weekly NASS and Chicago Mercantile Exchange (CME)
cheese price series to determine the cheese price contained in the
Class III and Class IV product-price formulas.
Proposal 15 was offered by DPNM. This proposal seeks to replace the
NASS commodity price surveys with CME commodity prices in each of the
price formulas except for the other solids formula. The dry whey price
in the other solids formulas would continue to be derived from the NASS
dry whey price survey.
Proposal 16 was offered by National All-Jersey, Inc. (NAJ).
Proposal 16 seeks to amend the Class III and Class IV product-price
formulas by eliminating the other solids price and adding the
equivalent value of dry whey to the protein price formula. NAJ is a
breed organization with more than 1,000 members.
Proposal 17 was offered by the National Milk Producers Federation
(NMPF). The proposal seeks to amend the Class III and Class IV product-
price formulas to incorporate a monthly energy cost adjustment based on
monthly changes in the manufacturing price indices for industrial
natural gas and industrial electricity as published by the Bureau of
Labor Statistics. NMPF is an association consisting of 33 dairy-farmer
cooperative members representing nearly three-quarters of U.S. dairy
farmers.
Proposal 18 was offered by the Maine Dairy Industry Association
(MDIA). Proposal 18 seeks to amend the Class III and Class IV product-
price formulas by incorporating a factor to account for any monthly
spread between component price calculations for milk and a competitive
pay price for equivalent Grade A milk. MDIA is an association that
represents all of Maine's 350 dairy farmers.
A proposal published in a supplemental hearing notice as Proposal
20 was submitted on behalf of Dairylea Cooperative, Inc. (Dairylea).
Proposal 20 seeks to amend the Class III and Class IV price formulas by
establishing cost-of-production add-ons that manufacturers could
include in the selling price of their products but would not be
included in the determination of the NASS survey prices. Dairylea is a
Capper-Volstead cooperative with 2,400 member-owners located in seven
northeastern states.
To provide order to the hearing testimony, post-hearing briefs and
comments and exceptions to the tentative final decision, the summary of
testimony is organized as follows:
1. Make Allowances: Proposals 1, 2 and 3
2. Product Yields and Butterfat Recovery Percentage: Proposals 6, 7
and 8
3. Value of Butterfat in Whey: Proposals 9 and 10
[[Page 9251]]
4. Barrel Cheese Price: Proposals 12 and 13
5. Product Price Series: Proposals 14, 15 and 18
6. Other Solids Price: Proposal 16
7. Energy Cost Adjuster; Proposal 17
8. Cost-of-Production Add-on; Proposal 20
1. Make Allowances
A witness from Cornell University (Cornell witness) testified
regarding the 2006 manufacturing cost survey (2006 survey) conducted by
the Cornell Program on Dairy Markets and Policy (CPDMP), to assess the
manufacturing costs of plants producing cheddar cheese, dry whey,
butter and NFDM. The witness did not testify in support of or in
opposition to any proposal presented at the hearing. The witness
explained that an earlier study, the CPDMP 2005 manufacturing cost
survey (2005 survey), was contracted in part by USDA and was presented
at a 2006 rulemaking hearing (71 FR 52502), and was a factor considered
by USDA in developing the make allowances that became effective March
1, 2007, (71 FR 78333). The witness said that some manufacturing plants
that participated in the 2005 survey requested a new survey to reflect
more current cost information.
The Cornell witness said that the plants that participated in the
2005 survey were asked to participate in the 2006 survey. The witness
stated that 21 plants agreed to participate and of those plants, 19
were deemed to have acceptable data to be included in the 2006 survey.
Plants submitted data corresponding to their most recent fiscal year;
most of the data observations occurred in calendar year 2006, the
witness said. The data was not audited by the witness. The witness
explained that if a plant produced multiple products they were asked to
allocate manufacturing costs for each product. However, if they failed
to do so the witness allocated costs on a per pound of solids basis in
the finished product. The average manufacturing costs detailed in the
study were on a per pound of finished product basis and were not
adjusted for moisture content, the witness said.
The Cornell witness said that 11 cheese plants participated in the
2006 survey compared with 16 cheese plants in the 2005 survey. Eight of
those plants (one classified as a large plant and the other seven as
small plants) also participated in the 2005 survey; the three remaining
plants that participated in the 2006 survey were asked to participate
in 2005 but submitted data too late for inclusion. The witness
testified that five small cheese plants that were included in the 2005
survey opted not to participate in the 2006 survey. Of the 11 plants,
the witness classified 7 as small plants and the remaining 4 as large
volume plants. The witness testified that the weighted average
manufacturing cost of the 2006 cheese plant sample was $0.1584 per
pound, a decrease of $0.0054 per pound from 2005. The witness said that
comparing the costs for the 8 plants that participated in both surveys
revealed a weighted average cost increase of $0.017 per pound between
the 2005 and 2006 surveys. The total pounds covered by the 2006 survey
increased from approximately 60 million pounds in 2005 to nearly 119
million pounds in 2006. The Cornell witness asserted that the 2005
survey over-sampled small plants while the 2006 survey over-sampled
large plants. The witness noted that the average packaging cost for
cheese in the 2006 survey was only for 40-pound block production. If a
plant produced barrel cheese the witness assigned it an average 40-
pound block packaging cost before computing the average manufacturing
costs for the entire sample.
The Cornell witness said that 7 whey plants participated in the
2006 survey and their weighted average cost was $0.1976 per pound--an
increase of $0.0035 per pound from the 2005 survey. According to the
witness, the 7 participating whey plants were associated with cheese
plants that were also included in the 2006 survey. The witness noted
that 12 whey plants participated in the 2005 survey.
The Cornell witness said that 4 butter plants participated in the
2006 survey; 3 of the plants also participated in the 2005 survey. The
weighted average cost of the 4 plants was $0.1846 per pound, an
increase of $0.0738 per pound over the 2005 survey. The survey
accounted for 57.6 million pounds of butter. The witness testified that
significant cost allocation problems and data quality problems with the
2005 butter data were major reasons for the large increase in the
weighted average cost from 2005 to 2006. The witness testified that the
2005 survey butter data was not accurate, but asserted that the
allocation problems were corrected in the 2006 survey. While
maintaining that the 2006 survey data was reliable, the witness said
that a larger sample size would have been preferred. The witness also
noted that the manufacturing costs submitted by one of the butter
plants in the 2006 survey did include the cost of transporting cream
from its drying plant to its butter plant.
The Cornell witness said that the 2006 survey for NFDM consisted of
7 of the 8 NFDM plants that participated in the 2005 survey. According
to the witness, the weighted average cost of the 7 plants was $0.1662
per pound, an increase of $0.0239 per pound from 2005. The witness
explained that the weighted average cost increase is partially
explained by increases in real costs (labor, packaging, etc.), but also
partly because of a change in the methodology of indirectly allocating
costs between butter and NFDM. According to the witness, there were
flaws in the method used to indirectly allocate costs for NFDM in the
2005 study that resulted in understating the cost of processing NFDM.
The witness claimed that an attempt was made in the 2006 survey to
correct this understated processing cost. The witness did not explain
the reported flawed methodology in the 2005 survey or the
methodological changes for the 2006 survey. According to the witness,
the 2006 survey accounted for 70.1 million pounds of NFDM, an increase
of 15 million pounds.
A witness appearing on behalf of Agri-Mark testified in support of
Proposals 1 and 2. The witness explained that Proposal 1 seeks to
update the make allowances adopted on an interim final basis (71 FR
78333), effective March 1, 2007, using 2005 CDFA data. The witness
asserted that this update would increase the butter, NFDM and cheese
make allowances by $0.0014, $0.0092 and $0.0029 per pound,
respectively. The witness was of the opinion that the dry whey make
allowance should incorporate the 2005 CDFA data which reflects an
average cost of $0.2851 per pound.
The witness reiterated Agri-Mark's position expressed in comments
to a previous tentative final decision (71 FR 67467) that proposed
adoption of the make allowances that were adopted in 2006. The witness
concluded that using this weighting methodology (including a $0.0015
per pound marketing cost factor) the resulting make allowances should
be: $0.1780 per pound for cheese, $0.1351 per pound for butter, $0.1510
for NFDM and $0.2090 per pound for dry whey.
The Agri-Mark witness conceded that increasing the make allowances
would assist high-cost plants in covering their costs while creating a
financial windfall for low-cost plants. In turn, the witness said, the
low cost plants could use the additional revenue to sell products at a
lower cost, pay producers a higher price, or increase their financial
returns. The witness said that any financial gains low-cost plants in
the southwestern region earn from a high make allowance would not harm
high-cost plants in the Northeast because it
[[Page 9252]]
is too costly to transport milk from the southwestern U.S. to the
northeast region. The witness believed that competitive issues
resulting from high make allowances would only arise if a low-cost
plant was located next door to a high-cost plant that competes for the
same milk supply.
The Agri-Mark witness advanced Proposal 2 seeking to establish an
annual manufacturing cost survey, administered by USDA that would
automatically update make allowances without requiring a rulemaking
proceeding. On brief, Agri-Mark withdrew the automatic updating portion
of this proposal. The witness explained that manufacturing input prices
fluctuate in the short-run and an annual survey would ensure more
timely recognition of these fluctuations in make allowances. The
witness said that the CPDMP survey should provide the basic methodology
needed to conduct the survey and that any changes to the methodology
should be done through the formal rulemaking process. The witness
asserted that the survey should be administered by Market Administrator
audit personnel and the plant sample, preferably larger than the CPDMP
sample, should be selected by random sampling. The witness also
supported auditing surveyed plants and asserted that this function
should be funded by payments from the Market Administrator's
administrative assessment funds. The witness said that if the survey
was audited, the use of CDFA cost data would no longer be necessary in
determining make allowances. The witness also supported addressing the
proposed manufacturing cost survey in a recommended decision to allow
for public comments.
The Agri-Mark witness was of the opinion that based on the CPDMP
2006 survey the make allowances should be set at the higher of: (1) A
level that would allow a minimum of 80 percent of the producer milk
used by Class III and Class IV plants to cover their costs; or (2) A
level that would allow a minimum of 25 percent of the producer milk
volume used by Class III and Class IV plants in any specific Federal
order annually pooling at least 4 billion pounds of milk to cover their
costs. The Agri-Mark witness opposed Proposal 3.
A witness appearing on behalf of Land O'Lakes (LOL) testified in
support of Proposals 1 and 2. According to the witness, LOL is a
Capper-Volstead cooperative with over 3,000 members that owns 4
manufacturing plants in the United States. The witness supported
updating the current make allowances with CDFA manufacturing cost data
as advanced in Proposal 1. The witness advocated that the audited CDFA
whey manufacturing cost data be included in the whey make allowance
computation. The witness asserted that the make allowances should be
recalculated by weighting the CDFA and CPDMP data by the survey sample
volumes, not national product volumes which the witness argued was not
statistically valid. The witness concluded that the new make allowances
(using LOL's proposed weighting) should be as follows: $0.1780 for
cheese; $0.2090 for dry whey; $0.1560 for NFDM; and $0.1351 for butter.
The LOL witness supported the annual cost survey offered in
Proposal 2, with technical modifications. The witness stated that the
authority for collecting plant cost data should be granted to the AMS
Administrator, that the plant sample be limited to plants located
outside of California that receive pooled (producer) milk, and that the
survey results be combined with the CDFA data to determine appropriate
Federal order make allowance levels. The witness opposed the portion of
Proposal 2 that would set make allowances at a level that would cover
the cost of manufacturing for the highest cost Federal order marketing
area. The witness said that classified prices are determined on a
national, not a regional basis, and therefore relying on regional costs
is inappropriate. The witness was of the opinion that USDA should
clearly identify the target product volume and percentage of plants
that should be covered by new make allowances that result from this
proceeding.
The LOL witness opposed Proposal 3 seeking to exclude CDFA
manufacturing cost data when computing new make allowances. The witness
argued that since 2000 the Department has continuously considered CDFA
manufacturing cost data when determining new make allowance levels and
asserted that there is no justification to modify that policy. The
witness elaborated that classified prices are determined using a
national survey that includes California plants and therefore including
California plant costs when determining make allowance levels is
appropriate.
A witness testifying on behalf of Michigan Milk Producers
Association (MMPA) testified in support of Proposals 1 and 2, and in
opposition to Proposal 3. According to the witness, MMPA is a Capper-
Volstead cooperative with approximately 2,400 members that markets 3.5
billion pounds of milk annually and operates 2 manufacturing plants.
The witness offered support for Proposal 1 to update the make
allowances based on the most currently available data. The MMPA witness
stressed support for Proposal 2's annual survey of manufacturing costs
that would be administered by AMS through its Market Administrators.
A witness appearing on behalf of NDA testified regarding the CPDMP
2005 survey that was used to determine 2006 make allowance levels. The
witness said that NDA participated in the study and that costs for its
NFDM plants were incorrectly allocated. The witness estimated that
NDA's NFDM production represented approximately 54 percent of the total
volume contained in the CPDMP 2005 survey for NFDM. In the survey,
cream costs were allocated on a butterfat solids basis rather than as a
percent of total solids, the witness said. However, according to the
witness NDA's NFDM plants separate the cream that is stored in silos to
be sold or transported to its butter manufacturing plant resulting in
an over-allocation of costs to cream in the CPDMP 2005 survey.
According to the witness, this misallocation inaccurately lowered NDA's
NFDM manufacturing costs by $0.036 per pound. The witness asserted that
after correcting for this error, the CPDMP 2005 survey for NFDM
weighted average cost should have been $0.019 per pound higher. The
witness urged USDA to issue an emergency decision addressing make
allowances because of the errors contained in the CPDMP 2005 survey.
A post-hearing brief was filed on behalf of Agri-Mark, Foremost
Farms USA, LOL, MMPA, NDA and Associated Milk Producers, Inc. (Agri-
Mark et al.). The members of Agri-Mark et al. are all Capper-Volstead
cooperatives who market their members' milk in the Federal order system
and operate manufacturing plants.
The Agri-Mark et al. brief emphasized support for product-price
formulas because, in their opinion, no truly independent competitive
price series exists to determine milk prices. The brief summarized the
evolution of the Federal order pricing system and asserted that USDA's
past policy has been to set make allowances at levels that cover the
processing costs for most Federal order plants. The brief expressed the
opinion that USDA deviated from this policy when determining current
make allowance levels.
The Agri-Mark et al. brief supported adoption of Proposal 1 and
argued that make allowances should be updated using the 2005 CDFA and
the CPDMP 2006 surveys. Agri-Mark et al. was of the opinion that USDA
should continue to use the same national product
[[Page 9253]]
volume weighting methodology that determined the current make
allowances, incorporate CDFA whey cost data, use the CPDMP 2005 survey
cheese plant population average cost instead of the sample average cost
and continue to include a marketing cost factor of $0.0015 per pound in
each make allowance.
In their post-hearing brief, Agri-Mark et al. proposed that the
cheese make allowance be set at $0.2154 per pound. Agri-Mark et al.
wrote that the CPDMP 2005 survey cheese plant population average of
$0.2028 per pound was most representative of average size plants and is
therefore the best available information to determine an appropriate
cheese make allowance. Agri-Mark et al. endorsed the methodology
explained in the IDFA brief that derived a cheese make allowance of
$0.2154 per pound.
The Agri-Mark et al. brief proposed a dry whey make allowance of
$0.2080 per pound by combining the 2005 CDFA and 2006 CPDMP surveys.
Using this same methodology, the brief proposed a butter make allowance
of $0.1725 per pound and the NFDM make allowance of $0.1782 per pound
(though stipulating that the CDFA medium-sized plant cost should be
used for NFDM.) The brief summarized the Cornell witness' testimony
regarding the errors with the 2005 butter and NFDM survey methodology
and concluded that the current make allowances that were determined
with this data are unrepresentative of actual costs. Agri-Mark et al.
requested that Proposal 1 be adopted on an emergency basis to rectify
the current unrepresentative make allowances.
In their brief, Agri-Mark et al. expressed support for the portion
of Proposal 2 that would authorize USDA to develop and conduct periodic
manufacturing cost surveys of plants located outside of California. The
brief explained that this data could then be relied upon in future
rulemaking proceedings to amend the product price formulas.
Comments and exceptions to the tentative partial final decision
submitted on behalf of Agri-Mark et al. expressed support for the
proposed make allowances. According to Agri-Mark et al. the proposed
make allowances reasonably reflect the record evidence of 2006 surveyed
plant cost data. However, they argued that the make allowances should
incorporate a one-time adjustment for energy costs because energy costs
have significantly increased from 2006 through June 2008. Based on
energy cost data from the Bureau of Labor Statistics, Agri-Mark et al.
proposed that the following adjustment should be added to the make
allowances: $0.0036 for cheese, $0.0029 for butter, $0.0114 for NFDM
and $0.0105 for dry whey.
In its exceptions, Agri-Mark et al. also stated that USDA had
shifted policy from adopting make allowances that allow most
manufacturing plants receiving pooled milk to recover their
manufacturing costs to make allowances that allow the manufacturing
plants receiving most of the pooled milk to cover their manufacturing
costs. Such a policy shift, from covering ``most plants'' to covering
``most milk'' noted Agri-Mark et al. should be explained in the final
decision. Agri-Mark et al. also requested that in the final decision
USDA reaffirm the exclusion of balancing costs as a make allowance
factor.
A witness testified on behalf of DPNM, Select Milk Producers, Inc.,
and Continental Dairy Producers, Inc. (DPNM et al.). The witness said
that Select and Continental are Capper-Volstead cooperatives whose
members are located in New Mexico, Texas, Kansas, Ohio, Michigan and
Indiana. According to the witness, the DPNM et al. testimony was
endorsed by Lone Star Milk Producers and Zia Milk Producers, Inc., who
are also Capper-Volstead cooperatives.
The DPNM et al. witness testified in support of Proposal 3. The
witness was of the opinion that CDFA cost data should not be used to
determine new make allowance levels because the data are only
representative of California manufacturing plants which the witness
asserted have higher manufacturing costs than the rest of the country.
The witness testified that CDFA data had been utilized in the past when
make allowances were determined using Rural Business Cooperative
Service (RBCS) cost data because the audited CDFA data broadened the
available data and was used to verify the information contained in the
RBCS study. However, the witness insisted that the CPDMP cost surveys
are far more representative of the population of manufacturing plants
and should now be relied upon as the sole determinant of make
allowances.
The DPNM et al. witness testified that make allowances should be
set at the following levels: $0.1108 per pound for butter; $0.1638 per
pound for cheese; $0.1410 per pound for NFDM; and $0.1500 per pound for
dry whey. The witness stated that, except for dry whey, the proposed
make allowances are identical to the weighted average costs contained
in the CPDMP 2005 survey. The witness proposed that the dry whey make
allowance be determined by adding $0.0090 per pound to the NFDM make
allowance to account for the additional energy needed to produce dry
whey. The witness estimated that if the make allowances proposed by
DPNM et al. were adopted, blend prices would increase by $0.22 per cwt.
A second witness, a dairy accountant and dairy farmer appearing on
behalf of DPNM et al. testified regarding dairy farm operating costs,
accounting and business analysis of large modern dairy farm operations.
According to the witness, the firm provides accounting and other
business services to dairy producer operations in 27 states whose
production volume represents about 10 percent of the milk produced in
the United States. The witness testified that based on data collected
during the 1990's, large dairy farms in six Western states had an
average annual net profit per cwt of $1.31. The witness testified that
based on 10 years' worth of client data, dairy farms in the west and
eastern states must earn a net income of $1.50 and $2.00 per cwt,
respectively, for a dairy farmer to collect a salary and retire debt.
The witness predicted that, for 2007, producer client gross income
would average $15.51 per cwt. At an average cost of production of
$15.17, the witness went on to predict that their clients would face a
net profit of $0.34 per cwt. The witness said that this amount is far
from the $1.50 per cwt net profit needed for their clients to reduce
debt or cover living expenses.
The second DPNM et al. witness stated that low milk prices in 2005
reduced dairy farm client income to an average of $206 per cow. The
witness noted that during the 1990's, average production cost per cwt
in western states was $11.87 but this has risen to $13.50 for 2004-
2005. The witness testified that rising input costs combined with lower
milk prices in 2004-2005 made large-scale, highly efficient dairy
farming unprofitable, even in low-cost operating areas such as western
Texas and New Mexico. The witness provided additional testimony to show
that increasing make allowances depressed dairy farmer income during a
period of increasing costs and reduced opportunities for profitability.
The witness supported this testimony with 2006 client data showing that
a farm milking 1,800 cows would have lost $284,000. The witness
provided detailed client data showing that the major higher-cost milk
production factors during 2005 and 2006 were increased energy and feed
costs.
A third witness, a dairy farmer, appearing on behalf of DPNM et al.
testified in support of Proposal 3. The
[[Page 9254]]
witness operates a farm in New Mexico that milks approximately 3,800
cows and testified that they have been receiving $1.50 cwt below the
Southwest order's blend price because of hauling costs. The witness
said that over the last few years any increase in producer milk prices
have been consumed by rapidly increasing production costs. The witness
supported all proposals submitted by DPNM and articulated opposition to
adoption of Proposals 1 and 2.
The DPNM et al. post-hearing brief explained that its opposition to
all other proposals included in the hearing to adjust the make
allowances was based on three principles: (1) The data used to
determine the appropriate level of manufacturing allowances for
establishing Federal order prices should be drawn from plants operating
within the Federal order system; (2) adjustments to Federal order
pricing regulations should always be subject to formal rulemaking; and
(3) make allowances should be set at a level deemed appropriate by
USDA, after taking into consideration all statutorily required factors
and current milk marketing conditions, rather than prescribed
geographic or volumetric factors. The brief explained why the CPDMP
2005 survey is the best data available and met their criteria for use
in establishing Federal order make allowances and why the 2006 survey
is flawed and should not be relied upon in determining make allowances.
Exceptions filed by DPNM et al. in response to the tentative
partial final decision argued that in proposing new make allowances the
Department failed to consider producer costs of feed and fuel in each
marketing area as mandated by the Food, Conservation and Energy Act of
2008 (2008 Farm Bill). DPNM et al. took exception with the Department's
national Economic Analysis of the proposed changes. It argued that
Federal orders do not encompass the entire national market and
therefore regional economic analyses should also be conducted.
DPNM et al. also took exception with the use of 2006 CDFA
manufacturing cost data (released October 3, 2007) to compute the make
allowances without input from interested parties about the
applicability of the new data. It specifically took exception with the
use of the weighted average cheese manufacturing cost and argued that
the record did not indicate if the number of high-cost versus low-cost
plants in the California survey is similar to the plant make-up of the
rest of the country.
DPNM et al. also stated in their comments that the Department has
denied dairy farmers due process and provided a list of examples. They
also took exception to the notion advanced in the tentative partial
final decision that milk production costs are reflected in the supply
and demand conditions for dairy products. Instead, DPNM et al. argued
that the cost of producing milk is reflected in the supply and demand
conditions of the various inputs, such as feed, labor and fuel. DPNM et
al. stated that contrary to the Department's findings, the increase in
the number of manufacturing plants from 2005 to 2007 indicates that
make allowances were not too low, and that only CPDMP 2005 data
(released in 2006) should be used to determine new make allowance
levels.
A witness appearing on behalf of IDFA testified in support of
Proposal 1 and the annual manufacturing cost survey advanced in
Proposal 2. However, the witness did not support adoption of the
portion of Proposal 2 that would result in the automatic update of make
allowances. The witness requested emergency adoption of Proposal 1 and
this request was reiterated in IDFA's post-hearing brief.
The IDFA witness testified that the product-price formulas
determine the minimum prices manufacturers must pay for their raw milk
and that those whose costs exceed the fixed make allowances in the
price formulas are unable to recoup their higher costs. The witness
asserted that any increase in the manufacturer's end product prices
would only result in an increase in the minimum raw milk price they
must pay. According to the witness, manufacturers also face financial
problems if any of the product-price formula factors are incorrect. The
witness illustrated by example the impacts of both inaccurate product
prices and inaccurate make allowances on manufacturers.
The IDFA witness testified that before January 1, 2000, the Federal
order system utilized a market-based pricing system which automatically
reflected current market conditions. However, under the end product
pricing system, market factors (e.g. yields, butterfat retention) are
set at a point in time and can only be changed through the formal
rulemaking process, the witness said.
The IDFA witness espoused that setting make allowances too high or
yield factors too low may result in low milk prices but that should not
be of concern to USDA. In this regard, the witness was of the opinion
that the Federal order system should only determine minimum prices and
allow market responses through over-order premiums to remedy any
regulated prices that are too low. However, the witness conceded that
if a plant can manufacture products at costs lower than those reflected
by the make allowance levels then the difference could be used to make
plant investments, secure a larger milk supply to the detriment of
higher-cost plants or return higher margins to plant owners.
The IDFA witness testified in support of updating the current make
allowances with the most current cost data available (Proposal 1). The
witness was of the opinion that the CDFA dry whey cost data should be a
factor in determining a new dry whey make allowance for Federal orders.
The witness asserted that the CDFA average dry whey plant size more
closely resembled the NASS average dry whey plant size than did the
CPDMP survey. Furthermore, the witness asserted that the CDFA dry whey
data was skewed toward low-cost plants, not high-cost plants as
asserted by USDA. The witness maintained that using the CDFA data in
determining the dry whey make allowance would not cause the make
allowance to be set too high. The witness concluded that both the CDFA
and CPDMP dry whey weighted average costs should be used to determine
the dry whey make allowance. This position was reiterated in the IDFA
post-hearing brief.
Also in its post-hearing brief, IDFA stated that any decision made
by USDA on the Class III and Class IV pricing formulas should not
directly consider hearing testimony regarding dairy farmer cost-of-
production. The brief asserted that it is already captured indirectly
through the supply and demand for manufactured dairy products and
therefore should not be given additional consideration in this
proceeding.
The IDFA witness testified that USDA needs to correct for CPDMP's
stratified cheese plant sampling which in IDFA's opinion over-
represents low-cost cheese plants. The witness highlighted the
testimony of the Cornell witness which compared the 8 cheese plants
that participated in both surveys revealing an average manufacturing
cost increase of 1.7 cents per pound. IDFA was of the opinion that
since the same cheese plant sample was not used in the two CPDMP
surveys, the most appropriate method for determining a new cheese make
allowance would be to use the weighted average cost from the 2005
survey ($0.2028) plus 1.7 cents for a total of $0.2198 per pound. In
its brief, IDFA concluded that the new make allowances should be set no
lower than the following: $0.2154 per pound for cheese; $0.1725 per
pound for butter; $0.1782 for NFDM; and $0.2080 for dry whey.
[[Page 9255]]
The IDFA witness supported adopting an annual manufacturing cost
survey as contained in Proposal 2 but opposed any automatic updating of
make allowances. The witness said that an annual survey would provide
industry participants information regarding trends in plant costs and
such information could be used in future hearings to adjust make
allowances. However, the witness did not support automatically updating
make allowances outside of the hearing process because it would
prohibit industry input regarding how the data should be utilized. IDFA
reiterated these views in its post-hearing brief.
The IDFA witness testified in opposition to Proposal 3. The witness
argued that audited CDFA data should continue to be included when
determining new make allowance levels. The witness asserted that the
elimination of the CDFA data would result in lower make allowances
that, in their opinion, are already too low. In its post-hearing brief,
IDFA asserted that the proponents of Proposal 3 had presented no
evidence that manufacturing costs have decreased to levels similar to
the manufacturing costs reflected in make allowances that were
effective prior to February 1, 2007.
Comments and exceptions filed by IDFA expressed support for the
proposed make allowances contained in the tentative partial final
decision. IDFA also indicated support for comments filed by Agri-Mark
et al. requesting that the make allowances be adjusted to reflect
increased energy costs through June 2008. IDFA also continued to
support adoption of a manufacturing cost survey (Proposal 2) as a means
to provide accurate and timely manufacturing cost data for use at
future rulemaking proceedings, and expressed continued support for the
denial of Proposal 3.
A witness appearing on behalf of Lactalis American Group, Inc.
(Lactalis) testified in support of Proposal 1 and in opposition to
Proposal 3. According to the witness, Lactalis operates six cheese
plants in the United States. The witness expressed support for IDFA's
positions. The witness said that the Class III and Class IV product-
price formulas should be amended to give more flexibility to market
participants in establishing market prices. The witness was of the
opinion that increasing make allowances by adopting Proposal 1 would
give processors the flexibility to make short-term adjustments in
response to changing market conditions. The witness argued that the
increasing milk supply, not make allowances which are too high, is the
cause of low milk prices received by dairy farmers. Therefore, the
witness opposed any proposals that would result in lower make
allowances.
A witness appearing on behalf of Leprino testified in opposition to
Proposal 3 stating that there is no basis to set make allowances below
current levels. According to the witness, Leprino operates nine
manufacturing plants throughout the United States that produce Italian
style cheeses. The post-hearing brief filed by Leprino expressed
support for the make allowances proposed in IDFA's post-hearing brief.
Leprino was of the opinion that make allowances should be set no lower
than the following: $0.2154 for cheese; $0.2080 for dry whey; $0.1725
for butter; and $0.1782 for NFDM.
A witness appearing on behalf of Saputo Cheese USA (Saputo), a
dairy product manufacturer, testified in support of IDFA's positions.
The witness testified that Saputo opposed any proposal which would add
complexity to the Federal milk order system. The witness supported
updating the current make allowances to reflect the most current
available data as sought in Proposal 1 and that updated make allowances
for dry whey should use CDFA data.
A post-hearing brief filed on behalf of Twin County Dairy (Twin
County), an Iowa-based cheese manufacturer, expressed support for the
proposals offered by IDFA and Agri-Mark that seek to increase make
allowances. However, the brief asserted that the proposals do not go
far enough to ensure that medium-sized plants, such as the one operated
by Twin County, remain profitable. The brief argued that the proposed
make allowances are heavily weighted toward large, low-cost plants and
their adoption, especially the dry whey make allowance, would cause
financial hardship for many cheese manufacturing plants that are
similar in size to Twin County. Twin County insisted that even though
product-price formulas are applied identically to large and small
plants, USDA should conduct a regulatory impact analysis because in
Twin County's opinion, product-price formulas have a disproportionate
impact on small businesses compared with larger entities that may
benefit from advantages of economies of scale.
A witness appearing on behalf of HP Hood LLC (HP Hood) testified in
opposition to Proposals 1, 2 and 3. According to the witness, HP Hood
is a manufacturer of Class I and Class II dairy products that are
distributed nationally. The witness opposed Proposals 1, 2 and 3
because their adoption would change the Class III and Class IV milk
pricing formulas that in turn are used to determine the Class I and
Class II prices that HP Hood pays for its raw milk supply. The witness
opposed adoption of any proposal that would result in the automatic or
periodic updating of the Class III and Class IV pricing formulas
arguing that such updates should be made through the formal rulemaking
process.
A witness appearing on behalf of NAJ offered an amendment to
Proposal 2. The witness said the amendment would expand the
manufacturing cost survey to include gathering manufacturing cost data
for whey protein concentrates (WPC's) and lactose. This inclusion was
reiterated in NAJ's post-hearing brief.
A Michigan dairy farmer testified regarding the profitability of
dairy farmers and in opposition to adopting any proposals that would
increase make allowances. The witness was opposed to increasing make
allowances until the price formulas are amended to recognize a farmer's
cost of production. The witness stated that on-farm fuel costs were
$35,000 in 2004 and had risen to $70,000 in 2006. The witness asserted
that there are many Michigan dairy farmers considering leaving the
dairy industry because of increased costs and low milk prices. The
witness also expressed the opinion that NASS NFDM prices were
misreported or under-reported during the prior 12 months.
A post-hearing brief submitted on behalf of O-AT-KA Milk Products
Cooperative, Inc., (O-AT-KA) expressed support for Proposals 1 and 2,
and opposition to Proposal 3. According to the brief, O-AT-KA is a
Capper-Volstead cooperative located in New York and its plant
manufactures 600 million pounds of milk annually into butter and NFDM.
The brief stressed that changes to the make allowances and other
factors of the product price formulas need to accurately represent the
current manufacturing market. O-AT-KA expressed support for Proposal 1
and was of the opinion that the CPDMP 2006 survey should be considered
a minimum when setting make allowances. According to the brief, O-AT-
KA's plant manufacturing costs are higher than the CPDMP 2006 survey
weighted average NFDM cost. O-AT-KA also wrote that they compete
directly with California plants and requested that USDA keep the Class
IV and California Class 4a prices aligned if it recommends any changes
to the product price formulas. O-AT-KA noted support for Proposal 2,
but not the portion that calls for automatically updating make
allowances. The O-AT-KA brief opposed adoption of Proposal 3 because it
would inhibit their ability
[[Page 9256]]
to provide balancing services to the market and a fair return to its
member-owners.
A joint post-hearing brief filed on behalf of Dairylea and DFA
(Dairylea et al.), opposed adoption of Proposals 1 and 2. The brief
expressed the opinion that the current make allowances should be used
with the addition of the energy adjustor advanced in Proposal 17 and
cost add-ons described in Proposal 20. The Dairylea et al. brief
supported the NAJ modification of Proposal 2 to expand the NASS product
price survey to include information on whey protein concentrates.
Separate comments filed on behalf of Grande Cheese Company
(Grande), Glanbia Foods, Inc. (Glanbia) and Kraft Foods (Kraft)
expressed support for the proposed make allowances contained in the
tentative partial final decision. Grande is a cheese manufacturer
located in Wisconsin processing over 1.5 billion pounds of milk
annually. Glanbia is a cheese manufacturer with plants located in Idaho
and New Mexico. Kraft operates numerous manufacturing plants located
throughout the country. Grande, Glanbia and Kraft all endorsed the
comments and exceptions filed by IDFA.
Grande's comments also took exception to the exclusive use of CDFA
data in determining the cheese make allowance and the sole use of CPDMP
data to determine the dry whey make allowance. Glanbia and Kraft urged
USDA to include CDFA dry whey cost data in the make allowance
computation because CDFA has the only audited whey cost data available.
Grande, Glaniba and Kraft also noted support for adopting a
manufacturing cost survey (Proposal 2).
Comments filed by Leprino Foods in response to the tentative final
partial decision expressed support for the proposed make allowances.
Leprino also supported adoption of a one-time energy cost adjustment as
proposed by Agri-Mark et al.
Comments filed in response to the tentative partial final decision
submitted on behalf of the Wisconsin Cheese Makers Association (WCMA)
offered support for the make allowances in the tentative partial final
decision and urged USDA to adopt the annual manufacturing cost survey
advanced in Proposal 2. WCMA is an organization representing 75
proprietary organizations and cooperatives that manufacture or process
dairy products. WCMA argued that because small- and medium-sized plants
typically do not have whey drying capacity, they are forced to pay more
for the whey in their producer milk than what can be recouped in the
market. WCMA stated that this is mostly because a plant's inability to
dry whey for sale in the market forces them to sell a lower-valued whey
product such as wet whey. According to WCMA, a higher whey make
allowance keeps small- and medium-sized cheese plants from losing
revenue in times of high dry whey prices. WCMA was of the opinion that
USDA should include CDFA dry whey cost data in the make allowance
computation as it would provide a higher make allowance than currently
proposed.
An Indiana dairy farmer took exception with the increased make
allowances contained in the tentative partial final decision. The dairy
farmer stated that producer paychecks should not be reduced to cover
the cost of manufacturing milk into finished products.
Comments filed in response to the tentative partial final decision
submitted on behalf of the National Family Farm Coalition (NFFC) and
the Ohio Farmers Union (OFU) opposed the increased make allowances.
NFFC and OFU contend that the tentative partial final decision did not
take into account farmers' costs of production. The two groups argued
that make allowances should not be increased during a time when milk
production costs also have increased.
Exceptions to the tentative partial final decision filed by St.
Albans Cooperative Creamery, Inc., (St. Albans) requested USDA to
consider dairy farmer production costs before permanently adjusting
make allowances. St. Albans is a dairy farmer-member Capper-Volstead
cooperative that operates a milk manufacturing plant. St. Albans was of
the opinion that the 2008 Farm Bill requires a dairy farmer cost
analysis before any final adjustments to make allowances.
2. Product Yields and Butterfat Recovery Percentage
A witness appearing on behalf of DPNM et al. testified in support
of Proposals 6, 7 and 8. The witness testified that before January 1,
2000, the Federal milk order price discovery mechanism took into
account dairy farmers' cost of production when determining minimum
regulated prices. If farmers' cost of production increased, the witness
said that manufacturers were able to pay farmers higher prices because
on-farm production costs could be passed on to their customers.
However, under the current pricing system, the witness argued, minimum
prices to dairy farmers are based on the average prices of dairy
products sold nationally during the month. As a result, the witness
asserted, dairy farmers have experienced financial hardship because
they are unable to pass on their higher costs to the marketplace.
The DPNM et al. witness was of the opinion that Proposals 6, 7 and
8 should be considered jointly as coordinated adjustments to the
various yield factors to ensure that dairy farmers receive a fair
minimum price. In its post-hearing brief, DPNM et al. added that
Proposals 3 and 15 should also be considered in conjunction with
Proposals 6, 7 and 8 because together they address all parts of the
current product price formulas.
The DPNM et al. witness testified in support of Proposal 6 seeking
to increase the butterfat yield factor from 1.20 to 1.211. The witness
said that this change would correct for a mathematical error in
calculating farm-to-plant shrinkage. The witness explained that in the
2002 final decision that established the current farm-to-plant
shrinkage factor, shrinkage allocated to butterfat loss should have
been calculated on a per cwt of milk basis, not on a per pound of
butterfat basis. DPNM et al. noted on brief that no witnesses at the
hearing disagreed with this assertion.
The DPNM et al. witness also offered a modification to Proposal 6
seeking to amend the butterfat credit in the protein price. The witness
explained that when USDA adjusted the butterfat yield factor in the
protein price formula to 1.572 in 2002 to account for farm-to-plant
shrinkage, the butterfat credit portion of the protein formula was not
adjusted to an equivalent of 89.4 percent. The witness estimated that
increasing the butterfat yield factor from 1.20 to 1.211 and decreasing
the butterfat credit portion of the protein formula from 90 to 89.4
percent would, on average, have increased blend prices by $0.07 per
cwt.
The DPNM et al. witness testified in support of Proposal 7 seeking
to eliminate the farm-to-plant shrinkage factor. The witness was of the
opinion that accounting for farm-to-plant shrinkage allows producers
and processors to mask inefficiencies. According to the DPNM et al.
witness their farm-to-plant shrinkage is well below the 0.25 percent
assumed in the pricing formulas. The witness attributed lower farm-to-
plant shrinkage to large producers who ship tanker loads of milk. The
witness insisted that shrinkage is not a result of milk solids being
unrecoverable from the milk tanker and hoses but rather the result of
imprecise measuring at the farm.
The DPNM et al. witness testified that the yield factors in the
product pricing
[[Page 9257]]
formulas should be amended to reflect current technology. The witness
proposed that the protein price formula be changed to reflect a 94
percent butterfat recovery in cheese manufacturing, that the casein
percentage in milk be increased to 83.25 percent, and that the
butterfat-to-protein ratio in cheese be changed to 1.214 to reflect
average producer tests. According to the witness, the adoption of a 94
percent butterfat recovery rate also implies that the butterfat yield
factor in the protein price should be increased from 1.587 to 1.653 as
proposed in Proposal 8.
The DPNM et al. witness estimated that increasing the butterfat
recovery rate from 90 to 94 percent would result in a $0.105 increase
in producer blend prices. The witness said that the currently assumed
90 percent butterfat recovery rate is based on technology that is more
than 20 years old while new technology enables manufacturers to achieve
a much higher recovery rate. Using CDFA plant cost survey data for 2002
through 2005, the witness used a mass balance analysis to estimate the
flow of milk components through a cheddar cheese plant and the
allocation of milk components to products and by-products. Through this
analysis the witness derived a 94 percent butterfat recovery rate for
plants participating in the CDFA cost survey. The witness estimated the
butterfat recovery rate for cheese plants that participated in the 2004
RBCS cost study to be 95.25 percent for all cheeses.
The DPNM et al. witness testified in support of Proposal 8. The
witness argued that the percentage recovery factor for casein in milk
should be increased from 82.2 to 83.25, to reflect average producer
tests, which would result in a 2.3-cent per cwt increase in producer
blend prices. However, in their post-hearing brief, DPNM et al.
stipulated that a casein recovery factor of 83.10 percent was
appropriate. DPNM et al. explained in their brief that changing the
casein recovery factor would raise the protein yield factor from 1.383
to 1.405; and increasing the butterfat recovery rate to 94 percent
would change protein price formulas by increasing the protein to
butterfat ratio from 1.17 to 1.214 and increasing the butterfat yield
from 1.587 to 1.653. These changes would update the protein price
formula to reflect current industry recovery standards and return
revenue to producers who, according to the DPNM brief et al. have
received lower pay prices.
The DPNM et al. witness estimated that increasing the butterfat-to-
protein ratio from 1.17 to 1.24 would result in a 3.7-cent increase in
producer blend prices. The witness said that the current butterfat-to-
protein ratio of 1.17 represents standardized milk tests at 3.5 percent
butterfat and 2.9915 percent true protein. However, according to the
witness the 2004 average producer milk test for milk contained in the
2004 RBCS study was 3.69 percent butterfat and 3.04 percent true
protein which more accurately represents a butterfat-to-protein ratio
of 1.214.
The DPNM et al. witness concluded that the current butterfat to
protein ratio of standardized milk undervalues more than one half of
the producer milk marketed on Federal orders. The witness also stated
that since plants purchase milk at test, not at the standardized
values, it is more appropriate to use weighted average milk tests in
the pricing formulas. In brief, DPNM asserted that standardized milk
tests are lower than average producer tests and result in yield factors
in the protein price formula that are artificially low which in turn
understates what the protein price paid to producers should be.
The DPNM et al. witness concluded that if the DPNM et al. proposals
to change the butterfat recovery percentage, butterfat-to-protein
ratio, and true protein in casein percentage are adopted, producer
blend prices would increase by $0.20 per cwt.
The DPNM et al. witness also testified that the NFDM yield factor
should be increased from .99 pounds of NFDM per pound of solids nonfat
(SNF) to 1.02 pounds of NFDM per pound of SNF. The witness stressed
that according to current FDA standards of identity, one pound of SNF
can produce as much as 1.05 pounds of NFDM. The witness elaborated that
NFDM is often sold with approximately 5 percent moisture, whereas SNF
is assumed to contain 0 percent moisture. Therefore, concluded the
witness, the current formula is incorrect in assuming that one pound of
SNF actually produces less than one pound of NFDM. The witness referred
to various studies conducted by CDFA and CPDMP that demonstrated a
combined NFDM and buttermilk powder yield in excess of 1.025 pounds per
pound of SNF. The witness was of the opinion that after taking into
account the lower market value of buttermilk powder, a NFDM yield of
1.02 is appropriate. The witness estimated that this proposed change
would increase producer blend prices by 4 cents.
The witness concluded that if all the DPNM et al. yield changes
were adopted, blend prices would increase by $0.42 per cwt and on
average, producers would receive $9,787 in additional income per year.
The witness was of the opinion that any adjustment in yield factors
should also be accompanied by an adjustment in make allowances because
the two are inherently linked.
Exceptions to the tentative partial final decision filed on behalf
of DPNM et al. opposed the denial of the butterfat recovery rate
portion of Proposal 6, and Proposals 7 and 8. DPNM et al. reiterated
their testimony presented at the hearing that the butterfat recovery in
cheese is in excess of 90 percent. DPNM et al. also argued that the
USDA did not properly evaluate the CDFA yield data for cheese and the
relevance of the factors in determining butterfat retention in cheese
making. They offered a calculation using the butterfat tests, solids
nonfat tests, cheese yield and cheese moisture content for California
plants which purported to show that those plants had a butterfat
retention rate in the range of 94 percent. They also commented that
similar results were obtainable from the RBCS data.
DPNM et al. noted in their comments to the tentative partial final
decision that the farm-to-plant shrinkage allowances should be removed
from the product-price formulas as advanced in Proposal 7. DPNM et al.
explained that in the western part of the country, where the producers
it represents operate, milk is delivered from the farm-to-plant in full
tanker loads and therefore shrinkage is not a problem. Accordingly,
they argued that DPNM et al. producers should not be penalized through
lower component prices for being more efficient than producers who ship
smaller loads and therefore experience farm-to-plant shrink.
Exceptions by DPNM et al. also requested the Department to
reconsider adoption of Proposal 8. They argued that yields contained in
the product-price formulas should be based on average producer tests,
not on milk standardized to 2.9915 percent protein and 3.5 percent
butterfat. They expressed the view that since cheese prices, butterfat
prices and make allowances are based on weighted averages, yields
should also be based on the weighted average component tests of
producer milk. The exception also reiterated their position that the
casein retention rate of 82.2 percent is incorrect and that the factor
should be 83.25 percent.
A witness appearing on behalf of Leprino testified in opposition to
Proposals 6, 7 and 8. The witness opposed the portion of Proposal 6
seeking to increase the butterfat recovery rate in cheese manufacturing
from 90 to 94 percent. In the witness'
[[Page 9258]]
opinion, the proponents for increasing the butterfat recovery rate
provided no evidence to support this increase aside from hypothetical
examples. The witness also opposed the amendment to Proposal 6 to
decrease the butterfat credit in the protein formula below the 90
percent butterfat recovery rate that is assumed in the cheese yield
formula. The witness explained that this would cause cheese
manufacturers to pay for more butterfat than is actually contained in
the raw milk. The witness agreed that there is an error regarding how
butterfat shrink is applied in the butterfat formula. However, the
Leprino witness did not support increasing the butterfat yield factor
to 1.211 because of milk component losses that occur in cheesemaking
that are not recognized in the formula.
The Leprino witness testified in opposition to elimination of the
farm-to-plant shrinkage factor advanced by Proposal 7. The witness said
that the loss of milk when shipping from the farm to the plant is well
documented and adjusting the Class III price to reflect this loss is
appropriate. The witness said that Leprino experiences farm-to-plant
milk losses of approximately 0.25 percent. The witness disagreed with
the rationale offered by the proponent that increasing farm sizes and
single producers shipping whole tanker loads of milk has remedied farm-
to-plant shrinkage. The Leprino witness testified that deliveries to
the Leprino plant in Waverly, New York, often have the milk of 15 to 18
producers per tanker. The witness argued that milk losses from farm-to-
plant remain a reality that should continue to be acknowledged in the
Class III price formula.
The Leprino witness testified in opposition to increasing the
cheese protein yield factor from 1.383 to 1.405 (Proposal 8.) The
witness said that the proponent's assumption of 83.25 percent casein in
true protein content that would lead to a cheese protein yield factor
of 1.405 was not based on actual laboratory casein tests. Leprino's
post-hearing brief reiterated its opposition to Proposals 6, 7 and 8.
A witness appearing on behalf of IDFA testified in opposition to
proposals seeking to increase yield factors (Proposals 6, 7 and 8). The
witness was of the opinion that the yield factors should actually be
decreased to reflect in-plant shrinkage and the sale of lower-valued
products such as whey cream and buttermilk. In its post-hearing brief,
IDFA espoused that proponents of increasing yield factors made
erroneous assumptions. The brief stated that hearing evidence documents
that farm-to-plant losses are a marketplace reality and should continue
to be recognized in the product price formulas. The brief also argued
that hearing evidence does not support proponent's claim that a 94
percent butterfat recovery rate is achievable by most cheese
manufacturing plants. Lastly, the brief insisted that the 83.25 percent
casein in true protein assumed by the proponents is not based on any
actual milk tests.
Comments and exceptions filed by IDFA to the tentative partial
decision expressed continued support for the denial of Proposal's 6, 7
and 8.
A food technologist witness appearing on behalf of IDFA testified
regarding the cheese manufacturing process and specifically about
cheese production at Alto Dairy Cooperative (Alto Dairy) during 1985--
2003. The witness discussed the evolution of cheese processing
technology and testified that the greatest loss of milkfat during the
cheese making process occurs during the cutting of the coagulum. The
witness estimated that in moving from the use of traditional open vats
to newer horizontal enclosed vats, the loss of milkfat during the
cutting of the coagulum was reduced from 9.6 percent to 6 percent.
However, the witness said, this does not account for losses during
other stages of the cheesemaking process. The witness was of the
opinion that the industry average butterfat recovery rate in cheddar
cheese is approximately 90 percent.
A witness appearing on behalf of Kraft testified in support of the
positions and proposals advocated by IDFA. The Kraft witness opposed
eliminating the farm-to-plant shrinkage factor in the Class III price
formula (Proposals 7 and 8.) The witness said that Kraft manufacturing
plants experience farm-to-plant milk shrinkage and that this factor
should continue to be acknowledged in the price formulas so that the
butterfat recovery percentages and yields are not arbitrarily inflated.
A witness appearing on behalf of Davisco Foods (Davisco) testified
as being unable to use whey cream in standardized full-fat cheddar
production. The witness explained Davisco sells whey cream to a butter
manufacturer at a price lower than that reflected in the Class III
pricing formula. According to the witness, Davisco owns and operates
manufacturing plants in Idaho, Minnesota and South Dakota.
A witness appearing on behalf of HP Hood opposed adoption of
increasing yield factors. According to the witness, the proposed yield
factors are not reflective of industry data provided in record
testimony. Furthermore, the witness said, the shrinkage factor should
remain in the pricing formulas and claimed that HP Hood experiences an
average total shrinkage (farm-to-plant and in-plant loss) of 1.5
percent.
A witness appearing on behalf of LOL testified in opposition to
Proposal 6. The witness asserted that when determining the current
farm-to-plant shrinkage factor USDA did not clearly state if the
butterfat loss was based on product pounds or cwt of milk. The witness
said that an increase in the butterfat yield would increase the raw
milk costs for manufacturers who already contend with a make allowance
that does not cover their cost of processing. The witness opposed
increasing the butterfat recovery percentage to 94 percent and revealed
that the LOL cheese plant in Kiel, Wisconsin, recently experienced an
average annual cheese yield of 10.21 pounds per cwt. According to the
witness, assuming a 90 percent butterfat recovery rate and applying the
plant's average milk tests, the Van Slyke formula estimates a cheese
yield of 10.16 pounds. The witness indicated that the theoretical Van
Slyke result and observed plant yield validates the continued use of
the 90 percent butterfat recovery rate in the Class III price formula.
The LOL witness also testified in opposition to Proposals 7 and 8
seeking to amend the yield factors by eliminating farm-to-plant and
butterfat shrinkage factors. The witness said proponents' claim that
minimal comingled milk in the Florida, Southwest, Arizona and Pacific
Northwest orders fails to recognize that comingled milk in the
Northeast and Upper Midwest is commonplace given that the milk of 10 or
more producers is commonly comingled on a single load. According to the
witness, this makes farm-to-plant shrinkage between farm and plant
weights inevitable. The witness indicated that in 2006, the LOL butter
and NFDM plant in Carlisle, Pennsylvania, experienced an average
difference of 0.343 percent between farm and plant weights and a 0.511
percent butterfat shrinkage. The witness insisted that the LOL
shrinkage percentages validate the continued incorporation of farm-to-
plant and butterfat shrinkage factors in the pricing formulas.
A witness appearing on behalf of MMPA testified in opposition to
Proposal 7 seeking to eliminate the farm-to-plant shrinkage factor. The
witness elaborated that even though MMPA pays its farmers based on farm
weights and tests, some milk solids are lost during transportation of
milk from
[[Page 9259]]
the farm to the plant. According to the witness, MMPA plants experience
approximately a 0.3 percent loss of milk from farm-to-plant. Without
the farm-to-plant shrinkage factor in the product price formulas, the
witness said that MMPA would have to pay farmers for milk that is lost
in transport and cannot be manufactured into a saleable product.
The MMPA witness also opposed Proposals 6 and 8 that seek to amend
the Class IV NFDM and butter yield factors. The witness provided
evidence that MMPA experiences butter and NFDM plant yields that are
slightly lower than those used by the Class IV formula. The MMPA
witness claimed that their yields typically generate a milk value of
$11.11 per cwt, while the assumed yields in the product price formulas
generate a milk value of $11.06 per cwt. The witness asserted that this
$0.05 per cwt advantage is eliminated because of the off-grade products
it produces and sells at discounted prices. The witness concluded that
the current Class IV yield factors are appropriate and that the current
calculation is superior to the complicated alternatives in Proposals 6,
7 and 8.
A witness appearing on behalf of Foremost testified regarding
cheese production at Foremost's manufacturing plants. The witness
entered a declaration for the record describing the types of cheese
produced by Foremost and the specific butterfat retention rate achieved
at its cheese manufacturing plant in Marshfield, Wisconsin. Using a
mass balance analysis, the witness stated that in 2006 the Marshfield
plant had an average butterfat retention rate of 90.25 percent. The
witness said that Foremost considered investing in more modern cheese
vats that would yield a higher butterfat retention rate but chose not
to do so because it would take at least 13 years to recoup any return
on such a large investment.
The Agri-Mark et al. post-hearing brief expressed opposition to the
adoption of Proposals 6, 7 and 8. The brief argued that the proponent's
methodology in computing product yields was flawed because it ignored
that milk solids and/or cream are sometimes added to farm milk during
processing resulting in increased vat yields. Therefore, Agri-Mark et
al. concluded that the product yields advanced in Proposals 6 through 8
are not representative of the volume of products that can be produced
from a hundredweight of milk. Agri-Mark et al. also took exception to
proponent's statements that dairy farmers are paying for the costs of
new plant equipment designed to increase yields through increased make
allowances and reduced producer income. Agri-Mark et al. argued that
enhanced yields increase production thus lower manufacturing costs per
pound of product from which make allowances are derived. Agri-Mark et
al. also opposed the elimination of a farm-to-plant shrinkage factor
used in the product price formulas.
The Agri-Mark et al. brief stated that increasing the butterfat
recovery rate from 90 percent to 94 percent is not justified. Agri-Mark
et al. insisted that the proponent's claim that cheese plants recycle
their whey cream into the cheese vat and are then able to achieve a 94
percent butterfat recovery was contradicted by many witnesses at the
hearing. Agri-Mark et al. also wrote that the record lacks sufficient
evidence to justify increasing the NFDM yield factor from .99 to 1.02.
The brief supported USDA's reasoning for relying on the current NFDM
yield factor and said that the farm-to-plant shrinkage factor is still
valid.
In comments and exceptions to the tentative partial final decision,
Agri-Mark et al. expressed support for amending the butterfat yield
factor, and to the denial of the portion of Proposal 6 seeking to
increase the butterfat recovery rate and the entirety of Proposals 7
and 8.
The post-hearing brief filed on behalf of Dairylea et al. agreed
with proponents of Proposal 6 that an arithmetic error in calculating
the shrinkage factor in the butterfat yield had been made by USDA.
Therefore, the brief advocated that the butterfat yield factor in the
butterfat price formula be increased to 1.211. The brief also discussed
the butterfat recovery percentage in the protein price formula and
supported increasing the butterfat retention factor in cheese
manufacturing but did not specify a factor. The brief explained that
currently the formula assumes that 90 percent of the butterfat in the
cheese vat ends up in the finished product. The brief emphasized the
importance of recognizing that the butterfat retention factor is based
on butterfat going into the vat, not butterfat coming from the farm.
The brief asserted that a 90 percent recovery rate of butterfat going
into the cheese vat is equivalent to 89.4 percent of the butterfat
coming from farms going into the finished product after accounting for
farm-to-plant shrinkage. The brief detailed that the cheese
manufacturers who testified to achieving a butterfat recovery
percentage of 90.25 percent on the basis of farm tests actually
experienced a butterfat recovery of 90.9 percent of fat that entered
the cheese vat. The brief concluded that this evidence, combined with
additional testimony regarding available technology, makes higher
butterfat recovery possible and should be reflected in the protein
price formula.
The Dairylea et al. brief opposed the elimination of the farm-to-
plant shrinkage factor as advanced in Proposal 7. The brief asserted
that while some production areas are dominated by large farms, a large
portion of the country is dominated by small farms where farm-to-plant
shrinkage is prevalent. However, the brief noted that farm-to-plant
shrinkage is reflected in the product-price formulas because yield data
provided by manufacturers is commonly based on farm weights and tests.
The post-hearing brief submitted on behalf of O-AT-KA stated that
the hearing record does not justify adoption of Proposals 6, 7 and 8,
and that the proposed changes to yield factors would increase its raw
milk costs and inhibit its ability to provide balancing services to the
market. O-AT-KA was of the opinion that Proposal 6 should only be
adopted if USDA simultaneously amends the product-price formulas to
account for in-plant losses and off-grade products that are sold at a
discount.
Comments to the tentative partial final decision filed separately
by Grande, Glanbia, Kraft, Leprino and WCMA expressed continued support
for the denial of Proposals 7 and 8.
3. Value of Butterfat in Whey
A witness appearing on behalf of IDFA testified in support of
Proposal 9 seeking to adjust the protein price formula to reflect the
lower value and volume of butterfat recoverable from whey cream and was
of the opinion that Proposal 9 was superior to Proposal 10. The witness
asserted that the current Class III price formula values the butterfat
not captured in the cheese at the Grade AA butter price even though it
is sold as whey butter which has a lower value in the marketplace. In
its brief, IDFA supported the testimony of the Leprino witness
regarding saleable volume and the value whey cream has in the
marketplace. The brief also highlighted testimony that some processors
do not return whey cream back into their cheese vats. The brief
concluded that the butterfat adjustment contained in the protein price
formula should be reduced by $0.016 to account for the lower value and
saleable volume of whey cream.
Comments filed by IDFA in response to the tentative partial final
decision took exception with the denial of Proposal 9. IDFA argued that
record evidence demonstrates that whey cream has a lower value in the
marketplace than butterfat used to produce Grade
[[Page 9260]]
AA butter. According to IDFA, opponents of Proposal 9 speculated as to
how much whey cream is re-used in cheese manufacturing but did not
provide any specific examples where the whey cream is valued at or
above the value of butterfat in Grade AA butter. IDFA referenced
hearing testimony from numerous cheese manufacturers who testified that
they did not use whey cream in the cheese manufacturing process.
The witness appearing on behalf of Agri-Mark supported adoption of
adjusting the Class III protein price component to account for the
lower value of whey butter (Proposal 10). The witness estimated that
0.42 pounds of whey butter is made from a hundredweight of milk and is
sold at a price below the Grade AA butter price. According to the
witness, Agri-Mark sells its whey butter for $0.074 per pound less than
its Grade AA butter. The witness was unaware of any public data or
published reports on market prices for whey butter and was of the
opinion that there are very few manufacturers making whey butter in the
United States.
The post-hearing brief filed on behalf of Agri-Mark et al.
contended that the product price formulas should recognize the lower
value and saleable volume of whey cream and urged the adoption of
Proposal 9. The brief summarized record evidence regarding plant whey
cream prices and volumes and insisted that lower whey cream values are
a market reality that should be reflected in the product-price
formulas. Agri-Mark et al. reiterated this view in comments and
exceptions filed in response to the tentative partial final decision.
Agri-Mark et al. stated that despite a lack of widely available whey
cream price data, USDA should still make an adjustment to the price
formulas to recognize its lower market value.
A witness appearing on behalf of Leprino testified in support of
Proposal 9. The Leprino witness reviewed the derivation of the current
cheese yield per pound of fat in the Class III product-price formula
using a Van Slyke formula with an assumed butterfat recovery rate of 90
percent and a moisture content of 38 percent. The witness asserted that
the Class III formula implies that 0.035 pounds of butterfat per cwt of
milk is recoverable as whey cream but is valued in the Class III
pricing formula as if it was used to produce 0.042 pounds of Grade AA
butter. However, the witness asserted that all whey cream is used to
produce Grade B butter which has a lower value than Grade AA butter.
Based on testimony from Agri-Mark, LOL and NDA, the witness estimated
that under the Class III price formula, cheese manufacturers in the
Northeast and Pacific Northwest are being charged 12.5 and 20.4 cents,
respectively, per pound of butterfat in the whey cream more than what
these products can be sold for in the marketplace. The witness was
unaware of any publicly available data on national whey cream
production volumes and prices.
The Leprino witness testified that the Class III formula also
overestimates the volume of butterfat recoverable as whey cream. With
an assumed 90 percent butterfat recovery rate, the witness said that
the formulas infer the remaining 10 percent of butterfat is captured as
whey cream. However, the witness explained that only 7.8 percent of the
butterfat is actually recoverable because some butterfat is
incorporated into dry whey or the skim portion of the salt whey that
must be disposed.
The Leprino witness testified that Proposal 9 would amend the Class
III formula to better account for overvaluing the theoretical volumes
and market values of whey cream. The witness explained that the
butterfat credit in the protein portion of the Class III formula should
be increased from 90 to 92.20 percent to acknowledge and correct for
the 7.8 percent of butterfat that is recoverable as whey cream. In
addition, the witness maintained that the butterfat portion of the
Class III formula should be reduced by $0.016 to account for the lower
price manufacturers receive for Grade B butter. The witness estimated
that these changes would have lowered the Class III price by $0.169 per
cwt over the last five years. The witness revealed that Leprino uses
all of its whey cream in its cheese production and therefore is able to
recoup the cheese value for all its milk components.
A post-hearing brief filed on behalf of Leprino stressed that the
butterfat portion of the Class III formula should actually be reduced
by $0.021 because hearing testimony from other witnesses revealed that
2007 whey prices in the Pacific Northwest were significantly lower than
those in 2005 and 2006. The brief highlighted testimony that the 2005-
2006 Pacific Northwest average whey cream sale price was 94.4 percent
of the average Grade AA butter price while the 2005-2007 average whey
price fell to 89.4 percent of the Grade AA butter price.
Comments to the tentative partial final decision filed by Leprino
took exception to the denial of Proposal 9. Leprino reiterated
arguments made during the hearing that the market value and volume of
whey cream recoverable in the cheesemaking process is overvalued in the
product-price formulas, and that the decision ignored record evidence
demonstrating these market realities. Leprino wrote that opponents of
Proposal 9 did not offer any evidence of other higher-valued uses for
whey cream, but they did acknowledge that whey cream for use in Grade B
butter has a lower market value. Leprino also argued that even if there
are higher-valued end uses for whey cream, that the ultimate use of
whey cream is irrelevant. According to Leprino, if whey cream is sold
at a discount to regular cream, then that should be reflected in the
price formulas.
A witness appearing on behalf of Kraft supported adoption of
Proposal 9. The witness indicated that on average, Kraft receives $0.10
per pound less for whey butter than for Grade AA butter.
Comments to the tentative partial final decision filed by Kraft
took exception to the denial of Proposal 9. Kraft argued that Proposal
9 should be adopted because the record demonstrates that whey cream has
a lower market value than cream used to produce Grade AA butter.
A witness appearing on behalf of Saputo testified that the Class
III pricing formula wrongly presumes that all cheese manufacturers have
dry whey processing capabilities and can obtain a high value for dry
whey in the marketplace. In reality, the witness said, manufacturers
sell whey as whey protein concentrates, whey protein isolates or in
liquid form that have widely disparate market values. According to the
witness, assumptions regarding the production of dry whey may
financially harm cheese manufacturers and could result in the
accelerated consolidation of milk manufacturing. For these reasons, the
witness supported the adoption of Proposal 9.
A witness appearing on behalf of Great Lakes Cheese (GLC) testified
in support of adoption of Proposal 9. According to the witness, GLC is
a cheese manufacturer whose plant in Adams, New York, annually
processes 410 million pounds of milk into American style cheeses and
by-products. The witness said that because milk components are lost in
many stages of the cheesemaking process, the Federal order system
should not have class prices that require manufacturers to pay for milk
components that they are unable to use and sell. The witness
illustrated by example the in-plant milk losses incurred from
sanitizing equipment and the removal of sludge from the whey separator.
In the
[[Page 9261]]
example, the witness estimated that in 2006, GLC lost $23,770 worth of
whey solids in the desludging process.
The GLC witness said that GLC's Adams facility produces one million
pounds of whey cream annually and usually sells it for the Grade AA
butter market price. In 2006, the witness stated, GLC received $1.2425
per pound of whey cream fat and the average CME AA butter price was
$1.2405. However, the witness explained, because the average Class III
butterfat price was $1.3185 per pound (a $0.076 price difference), it
had to pay a higher price for the butterfat in raw milk than it could
recover in the market.
A witness appearing on behalf of NDA testified that Federal orders
should establish fair minimum prices for producer milk while ensuring
that the product-price formulas reflect the true value of dairy
products in the market. The witness stated that NDA receives
significantly less for its whey cream sales than it does for sweet
cream sales and that Proposal 9 or Proposal 10 should be adopted to
reflect this reality in the product-price formulas. The witness
estimated that, on average, from 2005 through 2007, on a butterfat
basis, NDA sold its whey cream for 36 percent less than it sold its
sweet cream and $0.0244 per pound less than the Class III butterfat
price. Therefore, the witness said, NDA supports IDFA's proposal to
adjust the protein price to reflect the lower value of whey cream.
The NDA witness also explained that its average selling price for
manufactured products is less than its reported prices to NASS because
some of its production does not meet NASS specifications. The witness
testified that products not meeting NASS specifications are either
products made to meet specific customer orders or off-grade production
such as cheese fines. The witness said that in fiscal year 2007, 3.98
percent of NDA's cheese production did not meet NASS specifications
either by design or error. The volume was sold for a weighted average
price of $0.0218 per pound less than its NASS reported cheddar--
lowering NDA's total average cheese price for the year by $0.009 per
pound, the witness said. The witness described similar scenarios for
NDA's whey, NFDM and buttermilk production.
The NDA witness revealed that in fiscal year 2007, NDA's Sunnyside,
Washington, plant, which uses modern horizontal cheese vats,
experienced a cheese yield of 10.22 pounds of cheese per cwt of milk
with an average moisture content of 38 percent and a butterfat recovery
rate of 92 percent. The witness noted that NDA's yield reflects the use
of whey cream added to the cheese vats.
A witness for Twin County testified in support of adopting Proposal
9. The witness asserted that the Class III price formula and current
make allowances for cheese and dry whey overvalue milk components,
particularly other solids, leading to reduced plant profitability. As a
result, explained the witness, manufacturers are required to account to
the marketwide pool for some components at the Class III price of milk
even though they receive less than the Class III price for them in the
marketplace.
The witness explained that Twin County produces cheddar cheese that
meets particular customer specifications which do not allow for
returning whey cream into its cheese-making process. Consequently, the
witness said that Twin County invested in a whey processing facility to
process its skim whey into whey protein concentrates (WPC), ultra
filtered milk and permeate. According to the witness, Twin County sells
all of its whey cream in the marketplace for approximately the Grade AA
butter price times a multiplier of 1.12. The witness said that Twin
County does fortify its cheese vats with additional milk solids when it
is economically feasible and its average cheese yield (including
fortification) is seasonal and ranges from nine to ten pounds of cheese
per 100 pounds of milk. The witness said that while Twin County is
required to account to the marketwide pool for all milk components at
the Class III price, it sells the whey produced at a reduced price in
the market resulting in a net loss to the company for those components.
Additionally, while the current make allowances (effective March 2007)
did improve the profitability of Twin County, the witness insisted that
the whey make allowance is still inadequate in covering the whey
manufacturing costs of the plant.
The Twin County witness conceded that the premiums it pays for milk
could be adjusted downward to offset revenue losses. However, the
witness indicated, renegotiating premiums with suppliers may have the
unintended consequence of impeding or damaging long-standing
relationships with suppliers and disrupt their ability to procure milk
as needed.
The witness appearing on behalf of HP Hood also supported adoption
of Proposal 9 or 10.
The post-hearing brief submitted on behalf of Dairylea et al.
opposed the adoption of Proposals 9 or 10. The brief did not dispute
that whey cream has a lower value in the marketplace, but noted that
there are also higher valued uses for butterfat that are not recognized
in the butterfat price. The brief concluded that it would be
inappropriate to amend the butterfat value to recognize lower-valued
whey cream without also recognizing higher-valued butterfat uses.
The post-hearing brief submitted on behalf of DPNM et al. opposed
adoption of Proposals 9 or 10. The brief stressed that there is no
publicly announced information regarding prices and volumes for whey
cream or whey butter. The brief argued that record evidence
demonstrates that a significant portion of whey cream is returned to
the cheese vat and not sold as whey cream in the market. Exceptions to
the tentative partial final decision filed by DPMN et al. expressed
their continuing opposition to Proposal 9.
The post-hearing brief submitted on behalf of NAJ also expressed
opposition to the adoption of Proposals 9 or 10. The brief said that if
the value of whey butter is as low as the proponents claim, then a
separate whey butterfat price should be established in lieu of lowering
the protein price.
Separate comments to the tentative partial final decision submitted
on behalf of Grande and Glanbia each took exception to the denial of
Proposal 9. Grande and Glanbia both argued that record evidence
indicates that whey cream has a lower market value than cream processed
into Grade AA butter. Glanbia further insisted that while opponents to
Proposal 9 claimed that other higher-value uses for whey cream exist,
they provided no examples. Grande and Glanbia comments concluded that
Proposal 9 should be adopted so cheese manufacturers will not be
required to pay more for whey cream than can be recouped in the market.
Comments filed by WCMA also took exception with the denial of
Proposal 9 in the tentative partial final decision. WCMA argued that
whey cream is over-valued in the current product-price formulas because
it is made into lower valued Grade B butter. WCMA was of the opinion
that NASS should collect data on end uses and values of whey cream.
4. Barrel-Block Cheese Price
The witness appearing on behalf of IDFA testified in support of
eliminating the current 3-cent barrel-block price adjustment (Proposal
12). The witness maintained that there is no cost difference between
block and barrel production, therefore the 3-cent adjustment should be
eliminated. Furthermore, the witness said, the CPDMP data used to
determine the
[[Page 9262]]
current make allowances takes into account the manufacturing cost
difference between barrels and blocks. Maintaining the 3-cent
adjustment would, the witness said, result in double counting of any
purported cost difference. In its post-hearing brief, IDFA reiterated
the need to eliminate the 3-cent barrel-block price adjustment.
Comments filed by IDFA in response to the tentative partial final
decision opposed the denial of Proposal 12. IDFA argued that because
cost data contained in the record demonstrates no difference in
packaging costs between block and barrel cheese production, elimination
of the 3-cent barrel-block spread is warranted.
A witness appearing on behalf of Davisco testified in support of
Proposal 12. The witness offered evidence on Davisco's manufacturing
costs for 40-pound block and 500-pound barrel cheese production at its
LeSueur, Minnesota, plant. The witness explained that the LeSueur plant
has separate block and barrel production lines that enable Davisco to
easily isolate and compare packaging and capital costs. After
discussing the differences in packaging and equipment needed to produce
block cheese and barrel cheese, the witness testified that Davisco
spends $0.0012 per pound more to produce block cheese. According to the
witness, its de minimis cost differences in producing block and barrel
cheese warrant eliminating the 3-cent adjustment.
The witnesses appearing on behalf of Kraft, NDA and Saputo
expressed support for adoption of Proposal 12. The Kraft witness
testified that the 3-cent adjustment historically represented the
additional cost of producing blocks instead of barrels. However, the
Kraft witness asserted, the gross return between blocks and barrels
(adjusted to 38 percent moisture) is approximately $0.0075 per pound.
Therefore, concluded the Kraft witness, it is no longer necessary to
add 3-cents to the barrel cheese price because that cost difference is
being recouped in the marketplace.
Separate comments filed by Grande and Kraft in response to the
tentative partial final decision opposed the denial of Proposal 12.
Grande and Kraft argued that record evidence demonstrates that there is
no processing cost difference between block and barrel cheese. Kraft
elaborated that the cost data contained in this hearing record is the
first actual cost data contained in any hearing record that addressed
the 3-cent barrel adjustment. Therefore, Grande and Kraft urged USDA to
adopt Proposal 12 in the final decision.
While no testimony was received from proponents DFA and NDA
regarding Proposal 13, a witness appearing on behalf of Kraft testified
in opposition to eliminating the barrel cheese price from the Class III
price formula (Proposal 13). The witness asserted that since 2000, the
NASS cheese price survey represented approximately 57 percent barrels
and 43 percent blocks. Therefore, the witness was of the opinion that
it would be inappropriate to eliminate the barrel price from the Class
III price formula because it would not reflect the actual prices of
such a large part of the national cheese market.
The witness appearing on behalf of Leprino supported eliminating
the 3-cent block-barrel adjustment. The witness asserted that the
adjustment was originally added to the barrel cheese price because it
was considered the standard cost difference between producing block and
barrel cheese. The witness testified that the 3-cent adjustment was no
longer necessary because the CPDMP cheese manufacturing cost survey
used to derive the current make allowances already accounts for the
cost difference. The witness explained that keeping the 3-cent
adjustment would be double counting cost differences that may exist.
According to the witness, the 3-cent adjustment was never based on
actual cost data; rather it was a generally accepted valuation of the
average production cost difference between producing 40 pound blocks
and 500 pound barrel cheese at a 39 percent moisture standard. However,
the witness noted that after January 2001 the barrel cheese price was
adjusted to a 38 percent moisture standard. The witness asserted that
this moisture standard change, on average, increased the barrel cheese
price 2.2 cents per pound during the last 5 years. The witness
estimated that eliminating the 3-cent barrel-block adjustment would
reduce the Class III price by $0.1624 per cwt.
The Leprino witness also opposed adoption of Proposal 13 because it
would reduce the amount of data used to compute the classified milk
prices. The witness said that the barrel cheese price should continue
as a factor in computing the Class III price because of the additional
cheese volume for which it accounts.
Comments to the tentative partial final decision submitted by
Leprino opposed the denial of Proposal 12. Leprino disagreed with the
reasoning advanced in the tentative partial final decision that
differences in selling prices have no causal relationship to
differences in manufacturing costs. Leprino argued that the 3-cent cost
add-on was originally incorporated into the product-price formulas
because historically the selling price difference between blocks and
barrels was 3-cents. This difference in selling prices, Leprino
asserted, has always been attributed to manufacturing cost differences.
Regardless, Leprino added that the Davisco plant cost data contained in
the record proves that the difference in packaging costs between blocks
and barrels is negligible; therefore Proposal 12 should be adopted.
Leprino's comments were endorsed by Glanbia.
The post-hearing brief submitted on behalf of Agri-Mark et al.
maintained that the 3-cent barrel adjustment should be eliminated and
supported the views of the IDFA witness and its post-hearing brief
urging the adoption of Proposal 12. Agri-Mark et al. reiterated this
view in its comments and exceptions on the tentative partial final
decision. Agri-Mark et al. argued that proponents of the elimination of
the 3-cent add-on had provided enough record evidence to meet their
administrative burden. Agri-Mark et al. summarized the regulatory
history of the 3-cent barrel adjustment. They argued that record
evidence by the Davisco witness demonstrated that the packaging cost
difference between block and barrel cheese is negligible, and
maintained that opponents of its elimination offered no rebuttal
evidence.
The post-hearing brief submitted on behalf of Dairylea et al.
opposed eliminating the 3-cent per pound barrel-block cheese adjustment
as advanced in Proposal 12. The brief expressed the opinion that cost
data from one cheese plant offered by Davisco Foods is not adequate to
support adopting the proposed change. According to the brief, cost data
presented by Davisco Foods only compared packaging and capital costs
for producing barrel and block cheese. The brief argued that despite
Davisco's belief that total manufacturing costs before packaging were
the same, there may be differences in other processing costs because
block and barrels are produced at different moisture contents. The
brief asserted that if Davisco Foods cost data is adjusted to reflect
average moisture content for blocks (37.75 percent) and barrels (34
percent), the cost of capital and packaging for blocks would be 10
percent higher than for barrels.
The Dairylea et al. brief also addressed the proponents' assertion
that incorporating CPDMP data into the determination of new make
allowances provides the necessary recognition of
[[Page 9263]]
the cost difference between block and barrel production. The brief
argued that CDFA data only includes cost data from block production and
its continued use would mean that new make allowances would be too
heavily weighted towards block production. The brief also asserted that
evidence showing the market price relationship between blocks and
barrels does not provide a basis to conclude that similar cost changes
have occurred in the manufacturing costs of block and barrel cheese.
In its brief, DPNM et al. opposed the reduction or elimination of
the 3-cent barrel price adjustment (Proposal 12) unless Proposal 15 was
adopted. The brief explained that Proposal 15 (using the CME to
determine product prices) is intended to use only the CME block cheese
price, not an average of the 500-pound barrel and 40-pound block
prices. If Proposal 15 is adopted as intended, DPNM et al. wrote, the
3-cent barrel adjustment would no longer be necessary.
Comments filed by DPNM et al. in response to the tentative partial
final decision supported the continued use of the 3-cent barrel price
adjustment if USDA continues to use both block and barrel survey prices
in the Class III price formulas.
5. Product Price Series
A witness appearing on behalf of Agri-Mark testified in support of
Proposal 14. The witness said that the proposed price series would use
a combination of the NASS and CME cheese prices in the Class III
product-price formula. The witness said that Proposal 14 seeks to
incorporate current CME data to reduce the monthly differences between
prices that most manufacturers sell their cheese and the cheese price
from which the manufacturers cost of raw milk is determined. The
witness said that cheese manufacturers use the CME cheese price to set
their base cheese price which is then reflected in the NASS cheese
price announced two weeks later. The witness explained by example that
the two week lag between CME and NASS price releases was a problem in
2004 when cheese prices were rapidly changing from week-to-week causing
the two price series to vary by more than 10 cents per pound during
seven months of the year. According to an analysis conducted by the
witness from January 2000 until February 2007, 98 percent of the
variation in the NASS block cheese price and 87 percent of the
variation of the NASS barrel cheese price could be explained by the CME
price.
The Agri-Mark witness provided an example to illustrate how
Proposal 14 could be administered. The witness explained that the
cheese price in the Class III formula for April 2007 would be
calculated as follows: (1) Compute the average CME cheese price for the
four weeks in April; (2) add the average NASS cheese price for the last
two weeks of March and the first two weeks of April; and (3) subtract
the average CME cheese price for the four weeks of March. The Agri-Mark
witness explained that the cheese price used to determine the advanced
Class I price should be as follows: (1) Compute the average CME cheese
price for the second and third weeks of March; (2) add the average NASS
cheese price for the first and second weeks of March; and (3) subtract
the average CME cheese price for the last two weeks of February. The
witness was of the opinion that these new formulas would enable USDA to
use current CME prices while in the long-run the NASS price series
would continue as the primary determinant of cheese prices. The witness
was of the opinion that the resulting ``hybrid price'' would reduce
large monthly price variations like those experienced in 2004. The
witness said that Agri-Mark does not support the sole use of CME prices
in the price formulas because of low trading volume and the possibility
of price manipulation.
The Agri-Mark witness indicated that adopting this hybrid price
would not significantly change the average USDA cheese prices or FMMO
producer blend prices. The witness estimated that the average Class III
prices would have been approximately $0.005 per pound less and the
Northeast order producer blend prices would have averaged $0.003 per
cwt less using this hybrid price during 2003-2006. The witness did not
see a need to compute a hybrid price for butter because the lag between
the CME and NASS price reporting is not a problem.
In their post-hearing brief, Agri-Mark et al. reiterated their
support for adoption of Proposal 14 and opposition to adopting
Proposals 15 and 18, both of which are discussed subsequently.
In their comments and exception to the tentative partial final
decision, Agri-Mark et al. expressed support for USDA's decision to
deny Proposals 14, 15 and 18.
A witness appearing on behalf of DPNM et al. testified in support
of using CME product prices in the FMMO price formulas as advanced in
Proposal 15. The witness was of the opinion that the CME is a superior
price discovery mechanism. The witness asserted that the time lag
associated with the NASS price survey has, at times, created huge
differences between the advanced Class I and Class II prices and the
monthly prices that are incorporated into the Class III and Class IV
formulas. The witness opined that the time lag associated with using
the NASS price survey sends incorrect price signals to producers and
that it creates a disincentive for manufacturers to seek higher product
prices in the market as it results in increased raw milk costs.
The DPNM et al. witness testified that NASS product prices track
closely with CME prices for cheese and butter. However, the witness
said, the NASS NFDM price does not reflect the current cash market. The
witness stated that the NFDM market is unique because there are only a
few sellers and they tend to use the previous week's NASS NFDM price to
sell their products. The witness stated that there has been a growing
price disparity between the NASS NFDM price and the NFDM price reported
by Dairy Market News. According to the witness, during the first
quarter of 2007, the monthly NASS NFDM prices averaged $0.12 per pound
less than what was reported as the average Western Mostly NFDM price by
Dairy Market News. The witness calculated that this resulted in Class
II and Class IV prices that were $1.03 per cwt lower. The witness
asserted that the price discrepancy could be a reporting error, noting
that NASS does not have the authority to audit its surveyed price data.
The DPNM et al. witness testified that CME product prices could
become the preferred price discovery mechanism because they originate
in a public market that, since 1997, has expanded trading times and the
number of dairy products traded. The witness stressed that CME product
prices are more reflective of the current market for cheese, butter and
dry whey because many manufacturers refer to the current CME product
price when making their sales. The witness added that the involvement
of the Commodity Futures Trading Commission (CFTC) provides for
regulatory oversight. However, the witness testified that NFDM is not
actively traded on the CME because packaging specifications require
that NFDM traded on the CME be in government-specified bags. The
witness was of the opinion that if the packaging requirement was
changed, then the CME would become a viable market for NFDM.
The brief submitted by DPNM et al. expressed support for adoption
of Proposal 15 and reiterated the position that NASS product price
surveys should be replaced by CME product prices in
[[Page 9264]]
each of the price formulas except for the other solids formula.
According to the brief, since the other solids formula uses the NASS
dry whey price and the CME does not have a cash traded dry whey price,
continued use of the NASS dry whey price is appropriate. The brief
indicated that the use of CME prices would alleviate timing and
circularity issues associated with relying on NASS survey prices. The
brief noted that this position is supported in a June 2007 General
Accountability Office (GAO) study.
The DPNM et al. brief expressed support for using a competitive pay
price series to establish classified Federal order milk prices.
However, the brief expressed the opinion that Proposal 18 needs to be
more fully developed. It further requested that USDA investigate the
use of a competitive pay price and convene a hearing to consider it as
an alternative to NASS survey price information.
DPNM et al. exceptions to the tentative partial final decision
stated their opposition to the denial of Proposal 15. They reiterated
arguments made in their hearing testimony that the NASS survey is
vulnerable to manipulation. Consequently, DPNM et al. advocated use of
the CME prices in the product-price formulas to provide for transparent
market signals.
A witness appearing on behalf of the Maine Dairy Industry
Association (MDIA) testified in support of Proposal 18. According to
the witness, MDIA is an association that represents all of Maine's 350
dairy farmers. The witness said that Proposal 18 seeks to establish an
average competitive pay price for milk by incorporating a factor into
the other solids portion of the Class III price formula to account for
any monthly spread between the component prices for milk and a
competitive pay price for equivalent Grade A milk. The witness was of
the opinion that a competitive pay price is a superior method to
product-price formulas in determining the value of milk used to set
regulated minimum prices. The witness contended that butter, NFDM,
cheese and dry whey each have a separate market that responds to unique
supply and demand factors. The witness explained that in a competitive
pay price system, buyers pay for raw milk according to the supply and
demand conditions of the particular market in which they operate.
The MDIA witness stated that USDA has previously considered
competitive pay price mechanisms for pricing Class III milk. The
witness explained that a 1994-1996 simulated analysis conducted by USDA
revealed several difficulties with competitive pay prices, such as: (1)
The inability to eliminate the influence of regulated minimum prices;
(2) inadequate vigorous competition among buyers of milk; and (3) the
problems associated with using a competitive pricing scheme based on
the competitive situation for milk in Minnesota and Wisconsin. The
witness explained that these limitations formed the basis for Proposal
18.
The MDIA witness explained how Proposal 18's competitive pay price
would be administered. The witness said that geographic areas where an
adequate level of competition for milk exists should be determined by
computing a Herfindahl index for each county. The witness said this
index is a measurement of market competitiveness wherein a low
Herfindahl index indicates more competition for milk. For example,
competition for milk in a county with a value of 0.3450 is greater than
in a county with a value of 0.3500. The witness proposed that
competitive price zones be determined by aggregating clusters of ten or
more contiguous counties with values below 0.33. The witness said that
an ideal situation would be if at least a third of the manufacturing
milk in Federal order marketing areas were competitive price zones. The
witness explained that handlers purchasing milk within these zones
would be exempt from paying minimum classified prices, but would still
be required to pay current differentials for Class I and Class II milk.
According to the witness, these differentials would be pooled and
producers within the competitive price zones would receive a 12-month
rolling average producer price differential (PPD). Handlers would still
pay regulated classified prices for milk produced outside of these
zones, the witness said.
According to the MDIA witness, market administrators would collect
actual payment data from handlers for milk purchased within the
competitive price zones for the preceding month and estimated payments
for the current month. The market administrators would then compute a
weighted average price and deduct from that price the 12-month rolling
average PPD for the month. This residual would be the value of
manufacturing milk in the competitive price zone. A national average
competitive manufacturing milk price would then be computed by
aggregating the average price and volume data from all reporting
competitive price zones. This result would become the new minimum Class
III price for milk purchases outside of the competitive price zones.
The MDIA witness said that the computation of protein and fat
prices would be unchanged under its competitive price proposal.
However, the other solids price would be the residual value of the
Class III price once the values of butterfat and protein were deducted.
The witness explained that indirect compensation to farmers, such as
hauling charges, would not be included in the computation of a weighted
average price. However, the witness also noted that Class III milk
prices could potentially be decreased if manufacturers choose to
exploit a ``loophole'' and shift more monies into hauling subsidies.
The MDIA witness asserted that, over the long run, producers
located inside competitive price zones would receive the same revenue
for their milk as producers located outside of competitive price zones.
The witness did not know if Proposal 18's pricing method would generate
higher or lower prices to all producers than the prices generated by
the current end-product pricing system.
The MDIA witness was of the opinion that the largest group of
counties in competitive price zones would be in the Upper Midwest (UMW)
marketing area because of the large number of cheese plants competing
for a milk supply. The witness predicted that this would most likely
lead to a weighted average competitive pay price that is heavily
influenced by prices paid by UMW plants that historically have been
higher than Federal order minimum prices. The witness conceded that a
competitive pay price heavily weighted to conditions in the UMW would
not reflect national supply and demand conditions.
A Maine dairy farmer appearing on behalf of the MDIA testified in
support of Proposal 18. The witness testified that Maine is not an area
regulated by the Federal milk marketing order program, but that
producer prices in Maine are heavily influenced by those established
under the Northeast order. The witness stated that, in the face of
Federal minimum prices that are too low and driven by unpredictable
price swings for dairy products, Maine dairy farmers have had to turn
to alternative sources of income including state subsidies and
increased equity financing to keep their farms operating. After
adjusting USDA cost of production information for Vermont to account
for lower labor and feed costs, the MDIA witness estimated the cost of
production for a Maine dairy farmer in 2004, 2005 and 2006, to be $19
per cwt, $20 per cwt
[[Page 9265]]
and $24 per cwt, respectively. The witness compared this price to the
Northeast Federal order mailbox prices of $16.29 per cwt, $15.39 per
cwt and $13.22 per cwt in 2004, 2005 and 2006, respectively. Using the
Vermont cost data and the Northeast Federal order price data, the
witness estimated that for a medium-sized Maine dairy farm with 150
cows, average net income fell by $70,000 in 2004, $140,000 in 2005, and
$320,000 in 2006. The witness asserted that this increasing difference
between revenue and costs illustrates why the Federal order pricing
system needs to be amended to more fully reflect dairy farmer cost-of-
production.
The MDIA witness also testified regarding two programs operated by
the State of Maine. One program boosts revenue to Maine dairy farmers
by distributing an over-order price payment determined by the Maine
Milk Commission, and a second program provides for a subsidy payment
from the State's general fund. However, the witness said that during
recent months these payments have not been enough to make up for the
difference between declining milk prices and increasing production
costs. The witness was of the opinion that, in the long-run, these
State programs cannot be relied upon to provide a stable marketplace
for dairy farmers.
A post-hearing brief filed on behalf of MDIA reiterated the
position that end-product pricing does not result in high enough prices
for the dairy farmers of the northeastern region of the United States.
MDIA stated that Proposal 18 is ``a good starting point'' from which to
develop a competitive price scheme that would replace the current
scheme which derives prices from the values of manufactured dairy
products. The brief acknowledged that MDIA's proposal is complex and
lacks much of the detail needed for its adoption. However, MDIA
reiterated its position that the adoption of a competitive pay price
system would improve the valuation of producer milk and the subsequent
determination of minimum classified prices.
The MDIA brief argued that price discovery based on competitive
conditions for milk is superior to milk prices derived from the market
prices of manufactured dairy products. The brief insisted that prices
derived using sound economic principles and accurate market data are
crucial to accurate price determination. The brief stressed that ending
a competitive pay price series for milk has harmed dairy farmers,
especially in the northeastern, midwestern and southeastern regions of
the country. The brief attributed observed price volatility in milk
prices to the use of end-product price formulas. The brief asserted
that the product-price formulas and the logic underlying component
pricing do not meet the articulated policy of the AMAA. The brief
argued that the AMAA's paramount objectives are the stabilization and
enhancement of producer income.
Exceptions to the tentative partial final decision filed by MDIA
opposed the denial of MDIA's motion to reopen the hearing. The witness
appearing on behalf of Dairylea supported using the CME cheese and
butter prices as substitutes for the NASS surveyed prices as advanced
in Proposal 15. The witness said that the industry already uses the CME
to set base selling prices. The witness asserted that using NASS
surveys to set minimum prices has resulted in disorderly market
conditions because the time lag of NASS product price reporting results
in short-term manufacturing losses. According to the witness, using the
CME prices for butter and cheese to set minimum classified milk prices
would eliminate the time lag issue and price circularity issues.
A post-hearing brief submitted on behalf of Dairylea et al. opposed
adoption of Proposal 18 based on the conclusion that the record
evidence is insufficient to support its adoption. Their post-hearing
brief specifically expressed support for the portion of Proposal 15
proposing the use of CME prices for cheese and butter in the product
price formulas. This was not supported by DFA. While Dairylea's brief
expressed the opinion that using CME prices would address the issue of
price circularity inherent in the NASS price survey, they did not
support the use of CME prices for dry whey and NFDM.
In a separate post-hearing brief, DFA specifically expressed
support for adoption of the hybrid price series advanced in Proposal
14. DFA emphasized that the hybrid price series would transmit more
timely market signals to processors and producers by aligning the
purchase price of milk with the market prices of milk products.
The witness appearing on behalf of IDFA testified in opposition to
adoption of Proposal 14. The witness was of the opinion that using the
proposed hybrid price would result in unnecessarily complex price
formulas that would provide no tangible benefit to the industry. The
witness acknowledged the problems associated with the time-lag of the
NASS price series, but stated that there are alternative ways to
address the lag adding complexity to the price formulas. Similar
arguments were offered in IDFA's post-hearing brief.
The IDFA witness also testified in opposition to adoption of
Proposal 15. The witness stated that the NASS product price survey
provides the largest possible sample of wholesale prices and should
continue to be relied upon in the product price formulas. The witness
said that USDA's reasoning for relying on the NASS price survey in the
Federal order reform decision is still relevant. The witness was of the
opinion that many of the complaints associated with the NASS price
series could be remedied if price reporting to NASS were electronic,
mandatory and audited. IDFA insisted in its post-hearing brief that
using the CME to determine product prices could result in product
prices unrepresentative of actual market sale prices and could
encourage product trading on the CME solely to manipulate the minimum
classified milk prices established under Federal orders.
The IDFA witness also testified in opposition to adopting a
competitive pay price series as advanced in Proposal 18. The witness
indicated that currently no reliable unregulated milk supply of
adequate size exists to become the basis for a competitive pay price
series.
The witness appearing on behalf of Kraft opposed adoption of
Proposal 15 and supported the continued use of the NASS price survey to
determine classified prices. The witness explained that the NASS price
survey is national in scope and represents a significantly larger
proportion of national cheese production than does the CME. The witness
was of the opinion that if CME prices are used to determine classified
prices, the growing volume of cheese production and sales in the
western states would not be adequately represented. Therefore, the
witness concluded, NASS survey prices best reflect the settled sales
prices at the plants. The witness acknowledged the time lag between CME
prices and the NASS survey prices and insisted that a better solution
to the time lag problem would be to require timelier reporting of
prices to NASS rather than abandon the NASS price survey.
The witness appearing on behalf of Saputo opposed the adoption of
Proposals 14 or 15 and indicated support for the continued use of the
NASS price survey. The witness was of the opinion that timelier
reporting of prices to NASS would counter asserted problems associated
with the lag between the CME and NASS survey prices. The Saputo witness
opposed using the CME to set minimum prices because, in the witness'
opinion, the CME is too thin a market to provide accurate market
signals.
[[Page 9266]]
The witness appearing on behalf of Leprino testified in opposition
to Proposal 15 because of the low volume of cheese that is traded on
the CME as compared to the volume of cheese production that is
represented in the NASS survey. The witness also testified that Leprino
is not concerned with the time lag between the CME prices and the NASS
price survey. The witness was of the opinion that the time lag is
predictable and manageable for manufacturers.
The witness appearing on behalf of LOL testified in opposition to
Proposal 15. The witness was of the opinion that the more appropriate
solution to the problem of increased manufacturing costs is a more
timely method of updating make allowances and not the use of the CME to
derive classified prices. The witness argued that the NASS price survey
is more representative of the national cheese market while the CME
continues to remain a thinly traded market.
The witness appearing on behalf of HP Hood opposed adoption of
Proposal 18 because of the lack of analysis available to determine its
utility.
A post-hearing brief filed on behalf of O-AT-KA stated that
Proposal 18 may warrant further consideration but it should not be
adopted in this proceeding.
Comments to the tentative final partial decision filed separately
by IDFA, Grande, Glanbia, Kraft, Leprino and WCMA expressed support for
the denial of Proposals 14, 15 and 18.
6. Other Solids Price
A witness appearing on behalf of NAJ testified in support of
adopting Proposal 16. The witness was of the opinion that the value of
dry whey should be derived primarily from its protein content, rather
than its other solids content as it is currently computed. The witness
acknowledged that from August 2006 to February 2007 the NASS dry whey
price more than doubled from 29.65 cents per pound to 60.05 cents per
pound and the lactose price reported in Dairy Market News increased
from 33.89 cents per pound to 59.34 cents per pound. The witness was of
the opinion that the recent increase in lactose prices is reflective of
a shortage in lactose processing capacity and not a lack of available
lactose. The witness believed that the higher dry whey and lactose
prices prior to the fall of 2006 justify valuing dry whey on a protein
rather than on an other solids basis. According to the NAJ witness, if
Proposal 16 had been in place from April 2003 to September 2006, the
Class III price would have been one-cent per cwt higher and only
marginally higher since September 2006.
The NAJ witness testified that from 2003 to 2006 dry whey
production only increased 1.5 percent, while the increased production
of whey protein concentrates (WPCs) ranged from 6.6 percent to 45.5
percent depending on the percent protein in the WPC. The witness
concluded that purchasers of whey solids prefer WPC products that are
high in protein. It is this preference that led the witness to conclude
that dry whey should be priced on a protein basis.
Using Dairy Market News' monthly prices since January 2000, the
witness discussed the costs of buying a pound of protein (protein
parity) and a pound of lactose (lactose parity) in dry whey or WPC-34
(34 percent protein). The witness concluded that, in all months, the
average price per pound of protein in dry whey or WPC-34 exceeded the
average price per pound of lactose. The witness also asserted that the
cost per pound of lactose in WPC-34 is higher than if lactose were
purchased separately. According to the witness, this price relationship
reveals that buyers of dry whey and WPCs are purchasing these products
for their protein content rather than for their lactose content. The
witness also emphasized that the value of protein in dry whey and WPC-
34 more closely reflect each use than does lactose value contained in
the two products.
The NAJ witness also offered a modification to Proposal 16 such
that the NASS price surveys would be expanded to include collection and
reporting of market prices for various WPC's and lactose. The witness
said this would build a dataset for use in future rulemakings to
consider the appropriate valuation of whey solids.
A post-hearing brief filed on behalf of NAJ reiterated positions
given in testimony. According to the brief, the current other solids
price formula does not reasonably connect the market value of whey
solids which NAJ maintains is based on its protein content and how
producers are paid for whey.
NAJ stated its opposition to the denial of Proposal 16 in its
exceptions to the tentative partial final decision. NAJ argued that
counter to what USDA found as a flaw in Proposal 16, one of its
strengths is its revenue neutrality. NAJ was of the opinion that
adoption of Proposal 16 would give producers a financial incentive to
increase their milk protein content. NAJ reiterated arguments that
Proposal 16 would allow manufacturers to account to the pool for
protein, the component in whey that is most valued, while also
simplifying the product-price formulas. NAJ was also of the opinion
that USDA's decision to only make changes in the product-price formulas
to the make allowances and the butterfat yield factor indicates its
unwillingness to amend other factors in the formulas.
The witness appearing on behalf of IDFA opposed adoption of
Proposal 16 because it was too complex and would inappropriately value
whey based on its protein content when it is comprised mainly of other
solids. The witness said that USDA's preliminary economic analysis
demonstrates that adoption of Proposal 16 could increase the cost of
high protein milk while lowering the cost of low protein milk. However,
milk's other solids content (primarily whey) does not change in
relationship to the protein content, the witness said. The witness also
stated it would be inappropriate to price dry whey on its protein
content since protein does not affect whey yields.
The witness appearing on behalf of Leprino testified in opposition
to Proposal 16 because its adoption would result in distorted milk
component values. The witness insisted that since dry whey yields are
primarily driven by the lactose content of milk and the other solids
composition, it would be inappropriate to price whey on its protein
content.
The post-hearing brief filed on behalf of Agri-Mark et al. opposed
adoption of Proposal 16 arguing that the price of other solids would
then be determined on its protein component which has no impact on
yield. The brief claimed that since there is no standardized protein
content for whey, adoption of Proposal 16 could result in significant
over-valuing of the protein in whey. However, the brief supported NAJ's
call for USDA to collect manufacturing cost and price data for WPCs and
lactose on the basis that it would provide data on how to appropriately
value whey solids for use in future proceedings.
The post-hearing brief filed on behalf of Dairylea et al. opposed
adoption of Proposal 16 because it would not add value or efficiency to
the product price formulas.
The post-hearing brief filed on behalf of DPNM et al. opposed the
adoption of Proposal 16. However, the brief did express support for
NAJ's call for USDA collection of prices, manufacturing costs and
volumes for whey protein concentrates and whey protein isolates.
Comments filed separately by Agri-Mark et al.; DPNM et al.; IDFA;
Grande; Glanbia; Kraft and Leprino in response to the tentative partial
final decision expressed support for the denial of Proposal 16.
[[Page 9267]]
A witness from Pennsylvania State University offered testimony on
the use of an econometric model framework to analyze changes to the
Federal milk marketing orders from all the proposals under
consideration and provided the results at the hearing. The testimony
was not given on behalf of the Pennsylvania State University. The
witness testified neither in support of, nor in opposition to, any
proposals. The witness explained that the model is a short-run, supply-
side model that does not take into account changes in milk demand. The
witness said that the model was used to analyze scenarios as outlined
in the USDA preliminary economic analysis that was based on the USDA
Baseline Projections to 2015. The witness concluded that the USDA
preliminary economic analysis did not accurately reflect changes in the
milk supply because it did not adequately account for the increase in
feed prices and the resulting effect on producer decisions.
A witness testifying on behalf of the Ohio Farmers Union (OFU),
National Farmers Union (NFU) and the National Family Farm Coalition
(NFFC) called for the hearing to be terminated because dairy farmers
continuously face low milk prices and high input costs, and that these
concerns were not being addressed in this proceeding. The witness was
of the opinion that the FMMO system was no longer accomplishing its
mission of returning market power to dairy farmers.
7. Energy Cost Adjuster
A witness from NMPF testified that energy costs are the most
volatile manufacturing input cost in dairy manufacturing. The witness
asserted that increases in energy costs have countered many of the
measures manufacturers have taken to increase productivity and
efficiency.
The NMPF witness testified that the current make allowance levels
reliance on a fixed energy cost derived from information that existed
at a single point in time is no longer appropriate. The witness said
USDA should instead adopt a monthly energy price adjuster to capture
the change in energy prices that may occur from month to month. The
witness explained that the base energy cost should be derived from
surveyed energy costs in the manufacturing cost surveys used to
determine the make allowances. If two or more surveys were used to
determine make allowances, then the energy costs of each survey should
be weighted accordingly, the witness said. According to the witness, an
energy price adjustor would then be added (or subtracted) to the base
energy cost value.
The NMPF witness explained that the energy price adjustor should be
computed using the Bureau of Labor Statistics Producer Price Indexes
for Industrial Electricity and Industrial Natural Gas (PPI). The
witness said that the time period selected for the energy price
adjustor should correspond with the same time period of the
manufacturing cost survey data. The witness suggested the use of the
monthly PPI series for several energy products and proposed 2005 as the
base period from which percentage changes would be calculated. The
witness stressed that if an energy price adjuster is not adopted, then
the make allowances that are determined as a result of the current
proceeding may become obsolete prior to implementation.
The NMPF witness said that the adoption of a monthly energy price
adjustor would help maintain equity between producers and manufacturers
given that processors would not be unduly harmed when energy prices
rise while producers would not be harmed when energy prices fall. The
witness was of the opinion that it was not necessary to establish
monthly indexes for other cost factors contained in the make
allowances.
The NMPF witness asserted that if an annual manufacturing survey as
offered in Proposal 2 is adopted, then an energy cost factor should be
used in making monthly adjustments to make allowances. The witness was
of the opinion that even if make allowances were updated on an annual
basis, manufacturing cost data as old as 24 months would be
incorporated. According to the witness, energy prices vary so much over
short time periods that make allowances are essentially using a fixed
energy cost factor which results in make allowances that are neither
timely nor accurate.
A post-hearing brief filed on behalf of NMPF reiterated their
testimony in support of the adoption of Proposal 17. NMPF's brief
offered various methods USDA could use to determine an appropriate base
energy cost factor and corresponding monthly energy price adjustor.
The NMPF brief also addressed other hearing participants'
objections that an energy price adjustor would inhibit a plant's
ability to use the futures markets to hedge risk. The brief said that
while energy futures can be used to reduce energy price volatility, a
plant is more likely to lock in a high energy price if that plant
predicts energy costs will rise above levels covered by current make
allowances. The brief also argued that the use of energy futures may
not be applicable for balancing plants facing unpredictable energy
costs due to large seasonal fluctuations in product output.
A witness appearing on behalf of MMPA testified in support of
Proposal 17. The witness said that the large fluctuations in gas and
energy prices in recent years demonstrate the need for an energy price
adjustor in the determination of make allowances. The witness also
stated that adoption of the adjustor would ensure that manufacturers
could recover increased energy costs while also preventing financial
windfalls should energy prices decrease. Agri-Mark, Dairylea and O-AT-
KA also offered support for Proposal 17 in their post-hearing briefs.
The witness appearing on behalf of IDFA testified in opposition to
the adoption of Proposal 17 and was of the opinion that adoption of the
proposal would complicate manufacturers' ability to manage risk. IDFA
reiterated these arguments in its post-hearing brief. Kraft, Lactalis,
HP Hood and Leprino supported IDFA's position opposing the adoption of
Proposal 17.
With the exception of DPNM et al., Proposal 17 was supported by all
producer organizations that market the milk of dairy farmers who
participated in this proceeding, including those who manufacture NFDM
and dry whey. The record reflects that manufacturers of NFDM and dry
whey, in particular, intensively use either natural gas or electricity
in their drying processes. Accordingly, proponents favored the ability
of an energy cost adjustor to reflect actual natural gas or electricity
prices in minimum prices paid for producer milk. Supporters also
testified that this feature would account for monthly energy price
changes without permanently decreasing the value of producer milk until
subsequent rulemaking changes to make allowance levels can be made.
Opposition to Proposal 17 was universal among IDFA, along with its
member companies Saputo, Kraft, H.P. Hood and Leprino, who testified at
the hearing. The central themes of their opposition were that a monthly
energy adjuster would undermine the value of existing risk management
tools, and increase the complexity of product price formulas. DPNM et
al. also opposed adoption of Proposal 17 because, they assert, it would
add complexity to the pricing system.
8. Cost-of-Production Add-on
A witness appearing on behalf of Dairylea testified that
manufacturing plants would negotiate a price for the
[[Page 9268]]
applicable product with wholesale customers that included a factor
reflecting manufacturing costs not reflected in the pricing formula
make allowances. The witness said that these surcharges, or ``add-
ons,'' would not be included in the NASS price survey and therefore
would not affect Class III and Class IV prices. According to the
witness, the negotiated add-ons would be capped at a maximum amount to
be determined through a separate formal rulemaking.
The Dairylea witness explained that when a dairy manufacturer
attempts to pass on its higher manufacturing costs by charging higher
prices to its customers, the price increase is captured in the NASS
price survey which, in turn, increases a manufacturer's raw milk costs
through higher Class III and Class IV prices. The witness described
this as a ``price circularity'' problem. The witness was of the opinion
that Proposal 20 provided a method whereby dairy processors could pass
on higher manufacturing costs not reflected in the product-price
formulas to customers without those higher prices being reflected in
the NASS price survey. According to the witness, classified prices
would not be affected by a change in manufacturing costs.
The Dairylea witness acknowledged that manufacturers have
experienced higher processing costs than those that are represented by
the current make allowances. However, according to the witness, higher
make allowances cause dairy farmers to receive lower prices for their
milk even though they also face higher production costs. The witness
said that because dairy farmers are unable to pass on their higher
costs of production, as a matter of fairness and equity, processors
should seek needed manufacturing cost recovery through the price they
charge their customers, rather than through the price they pay dairy
farmers for raw milk.
The Dairylea witness emphasized that while the manufacturing cost
add-ons would not be included in the NASS price survey, any amount a
manufacturer charged in excess of the cost add-ons would be required to
be reported to NASS. The witness testified that the maximum
manufacturing cost add-on should only be changed through formal
rulemaking and that the value of a cost add-on should never be
negative. The witness was of the opinion that the National Fluid Milk
Processors Promotion Program (MilkPEP) check-off assessment
administered by AMS and the in-state over-order premium program
administered by the Pennsylvania Milk Marketing Board are examples of
successful programs providing for surcharges.
The Dairylea witness viewed adoption of an energy price adjustor to
modify make allowances as detailed in Proposal 17 to be a complement to
Proposal 20. The witness explained that any change in the energy price
adjustor should be subtracted from the value of the manufacturing cost
add-on. For example, the witness explained that for a given month, if
the manufacturing cost add-on for cheese was determined to be $0.0029
per pound and the energy price adjustor was $0.0023 per pound, then the
maximum cheese manufacturing cost add-on for that month would be
$0.0006 per pound. In months when the energy price adjustment was
greater than the maximum cost add-on, then the cost add-on for that
month would be zero, the witness said.
A joint post-hearing brief filed on behalf of Dairylea and Dairy
Farmers of America (Dairylea et al.) reiterated that adoption of the
cost add-on would address the price circularity problem inherent to the
NASS price survey. The brief argued that the Federal order system needs
to evolve such that manufacturing cost increases can be fully passed on
to consumers without lowering the value of producer milk used to make
Class III and Class IV products.
The Dairylea et al. brief emphasized that opposition to the
adoption of Proposal 20 was based on the invalid assumptions that: (1)
Manufacturing plants would not be able to negotiate cost add-ons, and
(2) manufacturing plants regulated by Federal orders would become
disadvantaged. The brief noted that a NFDM processor has been
successful in negotiating an energy cost surcharge with its customers,
despite competition from non-pool NFDM plants located in the United
States and abroad. The brief also countered opposition arguments
suggesting that a buyer would simply purchase finished products on a
spot basis from the Chicago Mercantile Exchange (CME) to avoid paying a
manufacturing cost add-on. The brief asserted that manufacturing
plants, regardless of pool status, would not give up the opportunity to
maximize profit by charging a cost add-on.
The witness appearing on behalf of HP Hood testified as being
receptive to the manufacturing cost add-on feature of Proposal 20
without offering any further details or justification.
The witness appearing on behalf of IDFA testified in opposition to
the adoption of Proposal 20. The witness disagreed with the assertion
that all manufacturers would be able to negotiate cost add-ons with
their customers. The witness insisted that manufacturers unsuccessful
in negotiating the cost add-on would only be able to recoup
manufacturing costs equal to the product-price formula's make
allowances. The witness argued that the examples of successfully
administered surcharges--the Milk PEP check-off assessment and the
Pennsylvania Milk Marketing Board over-order premiums--are misleading
because they involve regulated charges that processors are required to
pay. The witness was of the opinion that Federally regulated
manufacturers would be harmed by the adoption of manufacturing cost
add-ons because customers would simply seek a lower-cost product from
other manufacturers whose milk is not priced by an order or would make
spot purchases of product from the CME.
In characterizing that all cheeses have a price relationship in the
market, the IDFA witness strongly disagreed that a commodity cheddar
cheese manufacturer could include a cost add-on in its sales price.
According to the witness, cost add-ons change the price relationship of
commodity cheddar to other cheese varieties in the marketplace and as a
result, cheesemakers buying pooled milk would be at a competitive
disadvantage to those buying non-pooled milk. IDFA reiterated their
opposition to the adoption of Proposal 20 in their post-hearing brief.
The witness appearing on behalf of Lactalis found merit with the
intent of Proposal 20 but thought its method too complex and
impractical, and therefore opposed its adoption. According to the
witness, Lactalis operates six cheese plants in the United States. The
witness was of the opinion that Federally regulated manufacturers would
not be able to consistently and successfully negotiate a higher sales
price with their customers to compensate for higher manufacturing
costs.
In their post-hearing brief, Agri-Mark et al. opposed adoption of
Proposal 20 on the grounds that it assumes plants can successfully
negotiate manufacturing cost add-ons to recoup increased manufacturing
costs. The brief expressed the opinion that a manufacturing cost add-on
scheme would only be successful if all plants, including unregulated
plants, simultaneously increased prices and clearly labeled the cost
add-on on all invoices so that the add-on would not be included in the
NASS price survey. The brief asserted that unregulated manufacturing
plants have no incentive to report a manufacturing cost add-on
[[Page 9269]]
because NASS prices do not impact their raw milk costs in the same way
as plants regulated by Federal orders. The brief also stressed that if
plants were unsuccessful in negotiating a manufacturing cost add-on,
they would likely be unable to obtain cost relief elsewhere.
In their post-hearing brief, DPNM et al. opposed the adoption of a
manufacturing cost add-on in an attempt to eliminate the circularity
problem inherent to the NASS survey (now administered by AMS). DPNM et
al. was of the opinion that USDA resources should instead be
concentrated on developing a competitive pay price to replace the
product-price formulas.
A post-hearing brief filed on behalf of O-AT-KA stated that while
Proposal 20 may warrant further consideration, it should not be adopted
in this proceeding.
Discussion and Findings
1. Amending the Product Price Formulas
This proceeding offered a wide array of proposals aimed at changing
FMMO end-product pricing formulas used to establish classified prices
in all orders. The original 19 proposals noticed range from those that
seek to abandon the current product-price formulas used to compute
minimum Class III and Class IV prices to those that seek a variety of
changes to the product-price formulas including manufacturing cost
factors (make allowances), yield factors, technical factors and the
authority to separate a portion of manufactured product sales prices
from what otherwise is used to establish subsequent raw milk prices.
The diversity of proposals considered indicates a lack of consensus
within the dairy industry concerning how the Federal order program
should set minimum milk prices in general and more specifically, how
the many features of the product-price formulas should be altered.
Witnesses representing Agri-Mark, NMPF, Leprino, Twin County and
IDFA provided evidence that energy, transportation, labor and packaging
costs for manufacturing processors have increased since the adoption of
the March 2007 make allowances. As pointed out by IDFA, make allowances
account for manufacturing costs in the Class III and Class IV price
formulas but do not change as those costs change, therefore, increasing
make allowances is the only reasonable way that those increased costs
can be recovered.
The ability of a manufacturer to offset cost increases is limited
by the level of make allowances in the Class III and Class IV price
formulas. Manufacturing processors are charged the FMMO minimum price
for producer milk used to produce Class III and Class IV products.
However, plant manufacturing cost increases may not be recovered
because Class III and Class IV product-price formulas use make
allowances that are fixed regardless of market conditions and change
only by regulatory action. Simply put, when manufacturing cost
increases result in higher costs than those provided for in the formula
make allowance factors, the value of milk used to make those products
may be over-valued.
Product-price formulas are relied upon to establish the minimum
class prices of raw producer milk used to make Class III and Class IV
products, which in turn establish Class I and Class II prices. The
product-price formulas use market prices collected by AMS for cheddar
cheese, Grade AA butter and dry whey to set a minimum price for Class
III milk, and NFDM and Grade AA butter to set a minimum price for Class
IV milk. No competitive pay price series currently exists that can be
relied upon to establish a price for raw milk nationally. While some
proponents look to the CME, the futures prices of the CME use the FMMO
minimum class prices as the starting points for Class III and Class IV
milk futures contracts.
In the absence of a competitive pay price series, product-price
formulas based on cheese, dry whey, NFDM and butter serve as the only
practical basis that the value of raw producer milk used in their
production can be derived. A raw milk value is, in part, derived from
sales price data collected by AMS from manufacturers who produce and
market these commodity products. The information is aggregated weekly
and reported in the AMS Dairy Product Sales Repot. The Class III and
Class IV product-price formulas use, among other factors, the wholesale
market prices of the manufactured products from which make allowance
factors are subtracted. The remaining value, when converted to a milk
equivalent basis, is the value of raw milk. Accordingly, the accuracy
of deriving the minimum value of raw milk is dependent on the accuracy
of the commodity sale prices reported and, in large part, the accuracy
of the manufacturing cost factors, or make allowance factors, that are
used in the pricing formulas.
The Agri-Mark proposal, Proposal 1, seeks to change make allowances
used in the Class III and Class IV product formulas by relying on
manufacturing cost data contained in the record of this proceeding and
combining such data for plants outside of California with the most
current manufacturing cost data published by the CDFA.\3\ The two sets
of manufacturing costs for cheese, NFDM, dry whey and butter would be
combined on a weighted average basis in a manner consistent with the
development of the current make allowances used in determining Class
III and Class IV prices. Other proponents seek to use the most recently
available publications of the CDFA.\4\ This method was used in earlier
rulemakings to develop the make allowances used in the product-price
formulas.5 6
---------------------------------------------------------------------------
\3\ Official Notices are taken of amendments to make allowances
and all related documentation by the State of California in the
Determinations, Findings, Conclusions and Order of the Secretary of
Food and Agriculture, November 20, 2007, by the Office of the
California Secretary of Agriculture. See: https://www.cdfa.ca.gov/dairy/dairy_hearings_matrix.html, and https://www.cdfa.a.gov/dairy_hearings.html. and Summary of Weighted Average Manufacturing
Costs, Butter, Nonfat Dry Milk, Cheddar Cheese, and Dry Whey Powder,
Released September 18, 2007; See https://www.cdfa.ca.gov/dairy/pdf/manufcostexhibit2006.pdf.
\4\ Ibid
\5\ Official notice is taken of 67 FR 67906 November 7, 2002,
and 68 FR 7063, February 12, 2003, final decision and final rule
respectively, and 66 FR 54064, 65 FR 76832.
\6\ Official notice is taken of 71 FR 67467, November 22, 2006,
71 FR, 78333, December 29, 2006, as well as hearing testimony,
exhibits, and post hearing briefs for the hearing and hearing
continuations originally noticed in 71 FR 545, January 5, 2006, and
related materials concerning make allowances and dairy product
manufacturing costs, and published for the convenience of the public
on the USDA, AMS Dairy Programs Web site at www.ams.usda.gov/dairy.
---------------------------------------------------------------------------
Opponents of increasing make allowances argue a number of points--
that they are already set at too high a level, that dairy farmer
production costs also have increased significantly due to higher energy
and feed costs, that processors should look beyond asking dairy farmers
to receive less for their milk by charging more for manufactured
products, and that make allowance increases should be made only when
all dairy farmer production costs are captured in their milk pay price.
These are not valid arguments for opposing how make allowances should
be determined or what levels make allowances need to be in the Class
III and Class IV product-price formulas. The record evidence
demonstrates that make allowance levels are not reflective of the costs
manufacturers incur in processing raw milk into the finished products
of cheese, butter, NFDM and dry whey.
Additionally, the Class III and Class IV product-price formulas
establish derived classified prices for producer
[[Page 9270]]
milk that are used nationally in all Federal milk orders. When dairy
farmer production costs exceed the value that products are sold in the
marketplace, no source of revenue from the marketplace is available to
cover those costs.
In the aggregate, the costs of producing milk are reflected in the
supply and demand conditions for the dairy products. When the supply of
milk is insufficient to meet the demand for Class III and Class IV
products, the prices for these products increase as do regulated
minimum milk prices paid to dairy farmers because the milk is more
valuable and the greater value is captured in the pricing formulas.
Dairy farmers face no regulatory minimums in their costs and face no
regulated minimum payment obligation in the way that regulated handlers
must pay dairy farmers for milk.
It is reasonable to conclude that the make allowances used in the
Class III and Class IV product-price formulas should be updated to
reflect changes in the costs manufacturers incur in producing cheese,
butter, dry whey and NFDM. It is necessary to reflect changes in
manufacturing costs so that with the prevailing market prices for
manufactured products, minimum Federal order classified prices can be
set. In the record of this proceeding, the evidence demonstrates that
the manufacturing costs of producing cheese, dry whey, NFDM and butter
have increased since the implementation of the make allowances that
were adopted on an interim basis, effective March 1, 2007.\7\
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\7\ Ibid. Official notice is taken of 72 FR 36341, July 3, 2007.
---------------------------------------------------------------------------
The record reveals an absence of industry consensus concerning the
method that make allowances should be changed which in turn determines
the level of the make allowances used in the Class III and Class IV
product-price formulas. The differing proposed make allowance levels
offered during this proceeding represent the changes in opinions
concerning which manufacturing costs, which manufacturing cost
survey(s) and which other factors should be considered. For example,
some proponents seeking higher make allowances argued that only CPDMP
survey data and/or RBCS survey data volumes should be relied upon as
they are most reflective of costs borne by plants that pay Federal
order prices.
Proposal 3, proposed by DPNM, was offered in opposition to
increasing make allowances annually through a USDA administered
manufacturing cost survey, as contained in Proposal 2 offered by Agri-
Mark. DPNM argued that because the CPDMP 2005 survey represents
manufacturing costs of plants not located in California, it should be
relied upon exclusively in determining new make allowances. This
argument is rejected. Proponents of increasing make allowances have
clearly demonstrated that costs of producing Class III and Class IV
products have increased. Continuing with the method previously relied
upon--relying on manufacturing cost data from CPDMP's cost survey and
CDFA in combination--has provided effective and useable make allowances
in the pricing formulas.
At issue in this proceeding, in part, is whether make allowance
levels should be increased and what method should be relied upon to
determine those levels. On its face, the DPNM proposal to rely only on
the CPDMP 2005 survey data in determining make allowances may seem
reasonable as the survey excludes California plants. However, the
argument does not consider other important factors that affect the
marketing conditions for milk and dairy products represented by
California's dairy sector and its impact on the supply and demand for
milk and dairy products nationally. Cheese, butter, dry whey and NFDM
compete in a national marketplace and as such, the prices established
under the Class III and Class IV product-price formulas need to be
reflective of marketing conditions that directly affect the
determination of the minimum value of raw milk. Accordingly, Proposal 3
is not adopted.
Others participants supported the use of CDFA data. However, CDFA
data represents a cost survey of only California processing plants.
Federal order Class III and Class IV prices must be derived, as much as
possible, from national estimates of manufacturing cost information.
AMS survey prices, used to establish minimum Federal order prices,
include California processing plants. Accordingly, it is reasonable to
conclude that appropriately combining CDFA cost data with cost survey
data of manufacturing plants not located in California will produce a
measure of national manufacturing costs. This combination removes as
much bias as possible in manufacturing costs measurements that may
otherwise result from the exclusive use of one set of cost survey data
over another.
While many hearing participants support the general method of
determining make allowances proposed to be adopted in this decision,
the record nevertheless reveals a lack of industry consensus in
determining the specific factors to be used in the Class III and Class
IV product-price formulas. This is illustrated by the information
presented in Table 1 below. The seven sets of suggested make allowances
represent proposals from four different groups at various points during
this proceeding. The Agri-Mark, LOL and DPNM proposals were advanced by
producer groups with different milk marketing and processing interests.
Regulated processors, including some producer groups who are also
regulated in their capacity as processors, are represented in this
regard by the proposals advanced by IDFA and Leprino.
Table 1--Proposed Make Allowances
----------------------------------------------------------------------------------------------------------------
Proponents Cheese $/lb Butter $/lb NFDM $/lb Dry whey $/lb
----------------------------------------------------------------------------------------------------------------
Agri-Mark et. al. (Brief Pg 20-24).............. 0.2154 0.1725 0.1782 0.2080
IDFA (Brief pg 11).............................. 0.2154 0.1725 0.1782 0.2080
IDFA (Brief pg 12).............................. 0.2198 0.1846 0.1662 0.1976
Leprino (Brief pg 2)............................ 0.2154 0.1725 0.1782 0.2080
DPNM Proposal................................... 0.1638 0.1108 0.1410 0.1500
DPNM Brief (pg 1)............................... 0.1638 0.1150 0.1410 0.1590
DPNM Brief (pg 20).............................. 0.1638 0.1108 0.1410 0.1498
----------------------------------------------------------------------------------------------------------------
[[Page 9271]]
The range of proposed make allowances presented in Table 1 varies
more than 30 percent between the highest and lowest proposed make
allowance levels for cheese and dry whey and about 25 percent for NFDM.
Similarly, the range from highest to lowest proposed make allowances
for butter varies by more than 60 percent.
This final decision continues to find that it is appropriate to
rely on the CPDMP 2006 survey of manufacturing costs in establishing
the methodology of how make allowances should be determined. Its use is
consistent with the methodology relied upon in determining the previous
make allowance levels (effective March 1, 2007) in the Class III and
Class IV product-price formulas that utilized the CPDMP 2005 survey.
The CPDMP 2006 survey results provide a new estimation of manufacturing
costs for plants not located in California. The CPDMP 2006 survey
results, when used in conjunction with the most current survey results
from CDFA, improve the estimation of manufacturing costs on a national
basis and is consistent with the methodology relied upon in determining
the previously set make allowances.
The CPDMP 2006 survey is essentially a new cost survey. The
manufacturing cost data presented in the survey is similar to CPDMP's
earlier cost survey in that they both rely on cost information provided
from manufacturing plants not located in California. The surveys also
are similar in that they collect manufacturing cost data for cheese,
butter, NFDM and dry whey. However, there are differences with the most
important one being the use of different samples of plants.
In the CPDMP 2005 survey, 16 cheese plants provided cost data that
were incorporated to represent the weighted average costs to
manufacture cheese. The 2006 survey represents data from 11 cheese
plants, 8 of which were among the 16 plants that participated in the
2005 survey. For butter, 4 plants provided cost data in both the 2006
survey and the 2005 survey, but the surveys represent different
collections of sampled plants with different production volumes. In
addition, the butter manufacturing cost data in the 2006 survey differs
from the earlier survey because it employed a different method for
allocating costs between butter and NFDM production in plants that
jointly manufacture these products. For NFDM, the plants sampled and
reported in the 2006 survey included 7 of the 8 plants sampled as part
of the 2005 survey.
The purpose of this proceeding, in part, is to determine if make
allowances should be updated. Central to this question is determining
the proper methodology for determining new make allowances given the
available public data. Proponents of Proposal 1 argued that both CDFA
and CPDMP data were used to determine the 2006 make allowances and that
they should continue to be used because their combination better
reflects conditions in the national marketplace. This decision
continues to find that incorporating CDFA data into the make allowance
computations is justified to best reflect the national market where
dairy commodity products are sold. AMS prices used in the product-price
formulas incorporate sales from across the country, including
California. Despite comments filed by DPNM et al. this decision finds
that it is appropriate to rely on cost data from California (CDFA
survey) and the rest of the country (CPDMP survey). It is also
appropriate, contrary to comments from DPNM et al. to assess the
economic impact of the changes on the national market. Consequently,
the record supports use of the 2006 CDFA data to determine make
allowances.
DPNM et al. also commented that the Department failed to consider
producer feed and fuel costs as mandated by the Food, Conservation and
Energy Act of 2008 (2008 Farm Bill, (Pub. L. 110-246)). At the hearing,
official notice was taken of USDA data pertaining to various producer
costs. This information is part of the hearing record and as such, was
considered by the Department in determining whether make allowances
should be amended.
Comments regarding the tentative final decision from Agri-Mark et
al. request that make allowances be updated to reflect energy costs
through June 2008. Their comments cite the Bureau of Labor Statistics
Producer Price Indexes for Industrial Natural Gas and Industrial
Electric Power that demonstrate an increase in these energy prices
through June 2008. Agri-Mark et al. assert that energy prices would
remain high through 2009. Updating energy costs would result in make
allowances that may give an inappropriate weight to one cost factor in
an array of cost factors that are considered in determining make
allowances. This would lock in an artificially high make allowance
based solely on the costs of electricity and natural gas. Accordingly,
the request by Agri-Mark's et al. is denied. The determination of the
adopted make allowances for cheese, butter, NFDM and dry whey are
discussed below. The make allowances proposed to be permanently adopted
represent national manufacturing cost averages for cheese, butter, NFDM
and dry whey. As found and determined in previous rulemakings on this
issue, an estimation of manufacturing costs for national application
requires that national production volumes of these commodities be
considered in determining the level of make allowances to be relied
upon and used in the Class III and Class IV product-price formulas.
This is critical because Class III and Class IV prices are the same in
all Federal milk marketing orders.
Butter Make Allowance
The butter manufacturing cost data presented in the CPDMP 2006
survey reports weighted average costs based on a sample of four plants.
These data are combined with the average cost data from the most recent
CDFA survey and averaged over the 2006 national production volume as
published by NASS. The combination of the weighted average costs from
the CPDMP and CDFA surveys over the national production volume plus a
marketing cost adjustment of $0.0015 yields a make allowance $0.1715
per pound for butter.
NFDM Make Allowance
The NFDM manufacturing cost data presented in the CPDMP 2006 survey
reports weighted average costs based on a sample of 7 non-California
plants. These data are combined with the weighted average costs
reported by CDFA and averaged over the 2006 national NFDM production
volume as reported by NASS. The combination of the weighted average
costs from the CPDMP and CDFA surveys by the national production volume
plus a marketing cost adjustment of $0.0015 yields a make allowance
$0.1678 per pound of NFDM.
Cheese Make Allowance
The cheese manufacturing cost data presented in the CPDMP 2006
survey reports an average cost of producing a pound of cheese of
$0.1584 per pound. This is significantly below the cost of producing a
pound of cheese reported by the CPDMP 2005 survey. The cost difference
was explained by the inclusion of fewer small plants in the 2006
survey. In addition, cheese manufacturing costs of a larger plant were
included in the 2006 survey that did not participate in the 2005
survey. This led to 2006 survey results that are heavily weighted
towards larger volume plants.
[[Page 9272]]
The record reveals that eight cheese plants participated in both
the 2005 and 2006 surveys and that their costs increased an average of
$0.017 per pound of cheese between the two survey years. The Cornell
researcher who administered both surveys conceded that this was the
strongest conclusion which can be drawn from the cheese manufacturing
data of the two surveys. Supporters of relying on the $0.017 factor to
compute a new make allowance purport that this number can simply be
added to the 2005 CPDMP plant average population cost of $0.2028. This
decision finds that combining those two figures to compute a new cheese
make allowance is procedurally incorrect. While a cost increase of
$0.017 is significant and may be factually correct, it cannot be a
factor in determining a new make allowance unless the original 2005
average manufacturing cost of the eight plants is included in the
record. Therefore, use of the $0.017 cost increase in determining a new
cheese make allowance is denied.
While the $0.017 cannot be used to determine a new cheese make
allowance, the cost comparison between the same samples of plants does
reveal that average manufacturing costs have increased. However,
comparing the weighted average cheese costs of the two CPDMP surveys
indicates that processing costs have actually declined $0.0054 per
pound. This decision finds that the inconsistencies between the two
CPDMP surveys call into question whether either survey is
representative of cheese manufacturing costs. Accordingly, for the
purpose of determining a make allowance for cheese, the CPDMP 2006
survey results for cheese are rejected.
This decision finds that the CDFA 2006 survey of average cheese
manufacturing costs is the best available information representing the
manufacturing cost of producing a pound of cheddar cheese. Accordingly,
the make allowance proposed to be permanently adopted for cheddar
cheese is $0.2003 per pound including a $0.0015 per pound marketing
cost adjustment.
Dry Whey Make Allowance
Estimating the cost of manufacturing dry whey presents a problem
similar to that for cheese. Despite exceptions to the tentative partial
final decision from Kraft, Glanbia and WCMA that CDFA whey data should
be factored into determining a dry whey make allowance, this decision
continues to reject relying on CDFA data in determining the dry whey
make allowance. The CDFA 2006 manufacturing cost survey reveals that
CDFA was not satisfied with the precision in estimating the average
cost per pound for whey products. Accordingly, it is unreasonable to
rely on information that may not be reflective of market conditions.
Adopting an artificially high make allowance for dry whey would result
in the unwarranted decrease of producer revenue. Accordingly, CDFA dry
why manufacturing cost data is not relied upon in determining the dry
whey make allowance in the product-price formulas.
This decision continues to rely on the CPDMP 2006 survey of the
average manufacturing cost to produce a pound of dry whey. Relying
solely on the CPDMP 2006 survey is identical to the approach used in
determining the make allowance for dry whey used in the Class III price
formula effective March 1, 2007. The 2006 survey value of $0.1976 plus
a marketing cost adjustment of $0.0015 yields a dry whey make allowance
of $0.1991 per pound.
An issue was raised by Twin County in its brief concerning an
alleged differential impact on small and large businesses if make
allowances or Class III and IV price formulas are amended. However, the
purpose of the Class III and IV price formulas and make allowances is
to set individual minimum class prices for the Federal milk order
program on a national basis.
Butterfat Yield Factor
A proposal, published in the hearing notice as Proposal 6, was
included in a package of proposals advanced by DPNM seeking to amend
the product-price formulas to more accurately capture the use of modern
manufacturing technology and its impact on milk value. A portion of
Proposal 6 seeks to amend the butterfat yield factor in the butterfat
price formula from 1.20 to 1.211 to account for what DPNM and other
participants in this proceeding characterized as a misapplication of
farm-to-plant shrinkage when the Class III and Class IV product-price
formulas were adopted in November 7, 2002 (67 FR 67906), and became
effective on April 1, 2003 (68 FR 7063).\8\
---------------------------------------------------------------------------
\8\ Official notice is taken of 67 FR 67906, published November
7, 2002, and 68 FR 7063, effective April 1, 2003.
---------------------------------------------------------------------------
Specifically, DPNM explained that the butterfat recovery factor of
1.20 used in the butterfat pricing formula was the result of the
incorrect application of the butterfat shrinkage factor of 0.015
percent on a per pound of butterfat basis rather than on a per cwt
basis. As explained by DPNM, the shrinkage factor was, however,
properly applied to the butterfat adjustment portion of the protein
price formula. Correction of this mathematical error removes this
inconsistency between the butterfat pricing formula and the protein
price formula.
This decision agrees with DPNM and others who support correction of
this error. In the 2002 final decision adopting the butterfat yield of
1.20, USDA correctly explained that when accounting for the farm-to-
plant loss of milk, there is a 0.25 percent butterfat loss per pound of
butterfat, plus an additional loss of 0.015 pounds per cwt of milk.
However, when mathematically accounting for the loss in the price
formulas, the additional 0.015 pound of loss was applied on a per pound
of butterfat basis. This decision corrects that error and proposes to
permanently adopt a butterfat yield of 1.211.
Opponents of amending this factor do not dispute that the 1.20
butterfat yield factor used in the pricing formulas was in error.
Rather, opposition rests on the premise that manufacturing processors
are already paying too much for raw milk and they attribute this to the
in-plant shrinkage of butterfat that cannot be processed into a
finished product. Furthermore, adopting the 1.211 factor would result,
all other factors unchanged, in a higher minimum price for raw milk.
This decision rejects such arguments. The arguments are based on an
unwanted outcome and not on the basis of the proper application of this
factor. The other features of Proposal 6 are not proposed to be adopted
and those features are discussed later in this decision.
Other proposals considered in this proceeding address the three
major elements of the product-price formulas--end-product prices used
in the formulas, manufactured product yield factors and other intra-
formula cost factors. A proposal (Proposal 18) advanced to establish an
alternative approach to determining prices of raw milk by attempting to
develop a competitive pay price also is considered.
Product Yields and Butterfat Recovery Percentage
A package of proposals, advanced by DPNM, seek to amend the
product-price formulas to capture the use of more modern manufacturing
technology and its impact on milk value (Proposals 6, 7, and 8). As
already discussed, a part of Proposal 6 seeking to amend the butterfat
yield factor in the butterfat price formula from 1.20 to 1.211 is
proposed to be permanently adopted.
[[Page 9273]]
However, Proposal 6 also seeks to increase the butterfat recovery
percentage in the protein price formula from 90 percent to 94 percent.
The argument for increasing this factor is that new cheese
manufacturing technology has increased the amount of butterfat that
manufacturers can potentially recover when making cheese. A 94 percent
recovery rate also will increase the blend price paid to producers by
$0.07 per cwt.
Opponents to increasing the butterfat recovery rate, including LOL,
NDA, Sorrento, Leprino, MMPA, and H. P. Hood presented evidence
countering the DPNM claim that a butterfat recovery in excess of 90
percent is achievable industry-wide. Many manufacturer witnesses
testified that their butterfat recovery percentage in cheese is, on
average, 90 percent.
While the record contains evidence of what butterfat recovery rate
in cheese production is possible through the use of more modern
manufacturing methods and technology, the preponderance of evidence
reflects that many cheese manufacturers generally achieve butterfat
recovery near 90 percent. DPNM et al. failed to make a compelling
argument for an increase in the butterfat recovery rate in their
exceptions to the tentative partial final decision. While they did
offer several references to articles published by dairy scientists
providing examples of cheese yields with higher butterfat retention
rates, they did not provide examples of manufacturing facilities
currently experiencing those higher rates. Furthermore, the use of
advertisements claiming that a specific cheese vat will result in
higher butterfat retention rates does not merit the conclusion that
those rates are, on average, achieved. It is important that the
product-price formulas reflect current plant conditions, not plant
conditions that may be possible but not reflective of general industry
wide conditions. Accordingly, this final decision continues to reject
adoption of this feature of Proposal 6.
Proponents also commented that plants whose butterfat recovery rate
is greater than 90 percent are not paying for all of the protein used
to make cheese. This final decision rejects that assertion. All of the
protein contained in producer milk, regardless of if its end use in
cheese or in the whey stream, is priced at the protein price. The
protein price is not reduced to reflect a lower value for the protein
in the whey stream.
A second proposal of the DPNM package of proposals, Proposal 7,
seeks to eliminate the farm-to-plant shrink adjustment factors in the
Class III and Class IV product-price formulas. The argument by
proponents is that modern measurement and milk-handling techniques, and
the trend of transporting full loads of milk from single producers
negate the need to retain the shrinkage adjustment factors. Opponents
argue that in many marketing areas, milk shipments are commonly
assembled from multiple farms and some farm-to-plant shrinkage is
inevitable.
Record evidence supports concluding that farm-to-plant shrinkage
remains a reality for manufacturers. Numerous witnesses testified
regarding actual average farm-to-plant shrinkage experienced at their
plants: LOL (0.343 percent); MMPA (0.3 percent); Leprino (0.25
percent); and HP Hood (1.5 percent including in-plant losses). While
DPNM argued at the hearing and in its exceptions that its members'
farm-to-plant shrinkage is well below the 0.25 percent contained in the
Class III and Class IV product-price formulas, no evidence was offered
for examination as an alternative other than its elimination.
Furthermore, while proponents assert that shipping full tanker loads of
milk is common in the southwest where they operate, record evidence
does not demonstrate this reality in the rest of the country.
This final decision continues to find that the Class III and Class
IV product-price formulas should recognize the loss of milk that occurs
when milk is moved from the farm to a receiving plant. Record evidence
demonstrates that farm-to-plant shrinkage occurs, for example, from
imprecise stick readings and sampling at the farm or from product
remaining on tanker walls after emptying the load at the plant. In most
cases, producers are paid based on farm weights and tests, in which
case the handler pays for product that is not ultimately received. It
is therefore reasonable when determining component prices charged to
handlers to make an adjustment for the lost product. The 0.25 percent
shrinkage factor contained in the formulas is a reasonable factor that
represents the loss of producer milk when shipped from farm-to-plant.
Accordingly, Proposal 7 is not proposed to be adopted.
A third proposal of the DPNM package of proposals, Proposal 8,
seeks to increase the nonfat solids (NFS) yield factor in the Class IV
product price formula and the yield factors for protein and butterfat
in the protein price formula components of the Class III product-price
formula. Proponents computed the proposed conversion factors to be used
in the protein price formula by assuming: a) that the percentage of
casein in true protein is actually 83.25 percent (resulting in a cheese
yield per pound of protein of 1.405); b) the butterfat recovery rate in
cheese is 94 percent (resulting in a cheese yield per pound of
butterfat of 1.653); and c) that average producer tests should be used
in the price formulas (resulting in a fat to protein ratio of 1.214).
The conversion factor for computing the nonfat solids should be 1.02
based on actual nonfat dry milk yield per pound of nonfat solids.
Opponents counter that the methodology used to derive the proposed
yield factors are flawed and that no actual studies were offered to
support their conclusion that product yields are higher than those
currently provided in the formulas. This final decision continues to
find no record evidence to support amending the yield factors as
proposed in Proposal 8.
Despite comments to the tentative partial final decision by DPNM et
al., record evidence does not support making changes to the yield
factors in the protein price formula. Proponents continue to argue that
based on producer tests, the actual percentage of casein in true
protein is 83.25 percent. The formulas currently assume that the
percentage of casein in true protein is 82.2 percent. This factor,
adopted in 2002 (67 FR 67928),\9\ was based on evidence provided at
that proceeding by a university researcher whose studies demonstrated a
casein in true protein range of 82.2 percent to 82.4 percent. The
record of this proceeding does not contain data from any studies that
would indicate that the casein in true protein percentage has
increased. Accordingly, this decision does not propose increasing the
percentage of casein in true protein to 83.25.
---------------------------------------------------------------------------
\9\ Official notice is taken of 67 FR 67928, published November
7, 2002.
---------------------------------------------------------------------------
In their exceptions DPNM et al. reiterated its arguments that a
butterfat recovery rate of 94 percent should be adopted. Its adoption
would result in an increase in the cheese yield per pound of butterfat
to 1.653. This final decision has already discussed why a 94 percent
butterfat recovery rate is not proposed to be adopted. Consequently,
the butterfat yield factor in the protein formulas is not amended.
Proposal 8 also seeks to increase the fat-to-protein ratio in the
protein formula to 1.214. Proponents claim that the increased ratio
reflects the use of average producer milk tests of 3.04 percent true
protein and 3.69 percent butterfat. The current ratio of 1.17 was
computed using standardized milk tests
[[Page 9274]]
of 2.9915 percent true protein and 3.5 percent butterfat. Record
evidence does not support using average producer tests in determining
yield factors. Proponents claim that other yield factors were
determined using average producer tests. This statement is incorrect.
Other yield factors in the product price formulas take into account the
amount of the component in the product; there is no consideration of
average producer tests. For example, the yield factor in the butterfat
price formula is 1.211. This value was derived from the percentage of
butterfat in butter, and was later adjusted for farm-to-plant
shrinkage. Weighted average producer tests have no bearing on this
yield number. This final decision continues to find that increasing the
fat-to-protein ratio to account for weighted average producer tests is
not justified.
The last portion of Proposal 8 seeks to increase the nonfat solids
yield factor from .99 to 1.02. DPNM et al. claims that it is impossible
for 1 pound of solids nonfat to yield less than one pound of nonfat dry
milk. In their exceptions, DPNM et al. claims that the California milk
pricing formulas actually use a yield factor of 1.02. According to a
December 2007 California Milk Pricing Formulas publication release by
CDFA, California price formulas utilize a nonfat solids yield factor of
1.\10\ The .99 yield factor currently contained in the nonfat solids
price formula was adopted on April 1, 2003 (68 FR 7063).\11\ This
factor was reduced from 1.02 to account for farm-to-plant shrinkage.
USDA continues to find it appropriate to acknowledge farm-to-plant
shrinkage in the product price formulas. Therefore, the nonfat solids
yield factor is unchanged.
---------------------------------------------------------------------------
\10\ Official notice is taken of ``California Milk Pricing
Formulas'', December 2007, Dairy Marketing Services Branch,
California Department of Agriculture: https://www.cdfa.ca.gov/dairy/pdf/steps_for_calc_minprices.pdf.
\11\ Official notice is taken of 68 FR 7063, February 12, 2003.
---------------------------------------------------------------------------
Value of Butterfat in Whey
Two proposals advanced by IDFA and Agri-Mark, Proposals 9 and 10
respectively, seek to change the protein price formula feature of the
Class III product-price formula by reducing the protein price to
reflect the lower market value of whey cream. Proposal 9 also seeks to
further lower the protein price to reflect the reduced recoverable
volume of whey cream in the cheese making process. (During the
proceeding Agri-Mark withdrew its support of Proposal 10 in support of
IDFA's Proposal 9.) The argument for seeking these changes is that that
the volume of milkfat contained in whey cream is currently valued at
the Grade AA butter price but can only be sold as whey butter (Grade B
butter) or for other uses with values below the Grade AA butter price.
Record evidence does indicate that Grade B is often marketed to
commercial food service establishments such as bakeries and is marketed
at a discount to the Grade AA butter price. Some hearing participants
(NAJ) suspect that the volumes of whey cream produced and the extent of
a secondary market for whey butter are relatively small. Record
evidence contains very limited data regarding plant sales of whey cream
or Grade B butter. More importantly, there is no known publically
available data for U.S. market prices and volumes of whey cream or
Grade B butter produced or sold.
Opponents (Dairylea et al.) to IDFA's proposal acknowledge that
while whey cream does have a lower value than that reflected in the
Grade AA butter price, other higher-value uses for whey cream exist
that also are not recognized. Opponents argue that it would be
inappropriate to amend the butterfat value to reflect a selected
measure of whey cream value while not considering whey cream value in
other (possibly higher-value) uses.
After considering the comments and exceptions to the tentative
partial final decision for reducing the protein price to reflect the
lower market value of whey cream, this decision continues to reject
this proposal. Whey cream may have a lower market value, but without
publicly available market data that provides whey cream volumes and
prices, no reasonable and objective means is available to determine if
or how whey cream is distorting the protein price formula feature
contained in the Class III product-price formula. Supporters of
Proposal 9 did not offer market information that could be relied upon
as a basis for changing the protein price. While there is record
evidence from some manufacturers as to their individual saleable
volumes and values of whey cream, that limited data does not provide
for a reasonably complete assessment of the national market for whey
cream and its various competing uses. The lack of verifiable data
concerning whey cream and/or its applicability to any additional costs
or value loss experienced by cheese manufacturers across the industry
is unknown. Accordingly, Proposals 9 and 10 are not proposed to be
adopted.
Barrel-Block Cheese Price Spread
Proposal 12 offered by IDFA and supported by Leprino, DFA, NDA,
Agri-Mark, and others, seeks to eliminate the 3-cent addition to the
barrel price in the protein price formula. The argument for elimination
from the protein price formula is that the average price difference
between block and barrel cheese was 3-cents when first incorporated
into the formula but now there is virtually no difference in the
packaging costs of blocks and barrels. Proponents also argue that even
if there were a cost difference, that difference would have been
captured in the CPDMP 2006 survey of manufacturing costs. Other
proponents add to the argument that after the NASS barrel cheese price
was adjusted from 39 percent to 38 percent moisture content in January
2001, the price difference between barrels and blocks has averaged
$0.008 per pound.
The record contains only one cheese manufacturer's (Davisco)
specific packaging cost data for a single plant located in Minnesota
that produces cheese in both blocks and barrels. That plant's average
packaging cost for block cheese was $0.0012 per pound more than for
barrels. Another cheese manufacturer (Twin County) producing cheese
exclusively in barrels in Iowa was unable to indicate whether it was
advantageous to their business to support or oppose any change in the
3-cent adjustment advanced in Proposal 12.
This final decision does not support adoption of Proposal 12. The
argument that any packaging cost differences that exist between barrel
and block cheese is captured in the CPDMP 2006 survey is inadequately
supported. The record reveals that all packaging costs reported in the
CPDMP 2006 survey were for 40-pound block cheese production. If a
surveyed plant produced barrel cheese, an average packaging cost for
40-pound blocks was assigned to the plant.
Additionally, proponents assert that since the price difference
between blocks and barrels is almost zero, it can be concluded that
that any packaging cost difference must also be nearly zero. This
decision does not find a causal relationship between selling prices and
manufacturing costs. Even though the price spread between blocks and
barrels has narrowed over time and recently averaged near zero, the
cost difference between block and barrel packaging cannot be assumed to
also be zero. Blocks and barrels have different supply and demand
functions. Comparing average prices over a period of time does not
therefore automatically reflect cost differences. Since barrel cheese
prices exceed block cheese prices at certain times, due to different
supply and demand curves, average prices will not in and of themselves
indicate cost
[[Page 9275]]
differences. While the record contains packaging cost information for a
single plant that suggests similar packaging costs of barrel and block
cheese, such evidence is insufficient to conclude that this is
representative across Federal order manufacturing plants or should be
the basis for adopting the proposal. Accordingly, Proposal 12 is
denied.
The proposal by DFA and NDA, Proposal 13, seeks to eliminate the
cheese barrel price from the protein price formula feature of the Class
III product-price formula but no testimony was given in support of this
proposal. In addition to NDA proponent support during the hearing and
DFA opposition to the adoption of the proposal in their post-hearing
brief, significant opposition from others was given. Opponents argue
that because barrel cheese represents roughly half of the NASS price
survey cheese volume (now captured in the AMS survey), removing the
barrel price from the protein price formula would greatly reduce the
total AMS survey volume thereby making the price survey less
representative of the cheddar cheese market.
This final decision continues to find that retaining the cheese
barrel price in the protein price formula is necessary to ensure that
the protein price is representative of the national cheese market. The
Class III product-price formula needs to be reasonably representative
of the market for cheese that determines the value of milk. Record
evidence reveals that barrel production in the AMS survey is often in
excess of 50 percent of the total cheese volume surveyed. Eliminating
the barrel price from the protein price formula would significantly and
needlessly reduce the volume of cheese used in the Class III product
price formula which could lead to protein prices that are not as
representative of the national cheese market. Accordingly, Proposal 13
is not proposed to be adopted.
Product Price Series
Proposal 14, advanced by Agri-Mark, seeks to change the price data
used in the Class III and protein price formula by combining the NASS
price survey data for cheddar cheese (now the AMS price survey data for
cheddar cheese) with the weekly average CME cheese prices as a method
that results in a superior benchmark price for cheese. The argument
rests on the assertion that the 2-week timing difference, or lag,
between the CME price and the AMS price survey for cheese fails to
capture changes in market prices in the current value of cheese and the
near-actual Class III value. The proponent also argues that adoption of
this new price series would reduce price volatility and provide more
up-to-date market information than that provided by the AMS price
survey. In other words, more current market information would be
transmitted through minimum Class III prices and provide more accurate
pricing signals to processors and producers.
Opponents to adoption of Agri-Mark's Proposal 14, including IDFA
and its members, collectively argue that combining the CME price with
the AMS price would reduce the usefulness of currently available risk
management tools. These tools include the use of futures contracts and
the use of forward contracts. Opponents also note that (1) the CME is a
spot market representing only about 4.1 percent of all cheddar cheese
traded and is not representative of cheese being more commonly produced
and marketed on a longer-term contract basis, (2) it adds a degree of
complexity to a pricing-formula which is already too complex without
any discernible benefit and (3) its adoption would tend to bias price
reporting to the market conditions of the Chicago area. All comments to
the tentative partial final decision regarding Proposal 14 supported
USDA's denial of the proposal.
It is reasonable to expect that adding a degree of complexity may
tend to reduce transparency and lessen the understanding of the Class
III and Class IV product-price formulas. Other than assertions by the
proponent, the record lacks evidence that combining CME prices with AMS
survey prices would improve price discovery or market information or
would offer superior transmission of economic signals through the
minimum Class III price.
In addition, rulemaking action on mandatory product price reporting
overtakes the need to consider adoption of a new price series that
combines CME prices with AMS survey prices. Improved mandatory price
reporting that provides for the auditing of prices reported to AMS
makes the accuracy, but not the timing, of price data less of an issue
than envisioned throughout this proceeding. Accordingly, Proposal 14 is
not proposed to be adopted.
A proposal advanced by DPNM, Proposal 15, seeking to replace the
AMS price series for cheese with the CME price has similarities to that
of Proposal 14. It seeks to eliminate the 2-week lag between CME prices
and AMS price reporting. DPNM has argued throughout this rulemaking
proceeding that the use of CME prices in the price formula for cheese
would provide producers, marketers and manufacturers of cheddar cheese
with more timely and transparent prices as the CME represents actual
current cheese prices.
In opposition to the adoption of Proposal 15, the opponents,
including IDFA, NDA, Agri-Mark and DFA, as in their opposition to the
adoption of Proposal 14, argue that (1) The CME is too thin a market to
be relied upon for use in the Class III product-price formula, (2) the
CME represents only about 4.1 percent of all cheddar cheese traded, (3)
its exclusive use would tend to bias and limit the price reporting for
cheese to the market conditions of the Chicago market, and (4) being a
spot market for cheese, the CME ignores other sales agreements and
marketing arrangements that account for more than 95 percent of the
cheese marketed and largely captured in the AMS price survey.
This final decision continues to find that cheese prices used in
product-price formulas should reflect broad markets and not rely
exclusively on a smaller subset of cheese prices and spot marketing
conditions as represented by the CME. The record also makes clear that
more industry confidence is placed in AMS price surveys than in spot
market prices for cheese. Accordingly, Proposal 15 is not adopted.
Other Solids Price
Proposal 16, advanced by NAJ, seeks to eliminate the other solids
price and expand the protein price formulas to include the value of dry
whey because, according to NAJ, the value of whey lies in its protein
content. The proponent asserts that the other solids price formula does
not connect the market value of whey solids to how producers are paid
for whey. Therefore, the proponent advocates that the value of dry whey
in the price formulas be determined on the basis of its protein content
which will make the other solids price formula no longer necessary.
IDFA and other opponents argue that it would be inappropriate to
value dry whey on a component (protein) that has no measurable effect
on the product yield. Except for comments filed by the proponent,
comments filed by both producer and manufacturer groups in response to
the tentative partial final decision expressed opposition to the
adoption of Proposal 16.
This decision continues to find that Proposal 16 would add no
additional value arising from protein to the marketwide pool. It would
simply shift the money attributed to other nonfat solids into the
protein price formula and add a level of complexity to the product
[[Page 9276]]
price formulas that would yield no measurable benefit.
Record evidence regarding Proposal 16 does not support eliminating
the other nonfat solids prices and shifting the value of dry whey into
the protein price formula. Other solids in milk are composed primarily
of lactose, whey protein, ash and other non-protein solids. Numerous
component markets, such as lactose and dry whey, were evaluated during
Federal order reform to determine an appropriate market to base the
other solids price. It was determined that because no reliable lactose
market existed, the dry whey market was the next best alternative. At
this time, there is still no reliable market for lactose on which the
other solids price could be based. Therefore, this final decision finds
that dry whey, despite the opinion of NAJ, remains the most relevant
market on which to base the other solids price. Accordingly, Proposal
16 is not adopted.
Competitive Price Series
Proposal 18, advanced by the Maine Dairy Industry Association
(MDIA), seeks to determine Class III and Class IV prices with a
competitive pay price series rather than the current product-price
formulas. The proposal seeks a return to a competitive pay price used
by the FMMO program prior to 2000. The proponent argues that adoption
of the proposed competitive pay price series would eliminate the need
for establishing make allowances that, when increased, reduce prices
received by dairy farmers.
A competitive pay price series previously existed for nearly 40
years and provided the foundation for all classified prices set in the
system of milk marketing orders. A competitive pay price series would
negate the need to directly consider manufacturing costs and other
factors such as product yields and their relationship in deriving the
value of raw milk.
However, there are many details that need resolution before the
FMMO program could return to using a competitive pay price series. For
example, the proposed method is based on geographic areas (zones)
wherein strong competition for raw milk prevails. A competitive pay
price would be derived by averaging prices from all the competitive
price zones. As conceded by the proponent, these areas would most
likely be surrounded by Federal milk marketing areas where minimum
classified prices prevail. Milk prices within the competitive price
zones would therefore be influenced by milk priced under adjoining
Federal orders. Other considerations, including an accounting of
various forms of in-kind payments to producers, also need to be
addressed. Ignoring consideration of such payments would allow plants
to increase (decrease) their hauling charges as a way of reducing
(increasing) the actual pay price to dairy farmers.
Therefore, this final decision finds that Proposal 18 cannot be
implemented as proposed and is herein denied
B. Termination of a Portion of the Proceeding
Proposal 2, offered by Agri-Mark, proposed to amend the Class III
and Class IV product formulas to annually update the manufacturing
allowances using an annual manufacturing cost survey of cheese, whey
powder, butter and non-fat dry milk plants. The proposal would give
authority for selecting the sample and conducting the survey to the
market administrators. The manufacturing cost data would then be used
to update manufacturing allowances to prescribed levels. On brief,
Agri-Mark withdrew the automatic-updating portion of the proposal.
The record of hearing reflects a mixture of support and opposition
to this proposal. This wide variance in industry response clearly
demonstrates a lack of unity and policy direction. Opposition to
Proposal 2 tended to stem primarily from the implementation of an
automatic adjuster to manufacturing allowances, which was subsequently
withdrawn by Agri-Mark. However, amongst supporters there was a clear
lack of consensus as to how and by whom the survey should be
implemented, what regions should comprise the survey sample, and
specifics as to how the survey data were to be used. The only clear
assertion made by the record was that some participants supported
establishing a manufacturing cost survey.
Proposal 17, advanced by NMPF, would have amended the Class III and
Class IV product price formulas to incorporate a monthly energy cost
adjustment based on monthly changes in the producer price indices for
industrial natural gas and electricity as published by the Bureau of
Labor Statistics. Proponents argued that the implementation of an
energy price adjuster would update make allowances in response to
fluctuating energy prices. As mentioned earlier, this proposal was
broadly supported by producer organizations, many of which manufacture
NFDM and dry whey. These two products, in particular, require the use
of energy-consuming driers in their production processes.
Opponents to Proposal 17 were overwhelmingly manufacturers of dairy
products. They argued that the inclusion of an energy cost adjuster in
the make allowance would complicate the milk pricing system and reduce
the effectiveness of certain risk management tools.
Proposal 20, advanced by Dairylea, would amend the Class III and
Class IV product price formulas by establishing cost-of-production add-
ons that manufacturers could include in the selling price of their
products, but which would not be included as part of the NASS (now AMS)
dairy product price survey. Proponents noted that increases in
wholesale prices on dairy products are captured by product price
surveys and subsequently drive up the costs of raw milk, through higher
Class III and Class IV prices. The proposed mechanism, they argued,
would break the existing price circularity, allowing processors to
increase wholesale prices without affecting input costs.
Opponents, many of whom are dairy processors, argued that it would
be difficult to negotiate cost add-ons with wholesalers. Those handlers
unable to successfully negotiate a higher cost add-on would be limited
to the cost allowance included in the manufacturing allowance.
Similarly, handlers operating outside of the Federal order system could
potentially gain market share over regulated competitors. Additionally,
opponents noted, the implementation of a cost add-on would further
complicate the existing price discovery mechanism used by the Federal
order system.
In the time following the implementation of the interim final rule
(73 FR 44617), the Department received a request, which has been made
part of the Official Record, from the Greater Northeast Milk Marketing
Agency (GNEMMA) to finalize those proposals from this proceeding
implemented on an interim basis and terminate the remainder (Proposals
2, 17 and 20). GNEMMA is a marketing agency in common comprised of:
Agri-Mark, Inc.; Dairy Farmers of America, Inc.; Dariylea Cooperative,
Inc.; Dairy Marketing Services, LLC; Land O'Lakes, Inc.; Maryland and
Virginia Milk Producers Cooperative Association, Inc.; St. Albans
Cooperative Creamery, Inc.; and Upstate Niagara Cooperative, Inc.
GNEMMA members market in excess of 64 percent of all milk in the
Northeast milk marketing area. The petitioners argue that certain
market conditions have changed in the time since the hearing and
certain data reflected in the record of hearing in regards to Proposals
2, 17 and 20 are no longer valid.
[[Page 9277]]
Other proposals proposed to be permanently adopted by this decision
have already been implemented on an interim basis. This decision
continues to support their adoption, and in essence the status quo.
While evidence regarding Proposals 2, 17 and 20 was collected
during the hearing, the Department has never issued a decision on their
merits. The hearing was initially held in 2007. The hearing record
reflects marketing conditions at that time. Marketing conditions since
the 2007 hearing have changed. Accordingly, given these circumstances,
it is reasonable to terminate the proceeding in regards to Proposals 2,
17 and 20 in their entirety.
In view of the foregoing, it is hereby determined that the
proceeding with respect to Proposals 2, 17 and 20 should be and are
hereby terminated.
Rulings on Motions
A motion for official notice of a publication \12\ and a final
decision \13\ by the CDFA was submitted by Agri-Mark et al. joined by
Twin County Dairy, Inc., (Twin County) and supported by IDFA. This
decision takes official notice of these publications.
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\12\ California Department of Food and Agriculture: Summary of
Weighted Average Manufacturing Costs, Butter, Nonfat Dry Milk,
Cheddar Cheese, and Dry Whey Powder, Released September 18, 2007.
\13\ California Department of Food and Agriculture: Final
Results for Class 4a and 4b Pricing Formula Hearing of October 10,
2007, released November 20, 2007.
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In their comments to the tentative partial final decision, Agri-
Mark et al. and Twin County also filed a motion for official notice of
specific energy price statistics and projections of the U.S. Department
of Labor and the U.S. Department of Energy. This motion was supported
by IDFA. The motion advocated use of this data for a one-time energy
cost adjustment to the manufacturing allowances adopted in the final
decision. Previous publications of these statistics were officially
noticed during the hearing. This final decision takes official notice
of these publications through March 2009.
A motion and supplemental information in support of the motion
seeking a continuance of the hearing for the limited purpose of
offering additional data and analysis in advancing Proposal 18 were
submitted by MDIA. A counter motion opposed to MDIA's motion was made
by IDFA. Offering new data and analysis by continuing or re-opening the
hearing for the limited purpose of reconsidering Proposal 18 would put
all other hearing participants advancing or opposing proposals during
the proceeding at a disadvantage. This proceeding lasted for 3 weeks
over a 6 month period from February 2007 through July 2007. It also was
preceded by an information session in December 2006. The tentative
final decision found that sufficient time was made available to all
known parties to develop and present noticed proposals and the motion
was denied.
Exceptions to the tentative partial final decision filed by MDIA
requested that USDA reconsider their original motion for a continuance
of the hearing. MDIA argued that because a decision has yet to be
issued on three other noticed proposals, the hearing--in regard to
those proposals--remains open. Therefore, concluded MDIA, USDA has the
latitude to grant MDIA's motion for a continuance on Proposal 18. MDIA
also stated that in denying its first motion, USDA did not give proper
weight to the support for the basic concept of Proposal 18 (a
competitive pay price series) expressed in numerous post-hearing briefs
that were submitted by various hearing participants.
MDIA also took exception with the tentative partial final
decision's characterization that the MDIA's witness conceded problems
with the proposed competitive pay price series. MDIA wrote that
Proposal 18 was designed to be a beginning framework for a functioning
competitive pay price series that would be superior to end-product
pricing formulas. MDIA argued that it intended to use the hearing
process as a method for determining concerns with the proposal and then
recommend to the Department a procedure for further development of the
proposal.
MDIA's motion for a continuance continues to be denied. Though a
continuation might allow for further development of Proposal 18 with
USDA and industry participants, there is a necessity to proceed with
finalizing the rulemaking on the Class III and Class IV price formulas.
While MDIA's motion is denied, this does not prevent future
consideration of a competitive pay price system.
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 Northeast and other marketing orders were
first issued and when they were 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 agreements and the orders, 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 milk in the marketing areas, and the minimum
prices specified in the tentative marketing agreements and the orders,
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 agreements and the orders, 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, marketing
agreements upon which a hearing has been held.
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 is one document: A Marketing
Agreement regulating the handling of milk. The order amending the order
regulating the handling of milk in the Northeast and other marketing
areas was approved by producers and published in the Federal Register
on July 31, 2008 (73 FR 44617), as an Interim Final Rule.
[[Page 9278]]
Both of these documents have been decided upon as the detailed and
appropriate means of effectuating the foregoing conclusions.
It is hereby ordered that this entire final decision and the
Marketing Agreement 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 referenda 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 procedure for the conduct of
referenda (7 CFR 900.300-311), to determine whether the issuance of the
orders as amended and as hereby proposed to be amended, regulating the
handling of milk in the Upper Midwest, Mideast, and Northeast marketing
areas is approved or favored by producers, as defined under the terms
of the orders (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 areas.
The representative period for the conduct of such referenda is
hereby determined to be May 2012.
The agents of the Secretary to conduct such referenda are hereby
designated to be the respective market administrators of the aforesaid
orders.
Determination of Producer Approval and Representative Period for All
Other Orders
May 2012 is hereby determined to be the representative period for
the purpose of ascertaining whether the issuance of the orders, as
amended and hereby proposed to be amended, regulating the handling of
milk in the Appalachian, Florida, Southeast, Central, Pacific
Northwest, Arizona, and Southwest areas is approved or favored by
producers, as defined under the terms of each of these orders 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 areas.
List of Subjects in 7 CFR Part 1000
Milk marketing orders.
Order Amending the Orders Regulating the Handling of Milk in the
Northeast and Other Marketing Areas
This order shall not become effective until the requirements of 7
CFR section 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 orders were first issued and when they
were 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 agreements and to the orders
regulating the handling of milk in the Northeast and other marketing
areas. The hearing was held pursuant to the provisions of the
Agricultural Marketing Agreement Act of 1937, 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 orders 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 orders as hereby amended regulate 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 Northeast and other marketing areas
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
interim amendment of the order issued by the Administrator,
Agricultural Marketing Service, on July 25, 2008, and published in the
Federal Register on July 31, 2008 (73 FR 44617), are adopted without
change and shall be and are the terms and provisions of this order.
[Note: The following will not appear in the Code of Federal
Regulations.]
Marketing Agreement Regulating the Handling of Milk in Certain
Marketing Areas
The parties hereto, in order to effectuate the declared policy of
the Act, and in accordance with the rules of practice and procedure
effective thereunder (7 CFR part 900), desire to enter into this
marketing agreement and do hereby agree that the provisions referred to
in paragraph I hereof, as augmented by the provisions specified in
paragraph II hereof, shall be and are the provisions of this marketing
agreement as if set out in full herein.
I. The findings and determinations, order relative to handling, and
the provisions of Sec. -------- to -------- all inclusive, of the
order regulating the handling of milk in the ------------ marketing
area (7 CFR part --------); and
II. The following provisions: Sec. ------------ Record of milk
handled and authorization to correct typographical errors.
(a) Record of milk handled. The undersigned certifies that he/she
handled during the month of ------------, ------------ hundredweight of
milk covered by this marketing agreement.
(b) Authorization to correct typographical errors. The undersigned
hereby authorizes the Deputy Administrator, or Acting Deputy
Administrator, Dairy Programs, Agricultural Marketing Service, to
correct any typographical errors which may have been made in this
marketing agreement.
[[Page 9279]]
Effective date. This marketing agreement shall become effective
upon the execution of a counterpart hereof by the Department in
accordance with Section 900.14(a) of the aforesaid rules of practice
and procedure.
In Witness Whereof, The contracting handlers, acting under the
provisions of the Act, for the purposes and subject to the limitations
herein contained and not otherwise, have hereunto set their respective
hands and seals.
Signature
By (Name)--------------------------------------------------------------
(Title)----------------------------------------------------------------
(Address)--------------------------------------------------------------
(Seal)
Attest-----------------------------------------------------------------
Dated: February 1, 2013.
David R. Shipman,
Administrator, Agricultural Marketing Service.
[FR Doc. 2013-02623 Filed 2-6-13; 8:45 am]
BILLING CODE 3410-02-P