Federal Register: November 19, 2002 (Volume 67, Number 223)
DOCID: FR Doc 02-29030
DEPARTMENT OF AGRICULTURE
Veterans Affairs Department
CFR Citation: 7 CFR Part 1032
DOCUMENT ID: [Doc. No. AO-313-A44; DA-01-07]
NOTICE: Part III
DOCUMENT ACTION: Proposed rule.
Milk in the Central Marketing Area; Tentative Decision on Proposed Amendments and Opportunity To File Written Exceptions to Tentative Marketing Agreement and to Order
DATES: Comments are due on or before January 21, 2003.
This tentative decision adopts, on an interim final and emergency basis, provisions that amend certain features of the pooling standards of the Central Federal milk order. Specifically, this tentative decision adopts amendments to the Pool plant provisions which: Establish lower but yearround supply plant performance standards; will not consider the volume of milk shipments to distributing plants regulated by another Federal milk order as a qualifying shipment on the Central order; exclude from receipts diverted milk made by a pool plant to another pool plant in determining pool plant diversion limits; and establish a ``net shipments'' provision for milk deliveries to distributing plants. This decision recommends adopting provisions to limit supply plant system formation, but not on an emergency basis. For Producer milk, this tentative decision adopts amendments that: Establish higher yearround diversion limits; will base diversion limits for supply plants on deliveries to Central order distributing plants; and eliminate the ability to simultaneously pool milk on the Central milk order and a Stateoperated milk order that has marketwide pooling. Public comments on these actions and the other pooling and payment issues not adopted by this tentative decision are requested. Additionally, this decision requires determination of whether producers approve the issuance of the amended order on an interim basis.
Agriculture Department, Agricultural Marketing Service,
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.
These 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. If adopted, 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, as amended (7 U.S.C. 601674), 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 a petition stating that the order, any provision of the order, or any obligation imposed in connection with the order is not in accordance with the law. A handler is afforded the opportunity for a hearing on the petition. After a hearing, the Department would rule on the petition. The Act provides that the district court of the United States in any district in which the handler is an inhabitant, or has its principal place of business, has jurisdiction in equity to review the Department's ruling on the petition, provided a bill in equity is filed not later than 20 days after the date of the entry of the ruling.
Regulatory Flexibility Act and Paperwork Reduction Act
In accordance with the Regulatory Flexibility Act (5 U.S.C. 601 et seq.), the Agricultural Marketing Service has considered the economic impact of this action on small entities and has certified that this proposed rule will not have a significant economic impact on a substantial number of small entities. For the purpose of the Regulatory Flexibility Act, a dairy farm is considered a ``small business'' if it has an annual gross revenue of less than $750,000, and a dairy products manufacturer is a ``small business'' if it has fewer than 500 employees. For the purposes of determining which dairy farms are ``small businesses,'' the $750,000 per year criterion was used to establish a production guideline of 500,000 pounds per month. Although this guideline does not factor in additional monies that may be received by dairy producers, it should be an inclusive standard for most ``small'' dairy farmers. For purposes of determining a handler's size, if the plant is part of a larger company operating multiple plants that collectively exceed the 500employee limit, the plant will be considered a large business even if the local plant has fewer than 500 employees.
Approximately 9,695 of the 10,108 dairy producers (farmers), or 95.9 percent, whose milk was pooled under the Central Federal milk order at the time of the hearing, November 2001, would meet the definition of small businesses. On the processing side, approximately 10 of the 56 milk plants associated with the Central milk order during November 2001 would qualify as ``small businesses,'' constituting about 17.9 percent of the total.
Based on these criteria, more than 95 percent of the producers would be considered as small businesses. The adoption of the proposed pooling standards serves to revise established criteria that determine those producers, producer milk, and plants that have a reasonable association with, and are consistently serving the fluid needs of, the Central milk marketing area and are not associated with other marketwide pools concerning the same milk. Criteria for pooling are established on the basis of performance levels that are considered adequate to meet the Class I fluid needs and, by doing so, determine those that are eligible to share in the revenue that arises from the classified pricing of milk. Criteria for pooling are established without regard to the size of any dairy industry organization or entity. The criteria established are applied in an identical fashion to both large and small businesses and do not have any different economic impact on small entities as opposed to large entities. Therefore, the proposed amendments will not have a significant economic impact on a substantial number of small entities.
A review of reporting requirements was completed under the Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35). It was determined that these proposed amendments would have no impact on reporting, recordkeeping, or other compliance requirements because they would remain identical to the current requirements. No new forms are proposed and no additional reporting requirements would be necessary.
This notice does not require additional information collection that
requires clearance by the Office of Management and Budget (OMB) beyond
currently approved information collection. The primary sources of data [[Page 69911]]
used to complete the forms are routinely used in most business transactions. Forms require only a minimal amount of information which can be supplied without data processing equipment or a trained statistical staff. Thus, the information collection and reporting burden is relatively small. Requiring the same reports for all handlers does not significantly disadvantage any handler that is smaller than the industry average.
Interested parties are invited to submit comments on the probable regulatory and informational impact of this proposed rule on small entities. Also, parties may suggest modifications of this proposal for the purpose of tailoring their applicability to small businesses.
Prior documents in this proceeding:
Notice of Hearing: Issued October 17, 2001; published October 23, 2001 (66 FR 53551).
Notice is hereby given of the filing with the Hearing Clerk of this tentative final decision with respect to proposed amendments to the tentative marketing agreement and the order regulating the handling of milk in the Central marketing area. This notice is issued pursuant to the provisions of the Agricultural Marketing Agreement Act and the applicable rules of practice and procedure governing the formulation of marketing agreements and marketing orders (7 CFR part 900).
Interested parties may file written exceptions to this decision with the Hearing Clerk, U.S. Department of Agriculture, Room 1083Stop 9200, 1400 Independence Avenue, SW., Washington, DC 202509200, by January 21, 2003. Six (6) copies of the exceptions should be filed. All written submissions made pursuant to this notice will be made available for public inspection at the office of the Hearing Clerk during regular business hours (7 CFR 1.27(b)).
The hearing notice specifically invited interested persons to present evidence concerning the probable regulatory and informational impact of the proposals on small businesses. While no evidence was received that specifically addressed these issues, some of the evidence encompassed entities of various sizes.
The proposed amendments set forth below are based on the record of a public hearing held at Kansas City, Missouri, on November 1415, 2001, pursuant to a notice of hearing issued October 17, 2001, and published October 23, 2001 (66 FR 53551).
The material issues on the record of the hearing relate to:
1. Pooling Standards:
a. Supply plant pooling standards.
b. Cooperative supply plant performance standards.
c. Supply plant system standards.
d. Standards applicable for Producer milk.
e. Establishing pooling standards for ``State units.''
2. Simultaneous pooling of milk on the order and on a State operated milk order providing for marketwide pooling.
3. Rate of partial payments to producers.
4. Determining whether emergency marketing conditions exist that would warrant the omission of a recommended decision and the opportunity to file written exceptions.
Findings and Conclusions
The following findings and conclusions on the material issues are based on evidence presented at the hearing and the record thereof: 1. Pooling Standards of the Order
a. Supply Plant Pooling Standards
Several amendments to the pooling provisions of the Central order should be adopted immediately. Certain inadequacies of the supply plant pooling provisions are resulting in disorderly marketing conditions and the unwarranted erosion of the blend price received by those producers who are consistently providing milk to meet the fluid demands of the Central marketing area. Specifically, the following amendments for pool supply plants should be adopted immediately: (1) Lower the performance standards to 20 percent in each of the months of August through February and 15 percent in each of the months of March through July. Accordingly, automatic pool plant status during the 3month period of May through July is thereby eliminated from the order; (2) Eliminate the volume of milk shipments made by supply plants to distributing plants regulated by another Federal milk marketing order as qualifying shipments in meeting the Central supply plant shipping standard; (3) Exclude from receipts the diversions made by a pool plant to a second pool plant from the calculation of the diversion limits established for pool plants; and (4) Provide a ``net shipments'' standard for supply plant deliveries to the order's distributing plants for the purpose of meeting the Central order's supply plant shipping standard. Expanding pool supply plant qualification to include milk shipments to any plant that is part of a distributing plant unit is not adopted.
The Central order currently provides a supply plant performance standard whereby 35 percent of the milk received directly from dairy farms and cooperative handlers must be transferred or diverted to distributing plants, including milk diverted by the plant operator, during each of the months of September through November and January. For all other months a 25 percent standard applies.
The Central marketing order currently provides automatic pool plant status during the 3month period of May through July for supply plants provided they were pool plants during each of the immediately preceding months of August through April. The order does not currently include a performance standard which considers shipments to any plant that is part of a distributing plant unit as a qualifying shipment. The current order does not limit supply plant shipments to distributing plants on a ``net shipments'' basis.
In addition, handlers may currently qualify supply plants as pool plants located inside or outside the market area by diverting milk to a pool distributing plant regulated by the Central order. Supply plant transfers to distributing plants regulated by another Federal order currently are considered as qualifying shipments for the purpose of determining if the Central supply plant shipping standard has been met.
These amendments to the supply plant pooling standards were presented in testimony related to a proposal published in the hearing notice as Proposal 1. This proposal was offered by Dairy Farmers of America (DFA), Prairie Farms Cooperative (Prairie Farms), and Swiss Valley Farms (Swiss Valley). These organizations are cooperative associations that historically have pooled milk on the Central milk order or one of the nine orders consolidated to form the Central milk order. Hereinafter, this decision will refer to these proponents as ``DFA, et al.'' All three cooperative associations have ownership interests in fluid milk processing plants. Prairie Farms and Swiss Valley operate fluid plants.
Amendments to the supply plant pooling standards were offered, the
proponents assert, because the pooling provisions of the order are not
appropriately linking the ability to pool milk on the order with
demonstrating consistent service in supplying the fluid needs of the
market. DFA, et al., proposed changing the seasonally adjusted
performance standard for supply plants to 25 percent during each of the
months of August through November and to 20 percent for each of the months of December through July.
Adopting these standards would also eliminate automatic pool plant status for the 3month period of May through July currently provided by the order.
Proposal 1 as offered would no longer consider milk deliveries to distributing plants regulated by another Federal milk marketing order as qualifying shipments for determining if the supply plant performance standard for the Central Order had been met. Similarly, the proposal would not consider milk deliveries to distributing plants that are part of a distributing plant unit as qualifying shipments for determining if the supply plant performance standard had been met.
Proposal 1 also would limit a handler's ability to qualify supply plants located outside the Central Order marketing area as pool plants through direct deliveries of milk to pool distributing plants. The proposal also calls for establishing a ``net shipments'' provision. A net shipments standard would exclude from a supply plant's qualifying shipments any transfer or diversion of bulk fluid milk products made by a distributing plant receiving a qualifying shipment.
In support for Proposal 1, the DFA, et al., witness testified that the orderly marketing of milk requires appropriate performance standards for supply plants to ensure that distributing plants are adequately supplied with milk as a condition for receiving the Central order's blend price. The witness explained that performance standards should require a level of association to a market by demonstrating the ability to supply the Class I needs of that market. The witness testified that milk located far from the market also should have performance standards that are workable and consistent with Federal order policy. According to the witness, the current practice of using direct deliveries from farms to distributing plants located inside the marketing area as a method to qualify plants located outside of the Central order marketing area as pool supply plants is inappropriate because milk pooled in this manner does not provide any reasonable service to the Class I needs of the market.
According to the DFA, et al., witness, the reform of Federal milk orders provided unique pooling standards that apply to each market on an individual basis. The witness testified that during the reform process, the more lenient performance standard was often selected for the new consolidated orders. According to the witness, such standards are proving to be inappropriate for the larger consolidated Central milk marketing order.
As evidence that milk is being inappropriately pooled on the order, the DFA, et al., witness noted that at the time of implementing Federal milk order reform, the consolidated Central order was expected to have Class I use of nearly 50 percent. Instead, Class I use is averaging below 30 percent, the witness noted. The witness was of the opinion that this shortfall in projected Class I use was due to pooling much more milk from sources outside the marketing area than could be explained by consolidating the nine prereform orders into the current Central order. The DFA, et al., witness asserted that milk order reform did not intend to provide for pooling milk supplies on the Central order that would not also provide a consistent and reliable service to the Class I needs of the market. Stressing that such milk does not provide a consistent and reliable service to the Class I needs of the market, the witness maintained that such milk should not be pooled on the Central order and receive the order's blend price.
The DFA, et al., witness testified that the ability of handlers to pool large volumes of milk from distant sources without having to actually deliver the milk to the market has resulted in a significant reduction of the blend price received by producers who are serving the market's Class I needs. The witness also asserted that some Central order fluid handlers are having difficulties in obtaining sufficient milk supplies and find themselves competing for a supply of milk with other fluid handlers regulated under adjacent orders where blend prices are higher.
The DFA, et al., witness also explained that a portion of the pre reform Southwest Plains order area had contributed a significant share of the milk supply needed for fluid use in the southeastern portion of the current Central marketing area. Much of the milk produced in Arkansas and southern Missouri became part of the milk supply for the Southeast order area, added the DFA, et al., witness. The witness was of the opinion that adoption of Proposal 1 would result in a higher blend price for the Central order dairy farmers and enhance the ability of local Class I handlers to procure local milk supplies.
A DFA, et al., witness from Prairie Farms testified that the significantly higher blend prices paid to producers under the neighboring Southeast and Appalachian orders are attracting milk supplies located in the southern and southeastern areas of the Central marketing area. The witness observed that these producers receive a higher price for their milk without incurring a significant change in hauling costs. The witness indicated that this situation is resulting in distributing plants needing to pay substantial overorder premiums to obtain a supply of milk for distribution in the Central marketing area.
Witnesses representing several distributing plant operators confirmed that they are experiencing problems obtaining an adequate supply of milk for fluid use, especially during the fall months. These fluid handlers supported the adoption of Proposal 1 because the link between milk pooled on the Central order needs to be tied to actual deliveries of milk to the order's pool distributing plants.
A witness from AndersonErickson (AE), a distributing plant operator regulated by the Central order, testified that the order's pooling provisions need to be revised to better condition the receiving of the order's blend price to actual performance in supplying the market's Class I needs. Similarly, a witness representing Suiza Foods (Suiza), a company which owns and operates distributing plants regulated by the Central order, testified that the pooling of milk on the Central order needs to be directly tied to actual performance in serving the fluid market. The Suiza witness stressed that actual performance in serving the fluid market should be necessary because it is the fluid market that generates the additional dollars to the marketwide pool.
The Suiza witness testified that their costs and ability to obtain raw milk for Class I use are tied directly to the pooling provisions of Federal milk orders, including the Central milk order. The witness stressed that blend prices, especially relative blend prices, provide the incentives for producers to move milk to where it is needed. However, explained the witness, Suiza faces new challenges in the Central marketing area since its formation under milk order reform. Specifically, the witness noted difficulty in procuring milk at one of their plants because local dairy farmers are delivering their milk to plants regulated on the Southeast and Appalachian orders. According to the witness, the blend prices in those orders are higher than in the Central milk order and therefore attract milk to those markets.
The Suiza witness was of the opinion that milk order reform placed
other Central order distributing plants at a similar competitive
disadvantage in competing for a supply of milk. While noting that the purpose of this proceeding is to address pooling
problems resulting in lower blend prices to Central order dairy farmers, the witness stressed that in their opinion, the real issue that needs to be addressed is whether the Central order is too large. The witness cited the geographic diversity of the order and vastly differing marketing conditions within the marketing area's boundaries to question whether the Central order is truly a viable, single milk marketing area.
A witness from Mid States Dairy, an organization that operates a distributing plant regulated by the Central order, testified that they were no longer able to source milk from their usual milksheds in southern Missouri and central Illinois. This witness stated that until recently, they had to rely on contracts with southern milk sources at premium prices to obtain a supply of milk because milk supplies were not available locally.
The DFA, et al., witness testified that the order's supply plant performance standards should continue to be adjusted seasonally but at slightly different times. According to the witness, a higher standard of performance is needed for the months of August through November because increased customer demand occurs in those months. More importantly, the witness indicated that performance should be specified for every month of the year. In this regard, the witness from Prairie Farms added that specifying August through November for increased performance would help to ease their need to obtain additional milk supplies from other marketing areas.
Using milk located within the marketing area to qualify milk for pooling at plants located far from the marketing area was described by the DFA, et al., witness as ``pyramiding.'' The witness also attributed pyramiding to inadequate performance standards. As an illustration, the witness provided evidence to show how pooling provisions permit the pooling of milk volumes that cannot reasonably demonstrate performance in serving the Class I needs of the Central marketing area. As an example, the witness explained how a single tanker load of milk delivered to a pool plant within the Central order marketing area can qualify as many as 15 additional tanker loads of milk for pooling on the order though diversions. The witness contended that the ability to pyramid milk for pooling in this way reveals the inadequacy of the current pooling standards. Eliminating the ability to pyramid milk for pooling, the witness stressed, provides a basis for lowering the order's supply plant performance standard.
The DFA, et al., witness testified that supply plants delivering milk to distributing plants not regulated by the Central milk order should not be counted in determining if the Central order's performance standards have been met. The witness indicated that such milk does not serve the Class I needs of the Central order. The witness offered that standards allowing for pool qualification to be earned from shipments to another order's distributing plants stem from prereform pooling provisions that were generally associated with ``reserve supply'' orders where Class I use was relatively small. The witness contended that the consolidated Central order is not such an order. While deliveries of milk to another order could still occur, noted the witness, the deliveries should not count toward pool qualification.
The witness from DFA, et al., also offered a modification to Proposal 1 for incorporating a ``net shipments'' feature for pool supply plants as a way to ensure that fluid milk was actually received and retained at a distributing plant for Class I use. According to the witness, this feature would prevent a supply plant from physically shipping milk into the facilities of a distributing plant only to have the milk reloaded and moved to another plant for uses other than Class I. The witness also noted that without a ``net shipments'' provision, suppliers could qualify milk for pooling on the Central order without that milk ever being available to service the Class I needs of the market.
The witnesses from AE concurred with the need for a ``net shipments'' provision, as did a witness from Foremost Farms, a fluid handler whose plants were regulated under the Central and Upper Midwest milk marketing orders. A witness from Suiza, testified that while they did not oppose a ``net shipments'' provision, they were of the view that milk actually delivered to a distributing plant was performing a service to the Class I needs of the market. To the extent that the same milk is subsequently pumped back out of the plant, indicated the witness, that decision is made by the receiving handler. Therefore, concluded the Suiza witness, such milk should be counted in determining if the supply plant performance standard is being met.
Briefs from both AE and Dean Foods \1\ reaffirmed their opposition
to the inclusion of supply plant shipments to distributing plant unit
plants as counting towards meeting pool qualifying performance
standards noting that a relatively large nonClass I volume of milk is
often associated with distributing plant units. The briefs contended
that pooling standalone Class II operations could result in placing
pooling priority for milk used in Class II dairy products on a par with
milk used for Class I. They viewed that adoption of expanding supply
plant qualifying deliveries to distributing plant units would create
inequities and perhaps even result in creating new disorderly marketing conditions.
\1\ Suiza Foods Corporation merged with Dean Foods Company on December 21, 2001, at which time the name of the merged company became Dean Foods Company.
A group of cooperative associations with members located primarily in the Upper Midwest milk marketing area opposed amendments included in Proposal 1 because it was their view that the amendments would limit their ability to pool milk on the Central order. The cooperative associations included: Associated Milk Producers, Inc. (AMPI); Foremost Farms USA (Foremost); Land O'Lakes (LOL); First District Association (FDA); Family Dairies USA; and Lakeshore Federated Dairy Cooperative (Lakeshore), comprised of Midwest Dairymen's Company, Manitowoc Milk Producers Cooperative, and Milwaukee Cooperative Milk Producers. Hereinafter this decision will collectively refer to this group of cooperative associations as the ``Upper Midwest Cooperatives.''
Testimony by the Upper Midwest Cooperatives' witnesses argued that the adoption of more restrictive pooling standards would force milk that currently is pooled on the Central order to be pooled instead with the Upper Midwest pool. According to the witnesses, this would result in lower blend prices to Upper Midwest producers because of the lower Class I use in that area. The witnesses also argued that adopting the amendments contained in Proposal 1 would establish the more stringent pooling provisions that were in effect prior to milk order reform. According to the witnesses, this would establish a barrier to pooling the milk of producers who had long been associated with the markets merged to form the Central order.
To illustrate their point that the amendments of Proposal 1 would
limit their ability to pool milk on the Central order, an Upper Midwest
Cooperatives' witness testified that under current pooling provisions,
every pound of milk delivered to Central order pool distributing plants
provides the ability to pool 15 additional pounds of milk. If the
pooling provisions proposed are adopted, the witnesses indicated that only 3 additional pounds of milk could
be pooled for each pound of milk delivered on the Central order.
The Foremost Farms witness, testifying on behalf of AMPI, LOL, Family Dairies, Midwest Dairymen, and First District Association, testified that if Proposals 1 and 5 (Proposal 5 is discussed in more detail later in this decision) were adopted, and if they were pooling the maximum amount of milk allowed in the prereform orders, approximately 400 million pounds of milk per month would no longer be pooled on the Central order. Instead, the witness testified, this milk would be pooled on the Upper Midwest order. The witness maintained that this would increase the blend price differences between the two orders.
According to the Foremost Farms witness, the blend price differences would have ranged between 32 cents per hundredweight (cwt) to as much as 91 cents per cwt for the oneyear period of September 2000 through August 2001 if the pooling standards proposed had been in effect during that time. The witness emphasized this would have had an enormous adverse effect on the net income of Upper Midwest producers.
An Upper Midwest Cooperatives' witness from Family Dairies testified in opposition to pooling provision amendments that would limit the ability to pool milk on the Central Order and result in lower blend prices to producers located in the Upper Midwest. The witness stated that adoption of such proposals would result in creating more regional pricing problems and give selected handlers the ability to use the blend price as a procurement tool in areas outside the Central Order.
A witness for Lakeshore joined other Upper Midwest Cooperatives' witnesses by also stating their concern that the proposed pooling changes specifically in Proposals 1, 3, 5, and 7 (Proposals 3, 5 and 7 are discussed later in this decision) could force milk currently pooled on the Central order to instead be pooled on the Upper Midwest order. According to the witness, this would result in decreasing producer returns for those dairy farmers located in Northern Illinois and the surrounding area. Specifically, the Lakeshore witness explained that while a fluid milk plant at Rockford, Illinois, and a Dubuque, Iowa, distributing plant have the same federal orderdictated Class I price, the Rockford plant is disadvantaged because it has to pay a higher competitive value to attract Class I milk, adversely impacting their northern Illinois businesses.
A witness from LOL emphasized the necessity of basing pooling provisions on performance in serving the Class I needs of the market rather than the location of where milk originates. The witness was also of the opinion that the current order provisions provide adequate incentives to service Central order distributing plants. Stating that producers who share in the pool must be willing to serve the market, the LOL witness nevertheless stressed that the ability to pool milk on the Central order pool should not be restricted for the benefit of a select few. The LOL witness testified that milk no longer pooled on the Central order would instead be pooled on adjoining milk orders such as the Upper Midwest or Western marketing areas and characterized these areas as already carrying a disproportionate volume of reserve milk.
In response to concerns that Central order Class I handlers are having difficulty in obtaining a supply of milk, the LOL witness provided an analysis which suggested that tightening pooling provisions would not achieve what the proponents of Proposal 1 assert. The witness estimated that adopting the proposed pooling provisions would result in an increase of 35 cents per cwt in the Central Order blend price. According to the witness, such an increase would still leave the Central order blend price $1.48 per cwt below the blend price of the Southeast order thus weakening the argument that the higher blend prices in orders to the south and southeast would mitigate the problem of Central order distributing plants securing a supply of milk.
The LOL witness asserted that the combination of Proposals 1, 3, 5, and 7 would place unreasonable restrictions on milk produced outside the marketing area relative to milk produced inside the marketing area. The witness indicated that supply plants located outside the marketing area would be required to receive milk and transfer it to distributing plants, thereby causing uneconomic movements of milk, adding costs and degrading milk quality due to additional handling. Furthermore, barriers to trade would be created by adopting these proposals, indicated the witness.
Two of the Upper Midwest Cooperatives' witnesses introduced cost ofproduction studies conducted by universities indicating that dairy farmers in northern Illinois and Wisconsin enjoy little financial return from their dairy operations. The Foremost Farms witness cited the Wisconsin study to indicate that in Wisconsin the marginal return of producing milk can be less than zero. According to the witnesses, the financial impact by limiting participation in the Central order pool through increased performance standards would be detrimental to Upper Midwest dairy farmers. In this regard, all of the Upper Midwest Cooperatives' witnesses stressed that their member producers are considered small businesses pursuant to the Regulatory Flexibility Act and that such status should be considered in determining appropriate performance standards for the Central order.
The witnesses for AE and Suiza testified in opposition to considering supply plant shipments to distributing plant ``units'' as counted in determining poolqualifying deliveries unless each plant of the ``unit'' could independently be a distributing plant under the terms of the order. The witness noted that relatively large nonClass I volumes of milk associated with a distributing plant unit could result in reducing the actual need for qualifying shipments made to distributing plants. In posthearing briefs, Dean Foods indicated opposition to expanding qualifying shipments to any plant that is part of a distributing plant unit, noting that such performance standards would be inequitable and result in the creation of new disorderly marketing conditions.
The record of this proceeding strongly supports concluding that the various features of the Central milk marketing order's supply plant pooling standards are either inadequate or unnecessary. These deficiencies contained in the pooling standards for supply plants are causing much more milk to be pooled on the Central milk order than can reasonably be considered as properly associated with the Central marketing area. Such milk does not demonstrate reasonable levels of performance necessary to conclude that it provides a regular and reliable service in satisfying the Class I milk demands of the Central marketing area.
The pooling standards of all milk marketing orders, including the
Central order, are intended to ensure that an adequate supply of milk
is supplied to meet the Class I needs of the market and to provide the
criteria for identifying those who are reasonably associated with the
market as a condition for receiving the order's blend price. The
pooling standards of the Central order are represented in the Pool
Plant, Producer, and the Producer milk provisions of the order. Taken
as a whole, these provisions are intended to ensure that an adequate
supply of milk is supplied to meet the Class I needs of the market. In addition, it provides the
criteria for identifying those whose milk is reasonably associated with the market by meeting the Class I needs and thereby sharing in the marketwide distribution of proceeds arising primarily from Class I sales. Pooling standards of the Central order are based on performance, specifying standards that, if met, qualify a producer, the milk of a producer, or a plant to share in the benefits arising from the classified pricing of milk.
Pooling standards that are performancebased provide the only viable method for determining those eligible to share in the marketwide pool. This is because it is the additional revenue from the Class I use of milk that adds additional income, and it is reasonable to expect that only those producers who consistently bear the costs of supplying the market's fluid needs should be the ones to share in the distribution of pool proceeds. Pool plant standardsspecifically standards that provide for the pooling of milk through supply plants also need to reflect the supply and demand conditions of the marketing area. This is important because producers whose milk is pooled receive the market's blend price.
Similarly, supply plant pooling standards should provide for those features and accommodations that reflect the needs of proprietary handlers and cooperatives in providing the market with milk and dairy products. When a pooling feature's use deviates from its intended purpose, and its use results in pooling milk that cannot reasonably be determined as serving the fluid needs of the market, it is appropriate to reexamine the need for continuing to provide that feature as a necessary component of the pooling standards of the order. Because one of the objectives of pooling standards is ensuring an adequate supply of fluid milk for the market, a feature which results in pooling milk on the order that does not provide such service should be considered as unnecessary for that marketing area.
Pooling standards are needed to identify the milk of those producers who are providing service in meeting the Class I needs of the market. If a pooling provision does not reasonably accomplish this end, the proceeds that accrue to the marketwide pool from fluid milk sales are not properly shared with the appropriate producers. The result is the unwarranted lowering of returns of those producers who actually incur the costs of servicing and supplying the fluid needs of the market.
The posthearing brief received from the Upper Midwest Cooperatives continued to stress opposition to the amendments offered by Proposals 1 (and Proposals) 3, 5, and 7. They view that such changes to the Central milk marketing order are discriminatory and that the proposed amendments would foster inefficiencies in milk marketing. The brief re iterated their view that the Department's policy has been to design plant and producer pooling provisions that provide a regulatory balance between the fluid needs of the market and transportation efficiency to meet those needs. In this regard, the brief stressed the opinion that orderly marketing is promoted by not requiring shipments to distributing plants when such shipments are not needed for fluid uses. Additionally, the brief asserts that the Department has long recognized that excluding milk from the pool is a greater threat to orderly marketing in surplus marketing areas than is the pooling of surplus milk supplies under rigid performance rules.
The Upper Midwest Cooperatives' brief added that marketwide pooling has been determined as a constitutional means for surplus Grade A milk to share in the additional revenue resulting from fluid sales. Additionally, the brief noted that the 43day national hearing review and reform proceeding of 1990and the Second Amplified Decision of 1996 of that proceedingarticulate the policy of the Department to allow milk to shift to different markets in response to blend price changes. The brief also cited case law to maintain that the statutory scheme for promoting orderly marketing is the sharing of proceeds among producers in the form of uniform, or blend, prices. The opinion expressed in the Upper Midwest brief cites that case law has concluded that producer blend prices cannot be thwarted by a discriminatory transportation burden imposed on distant producers by government mandate.
The record of this proceeding clearly supports a finding that certain features of pooling standards of the Central Order established under the Federal order reform process, especially as they relate to supply plants, are either inadequate or unnecessary. The Final Decision of milk order reform examined and discussed the various pooling standards and features of the prereform orders for their applicability in a new, larger consolidated milk order. The pooling standards and features adopted for the consolidated Central Order were designed to reflect and retain those standards and features of the prereform orders so as not to cause a significant change and indeed to provide for the continued pooling of milk that had been pooled by those market participants.
The record provides strong evidence to conclude that several features of the Pool plant definition, specifically the provisions and features for supply plants, are not being used for the reasons they were intended. Other shortcomings of the Central order, specifically as they relate to producer milk (discussed later in this decision) also contribute to the inappropriate pooling of the milk of producers who are not a legitimate part of the Central milk marketing area. Here too the impact is an unwarranted pooling of milk classed at lower prices resulting in a lower blend price to those producers who actually and consistently supply the Class I needs of the market.
This decision finds that the milk of some producers is benefitting from the blend price of the Central order while not demonstrating actual and consistent service in satisfying the Class I needs of the Central milk marketing area. This finding is attributed to faulty pooling standards. The pooling provisions provided in the Final Decision of milk order reform established pooling standards and pooling features that envisioned the needs of the market participants resulting from the consolidation of nine prereform milk marketing areas consolidated to form the current Central milk marketing area. The reform Final Decision, as it related to the Central marketing area, did not intend or envision that the pooling standards and pooling features adopted would result in the sharing of Class I revenues with those persons, or the milk of those persons, who would not be demonstrating a measure of service in providing the Class I needs of the Central marketing area.
The reform Final Decision examined and discussed various pooling
standards and features of the prereform orders for applicability in a
new, larger consolidated milk order. The pooling standards and features
adopted for the Central order were intended to reflect and retain those
standards and features of the prereform orders so as to not cause a
significant change, and indeed to provide for the continued pooling of
milk that had been pooled by those market participants. The pooling
provisions of the Central order were based largely on the predecessor
Iowa milk marketing order (then known as Order 79). The Iowa milk
marketing order contained the more liberal pooling provisions of the
nine orders consolidated to form the current Central order. The record
of this proceeding reveals that the combination and features adopted
for pool plants, especially as they apply to pool supply plants, are not reasonable or appropriate
standards for the much larger consolidated Central order.
The record of this proceeding reveals that twothirds of the Central marketing area population (and corresponding demand for fluid milk) is located in the southern and western portions of the marketing area. However, the adoption of the current Central order pooling provisions did not anticipate that the adopted pooling standards would not adequately consider the impact on the northern Central marketing area resulting from the Arkansas and southern Missouri portions of the prereform Southwest Plains marketing area becoming part of the current Southeast marketing area. Milk produced in these regions had been regularly pooled on the Southeast milk order prior to the expansion of the Southeast order as part of milk order reform and is an integral part of the current Southeast marketing area milkshed. Changes in marketing conditions, as revealed in the record, have resulted from the existing pooling standards as an important factor in explaining why fluid handlers in the southern reaches of the Central order have had difficulties obtaining a supply of milk.
As previously indicated, pooling milk on the Central order without demonstrating actual performance in servicing the Class I needs of the market area is neither appropriate nor intended. The record indicates that the volume of milk pooled on the Central Order originating from sources far outside the marketing areas of the nine predecessor marketing areas increased by 186 percent when comparing, for example, the prereform month of December 1998 with the postreform month of December 2000. Of the increase shown in this comparison, milk pooled on the order and originating within the marketing area increased by only 10 percent. Of the additional milk pooled on the Central order, the greatest increase is represented by milk priced at lower class prices. Additionally, testimony by Upper Midwest Cooperatives' witnesses clearly indicated that under the Central order's current pooling provisions, milk pooled on the Central order is not necessarily available to fill the Central market's fluid needs.
This decision agrees with the proponents and those entities who expressed support for adopting Proposal 1 that the order's pooling standards warrant changes. This decision finds, however, that the performance standards of Proposal 1 are unreasonably high when considering the complete context of the pooling provision modifications made in this decision. If adopted as proposed together with the other amendments adopted in this decision, milk that has had a long established association in supplying those prereform marketing order areas consolidated to form the Central order may no longer be pooled on the Central order. Most of this milk originates from areas in the Upper Midwest marketing area. The performance standards sought in Proposal 1 may unintentionally compound the difficulties of Central order distributing plants in securing needed milk supplies that could be made available if not for unreasonably high performance standards. Accordingly, this decision adopts the following amendments to the pooling standards and features of the order:
1. Performance standards for supply plants are reduced to (1) 20 percent in each of the months of August through February and (2) 15 percent in each of the months of March through July. Lower supply plant shipping performance standards are established because of accompanying adjustments to the order's other pooling provisions and features. Lowering supply plant performance standards also addresses the concern by Upper Midwest Cooperatives that a ``tightening'' of the order's performance standards would erect an unreasonable barrier in supplying to, and to pooling milk on, the Central order. To the extent that the supply plant performance standards may warrant further refinement, the order already provides the means for initiating a change by providing authority for the Market Administrator to consider and make needed changes.
Given that performance standards are specified in every month, the need to continue with the automatic pool plant feature for supply plants during the 3month period of May through July is rendered unnecessary and contrary to establishing such standards of performance in the first place. The adoption of yearround performance standards, adjusted seasonally, will better assure that a consistent and reliable supply of milk will be provided to the fluid market throughout the year.
August should be included for those months in which a higher performance standard is warranted. Including August in the higher performance months is supported by record evidence which reveals August as the beginning of seasonal increased demand due to the opening of schools occurring at the same time as a general overall decline in milk supplies.
2. This decision eliminates a handler's ability to qualify plants located outside the marketing area by cooperative handlers (as defined in Sec. 1000.9(c)) or diversions from a pool plant of the Central order to another pool plant of the Central order. The record supports a finding that milk pooled in this manner does not actually demonstrate real service in meeting the Class I needs of the Central marketing area. Milk pooled in this manner was often referred to in record testimony as ``pyramiding.'' No reasonable basis can be found in the record evidence to conclude that milk pooled in this manner warrants receiving the Central order blend price. The record can only support concluding that milk pooled in this manner serves to lower the blend price paid to producers who actually do supply the market's Class I needs.
3. This decision finds that shipments of milk to distributing plants regulated by another Federal milk marketing order should not be considered in determining if a supply plant meets the specified performance standard for pooling. The performance standards adopted in this decision for the Central order are designed so that its distributing plants are adequately supplied with milk. Milk shipments to distributing plants regulated by another Federal order only serve the Class I needs of that other order. Pooling standards for the Central marketing area provide the criteria for determining the milk of those producers who are serving the Class I needs of the Central marketing area and who would thereby receive the Central order blend price. It is reasonable in light of this objective to conclude that serving the needs of another market is not providing a service to the Central marketing area. Accordingly, such milk should not be considered as a qualifying shipment for meeting the supply plant performance standards of the Central order.
4. This decision finds that the modification of Proposal 1 offered by DFA to limit pool qualifying deliveries to distributing plants on a ``net shipments'' basis is warranted. Milk deliveries to distributing plants will be limited to milk transferred or diverted and physically received by distributing pool plants, less any transfers or diversions of bulk fluid milk products from the distributing plant. Relying on net shipments for determining pool qualifying deliveries to distributing plants is applicable to both supply plant deliveries and milk moved to distributing plants directly from the farms of producers. Adoption of this feature will help ensure that milk not serving the market's Class I needs will not be counted towards meeting the specified performance standard.
Providing a net shipments feature for the Central order is reasonable and will likely not be burdensome despite opposition to its adoption. Even with the inappropriate pooling of milk on the order, lower supply plant performance standards adopted in this decision are at levels below the Central market's Class I use of milk. While distributing plants do have some transfers and diversions of milk resulting from variations in demand arising from changing fluid milk needs on weekend days and holidays, this decision finds it is doubtful that the magnitude of these transfers and diversions would be such that a supply plant would risk loss of pool plant status. Additionally, other changes to the order's pooling standards adopted in this decision (discussed below) should provide the necessary safeguards that would make it even more unlikely that a supply plant would lose its pool status. This decision finds that adoption of a net shipments feature in the pooling standards of the Central order also will aid in properly identifying the milk of those producers who actually supply milk to meet the Central marketing area's fluid needs.
b. Cooperative Supply Plant Performance Standards
A cooperative supply plant pooling provision, together with the feature of authorizing the market administrator to adjust the performance standards for cooperative supply plants, should be retained. It is unclear whether Proposals 2 and 4, seeking removal of the cooperative supply plant performance standard and the corresponding provision authorizing the market administrator to adjust those standards, should be adopted in this tentative decision. Based on this, the Department has not adopted these proposals in this tentative decision.
The Central marketing order provides for a cooperative association plant as a type of supply plant on the order provided the cooperative association's plant is located within the marketing area and that at least 35 percent of the milk which the cooperative association handles is shipped to a Central order distributing plant during any current month or in the immediately preceding 12month period. In addition, the provision requires that the cooperative association plant not qualify as a distributing or supply plant under the Central order or any other Federal milk marketing order.
The DFA, et al., witness stated that adoption of some of the other proposals considered in this proceeding, such as modifying supply plant performance standards and providing for net shipments and a onetime ``touch base'' standard, makes retaining this provision unnecessary. The witness also testified that the provision has not been used since implementation of the consolidated Central order.
Elimination of the provision was supported in testimony by witnesses representing both AE and Suiza Foods. Both witnesses stated that the provision is unnecessary and is not being used. In their post hearing briefs, both AE and Dean Foods reiterated that no plant is presently qualified under the cooperative supply plant definition.
Although there was no opposition testimony to the removal of the cooperative supply plant provision in the Central Order, this provision and the corresponding provision authorizing the market administrator to make needed adjustments should be retained pending further public comment. The testimony contained in the record does not contain sufficient reason for a finding to eliminate this standard other than it is a provision that is not used. The provision allows pool qualification for cooperative supply plants on either an average of the preceding 12month's shipments or the current month's shipments and provides pooling flexibility for cooperatives. The cooperative supply plant definition contains features that are unique and intentional. While the proponents and supporters of Proposals 2 and 4 testified that the cooperative supply plant provision is not currently being used, testimony received did not address the apparently diminished importance of this pooling provision that was used in four of the nine prereform milk orders consolidated to form the Central order. The provision also is a pooling feature provided in most other Federal orders and, as with the Central order, is not currently being used in most of the other Federal orders containing this provision. Given the current record, removing this provision from the Central order may result in the unintended removal of a pooling provision intended for cooperative associations that may be needed at some future time. Accordingly, this decision does not adopt Proposals 2 and 4.
c. Supply Plant System Standards
Proposal 3 of the hearing notice seeking to increase the performance standards for a system of supply plantsand modified at the hearing to limit supply plant system formation to single handler entities instead of currently allowing such systems to be formed by multiple handlersis not adopted in this tentative decision. As previously discussed, the record contains evidence that distributing plants regulated by the Central milk order are having difficulty obtaining an adequate supply of milk for fluid use. While this proposal's aim is, in part, to address this problem, there nevertheless remains the potential for a supply plant system to pool milk supplies that may not demonstrate actual service to the fluid needs of the Central marketing area. The modification of the proposal seeking to limit supply plant system formation to a single handler entity has merit. However, taking into account the current record, it should not be adopted as a modification to the order's current system pooling provision in this tentative decision. It is noted that the hearing testimony often referred to supply plant systems as ``supply plant units.'' Nevertheless, it is clear that hearing participants intended to mean ``supply plant systems'' and accordingly, this tentative decision considered the testimony in the context intended.
The supply plant system provisions of the Central order currently provide that a system of supply plants may qualify for pooling if 2 or more plants operated by one or more handlers meet the applicable performance standards established for a supply plant. A supply plant system would qualify to pool all of its milk receipts, including diversions, by meeting a performance standard of 25 percent in each of the months of September through November and January and of 35 percent for all other months. The order currently limits the formation of a supply plant system to plants located within the marketing area.
Proposal No. 3, by DFA, et al., would raise the performance
standards for supply plant systems by 5 percentage points for each of
the months of August through November and by 3 percentage points higher
in all other months. The proponent witness (representing DFA, et al.)
testified that providing for supply plant systems extends benefits and
efficiencies not otherwise available for individual handlers to reduce
transportation costs by delivering milk from a more advantageously
located supply plant at a volume that would satisfy the performance
standards as if all supply plants not as advantageously located had
individually met the indicated performance standard. According to the
witness this also would avail plant efficiencies in the manufacturing
operation of all supply plants that are part of the system. The witness
also envisioned that the proposal could ease otherwise disruptive
shipping obligations to their manufacturing operations, potentially [[Page 69918]]
reduce paperwork, and provide the opportunity for producers to receive prices higher than regulated minimum prices. Because system pooling offers a rewarding degree of pooling flexibility, the witness was of the opinion that a supply plant system should meet slightly higher performance standards than those applicable for a single supply plant. This rationale is consistent, the witness indicated, with the pre reform Chicago Regional order which specified a performance standard at twice the rate for supply plant systems than was applicable for individual supply plants.
According to the DFA, et. al., witness, a higher performance standard for supply plant systems would contribute to making it easier to obtain additional milk supplies in the most efficient manner. Additionally, the witness was of the opinion that this change, together with other changes proposed, would eliminate the ability to ``pyramid'' the pooling of milk on the order and renew interest in supply plant systems for the market.
A witness from Associated Milk Producers, Inc. (AMPI), who also testified on behalf of the Upper Midwest Cooperatives, opposed adoption of Proposal 3. The witness explained that increased performance standards would simply cause a handler to discontinue pooling its plants as a system, thus forcing the handler to ship a lower percentage of milk receipts from each of the individual supply plants. The witness asserted that this alternative would increase transportation costs without providing additional milk to distributing plants.
An Upper Midwest Cooperatives' witness of AMPI also testified that a supply plant system operated by multiple handlers has the potential for one handler with substantially more sales to distributing plants than needed to meet the supply plant performance standard to pool the milk receipts of other handlers. According to the witness, this could reduce the total volume of milk shipments to distributing plants while technically meeting the order's performance standards. According to the witness, such a provision allows some handlers to entirely escape responsibility for supplying the fluid market and encourages handlers to pay other handlers to qualify their milk supplies for pooling. In light of these concerns, the witness offered a modification to Proposal 3 that limits supply plant system formation to single handler entities.
A witness testifying on behalf of Foremost, AMPI, LOL, Family Dairies, Midwest Dairymen, and First District Association supported the advantages supply plant systems offer as a means to promote more efficient movement of milk to distributing plants. However, given the higher performance standards called for by the proposal, the witness indicated opposition to Proposal 3. The witness was of the opinion that there is no justification for supply plant systems to be required to meet higher performance standards than individual supply plants. The witness did note that a higher performance standard for a supply plant system formed by multiple handlers may be appropriate.
Providing pooling flexibility by permitting more than a single supply plant to form into a single pooling system offers the potential to increase efficiencies by minimizing transportation costs that may not be obtainable when each supply plant of the handler would need to meet the performance standards separately for each plant. Additionally, providing for supply plant systems serves to accommodate the specialization of plant operations without otherwise encouraging such a plant to deliver milk to a distributing plant solely to retain pool status. Providing the opportunity to gain such efficiencies is intended by the supply plant system provision because it does not disrupt the flow of milk for Class I use from supply plants to distributing plants.
The record suggests that supply plant systems formed by multiple handler entities offer the potential to pool milk on the Central order without meeting intended performance standards. The modification to Proposal 3, which would limit the formation of a supply plant system to a single handler entity, may offer a warranted change in the current supply plant system provisions without changing the current performance standards. However, this tentative decision finds that the record does not provide sufficient evidence to tentatively adopt a change in the performance standards for supply plant systems or to limit the formation of supply plant systems.
d. Standards for Producer Milk
Several changes to the pooling standards contained in the Producer milk definition of the Central Order should be adopted immediately. The adopted amendments were largely contained in a proposal, published in the hearing notice as Proposal 5, which was modified at the hearing by its proponents. These producer milk pooling standard changes are necessary to more accurately identify the milk of those dairy farmers who actually serve the Class I needs of the market. The amendments include: (1) Establishing yearround diversion limits, adjusted seasonally, for the amount of milk that a pool plant may divert to nonpool plants at 80 percent for each of the months of August through February and at 85 percent for each of the months of March through July. Accordingly, the current lack of diversion limits for the months of May through August is corrected; (2) Diversion limits for supply plants will be based on deliveries to Central order pool distributing plants and will not include deliveries to other pool supply plants of the Central order. This will eliminate the ability of a pool plant to pool increased volumes of milk by diversion to nonpool plants by diverting milk to a second pool plant; and (3) Establishing a net shipments feature for producer milk. These amendments will maintain the integrity of the performance standards for pool plants of the Central marketing area and will more appropriately identify those producers whose milk actually is supplying the Central marketing area's Class I milk needs.
The Producer milk provision of the Central order provides for diversion limits of 65 percent during the months of September through November and January and 75 percent during the months of February through April and December. While the Central order limits the pooling eligibility of diverted milk to nonpool plants in specified months, the order places no limits on milk diversions to other pool supply plants of the order. Milk diverted from one pool plant to another pool plant enables the diverting pool plant to increase the amount of milk that can be pooled but diverted to nonpool plants. During the months of May through August, an unlimited amount of producer milk may be diverted by pool plants to nonpool plants. The milk of a producer is not eligible for diversion until at least one day's production of a dairy farmer has been physically received at a pool plant
FOR FURTHER INFORMATION CONTACT
Gino M. Tosi, Marketing Specialist, USDA/AMS/Dairy Programs, Order Formulation and Enforcement Branch, Room 2968, 1400 Independence Avenue, SW., STOP 0231, Washington, DC 20250 0231, (202) 6901366, email address: firstname.lastname@example.org.