[Federal Register Volume 59, Number 158 (Wednesday, August 17, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-19982]


[[Page Unknown]]

[Federal Register: August 17, 1994]


_______________________________________________________________________

Part V





Department of Agriculture





_______________________________________________________________________



Agricultural Marketing Service



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7 CFR Parts 1001, 1002, et al.



Milk in New England and Other Marketing Areas; Amplified Decision; Rule
DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Parts 1001, 1002, 1004, 1005, 1006, 1007, 1011, 1012, 1013, 
1030, 1032, 1033, 1036, 1040, 1044, 1046, 1049, 1050, 1064, 1065, 
1068, 1075, 1076, 1079, 1093, 1094, 1096, 1099, 1106, 1108, 1124, 
1126, 1131, 1134, 1135, 1137, 1138, 1139

[Docket No. AO-14-A64, etc.; DA-90-017]
RIN: 0581-AA37

 

Milk in the New England and Other Marketing Areas; Amplified 
Decision 

------------------------------------------------------------------------
    7 CFR part               Marketing area                AO Nos.      
------------------------------------------------------------------------
1001..............  New England.....................  AO-14-A64         
1002..............  New York-New Jersey.............  AO-71-A79         
1004..............  Middle Atlantic.................  AO-160-A67        
1005..............  Carolina........................  AO-388-A3         
1006..............  Upper Florida...................  AO-356-A29        
1007..............  Georgia.........................  AO-366-A33        
1011..............  Tennessee Valley................  AO-251-A35        
1012..............  Tampa Bay.......................  AO-347-A32        
1013..............  Southeastern Florida............  AO-286-A39        
1030..............  Chicago Regional................  AO-361-A28        
1032..............  Southern Illinois-Eastern         AO-313-A39        
                     Missouri.                                          
1033..............  Ohio Valley.....................  AO-166-A60        
1036..............  Eastern Ohio-Western              AO-179-A55        
                     Pennsylvania.                                      
1040..............  Southern Michigan...............  AO-225-A42        
1044..............  Michigan Upper Peninsula........  AO-299-A26        
1046..............  Louisville-Lexington-Evansville.  AO-123-A62        
1049..............  Indiana.........................  AO-319-A38        
1050..............  Central Illinois................  AO-355-A27        
1064..............  Greater Kansas City.............  AO-23-A60         
1065..............  Nebraska-Western Iowa...........  AO-86-A47         
1068..............  Upper Midwest...................  AO-178-A45        
1075..............  Black Hills, South Dakota.......  AO-248-A21        
1076..............  Eastern South Dakota............  AO-260-A30        
1079..............  Iowa............................  AO-295-A41        
1093..............  Alabama-West Florida............  AO-386-A11        
1094..............  New Orleans-Mississippi.........  AO-103-A53        
1096..............  Greater Louisiana...............  AO-257-A40        
1097\1\...........  Memphis, Tennessee..............  AO-219-A46        
1098\1\...........  Nashville, Tennessee............  AO-184-A55        
1099..............  Paducah, Kentucky...............  AO-183-A45        
1106..............  Southwest Plains................  AO-210-A52        
1108..............  Central Arkansas................  AO-243-A43        
1124..............  Pacific Northwest...............  AO-368-A19        
1126..............  Texas...........................  AO-231-A60        
1131..............  Central Arizona.................  AO-271-A29        
1134..............  Western Colorado................  AO-301-A22        
1135..............  Southwestern Idaho-Eastern        AO-380-A9         
                     Oregon.                                            
1137..............  Eastern Colorado................  AO-326-A26        
1138\2\...........  New Mexico-West Texas...........  AO-335-A36        
1139..............  Great Basin.....................  AO-309-A30        
------------------------------------------------------------------------
\1\The Memphis, Tennessee and Nashville, Tennessee, Orders were         
  terminated effective July 31, 1993.                                   
\2\The Lubbock-Plainview, Texas Panhandle and Rio Grande Valley Orders  
  were merged to form the New Mexico-West Texas order, effective        
  December 1, 1991.                                                     

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Amplified Decision.

-----------------------------------------------------------------------

SUMMARY: On April 14, 1994, the United States District Court for the 
District of Minnesota issued a memorandum opinion and order that, in 
part, directed the Secretary of Agriculture to issue an amplified 
decision that more fully explains the conclusions reached in a final 
decision published in the Federal Register on March 5, 1993. This 
amplified decision responds to that order and supplements and clarifies 
the findings and conclusions of the final decision.

FOR FURTHER INFORMATION CONTACT: John F. Borovies, Chief, Order 
Formulation Branch, USDA/AMS/Dairy Division, Room 2968, South Building, 
P.O. Box 96456, Washington, DC 20090-6456, (202) 720-6274.

SUPPLEMENTARY INFORMATION: This administrative action is governed by 
the provisions of 5 U.S.C. 556 and 557 and therefore is excluded from 
the requirements of Executive Order 12866.
    The Regulatory Flexibility Act (5 U.S.C. 601-612) requires the 
Agency to examine the impact of a final rule on small entities. 
Pursuant to 5 U.S.C. 605(b), the Administrator of the Agricultural 
Marketing Service has certified that this action will not have a 
significant economic impact on a substantial number of small entities. 
Each order, as amended, will promote more orderly marketing of milk by 
producers and regulated handlers.
    This final rule has been reviewed under Executive Order 12778, 
Civil Justice Reform. This action is not intended to have a retroactive 
effect. This action will not preempt any state or local laws, 
regulations, or policies, unless they present an irreconcilable 
conflict with the rule.
    The Agricultural Marketing Agreement Act of 1937, as amended (7 
U.S.C. 601-674) (AMAA), provides that administrative proceedings must 
be exhausted before parties may file suit in court. Under section 
608c(15)(A) of the AMAA, any handler subject to an order may file with 
the Secretary a petition stating that the order, any provisions of the 
order, or any obligation imposed in connection with the order is not in 
accordance with law and requesting a modification of the order or to be 
exempted from the order. A handler is afforded the opportunity for a 
hearing on the petition. After a hearing the Secretary 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 to review the 
Secretary's ruling on the petition, provided a complaint is filed not 
later than 20 days after the date of the entry of the ruling.
    When the administrative proceeding in this matter was initiated, 
the Notice of Hearing listed separately the Lubbock-Plainview, Texas 
(Part 1120); the Texas Panhandle (Part 1132); and Rio Grande Valley 
(Part 1138) orders. A hearing on a merger of these three orders was 
held in December 1989. As a result of that hearing, the three orders 
were merged effective December 1, 1991, under the name of the New 
Mexico-West Texas order, which is 7 CFR Part 1138. Therefore, all 
proposed order language in connection with this proceeding is in terms 
of the merged order. In this and future documents in this proceeding, 
the New Mexico-West Texas order will replace the three orders named 
above.
Prior Documents in This Proceeding
    Advance Notice of Proposed Rulemaking: Issued March 29, 1990; 
published April 3, 1990 (55 FR 12369).
    Notice of Hearing: Issued July 11, 1990; published July 17, 1990 
(55 FR 29034).
    Extension of Time for Filing Briefs and Reply Briefs: Issued March 
28, 1991; published April 3, 1991 (56 FR 13603).
    Recommended Decision: Issued November 6, 1991; published November 
22, 1991 (56 FR 58972).
    Extension of Time for Filing Exceptions: Issued December 24, 1991; 
published January 6, 1992 (57 FR 383).
    Final Decision: Issued February 5, 1993; published March 5, 1993 
(58 FR 12634).
    Proposed Termination of Order: Issued April 20, 1993; published 
April 27, 1993 (58 FR 25577).
    Final Rule and Order: Issued April 20, 1993; published May 11, 1993 
(58 FR 27774).
    Referendum Order: Issued June 25, 1993; published July 1, 1993 (58 
FR 35362).
    Final Rule and Withdrawal: Issued August 9, 1993; published August 
17, 1993 (58 FR 43518).
    Correction of Final Rule: Issued November 29, 1993; published 
December 6, 1993 (58 FR 64110).

Preliminary Statement

    A public hearing was held upon proposed amendments to the marketing 
agreements and the orders regulating the handling of milk in the New 
England and other marketing areas. The hearing was held, pursuant to 
the provisions of the AMAA and the applicable rules of practice (7 CFR 
Part 900), at Eau Claire, Wisconsin; Minneapolis, Minnesota; St. Cloud, 
Minnesota; Syracuse, New York; Tallahassee, Florida; and Irving, Texas, 
on September 5, 1990, through November 20, 1990. Notice of such hearing 
was issued on July 11, 1990, and published July 17, 1990 (55 FR 29034).
    Upon the basis of the evidence introduced at the hearing and the 
record thereof, the Administrator, on November 6, 1991, issued his 
recommended decision containing notice of the opportunity to file 
written exceptions thereto. Following the submission of exceptions and 
comments on the recommended decision, a final decision was issued on 
February 5, 1993.

General Basis for This Amplified Decision

    On April 14, 1994, the United States District Court for the 
District of Minnesota issued a memorandum opinion and order. The Court 
held that the Secretary of Agriculture's final decision for the ``1990 
National Hearing'' on amending Federal milk orders was deficient in 
part. The Court found that the Secretary's decision to retain the 
existing Class I pricing structure was tantamount to a finding that the 
structure continued to satisfy the requirements of the AMAA as set out 
in section 608c(18). The Court stated that this conclusion might or 
might not be supported by the substantial evidence from the 1990 
National Hearing, but since the explicit findings and explanations 
relative to the Sec. 608c(18) factors were not issued, the Court was 
unable to make that determination. The final decision was remanded to 
the Secretary for 120 days for filing of an amplified decision.
    This amplified decision provides additional findings and 
conclusions that address the material issue on the record of the 1990 
National Hearing concerning Class I milk pricing and related issues. 
This document provides an amplified explanation of why the Secretary 
decided to not change the Class I pricing structure of Federal milk 
marketing orders and that such determination is consistent with the 
pricing requirements of section 608c(18) of the AMAA.

Findings, Explanations, and Conclusions

    The following findings, explanations, and conclusions on the 
material issues are based on evidence presented at the hearing and the 
record thereof:

Statutory Price Factors

    7 U.S.C. 608c(18) states:
    Whenever the Secretary finds, upon the basis of the evidence 
adduced at the hearing required by section 608b of this title or 
this section, as the case may be, that the parity prices of such 
commodities are not reasonable in view of the price of feeds, the 
available supplies of feeds, and other economic conditions which 
affect market supply and demand for milk and its products in the 
marketing area to which the contemplated agreement, order, or 
amendment relates, he shall fix such prices as he finds will reflect 
such factors, insure a sufficient quantity of pure and wholesome 
milk to meet current needs and further to assure a level of farm 
income adequate to maintain productive capacity sufficient to meet 
anticipated future needs, and be in the public interest.

    The statute mandates a two-step analysis for determining the 
appropriate level of prices under Federal milk market orders. The first 
step involves ascertainment of parity prices. If the Secretary finds 
that the parity price levels are not reasonable, then the second step 
requires investigation of appropriate price levels. Both pricing 
standards require recognition of explicit statutory factors, namely the 
price of feeds, the available supplies of feeds, and other economic 
conditions which affect market supply and demand.
    Parity prices are, and have been, at a level that is significantly 
higher than the prices applicable in competitive milk markets. At the 
administrative hearing, official notice was requested and granted for a 
regular publication of the United States Department of Agriculture 
titled ``Dairy Situation and Outlook Yearbook'', DS-426, Economic 
Research Service, August 1990. On page 10, Table 1.--United States 
dairy situation at a glance, annual average numbers are listed for 
prices received by farmers (all-milk price for milk sold to plants) and 
how this price level relates to the parity price measure. The 
statistics reveal that over the 7-year period from 1983 through 1989, 
the simple average all-milk price was approximately 55 percent of the 
value of the calculated parity price level. These statistics show that 
the calculated parity price levels relative to the all-milk price would 
be excessively high because more than ample supplies of milk were 
available for all uses at prices far below the parity price level, and 
thus, the parity price is not reasonable. This finding was set forth in 
the final decision at 58 FR 12675. Accordingly, the second step of the 
section 608c(18) analysis was undertaken. The second step of price 
determination requires a more in-depth analysis of dairy market 
structure. The statute allows the Secretary to decide the price levels 
that will achieve articulated market performance goals: the chosen 
prices must ensure a sufficient supply of pure and wholesome milk to 
meet current and future market needs and be in the public interest. As 
outlined below, the Secretary conducted an extensive analysis of each 
individual marketing order in light of the statutorily-required dairy 
market performance goals.
    As required by 7 U.S.C. 608c(18), any administratively recognized 
price level must reflect the price of feeds, the available supplies of 
feeds, and other economic conditions that affect market supply and 
demand. The key economic concept focuses on supply and demand. Milk 
markets consist of both buyers and sellers, the buyer representing a 
demand for what the seller can supply. Each side could be studied 
independently. However, it is the simultaneous consideration of all 
sides of the market that the Secretary must address when regulating 
dairy markets and in determining reasonable price levels.
    To this end, federal order markets utilize an unregulated and 
competitive market equilibrium price that measures all economic factors 
affecting the supply of and demand for milk and its products that 
captures all of the pricing criteria established by section 608c(18). 
As discussed below, this price is embodied in the Minnesota-Wisconsin 
(M-W) price. This price indicates the price-quantity relationship that 
buyers and sellers arrive at in a market where transactions are free of 
government intervention, the competition for milk is the most 
competitive, and milk products produced compete in a national market. 
The M-W price automatically adjusts to prevailing market supply and 
demand conditions.

The Minnesota-Wisconsin (M-W) Price

    Prior to adoption of the M-W price, federal milk orders relied upon 
various procedures to establish a basic milk price. Using different 
measures, each of these procedures attempted to identify the 
competitive value of milk used for manufacturing purposes. For example, 
certain orders variously based class prices on prices paid by specific 
manufacturing plants, such as the Midwestern Condensary Series; on 
local plant averages; on a three-product U.S. manufacturing price; or 
on product formulae, such as the butter/powder or butter/cheese 
formulae.
    One major problem with these pricing methods was the difficulty in 
keeping the pricing methods up-to-date with changes taking place within 
the dairy industry. For example, varying local needs required that some 
milk be shipped from plants to meet fluid demands and thus skewed 
plant-based formulae by affecting yields and prices of manufactured 
products produced from reserve milk. Moreover, cost factors, which do 
not lend themselves to accurate evaluation or precise and timely 
measurement, also complicated efforts to utilize efficiently these 
various formulae. Changes in labor costs and technology similarly could 
not be reflected in these product price formulae in a timely fashion.
    Thus, there was growing recognition that a competitive pay price 
which would automatically adjust to prevailing supply and demand 
conditions (including feed cost and availability) would provide the 
most practical and reasonable answer to shortcomings in the then-
existing pricing methods. The superiority of using a competitive pay 
price rests upon the economic principle that dairy processors in a 
highly competitive economy will tend to purchase milk at prices close 
to the price an efficient processor could pay for that product. 
Increasing labor and other costs tend to reduce prices that processors 
are willing to pay for milk. On the other hand, new assembling, 
processing, packaging and marketing techniques that reduce costs or 
increase product returns tend to increase the prices processors are 
willing to pay producers for milk. As these factors fluctuate, shifts 
occur in the prices that different processors may be able to pay 
producers. Other groups of processors must meet or approximate these 
prices or risk losing their supplies of milk. Similarly, various 
economic factors affecting producers (i.e., taxes, inflation, feed 
costs, capital assets costs, salaries, etc.) are automatically 
reflected in the competitive price that producers are willing and able 
to charge for their milk. Therefore, a competitive pay price was and is 
viewed as an excellent and superior indicator of the upward and 
downward adjustments in costs which are automatically reflected in 
market prices paid to producers for their milk.
    The M-W price is a competitive equilibrium market price that 
represents an estimate of the average of prices paid to dairy farmers 
for Grade B milk in Minnesota and Wisconsin by plants producing 
manufactured dairy products such as butter, nonfat dry milk and cheese. 
The M-W price was first adopted in 1961 as the basis for setting all 
minimum classified milk prices in the Chicago Regional marketing area. 
By 1975, the M-W price had been adopted by all federal milk orders. 
Both the industry and the Secretary view the M-W price as an accurate 
indicator of the value of milk in large part because the price reflects 
all of the supply and demand conditions that must be considered under 
section 608c(18).
    Manufactured dairy products (cheese, butter, and nonfat dry milk) 
can be made from Grade B or Grade A milk. Because manufactured dairy 
products are eight to ten times less bulky than raw farm milk and can 
be stored for much longer periods of time than raw farm milk, these 
manufactured products are less expensive to move and market than raw 
farm milk on a per pound basis. As a result, manufactured dairy 
products can and do compete on a national market basis while 
competition for raw and packaged fluid milk occurs on a more local or 
regional level.
    Accordingly, since manufacture dairy products (unlike fluid milk) 
compete in a national market, there is a relationship between the M-W 
price for Grade B milk and the price of surplus Grade A milk, which, 
like Grade B milk, is used to produce manufactured dairy products. The 
M-W price reflects a competitive free market price for raw farm milk 
and the explicit link between Grade B and Grade A surplus milk prices. 
Thus, the M-W price automatically incorporates the effects of 
innumerable economic factors which have an impact on both buyers and 
sellers including the relative price and availability of feed for dairy 
cows. Month-to-month changes in the unregulated free market M-W price 
(i.e., the price of Grade B milk) reflect changes in the overall supply 
and demand conditions for milk and its products nationally.
    Concern for the need to ensure competitive equity among handlers 
and the existence of basic price differences between adjacent marketing 
areas also led to the universal adoption of the M-W price in all 
federal milk orders. Marketing areas which relied on the other basic 
pricing formulae noted above often resulted in producer prices that 
were too low compared to those received by Midwestern producers. This 
situation created a competitive disadvantage for Midwestern processors 
with respect to sales of such manufactured dairy products as butter, 
nonfat dry milk and cheese because these products, which compete on a 
national rather than ``local'' market, were more expensive relative to 
similar products manufactured elsewhere. Consequently, it became clear 
that a competitive pay price would most accurately indicate the basic 
value of milk on a national level. Use of the M-W price which, as noted 
above, is a competitive pay price, automatically indicates the basic 
value of milk and eliminates the need for making possibly inaccurate 
judgments concerning particular products, prices, yield factors and 
manufacturing allowances which otherwise would be used to calculate 
product price formulae.
    In short, the M-W price provides automatic adjustments concerning 
all of the factors affecting the supply of and demand for milk and its 
products. Thus, the M-W price has been adopted in all federal milk 
orders as the ``mover'' of all Class I and Class II prices and is the 
Class III price (subject to certain minor adjustments). Using the M-W 
as the Class III price maintains price coordination between Grade B and 
surplus Grade A milk supplies used for manufacturing purposes.

Price and Supplies of Feed

    Agricultural commodities typically follow cyclical price-quantity 
patterns. Given fixed levels of demand, as supplies become plentiful, 
price for feed trends downward. When supplies become scarce, price for 
feed trends upward. The market signals incorporated into the M-W price 
indicate price movements up and down and elicit either more or less 
commodity production. This coupling pattern between feed supplies and 
feed prices allows market analysts to focus on either factor and 
implicitly know what the other is doing.
    The cost of feed is a significant factor involved in milk 
production. Officially noticed documents that are part of the record of 
the administrative hearing outline cash feed expenses as they relate to 
the total economic costs of producing milk. (``Economic Indicators of 
the Farm Sector: Costs of Production, Economic Research Service'', 
ECIFS 3-1, 1983; ECIFS 6-1, 1986; and ECIFS 9-1, 1989.) For the period 
1981 through 1989, data describing the annual average cost of producing 
one hundred pounds of milk were reviewed. Statistics for six individual 
regions plus the entire United States were examined. Information for 
one additional region was available for the 1987, 1988, and 1989 years.
    Annual regional and total United States summary statistics for a 
nine-year period from 1981 through 1989 were reviewed. The review of 
these statistics revealed that the total cash feed expenses as a 
percentage of the total economic costs of production, on a per 
hundredweight (cwt.) basis, ranged from 30 percent to 58 percent from 
year-to-year. This percentage measures the relative significance of 
cash feed expenses for each region and the United States relative to 
the estimated total cost of milk production for the respective regions 
and the United States.
    Although the availability and cost of feed are primary factors 
involved in farm level milk production, there is a limit to how much 
milk output can be obtained from a given quantity of feed input. This 
is a physical milk production constraint. It relates to the biological 
limits of the cow and the economics of milk production decisions made 
by individual farmers. In general, given a specified level of feed 
costs, a dairy farmer decides to purchase and/or grow a quantity of 
feed and forage. This in turn determines the amount of feed that may be 
made available to cows for milk production and has a direct impact on 
the aggregate level of milk that may be produced in absence of any 
consideration being given to the price that can be obtained for the 
milk that is produced.
    Such analysis of the availability and costs of feed provides only 
one dimension, albeit an important dimension, of the factors the 
Secretary must consider in establishing a price for milk. These 
important statutory pricing factors, however, are automatically 
embodied in the M-W price. The M-W is a superior basic price indicator 
for milk because it reflects all of the economic factors that affect 
the supply of milk as well as all of the factors that affect the demand 
for the products of milk.
    In summary, the rulemaking record contains ample evidence regarding 
the price and availability of feeds which the agency reviewed when 
making its decision. However, these factors, as well as all other 
supply and demand factors, continued to be automatically reflected in 
the M-W price, which has long been the moving factor in the Class I 
(and also Class II and III) prices.

The Class I Price and Class I Differential

    The Class I price in each order contains two components. The 
largest component is the M-W price, which applies in all orders. The 
smaller component is a Class I differential that is specific to each 
order. Consequently, through the M-W component the Class I price in 
each order automatically reflects the price and availability of 
supplies of feed and all other economic factors that affect the supply 
and demand for milk and dairy products.
    Raw milk is a bulky product and is more expensive to transport than 
the equivalent amount of milk used to produce concentrated manufactured 
dairy products. There is a direct link between weight and the cost of 
moving milk across geographic areas.
    The Class I differential part of the Class I price is intended to 
partially reflect the cost of transporting milk. The differential 
portion serves as a price incentive to draw milk from supply areas 
toward metropolitan demand centers. One of the statutory objectives of 
the Federal milk order program is to provide a sufficient amount of 
fluid milk for consumers. The differential serves as an incentive to 
move milk from supply areas to demand centers.
    In economic terms, a spatial pricing structure for milk evolves 
when it traverses geographic space. The structure is characterized by a 
price at the area of supply. Such price increases proportionally as the 
distance to the area of demand increases. It is noted that there does 
not need to be a single defined supply area. Furthermore, it is not 
necessary that prices be identical at all recognized supply areas. Many 
different supply areas could be considered. However, distance and the 
cost of transportation implicitly and efficiently link demand areas to 
the nearest and/or least cost area of supply. The spatial Class I milk 
pricing structure recognizes these economic relationships.
    The Court's opinion appears to misconstrue the Secretary's 
description regarding the Class I differential and transportation cost. 
The Court observed that:

    [T]he Secretary expressly states in his final decision that the 
differentials are no longer meant to reflect the cost of 
transportation * * * (Opinion, p.7).

In fact, the final decision pointed out that ``the Class I pricing 
structure does not cover the total cost of moving bulk fluid milk from 
one area to another.'' (58 FR 12648, emphasis added).
    In short, the relevant factor that establishes a limit for Class I 
differentials is the cost of transportation. Class I differentials 
partially reflect the cost of transportation at a level that will 
insure an adequate supply of milk pursuant to statutory objectives. 
Because some milk is produced just about everywhere, the mix of milk 
produced near consumption centers with milk shipped from distant areas 
varies among orders. If no nearby milk is produced for a particular 
consumption center, the Class I differential would have to more fully 
reflect the cost of transporting milk from the nearest alternative 
surplus milk-producing area. However, because some milk is produced 
just about everywhere, the Class I differential in any particular 
marketing area merely has to be high enough to bring forth adequate 
supplies of locally produced milk together with supplemental supplies 
from other areas.
    As the mobility of milk increased, a transition necessarily 
occurred from considering only isolated local markets to considering a 
system of regional markets that are linked through class price 
coordination. Individual markets that previously set class prices based 
on local supply-demand conditions now are part of larger regional 
markets whose prices are coordinated through the M-W price as the price 
mover in federal milk marketing orders. Once the M-W price was adopted, 
there was a common mechanism for coordinating market price movements.
    From the regulatory perspective, the statutory goal of providing an 
adequate milk supply for each market is furthered by coordinating milk 
prices among the system of orders. Based upon the cost of moving milk, 
Class I differentials are established so that the price of milk at any 
plant location does not exceed the cost of transporting milk from 
supply areas. Proper alignment of milk prices between nearby adjacent 
markets is necessary so that handlers located in more deficit milk 
producing areas can attract a supply of milk.

The Blend Price

    Handlers in each order account for milk in Class I, Class II, and 
Class III uses at the minimum respective class price established under 
each order. The blend price that applies to producers is calculated by 
dividing the total pounds of producer milk into the total value of all 
milk at class prices used by handlers regulated under an order. 
Accordingly, the blend price is a weighted average price that, because 
all milk of an order is part of the price calculation, assures that 
each producer shares in both the benefits of supplying the fluid milk 
market and the burden of the reserve or surplus milk supplies 
associated with each order. Thus, the blend price incorporates regional 
and national measures: it is a measure of supply and demand conditions 
in each order as well as a measure of national supply and demand 
conditions that are reflected in the class prices that are based on the 
M-W price. Blend prices increase or decrease as class prices increase 
or decrease in response to changes in national supply and demand 
conditions. Also, the blend price in each market increases or decreases 
as the Class III use in each market decreases or increases. Thus, blend 
prices reflect all of the economic factors that affect the supply of 
and demand for milk and dairy products that are required to be 
considered under the pricing criteria of the AMAA.
    Producers make their production and marketing adjustments on the 
basis of changes in blend prices and differences in blend prices among 
orders. It is not uncommon for supply areas of individual orders to 
expand or contract in response to blend price changes over time. Also, 
because milk is free to move to handlers regulated under different 
orders, it is not uncommon for milk to shift from one order to another 
in response to blend price differences that result from changes in 
supply and demand conditions under different orders.

USDA's Supply-Demand Analysis

    A supply and demand analysis was conducted by USDA to consider the 
Class I differential portion of the Class I prices. This analysis was 
based on the hearing record, exceptions, and comments, and was a proper 
and sufficient economic review of dairy market performance. By focusing 
on milk market performance measures, USDA's analysis directly addressed 
the statutory goal of ensuring adequate milk supplies to meet the needs 
of each federal milk marketing area.
    The examination conducted by USDA reviewed the level of Class III 
utilization for each market area. This market performance measure is 
appropriate because of the basic underlying accounting definitions and 
regulations in all federal milk orders.
    In general, each marketing order defines producer milk receipts as 
all Grade A milk that is associated with (i.e., used in) the particular 
order market. The producer receipts may be from dairy farms in or close 
to the defined ``marketing area'', or it may come from dairy farms that 
are located hundreds of miles away. The key identifying factor is that 
the milk is associated with the market as evidenced by its receipt by 
handlers regulated under that particular order.
    Specific market definitions also describe milk used for Class I, 
Class II, and Class III uses based on the end products made from such 
milk. The standard accounting identity applicable for all federal milk 
market orders requires that the total amount of milk used in Class I, 
Class II, and Class III products equals the total amount of producer 
milk receipts associated with each market order. The class utilization 
percentages are determined by dividing the amount of milk used in each 
respective class by the amount of producer receipts for the market. In 
this manner, the class utilization percentage represents how much milk 
is being used in each class of product relative to the total volume of 
milk associated with a specifically defined geographic Federal milk 
marketing area.
    Markets generally function by serving Class I demand first, then 
meeting Class II demands, and finally utilizing the residual volume of 
producer receipts as Class III. In this manner, the volume of milk 
utilized in Class III is an indication of the surplus, or reserve, milk 
level available to meet any supplemental needs of the Class I and Class 
II market. During certain periods of the year, the level of milk 
production is low while the demand for Class I and Class II milk is 
high. In these deficit periods, it may be necessary to use all milk 
regularly associated with the market to meet the Class I demand. A 
certain portion of the milk supply in most markets also is needed to 
meet regular Class II milk demands; consequently, a reserve milk supply 
of 30 to 35 percent (i.e., Class III percent utilization) is not 
excessive to ensure that sufficient milk is available in the market at 
all times to satisfy Class I and II demand.
    The Court's opinion suggests that the Secretary's reliance on 
producer milk in his analysis of whether Class I prices meet the 
statutory price considerations required by Section 608c(18) does not 
consider milk supplies available outside the marketing area (Opinion, 
p.20). In fact, producer milk and, more specifically, Class III 
utilization does incorporate the availability of milk supplies from 
outside a marketing area because, regardless of its origin, any milk 
received by a regulated handler in a marketing area is, by definition, 
producer milk. Thus, the Class III utilization of producer milk is an 
important indicator of federal order supply and demand conditions.
    The opinion also focuses on the following statement in the final 
decision (58 FR 12648):

    * * * There is no national supply and demand standard for the 
order program as a whole. This is not to say that a regulated market 
cannot rely on milk supplies from another area, as is often the 
case. Nevertheless, viewed on an individual market basis, we 
reaffirm our conclusion that milk supplies available for Class I and 
Class II uses are adequate, but not excessive in most markets.

    The above finding is in the first of three paragraphs that respond 
to an exception filed by the Upper Midwest Federal Order Coalition 
(UMFOC) that maintained the Secretary used too high a measure of what 
should be considered a reasonable reserve. The Secretary indicated that 
there was a range of views expressed concerning reserve supplies needed 
to serve Class I needs on a year-round basis. (58 FR 12646) When both 
Class I and Class II needs are considered, the Secretary indicated that 
this analysis of supply and demand for milk on the various markets and 
regions was valid.
    As noted above, the M-W is a measure of supply and demand factors 
throughout the country. However, there is no single national standard 
for determining how much reserve milk should be, or needs to be, 
associated with each marketing order. The amount of reserve milk varies 
among orders as a result of different circumstances that affect 
production and marketing practices and conditions. Some regions are 
affected more than others from year to year by variations in weather 
conditions that have an impact on milk production and reserve milk 
supplies. Also, some areas are more heavily involved in manufacturing 
than others. The amount of involvement has an impact on the amount of 
reserve milk that is historically associated with certain federal order 
markets relative to others. Moreover, since the blend price drives 
producers' production and marketing decisions, milk is shifted to 
alternative outlets and orders to take advantage of higher prices. This 
shifting of milk supplies impacts on the amount of reserve milk 
associated with different orders. Also, milk may be alternatively 
associated or disassociated from orders altogether depending on the 
blend price level of a federal milk order relative to returns from 
unregulated manufacturing plants. Consequently, Class III milk 
utilization is an important indicator of a market's performance and its 
ability to meet Class I needs. For these reasons, the Secretary's 
reliance on producer milk and Class III utilization is appropriate and 
automatically considers the availability of milk supplies from outside 
a marketing area.
    As detailed in the final decision, the supply-demand analysis 
conducted by the Secretary considered the level of Class III milk 
utilization relative to the established Class I price differential. 
Most markets appeared to have a relative balance between supply and 
demand, while some markets were deficit and others were surplus. On a 
system-wide basis considering all of the testimony from the hearing, 
comments, and exceptions, the Secretary properly determined that the 
current Class I differentials were meeting the statutorily described 
market performance measures.

General Findings

    The findings and determinations set forth herein have been issued 
in response to a memorandum opinion and order of the United States 
District Court, District of Minnesota, Fourth Division, issued on April 
14, 1994. The findings and determinations supplement those that were 
previously set forth in the final decision issued on February 5, 1993, 
and published in the Federal Register on March 5, 1993, with respect to 
the New England and other Marketing Area orders. No additional 
regulatory changes are necessary as a result of this amplified 
decision.

List of Subjects in 7 CFR Parts 1001, 1002, 1004, 1005, 1006, 1007, 
1011, 1012, 1013, 1030, 1032, 1033, 1036, 1040, 1044, 1046, 1049, 1050, 
1064, 1065, 1068, 1075, 1076, 1079, 1093, 1094, 1096, 1099, 1106, 1108, 
1124, 1126, 1131, 1134, 1135, 1137, 1138, 1139

    Milk marketing orders.

    Dated: August 10, 1994.
Mike Espy,
Secretary.
[FR Doc. 94-19982 Filed 8-16-94; 8:45 am]
BILLING CODE 3410-02-P