Milk in California; Proposal To Establish a Federal Milk Marketing Order, 14110-14172 [2018-06167]

Agencies

• Agricultural Marketing Service
• DEPARTMENT OF AGRICULTURE

[Federal Register Volume 83, Number 63 (Monday, April 2, 2018)]
[Proposed Rules]
[Pages 14110-14172]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-06167]



[[Page 14109]]

Vol. 83

Monday,

No. 63

April 2, 2018

Part II





 Department of Agriculture





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Agricultural Marketing Service





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7 CFR Part 1051





 Milk in California; Proposal To Establish a Federal Milk Marketing 
Order; Proposed Rule

Federal Register / Vol. 83 , No. 63 / Monday, April 2, 2018 / 
Proposed Rules

[[Page 14110]]


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DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Part 1051

[Doc. No. AO-15-0071; AMS-DA-14-0095]


Milk in California; Proposal To Establish a Federal Milk 
Marketing Order

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Proposed rule; order for referendum; notice of public meeting.

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SUMMARY: The Agricultural Marketing Service (AMS) proposes the issuance 
of a Federal Milk Marketing Order (FMMO) regulating the handling of 
milk in California. This proposed rule proposes adoption of a 
California FMMO incorporating the entire state of California and would 
adopt the same dairy product classification and pricing provisions used 
throughout the current FMMO system. The proposed California FMMO 
provides for the recognition of producer quota as administered by the 
California Department of Food and Agriculture. This proposed FMMO is 
subject to producer approval by referendum.

DATES: The Agricultural Marketing Service (AMS) will conduct a public 
meeting at 9:00 a.m. on April 10, 2018, to explain and answer questions 
relating to how the proposed California FMMO contained in this proposed 
rule, if adopted, would operate and review the producer referendum 
process that will be followed to obtain producer approval of the 
proposed rule.

ADDRESSES: The public meeting will be held at the Clovis Veterans 
Memorial District Building, 808 Fourth Street, Clovis, California 
93612. Meeting information can be found at www.ams.usda.gov/caorder.

FOR FURTHER INFORMATION CONTACT: Erin Taylor, Acting Director, Order 
Formulation and Enforcement Division, USDA/AMS/Dairy Program, STOP 
0231, Room 2969-S, 1400 Independence Ave. SW, Washington, DC 20250-
0231, (202) 720-7311, email address: [email protected].

SUPPLEMENTARY INFORMATION: This proposed rule, in accordance to 7 CFR 
part 900.13a, is the Secretary's final decision in this proceeding and 
proposes the issuance of a marketing order as defined in 7 CFR part 
900.2(j). AMS finds that a FMMO for California would provide more 
orderly marketing conditions in the marketing area, warranting 
promulgation of a California FMMO. The record is replete with 
discussion from most parties on whether disorderly marketing conditions 
exist, or are even needed, to warrant promulgation of a California 
FMMO. FMMOs are authorized by the Agricultural Marketing Agreement Act 
of 1937, as amended (7 U.S.C. 601-674 and 7253) (AMAA). The declared 
policy of the AMAA makes no mention of ``disorder,'' and AMS finds that 
disorderly marketing conditions are not a requirement for an order to 
be promulgated. The standard for FMMO promulgation is to ``. . . 
establish and maintain such orderly marketing conditions . . . ,'' (7 
U.S.C. 602(4)) and AMS finds that the proposed California FMMO meets 
that standard.
    AMS has considered all record evidence presented at the hearing. 
Pursuant to a February 14, 2018 Memorandum from Secretary of 
Agriculture Sonny Perdue, Judicial Officer William Jensen conducted an 
independent de novo review of the hearing record. The Judicial Officer 
issued an Order on March 9, 2018 whereby he ratified all decisions and 
rulings made by Administrative Law Judge (ALJ) Jill Clifton during the 
hearing. The Judicial Officer ratified ALJ Clifton's Certification of 
the Transcript, except that he revised the list of exhibits that ALJ 
Clifton identified as not having been admitted into evidence by adding 
``Exhibit 108-Exhibit D'' to that list. AMS has also considered the 
arguments and proposed findings submitted in post-hearing briefs, 
officially noticed documents, and comments and exceptions filed in 
response to the recommended decision to formulate this proposed FMMO. 
The regulatory provisions proposed herein reflect California marketing 
conditions, while adhering to fundamental FMMO principles that have 
historically helped to maintain orderly marketing conditions, ensured a 
sufficient supply of pure and wholesome milk, and been in the public 
interest.
    A FMMO is a regulation issued by the Secretary of Agriculture that 
places certain requirements on the handling of milk in the area it 
covers. Each FMMO is established under the authority of the AMAA. A 
FMMO requires handlers of milk for a marketing area to pay minimum 
class prices according to how the milk is used. These prices are 
established under each FMMO after a public hearing where evidence is 
received on the supply and demand conditions for milk in the market. A 
FMMO requires that payments for milk be pooled and paid to individual 
farmers or cooperative associations of farmers on the basis of a 
uniform or average price. Thus, all eligible dairy farmers (producers) 
share in the marketwide use-values of milk by regulated handlers.
    AMS proposes the establishment of a FMMO in 7 CFR part 1051 to 
regulate the handling of milk in California. Where appropriate, AMS 
proposes the adoption of uniform provisions found in 7 CFR part 1000 
that are have been adopted into the 10 current FMMOS established in 
chapter X. These uniform provisions include, but are not limited to, 
product classification, end-product price formulas, Class I 
differential structure, and the producer-handler definition.\1\ This 
decision recognizes the unique market structure of the California dairy 
industry through tailored performance-based standards to determine 
eligibility for pool participation.
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    \1\ References to Class I, Class II, Class III and Class IV 
refer to products classified in those classes based on uniform FMMO 
provisions.
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    As in all current FMMOs, California handlers regulated by a 
California FMMO would be responsible for accurate reporting of all milk 
movements and uses, and would be required to make timely payments to 
producers. The California FMMO would be administered by the United 
States Department of Agriculture (USDA) through a Market Administrator, 
who would provide essential marketing services, such as laboratory 
testing, reporting verification, information collection and 
publication, and producer payment enforcement.
    A unique feature of the proposed order is a provision for the 
recognition of the quota value specified in the California quota 
program currently administered by the California Department of Food and 
Agriculture (CDFA). AMS finds that the California quota program should 
remain a function of CDFA in whatever manner CDFA deems appropriate. 
Should CDFA continue to use producer monies to fund the quota program, 
AMS finds that the proper recognition of quota values within a 
California FMMO, as provided for in the Agriculture Act of 2014 (2014 
Farm Bill) (Pub. L. 113-79, sec. 1410(d)), is to permit an authorized 
deduction from payment to producers, in an amount determined and 
announced by CDFA.
    In conjunction with this proposed FMMO, AMS conducted a Regulatory 
Economic Impact Analysis to determine the potential impact of 
regulating California milk handlers under a FMMO on the milk supply, 
product demand and prices, milk allocation in California and throughout 
the United States, and impacts to consumers. As part of the

[[Page 14111]]

analysis, a regional econometric model was used to project deviations 
from the USDA Agricultural Baseline Projections to 2026 \2\ under the 
provisions of the proposed California FMMO. The full text of the 
Regulatory Economic Impact Analysis Report and accompanying 
documentation may be accessed at www.regulations.gov or 
www.ams.usda.gov/caorder.
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    \2\ Official Notice is taken of: U.S. Department of Agriculture, 
Office of the Chief Economist, World Agricultural Outlook Board, 
Interagency Agricultural Projections Committee, 2016, Long-term 
Projections Report OCE-2016-1.
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    Prior documents in this proceeding:
    Notice of Hearing: Issued July 27, 2015; published August 6, 2015 
(80 FR 47210);
    Notice To Reconvene Hearing: Issued September 25, 2015; published 
September 30, 2015 (80 FR 58636);
    Recommended Decision and Opportunity To File Written Exceptions: 
Issued February 6, 2017; published February 14, 2017 (82 FR 10634);
    Documents for Official Notice: Issued August 8, 2017; published 
August 14, 2017 (82 FR 37827); and
    Submission for OMB Review: Information Collection--Producer 
Ballots: Issued September 27, 2017; published October 2, 2017 (82 FR 
45795);
    Delay of Rulemaking: Issued February 1, 2018; published February 6, 
2018 (83 FR 5215);
    Ratification of Record: Issued March 14, 2018; published March 19, 
2018 (83 FR 11903).
    This proposed rule is governed by the provisions of Sections 556 
and 557 of Title 5 of the United States Code and is therefore excluded 
from the requirements of Executive Order 12866.
    This proposed rule is not expected to be an Executive Order 13771 
regulatory action because this proposed rule is not a significant 
regulatory action under Executive Order 12866.
    The provisions of this proposed rule have been reviewed under 
Executive Order 12988, Civil Justice Reform. They are not intended to 
have a retroactive effect. If adopted, the proposed FMMO would not 
preempt any state or local laws, regulations, or policies, unless they 
present an irreconcilable conflict with this rule.
    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.
    The AMAA provides that administrative proceedings must be exhausted 
before parties may file suit in court. Under 7 U.S.C. 608c(15)(A) of 
the AMAA, any handler subject to an order may request modification or 
exemption from such order by filing with USDA a petition stating that 
the order, any provision of the order, or any obligation imposed in 
connection with the order is not in accordance with the law. A handler 
is afforded the opportunity for a hearing on the petition. After a 
hearing, USDA would rule on the petition. The AMAA provides that the 
district court of the United States in any district in which the 
handler is an inhabitant, or has its principal place of business, has 
jurisdiction in equity to review USDA's ruling on the petition, 
provided a bill in equity is filed not later than 20 days after the 
date of the entry of the ruling.

Civil Rights Impact Analysis

    AMS has reviewed this proposed rule in accordance with Departmental 
Regulation 4300-4--Civil Rights Impact Analysis (CRIA), to identify and 
address potential impacts the proposal might have on any protected 
groups of people. After a careful review of the proposed rule's intent 
and provisions, AMS has determined that this proposed rule, if adopted, 
would not limit or reduce the ability of individuals in any protected 
classes to participate in the proposed FMMO, or to enjoy the 
anticipated benefits of the proposed program. Any impacts on dairy 
farmers and processors arising from implementation of this proposed 
rule are not expected to be disproportionate for members of any 
protected group on a prohibited basis.
    An anonymous commenter took exception to AMS's determination with 
respect to civil rights impact of the proposed rule. The commenter took 
exception with AMS's conclusion that because the proposed California 
FMMO would provide for orderly marketing conditions, its implementation 
would not result in disparate impacts on protected classes, especially 
consumers. The civil rights analysis did not consider consumers because 
consumers are not a protected class. Other observations suggested by 
the commenter regarding consumerism and homelessness are outside the 
scope of the CRIA.

Regulatory Flexibility Analysis

    Pursuant to the requirements set forth in the Regulatory 
Flexibility Act (RFA) (5 U.S.C. 601-612), AMS has considered the 
economic impact of this action on small entities. Accordingly, AMS has 
prepared this regulatory flexibility analysis.
    The purpose of the RFA is to fit regulatory actions to the scale of 
businesses subject to such actions so that small businesses will not be 
unduly or disproportionately burdened. Small dairy farm businesses have 
been defined by the Small Business Administration (SBA) (13 CFR 
121.601) as those businesses having annual gross receipts of less than 
$750,000. SBA's definition of small agricultural service firms, which 
includes handlers that would be regulated under this proposed FMO, 
varies depending on the product manufactured. Small fluid milk and ice 
cream manufacturers are defined as having 1,000 or fewer employees. 
Small butter and dry or condensed dairy product manufacturers are 
defined as having 750 or fewer employees. Small cheese manufacturers 
are defined as having 1,250 or fewer employees.
    For the purpose of determining which California dairy farms are 
``small businesses,'' the $750,000 per year criterion was used to 
establish a production guideline that equates to approximately 315,000 
pounds of milk per month. Although this guideline does not factor in 
additional monies that may be received by dairy farmers, it is a 
standard encompassing most small dairy farms. For the purpose of 
determining a handler's size, if the plant is part of a larger company 
operating multiple plants that collectively exceed the employee limit 
for that type of manufacturing, the plant is considered a large 
business even if the local plant has fewer than the defined number of 
employees.
    Interested persons were invited to present evidence at the hearing 
on the probable regulatory and informational impact of the proposed 
California FMMO on small businesses. Specific evidence on the number of 
large and small dairy farms in California (above and below the 
threshold of $750,000 in annual sales) was not presented at the 
hearing. However, data compiled by CDFA \3\ suggests that between 5 and 
15 percent of California dairy farms would be considered small business 
entities. No comparable data for dairy product manufacturers was 
available.
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    \3\ Official Notice is taken of: CDFA, California Dairy Review, 
Volume 19, Issue 9, September 2015. https://www.cdfa.ca.gov/dairy/pdf/CDR/2015/CDR_SEPT_15.pdf.
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    Record evidence indicates that implementing the proposed California 
FMMO would not impose a disproportionate burden on small businesses. 
Currently, the California dairy industry is regulated by a California 
State Order (CSO) that is administered and enforced by CDFA. While the 
CSO and FMMOs have differences that are discussed elsewhere

[[Page 14112]]

in this document, they both maintain similar classified pricing and 
marketwide pooling functions. Therefore, it is not expected that the 
proposed regulatory change will have a significant impact on California 
small businesses.
    The record evidence indicates that while the program is likely to 
impose some costs on the regulated parties, those costs would be 
outweighed by the benefits expected to accrue to the California dairy 
industry. In conjunction with the publication of the recommended 
decision (82 FR 10634), AMS released a Regulatory Economic Impact 
Analysis (REIA) to study the possible impacts of the proposed 
California FMMO. AMS received five comments related to the REIA. The 
substance of those comments and AMS's response are provided in the 
documentation that accompanies an updated REIA, which was prepared to 
reflect the provisions proposed in this FMMO. The updated analysis may 
be viewed in conjunction with this proposed FMMO (Docket No. AMS-DA-14-
0095) at www.regulations.gov.

California Dairy Market Background

    The record shows that the California dairy industry accounts for 
approximately 20 percent of the nation's milk supply. While its 39 
million residents are concentrated in the state's coastal areas, the 
majority of California's dairy farms are located in the interior 
valleys, frequently at some distance from milk processing plants and 
consumer population centers.
    CDFA has defined and established distinct regulations for Northern 
and Southern California dairy regions.\4\ According to data published 
by CDFA,\5\ over 94 percent of the state's approximately 40.4 billion 
pounds of milk for 2016 was produced in the Northern California region. 
The five leading milk production counties in 2016 were Tulare, Merced, 
Kings, Stanislaus, and Kern, together accounting for approximately 72.4 
percent of the state's milk.
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    \4\ Official Notice is taken of: CDFA, Stabilization and 
Marketing Plan for Market Milk, as Amended, for the Northern 
California Marketing Area, August 2015. https://www.cdfa.ca.gov/dairy/pdf/hearings/2015/NOCAL_STAB_PLAN61.pdf.
    \5\ Official Notice is taken of: CDFA, California Dairy 
Statistics Annual, 2016. https://www.cdfa.ca.gov/dairy/pdf/Annual/2016/2016_Statistics_Annual.pdf.
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    According to CDFA, there were 1,392 dairy farms in California in 
2016. Of those, 1,297 were located in Northern California, and 95 were 
in Southern California. The statewide average number of cows per dairy 
was 1,249; in Northern California, the average herd size was 1,265 
cows, and in Southern California, 1,026 cows. Average milk production 
for the state's 1.74 million cows was 23,265 pounds in 2016.
    According to record evidence, 132 handlers reported milk receipts 
to CDFA for at least one month during 2015. A CDFA February 2015 list 
of California dairy product processing plants by type of product 
produced \6\ shows that 35 California plants processed Class 1 
products; 75 plants processed Class 2 and 3 products; 18 plants 
processed Class 4a products; and 64 plants processed Class 4b 
products.\7\ Some plants processed products in more than one class.
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    \6\ Official Notice is taken of: CDFA, Milk and Dairy Food 
Safety Branch, Milk Plant Listings. https://www.cdfa.ca.gov/ahfss/Milk_and_Dairy_Food_Safety/#Plants.
    \7\ References to Class 1, Class 2, Class 3, Class 4a and Class 
4b refer to products classified in those categories based on the 
CSO.
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    CDFA reported \8\ that approximately 98 percent of California's 
2016 milk production was market grade (Grade A), and the rest was 
manufacturing grade (Grade B). Thirteen percent of the milk pooled 
under the CSO was utilized by California processors as Class 1 (fluid 
milk). Eight and three-tenths percent was utilized for Classes 2 and 3 
(soft and frozen dairy products), 32.3 percent was utilized for Class 
4a (butter and dried milk powders), and 46.4 percent was utilized for 
Class 4b (cheese).
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    \8\ CDFA, California Dairy Statistics Annual, 2016.
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    According to CDFA, total Class 1 sales in California were 
approximately 642 million gallons in 2016. Record evidence shows that 
annual California Class 1 sales outside the state averaged 22 million 
gallons for the five years preceding 2015.
    The record shows that for the five-year period from 2010 through 
2014, an average of 230 million pounds of California bulk milk products 
were transferred to out-of-state plants for processing each year. 
During the same period, an average of 633 million pounds of milk from 
outside the state was received and reported by California pool plants 
each year.

Impact on Small Businesses

    AMS proposes to establish a FMMO in California similar to the 10 
existing FMMOs in the national system. The California dairy industry is 
currently regulated under the CSO, which is similar to the proposed 
FMMO in most respects. California handlers currently report milk 
receipts and utilization to CDFA, which calculates handler prices based 
on component values derived from finished product sales surveys. 
Likewise, FMMO handlers report milk receipts and utilization to the 
Market Administrators, who calculate handlers' pool obligations 
according to price formulas that incorporate component prices based on 
end product sales values. Under both programs, the value of handlers' 
milk is pooled, and pool revenues are shared by all the pooled 
producers. Thus, transitioning to the FMMO is expected to have only a 
minimal impact on the reporting and regulatory responsibilities for 
large or small handlers, who are already complying with similar CSO 
regulations.

Pricing

    Under the proposed California FMMO, uniform FMMO end-product price 
formulas would replace the CDFA price formulas currently used to 
calculate handler milk prices. FMMO end-product price formulas 
incorporate component prices derived from national end-product sales 
surveys conducted by AMS. Use of price formulas based on national 
product sales would permit California producers to receive prices for 
pooled milk reflective of the national market for commodity products 
for which their milk is utilized. Consistent with the current FMMOs, 
California FMMO Class I prices would be computed using the higher of 
the Class III or IV advance prices announced the previous month, and 
would be adjusted by the Class I differential for the county where the 
plant is located.\9\
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    \9\ FMMOs have four classifications of milk: Class I--fluid milk 
products; Class II--fluid cream products, soft ``spoonable'' 
cheeses, ice cream, and yogurt; Class III--hard cheeses and 
spreadable cheese such as cream cheese; Class IV--butter and dried 
milk products.
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    Regulated minimum prices, especially for milk used in cheese 
manufacturing, are likely to be higher than what handlers would pay 
under the CSO. However, pooling regulations under the proposed FMMO 
would allow handlers to elect not to pool milk used in manufacturing. 
This option would be available to both large and small manufacturing 
handlers.
    Dairy farmers whose milk is pooled on the proposed California FMMO 
would receive a pro rata share of the pool revenues through the 
California FMMO uniform blend price. The California FMMO would not 
provide for the quota and non-quota milk pricing tiers found under the 
CSO. Under the proposed California FMMO, regulated handlers would be 
allowed to deduct monies, in an amount determined and announced by 
CDFA, from blend prices paid to California dairy farmers for

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pooled milk and send those monies to CDFA to administer the quota 
program.
    These changes are expected to affect producers and handlers of all 
sizes, but are not expected to be disproportionate for small entities.

Producer-Handlers

    The record shows that there are four producer-handlers \10\ in 
California whose Class 1 milk production is all or partially exempt 
from CSO pricing and pooling by virtue of their ``exempt quota'' 
holdings, representing approximately 21 million pounds of milk each 
month. It is likely that these four entities would become fully 
regulated by the proposed California FMMO and accountable to the 
marketwide pool for all of their Class I sales in the marketing area. 
By accounting to the pool for all their Class I sales in the marketing 
area, the value of the marketwide pool is expected to increase, 
benefiting most other large and small producers. The proposed 
California FMMO makes no provision for exempting large producer-
handlers from pricing and pooling regulations under the order.
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    \10\ Producer-handlers are dairy farmers who process and 
distribute their own farm milk into dairy products.
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    The evidentiary record shows that several smaller California 
producer-handlers, whose production volume exceeds the threshold to 
receive an exemption from the CSO's pricing and pooling regulations, 
would likely qualify as producer-handlers under the proposed California 
FMMO.\11\
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    \11\ The CSO exempts producer-handlers with sales averaging less 
than 500 gallons of milk per day on an annual basis and who 
distribute 95 percent of their production to retail or wholesale 
outlets.
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Interstate Commerce

    The evidentiary record indicates that milk in interstate commerce, 
which the CSO does not have authority to regulate, would be regulated 
under the proposed California FMMO. Currently, California handlers who 
purchase milk produced outside the state do not account to the CSO 
marketwide pool for that milk. Record evidence shows approximately 425 
million pounds of milk from outside the state was processed into Class 
1 products at California processing plants during 2014.
    Under the proposed FMMO, all Class I milk processed and distributed 
in the marketing area would be subject to FMMO pricing and pooling 
regulations, regardless of its origin. Thus, revenues from Class 1 
sales that are not currently regulated would accrue to the California 
FMMO pool and would be shared with all producers who are pooled on the 
California FMMO, including out-of-state producers. If California 
handlers elect to continue processing out-of-state milk into Class I 
products, under the provisions of the proposed California FMMO they 
would be required to pay the order's classified minimum price for that 
milk. Those additional revenues would be pooled and would benefit large 
and small producers who participate in the pool. Both large and small 
out-of-state producers who ship milk to pool plants in California would 
receive the California FMMO uniform blend price for their milk.

Classification and Fortification

    Dairy product classification under the CSO and the proposed FMMO is 
similar, but not identical. The table below compares CSO and FMMO 
product classes.

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                 CSO Class                      Equivalent FMMO Class
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Class 1...................................  Class I.
Class 2 and 3.............................  Class II.
Class 4b..................................  Class III.
Class 4a..................................  Class IV.
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    Under the proposed California FMMO, the classification of certain 
California products would change to align with standard FMMO 
classifications:
     Reassigning buttermilk from CSO Class 2 to FMMO Class I
     Reassigning half and half from CSO Class 1 to FMMO Class 
II
     Reassigning eggnog from CSO Class 2 to FMMO Class I
     There are numerous instances where the CSO classifies a 
product based on product type and where the product is sold.\12\ The 
proposed California FMMO would classify all products based solely on 
product type.
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    \12\ Official Notice is taken of: CDFA, Classification of Dairy 
Products. https://www.cdfa.ca.gov/dairy/pdf/PRDCLASS.pdf.
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    Under the proposed FMMO, California handlers would no longer 
receive credits for fluid milk fortification. Instead, accounting for 
fortification would be uniform with other FMMOs, as the fluid milk 
equivalent of the milk solids used to fortify fluid milk products would 
be classified as Class IV, and the increased volume of Class I product 
due to fortification would be classified as Class I. The FMMO system 
accounts for fortification differently than does the CSO. The record 
does not indicate the net impact of this change. However, the impact is 
not expected to disproportionately affect small entities.

Transportation Credits

    The proposed California FMMO does not contain a transportation 
credit program to encourage milk shipments to Class 1, 2, and 3 plants, 
as is currently provided for in the CSO. AMS proposes that producer 
payments be adjusted to reflect the applicable producer location 
adjustment for the handler location where the milk is received, thus 
providing the incentive to producers to supply Class I plants. 
Producers are responsible for finding a market for their milk and 
consequently bear the cost of transporting their milk to a plant. The 
record of this proceeding does not support reducing the producers' 
value of the marketwide pool by authorizing transportation credits to 
handlers. This change is not expected to disproportionately impact 
small business entities.

Summary

    AMS continues to find that adoption of the proposed California FMMO 
would promote more orderly marketing of milk in interstate commerce. 
Classified milk prices under the order would reflect national prices 
for manufactured products and local prices for fluid milk products, 
fostering greater equality for California producers and handlers in the 
markets where they compete. Under the proposed FMMO, handlers would be 
assured a uniform cost for raw milk, and producers would receive 
uniform payments for raw milk, regardless of its use. Small dairy 
farmers and handlers are not expected to be disproportionately impacted 
by the transition from CSO to FMMO regulations.

Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
Chapter 35), the ballot materials that will be used in conducting the 
referendum have been submitted to and approved by OMB (0581-0300). The 
forms to be used to administer the proposed California FMMO have also 
been reviewed by OMB (0581-0032) and would be approved should the 
California FMMO producer referendum pass.
    Any additional information collection and recordkeeping 
requirements that may be imposed under the proposed order would be 
submitted to OMB for public comment and approval.

Secretary's Decision

    Notice is hereby given of the filing with the Hearing Clerk of this 
final decision with respect to the proposed marketing agreement and 
order

[[Page 14114]]

regulating the handling of milk in California.
    This final decision is issued pursuant to the provisions of the 
AMAA and the applicable rules of practice and procedure governing the 
formulation of marketing agreements and orders (7 CFR part 900). The 
proposed marketing agreement and order are authorized under 7 U.S.C. 
608c.
    The proposed marketing agreement and order are based on the record 
of a public hearing held September 22 through November 18, 2015, in 
Clovis, California. The hearing was held to receive evidence on four 
proposals submitted by dairy farmers, handlers, and other interested 
parties. Notice of this hearing was published in the Federal Register 
on August 6, 2015 (80 FR 47210).
    Ninety-eight witnesses testified over the course of the 40-day 
hearing. Witnesses provided a broad overview of the history and 
complexity of the California dairy industry, and submitted 194 exhibits 
containing supporting data, analyses, and historical information.
    Upon the basis of evidence introduced at the hearing and the record 
thereof, the Administrator of AMS on February 6, 2017, filed with the 
Hearing Clerk, USDA, a recommended decision and Opportunity to File 
Written Exceptions thereto by May 15, 2017. Twenty-nine comments or 
exceptions were filed. That document also announced AMS's intent to 
request approval of new information collection requirements to 
implement the program. Written comments on the proposed information 
collection requirements were due April 17, 2017. Two comments were 
filed. AMS issued a notice regarding Documents for Official Notice, 
inviting comments on whether the Department should take official notice 
of numerous listed documents submitted for consideration by proponents. 
The notice was issued on August 8, 2017, and published on August 14, 
2017. Comments on the official notice request were due August 29, 2017. 
Three supportive comments were received and are discussed later in this 
decision. Lastly, AMS announced its intent to request approval of a new 
information collection for ballot material to be used in a producer 
referendum in a document issued on April 17, 2017, and published on 
April 21, 2017. Comments on the ballot material information collection 
were due June 20, 2017. One supportive comment was received. A 
Submission for OMB Review seeking OMB approval of the ballot material 
was issued on September 27, 2017, and published on October 2, 2017 (82 
FR 45795).
    The material issues presented on the record of hearing are as 
follows:
    1. Whether the handling of milk in the proposed marketing area is 
in the current of interstate commerce, or directly burdens, obstructs, 
or affects interstate commerce in milk or its products;
    2. Whether economic and marketing conditions in California show a 
need for a Federal marketing order that would tend to effectuate the 
declared policy of the Act;
    3. If an order is issued, what its provisions should be with 
respect to:
    a. Handlers to be regulated and milk to be priced and pooled under 
the order;
    b. Classification of milk, and assignment of receipts to classes of 
utilization;
    c. Pricing of milk;
    d. Distribution of proceeds to producers; and
    e. Administrative provisions.

Findings and Conclusions

    The findings and conclusions on the material issues are based on 
the record of the hearing and the comments and exceptions filed with 
regard to the recommended decision. Discussions are organized by topic, 
recognizing inevitable overlap in some areas. Topics are addressed in 
the following order:

1. Regulatory Comparison
2. Overview of Proposals
3. Justification for a California FMMO
4. California Quota Program Recognition
5. Definitions and Uniform Provisions
6. Classification
7. Pricing
8. Pooling
9. Transportation Credits
10. Miscellaneous and Administrative Provisions
11. Ruling on Office Notice Documents
12. Rulings on Proposed Findings, Conclusions, and Exceptions

1. Regulatory Comparison

    The purpose of the following section is to provide a general 
description and comparison of the major features of the California 
state dairy regulatory framework and the FMMO system as provided in the 
evidentiary record. A more detailed discussion of each issue is 
provided in the appropriate section of this decision.
    California State Order:
    Currently, milk marketing in California is regulated by the CDFA. 
The CSO is codified in the Pooling Plan for Market Milk, as amended, 
and in two Stabilization and Marketing Plan(s) for Market Milk, as 
amended, for the Northern and Southern California marketing areas.\13\
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    \13\ Official Notice is taken of: Chapter 2, Part 3, Division 21 
and Chapter 3, Part 3, Division 21 of the California Food and 
Agriculture Code.
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Quota

    The California quota program is a state-administered producer 
program that entitles the quota holder to $0.195 per pound of solids-
not-fat above the CSO base and overbase price of milk.\14\ The quota 
premium is funded by a deduction from the CSO marketwide pool before 
the CSO overbase price is calculated. The quota program requires quota 
holders to deliver milk to a pool plant at least once every 60 days. 
Quota can be bought and sold, and according to record evidence, 
approximately 58 percent of California dairy farms owned some volume of 
quota in 2015.
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    \14\ The hearing record reveals that the $0.195 per pound 
solids-non-fat equates to a $1.70 per cwt of milk quota premium. 
Additionally, under current CSO provisions, base and overbase prices 
are equal.
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Classification

    The CSO provides for the pricing of five classified use values of 
milk. In general, Class 1 is milk used in fluid milk products; Class 2 
is milk used in heavy cream, cottage cheese, yogurt, and sterilized 
products; Class 3 is milk used in ice cream and frozen products; Class 
4a is milk used in butter and dry milk products, such as nonfat dry 
milk; and Class 4b is milk used in cheese--other than cottage cheese--
and whey products.

Pricing

    The CSO utilizes an end-product pricing system to determine 
classified prices for raw milk produced and manufactured in the State 
of California. Class 1, 4a, and 4b prices are announced monthly. Class 
2 and 3 prices are announced bi-monthly. Prices for all five milk 
classes are component-based. Three components of milk are used to 
determine prices: butterfat (fat); solids-not-fat (SNF), which includes 
protein and lactose; and a fluid carrier (used in only the Class 1 
price).
    The CSO determines milk component prices based on commodity market 
prices obtained from the Chicago Mercantile Exchange (CME), the AMS 
Dairy Market News Western Dry Whey--Mostly (WDW-Mostly) price series, 
and the announced nonfat dry milk (NFDM) California Weighted Average 
Price (CWAP), which is determined by CDFA through weekly surveys of 
California manufacturing plants.
    The price for milk used in cheese manufacturing (CSO Class 4b) is a

[[Page 14115]]

central issue in this proceeding. The Class 4b price is announced 
monthly and utilizes average commodity market prices for block Cheddar 
cheese, butter, and dry skim whey to determine the Class 4b component 
values. The average CME prices for butter and 40-pound Cheddar blocks 
are adjusted by f.o.b. price adjusters, which are designed to represent 
the difference between the CME price and the price California 
manufacturers actually receive. The CME butter price is also reduced by 
$0.10 per pound to derive the value of whey butter as it relates to 
cheese processing. The value of dry skim whey is determined through a 
sliding scale that provides a per hundredweight (cwt) value based on a 
series of announced WDW-Mostly per pound value ranges. The sliding 
scale determines dry whey's contribution to the Class 4b price, with a 
floor of $0.25 per cwt and a ceiling of $0.75 per cwt when the WDW-
Mostly price equals or exceeds $0.60 per pound.
    The CSO pricing system has a number of features worth highlighting. 
First, under the CSO, handlers must pay at least minimum classified 
prices for all Grade A milk purchased from California dairy farmers, 
regardless of whether the milk is pooled on the CSO. Additionally, 
Class 1 processors may claim credits against their pool obligations to 
offset the cost of fortifying fluid milk to meet the State-mandated 
nonfat solids content standards.
    The classified use values of all the milk pooled on the CSO are 
aggregated, and producers are paid on the fat and SNF component levels 
in their raw milk. Producers are paid on the basis of their allocated 
quota (if applicable), base, and overbase production for the month. 
While the CSO pricing formulas have changed over time, in their current 
form the base and overbase prices are the same. Generally, the quota 
price is the overbase price plus the $1.70 per cwt quota premium.

Pooling

    Almost all California-produced milk received by California pool 
plants is pooled on the CSO, with some exceptions. Grade B milk is 
neither pooled nor subject to minimum prices. Manufacturing plants that 
do not make any Class 1 or 2 products can opt out of the pool; however, 
they are still required to pay announced CSO classified minimum prices 
for Grade A milk received. The requirement that quota holders must 
deliver milk to a pool plant at least once every 60 days tends to limit 
the amount of Grade A milk not pooled on the CSO. The decision not to 
pool milk in California carries with it a stipulation that the plant 
may not repool for 12 months after opting not to pool, and after 
repooling, a plant cannot opt out of pooling for 12 months.
    Entities recognized as producer-handlers under the CSO may be 
exempt from pooling some or all of their milk. Producer-handlers are 
dairy farmers who also process and distribute their dairy products. 
Fully exempt (``Option 66'') producer-handlers have minimal production 
volumes and are exempt from the pricing and pooling provisions of the 
CSO. Producer-handlers who own exempt quota (``Option 70'') do not 
account to the CSO marketwide pool for the volume of Class 1 milk 
covered by their exempt quota.
    The State of California cannot regulate interstate commerce; 
therefore, milk from out-of-state producers cannot be regulated by the 
CSO. While the record reflects that California handlers typically pay 
for out-of-state milk at a price reflective of the receiving plant's 
utilization, those prices are not regulated or enforced by the CSO.

Transportation Credits

    The CSO provides transportation credits to producers for farm-to-
plant Class 1, 2, and 3 milk movements between designated supply zones 
and plants with more than 50 percent Class 1, 2, and/or 3 utilization 
in designated demand zones. The CSO also provides for transportation 
allowances to handlers for plant-to-plant milk movements.
Federal Milk Marketing Orders
    A FMMO is a regulation issued by the Secretary of Agriculture 
(Secretary) that places certain requirements on the handling of milk in 
a defined geographic marketing area. FMMOs are authorized by the AMAA. 
The declared policy of the AMAA is to ``. . . establish and maintain 
such orderly marketing conditions for agricultural commodities in 
interstate commerce . . .'' (7 U.S.C. 602(1)). The principal means of 
meeting the objectives of the FMMO program are through the use of 
classified milk pricing and the marketwide pooling of returns.

Classification

    Whereas the CSO designates five classes of milk utilization, FMMOs 
provide for four classes of milk utilization. FMMO Class I is milk used 
in fluid milk products. Class II is milk used to produce fluid cream 
products, soft ``spoonable'' products like cottage cheese, ice cream, 
sour cream, and yogurt, and other products such as kefir, baking mixes, 
infant formula and meal replacements, certain prepared foods, and 
ingredients in other prepared food products. Class III is milk used to 
produce spreadable cheeses like cream cheese, and hard cheeses, like 
Cheddar, that can be crumbled, grated, or shredded. Class IV is milk 
used to produce butter, evaporated, or sweetened condensed milk in 
consumer-style packages, and dry milk products.

Pricing

    Like the CSO, the FMMO program currently uses end-product price 
formulas based on the wholesale prices of finished products to 
determine the minimum classified prices handlers pay for raw milk in 
the four classes of utilization. However, the FMMO pricing system has 
some notable differences. While the CSO announces some classified 
prices on a bi-monthly basis, FMMOs announce prices for all four milk 
classes monthly. FMMOs use four components of milk to determine prices: 
Butterfat, protein, nonfat solids, and other solids.
    Like the CSO, the FMMO determines component prices based on 
commodity prices. However, AMS administers the Dairy Product Mandatory 
Reporting Program (DPMRP) to survey weekly wholesale prices of four 
manufactured dairy products (cheese, butter, NFDM and dry whey), and 
releases weekly average survey prices in the National Dairy Product 
Sales Report (NDPSR).\15\ The FMMO product-price formulas use these 
surveyed prices to determine the component values in raw milk.
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    \15\ Official Notice is taken of: The Notice of Equivalent Price 
Series: 77 FR 22282. The National Dairy Product Sales Report was 
deemed as equivalent to the price series previously released by the 
National Agricultural Statistics Service.
---------------------------------------------------------------------------

    As referenced previously, a central issue of this proceeding is the 
pricing of milk used for cheese manufacturing (FMMO Class III). The 
FMMO pricing system determines the Class III value from DPMRP surveyed 
butter, cheese, and dry whey prices. The FMMO does not utilize a 
sliding scale to determine the value of whey that contributes to the 
Class III price.
    Unlike the CSO, FMMOs do not provide for a tiered system of 
producer payments. A uniform blend price is computed for each FMMO 
reflecting the use of all milk in each marketwide pool. A blend price 
is paid for all milk that is pooled on the FMMO, adjusted for location. 
In six of the FMMOs, producers are paid for the pounds of butterfat, 
pounds of protein, pounds of other solids, and cwt of milk pooled. The 
cwt price is known as the producer price differential (PPD) and 
reflects the

[[Page 14116]]

producer's pro rata share of the value of Class I, Class II, and Class 
IV uses in the pool relative to Class III value. In the other four 
FMMOs, producers are paid on a butterfat and skim basis.

Pooling

    Inclusion in the FMMO marketwide pool carries with it an obligation 
to be available to serve the fluid market with necessary milk supplies 
throughout the year. In the FMMO system, participation in the pool is 
mandatory for distributing plants that process Grade A milk into Class 
I products sold in a FMMO marketing area. Handlers of manufacturing 
milk (Class II, III, or IV) have the option of pooling, and pool 
eligibility is based on performance standards specific to each FMMO.
    FMMOs recognize the unique business structures of producer-handlers 
and exempt them from the pricing and pooling regulations of the orders 
based on size. Producer-handler exemptions under FMMOs are limited to 
those vertically-integrated entities that produce and distribute no 
more than three million pounds of packaged fluid milk products each 
month.
    Unlike the CSO, FMMOs are authorized to regulate the interstate 
commerce connected with milk marketing. Thus, there is no 
differentiated regulatory treatment for milk produced outside of a FMMO 
marketing area boundary. All eligible milk is pooled and priced in the 
same manner, regardless of its source.

Transportation Credits

    The Appalachian and Southeast FMMOs provide for transportation 
credits to offset a handler's cost of hauling supplemental milk to 
Class I markets. During deficit months, handlers can apply for 
transportation credits to offset the cost of supplemental milk 
deliveries from outside the marketing area to meet the Class I demand 
of FMMO handlers. The most significant difference from the CSO here is 
that the FMMO transportation credits described are not paid from the 
marketwide pool. Instead, they are paid from separate funds obtained 
through monthly assessments on handlers' Class I producer milk. The 
exception is the Upper Midwest FMMO, which provides transportation 
credits on plant-to-plant milk movements paid from the marketwide pool.

2. Overview of Proposals

    Four proposals were published in the Hearing Notice of this 
proceeding. Dairy Farmers of America, Inc., Land O'Lakes, Inc., and 
California Dairies, Inc. jointly submitted Proposal 1. Dairy Farmers of 
America, Inc. (DFA), is a national dairy-farmer owned cooperative with 
approximately 14,000 members and several processing facilities located 
throughout the United States, with products marketed both nationally 
and internationally. Within California, DFA represents 260 members and 
operates three processing facilities. Land O'Lakes (LOL) is a national 
farmer-owned cooperative with over 2,200 dairy-farmer members. LOL has 
processing facilities in the Upper Midwest, the eastern United States, 
and the State of California, with products marketed nationally and 
internationally. Within California, LOL represents 200 dairy-farmer 
members and operates three processing facilities. California Dairies, 
Inc. (CDI), is a California based dairy-farmer owned cooperative with 
390 dairy-farmer members, six processing facilities in California, and 
national and international product sales. Combined, DFA, LOL, and CDI 
(Cooperatives) market approximately 75 percent of the milk produced in 
California.
    Proposal 1 seeks to establish a California FMMO that incorporates 
the same dairy product classification and pricing provisions as those 
used throughout the FMMO system. Proposal 1 also includes unique 
pooling provisions, described as ``inclusive'' throughout the 
proceeding, that would pool the majority of the milk produced in 
California each month while also allowing for the pooling of milk 
produced outside of the marketing area if it meets specific pooling 
provisions. The proposal includes fortification and transportation 
credits similar to those currently provided by the CSO. Lastly, 
Proposal 1 provides for payment of the California quota program quota 
values from the marketwide pool before the FMMO blend price is computed 
each month.
    Proposal 2 was submitted on behalf of the Dairy Institute of 
California (Institute). The Institute is a California trade association 
representing proprietary fluid milk processors, cheese manufacturers, 
and cultured and frozen dairy products manufacturers in 38 plants 
throughout California. Institute plants process 70 percent of the fluid 
milk products, 85 percent of the cultured and frozen dairy products, 
and 90 percent of the cheese manufactured in the state. The Institute's 
first position is that a California FMMO should not be promulgated. 
However, should USDA find justification for promulgation, the Institute 
supports Proposal 2. Proposal 2 incorporates the same dairy product 
classification provisions used throughout the FMMO system, as well as 
pooling provisions that are consistent with those found in other FMMOs. 
The Proposal 2 pooling provisions require the pooling of Class I milk, 
but the pooling of milk used in manufactured products is optional. 
Proposal 2 includes fortification and transportation credits similar to 
those currently provided by the CSO. It also includes an additional 
shrinkage allowance for extended shelf life (ESL) products above that 
provided in the FMMO system. Lastly, Proposal 2 recognizes quota value 
by allowing producers to opt out of the quota program, thus receiving a 
FMMO blend price reflective of the market's utilization. Under Proposal 
2, producers who remain in the quota program would have their blend 
price monies transferred to CDFA and redistributed according to their 
quota and non-quota holdings.
    Proposal 3 was submitted on behalf of the California Producer 
Handlers Association (CPHA). CPHA is an association of four producer-
handlers: Foster Farms Dairy, Inc. (Foster); Hollandia Dairy, Inc.; 
Producers Dairy Foods, Inc. (Producers);and Rockview Dairies, Inc. 
(Rockview). CPHA members own their respective dairy farms and process 
that farm milk, as well as the milk of other dairy farms, for delivery 
to consumers. CPHA members own exempt quota, which entitles them to 
exemption from CSO pricing and pooling provisions for the volume of 
Class 1 milk covered by their exempt quota. Proposal 3 seeks 
recognition and continuation of CPHA members' exempt quota status under 
a California FMMO.
    Proposal 4 was submitted on behalf of Ponderosa Dairy (Ponderosa). 
Ponderosa is a Nevada dairy farm that supplies raw milk to California 
fluid milk processing plants. Ponderosa contends that disorderly 
marketing conditions do not exist in California that would warrant 
promulgation of a FMMO. However, if USDA finds justification for a 
California FMMO, Proposal 4 seeks to allow California handlers to elect 
partially-regulated plant status with regard to milk they receive from 
out-of-state producers. Such allowance would enable handlers to not 
pool out-of-state milk, as long as they could demonstrate that they 
paid out-of-state producers an amount equal to or higher than the 
market blend price.

3. Justification for a California FMMO

    This section reviews and summarizes the testimony, hearing 
evidence, and comments and exceptions filed regarding the recommended 
decision addressing whether or not promulgation of a California FMMO is 
justified. After careful consideration and review, this final decision 
affirms the finding that

[[Page 14117]]

the proposed California FMMO would provide for more orderly marketing 
conditions for the handling of milk in the State of California, as 
provided for and authorized by the AMAA. The Secretary has found upon 
the record that the proposed order and all of its terms and provisions 
will tend to effectuate the declared policy of the AMAA 608 c(4).

Summary of Testimony

    A Cooperative witness testified regarding current California 
marketing conditions and the need for establishing a California FMMO. 
According to the witness, California is the largest milk-producing 
state, producing more than 20 percent of the nation's milk. The witness 
stated that the pooled volume of a California FMMO would be the largest 
of all FMMOs, averaging slightly below 3.4 billion pounds per month; 
the Class I volume would represent the third largest, following the 
Northeast and Mideast FMMOs.
    The Cooperative witness testified that the primary reason 
California farmers are seeking the establishment of a FMMO is to 
receive prices reflective of the national commodity values for all milk 
uses. The witness opined that orderly marketing is no longer attainable 
through the CSO because the prices California dairy farmers receive do 
not reflect the full value of their raw milk. The witness estimated 
that this pricing difference has reduced California dairy farm income 
by $1.5 billion since 2010. The witness maintained that Proposal 1 
allows California dairy farms to receive an equitable price for their 
milk, while also tailoring FMMO provisions to the California dairy 
industry. The Cooperatives' post-hearing brief reflected this position.
    The Cooperative witness testified that there are significant price 
differences, depending on whether a producer's milk is regulated by the 
CSO or a FMMO. To illustrate this difference, the witness compared 
California farm milk prices to those received by producers in the 
states that comprise the Upper Midwest and Pacific Northwest marketing 
areas.\16\ The witness selected these areas for comparison due to the 
similar milk utilization in the Upper Midwest FMMO and the geographic 
proximity of the Pacific Northwest FMMO. The witness estimated that 
between August 2012 and May 2015, California dairy farmers received on 
average $1.85 per cwt less (ranging from $0.43-$4.27 per cwt lower) 
than producers pooled on the Upper Midwest and Pacific Northwest FMMOs. 
The witness used the data to emphasize a wide difference in prices for 
farmers in similarly situated areas. The witness opined that a 
California FMMO, as advanced in Proposal 1, would ensure California 
dairy farmers receive equitable prices, more in line with those 
received by their FMMO counterparts.
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    \16\ Wisconsin, Minnesota, and Illinois; Oregon, Washington and 
Northern Idaho, respectively.
---------------------------------------------------------------------------

    The Cooperative witness emphasized that while both the CSO and the 
FMMOs use end-product pricing formulas to determine class prices, the 
two regulatory systems use different commodity series, effective dates, 
yield factors, and make allowances, which result in substantially 
different prices, as highlighted above. The witness explained that 
while the two regulatory systems have always had price differences, 
historically CSO and FMMO prices were relatively close. According to 
the witness, prices began to diverge significantly in 2007 when the CSO 
established a fixed whey factor in its formula for milk used to produce 
cheese. From that point forward, the witness said, price differences 
have become significant and have led to market disruptions both in the 
fluid and manufacturing markets.
    The Cooperative witness summarized USDA's justification from the 
FMMO Order Reform decision for adopting a national Class I price 
surface that assigns a Class I differential for every county in the 
country, including counties in California. The witness said that the 
separate CSO Class 1 price surface undermines the integrity of the 
nationally coordinated Class I price surface and has become a source of 
disorder in California. To demonstrate the disorder, the witness 
compared FMMO Class I and CSO Class 1 prices for both in-state and out-
of-state purchases. The witness said that because of the CSO and FMMO 
differences in both classified price formulas and Class I/1 price 
surfaces, the Class 1 price paid by California handlers is almost 
always lower than what it otherwise would be if FMMO Class I prices 
were applicable for those same purchases.
    The Cooperative witness presented a similar comparison between CSO 
Class 1 prices and Class I prices in FMMO areas that were likely 
competitors. The witness said that under FMMO regulations, the 
difference in Class I prices between two FMMO areas is attributed to 
the difference in the Class I differential at the two locations. For 
example, the witness explained, the Class I price difference between 
two plants, one located in a $2.10 zone and another in the $2.00 zone, 
would be $0.10 per cwt. However, when the witness compared Class 1 
prices in California and a competing FMMO area, the price difference 
was always greater than the difference in differentials. For example, 
the FMMO differential in the Los Angeles/San Diego market is $2.10, 
while the differential in neighboring Phoenix is $2.35, a difference of 
$0.25. However, said the witness, when comparing the actual CSO Class 1 
price in Los Angeles/San Diego with the FMMO Class I price in Phoenix 
from August 2012 to July 2015, the difference averaged $0.62. The 
witness concluded that these observed price differences undermine a 
nationally-coordinated pricing structure and contribute to disorderly 
marketing, where fluid milk handlers pay different minimum prices 
depending on where they are regulated.
    The Cooperative witness also provided testimony on the CSO and FMMO 
price disparities for manufacturing milk. The witness testified that 
FMMO Class II, III, and IV prices reflect national prices for products 
manufactured in these classes. If Proposal 1 is adopted, the witness 
said, California handlers would pay the same uniform prices as their 
FMMO competitors in the national marketplace. The witness noted past 
FMMO decisions that discussed the national supply and demand for 
manufactured dairy products and the need for national uniform 
manufacturing prices. The witness stressed that California producers 
should also receive these national prices like their FMMO counterparts.
    The Cooperative witness elaborated on the differences between CSO 
and FMMO manufacturing class prices. When comparing FMMO Class II to 
CSO Class 2 and Class 3 prices, the witness cited differences in the 
commodity series used as price references, the time periods of data 
used, and the length of time prices are applicable to explain the 
sometimes large differences in prices under the two regulatory systems. 
As a result, the witness said, Class 2 products are sometimes sold on a 
spot basis to exploit short-term price differences.
    The Cooperative witness presented a comparison of CSO Class 4a and 
FMMO Class IV prices from January 2000 to July 2015, revealing that 
over the entire time period the Class 4a price averaged $0.29 per cwt 
less than the Class IV price. The witness added that over this 15-year 
period, the CSO Class 4a price on an annual average basis was never 
above the FMMO Class IV price.
    The Cooperative witness also provided testimony on the price 
disparity between CSO Class 4b and FMMO Class III price formulas. Data 
from January 2000 to July 2015 revealed

[[Page 14118]]

that the CSO Class 4b price was lower than the Class III price in 161 
of the 187 months examined. The witness computed the average difference 
over that 15-year time period to be $0.91 per cwt, with the largest 
difference of $3.24 per cwt occurring in November 2014. The witness 
attributed the observed price differences to differences in the 
valuation of dry whey between the CSO 4b and the FMMO Class III 
formulas. The witness said that in 2007, the whey factor in the CSO 
Class 4b formula became a tiered, bracketed system with a floor of 
$0.25 and a ceiling of $0.75, which is reached when the WDW-Mostly 
price is greater than or equal to $0.60 per pound. The witness added 
that the whey value contained in the FMMO Class III price comes from 
the AMS NDPSR, and reflects the mandatory reporting of dry whey sales 
throughout the country. The witness estimated that from August 2012 
through July 2015, the Dairy Market News (DMN) whey value contributed 
$0.68 per cwt to the CSO 4b price, while the NDPSR whey value 
contributed $2.39 per cwt to the FMMO Class III price. The witness 
concluded that the whey cap contained in the CSO 4b price results in 
lower contributions to the marketwide pool than what is observed in the 
national marketplace and reflected in FMMO prices.
    The Cooperative witness reiterated the consequences of having two 
different regulatory pricing schemes which has led to severe 
differences between the regulated markets. The witness opined that the 
regulatory differences allow California handlers who purchase raw milk 
and manufacture products for sale in the national marketplace to pay 
substantially different regulated minimum prices than handlers 
regulated by the FMMO system. The witness estimated that because of the 
regulatory price differences, from August 2012 to July 2015, California 
farms received, on average, $1.89 per cwt less than similarly-situated 
FMMO farms. The witness concluded that this results in California farms 
being in a worse competitive position than similarly situated FMMO 
farms. The witness labeled this as disorderly and said that this 
condition should be remedied through the adoption of Proposal 1.
    The Cooperative witness also entered data estimating the value of 
regulating interstate commerce through the establishment of a 
California FMMO. The witness cited January 2009 through July 2015 CDFA 
data that indicated a monthly average of 54.5