[Federal Register Volume 59, Number 211 (Wednesday, November 2, 1994)]
[Proposed Rules]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-26906]


[[Page Unknown]]

[Federal Register: November 2, 1994]


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Part II





Department of Agriculture





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Agricultural Marketing Service



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7 CFR Part 1030 et al.




Milk in the Chicago Regional and Other Marketing Areas; Recommended 
Decision and Opportunity To File Written Exceptions on Proposed 
Amendments to Tentative Marketing Agreements and to Orders; Proposed 
Rule

  Federal Register / Vol. 59, No. 211 / Wednesday, November 2, 1994 / 
Proposed Rules  
DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Parts 1030, 1065, 1068, 1076 and 1079

[Docket Nos. AO-361-A31, etc.; DA-92-27]

 
Milk in the Chicago Regional and Other Marketing Areas; 
Recommended Decision and Opportunity To File Written Exceptions on 
Proposed Amendments to Tentative Marketing Agreements and to Orders

------------------------------------------------------------------------
 7 CFR                                                                  
 part                   Marketing area                      AO Nos.     
------------------------------------------------------------------------
1030..  Chicago Regional.............................  AO-361-A31       
1065..  Nebraska-Western Iowa........................  AO-86-A50        
1068..  Upper Midwest................................  AO-178-A48       
1076..  Eastern South Dakota.........................  AO-260-A32       
1079..  Iowa.........................................  AO-295-A44       
------------------------------------------------------------------------

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Proposed rule.

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SUMMARY: This document recommends changes in the Federal milk marketing 
orders for five north-central marketing areas based on industry 
proposals considered at a public hearing. The decision recommends 
adopting a plan for pricing milk on the basis of its protein and other 
nonfat solids, as well as butterfat, components. The proposed plan 
includes adjustments per hundredweight of all producer milk based on 
the somatic cell count of the milk. The intended effect of this rule is 
to better reflect the value of the nonfat solids components in the skim 
portion of milk.

DATES: Comments are due on or before December 2, 1994.

ADDRESSES: Comments (six copies) should be filed with the Hearing 
Clerk, Room 1083, South Building, United States Department of 
Agriculture, Washington, DC 20250.

FOR FURTHER INFORMATION CONTACT: Constance M. Brenner, Marketing 
Specialist, USDA/AMS/Dairy Division, Order Formulation Branch, Room 
2971, South Building, P.O. Box 96456, Washington, DC 20090-6456, (202) 
720-2357.

SUPPLEMENTARY INFORMATION: This administrative action is governed by 
the provisions of Sections 556 and 557 of Title 5 of the United States 
Code and, therefore, is excluded from the requirements of Executive 
Order 12866.
    The Regulatory Flexibility Act (5 U.S.C. 601-612) requires the 
Agency to examine the impact of a proposed rule on small entities. 
Pursuant to 5 U.S.C. 605(b), the Administrator of the Agricultural 
Marketing Service has certified that this proposed rule will not have a 
significant economic impact on a substantial number of small entities. 
The amendments would promote orderly marketing of milk by producers and 
regulated handlers.
    The amendments to the rules proposed herein have been reviewed 
under Executive Order 12778, Civil Justice Reform. They are not 
intended to have a retroactive effect. If adopted, the proposed 
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. 601-674), provides that administrative proceedings must be 
exhausted before parties may file suit in court. Under section 
608c(15)(A) of the Act, any handler subject to an order may file with 
the Secretary 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 and requesting a modification of an 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 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 Secretary'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.
    Prior documents in this proceeding:
    Notice of Hearing: Issued December 22, 1993; published January 4, 
1994 (59 FR 260).
    Extension of Time for Filing Briefs: Issued April 22, 1994; 
published April 24, 1994 (59 FR 22138).

Preliminary Statement

    Notice is hereby given of the filing with the Hearing Clerk of this 
recommended decision with respect to proposed amendments to the 
tentative marketing agreements and the orders regulating the handling 
of milk in the Chicago Regional and certain other marketing areas. 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, Washington, DC 
20250, by the 30th day after publication of this decision in the 
Federal Register. Six 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 proposed amendments set forth below are based on the record of 
a public hearing held at Bloomington, Minnesota, on January 25-27, 
1994, pursuant to a notice of hearing issued December 22, 1993; (59 FR 
260).
    The material issues on the record of hearing relate to:
    1. Adoption of multiple component pricing.
    2. Orders to be included.
    3. Components and component prices.
    a. Protein.
    b. Other nonfat solids.
    c. Butterfat.
    d. Miscellaneous issues.
    4. Somatic cell adjustment.
    5. Conforming changes.

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. Adoption of Multiple Component Pricing

    Proposals to incorporate multiple component pricing in the Chicago 
Regional (Order 30), Nebraska-Western Iowa (Order 65), Upper Midwest 
(Order 68), Eastern South Dakota (Order 76) and Iowa (Order 79) Federal 
milk marketing orders (the five orders) should be adopted, with some 
modifications. The pricing plan generally would be patterned after the 
multiple component pricing plan proposed by National All-Jersey, Inc. 
and other dairy organizations. Producers would be paid on the basis of 
the pounds of butterfat, protein and other nonfat solids (solids-not-
fat other than protein) in their milk, and would share in the value of 
the pool's Class I and Class II uses on a per hundredweight basis. 
Regulated handlers would pay for the milk they receive on the basis of 
total butterfat, the protein and other nonfat solids used in Classes II 
and III, skim milk used in Class I, and the hundredweight of total 
product used in Classes I and II. A somatic cell adjustment, per 
hundredweight, would also apply to payments for all producer milk.
    At the present time, milk received by handlers under the five 
orders is priced according to the pounds of producer milk allocated to 
each class of use multiplied by the prices per hundredweight of milk 
testing 3.5 percent butterfat, as determined under the orders for each 
class of use. Adjustments for such items as overage, reclassified 
inventory, location and other source milk allocated to Class I are 
added to or subtracted from the classified use value of the milk. The 
resulting amount is divided by the total producer milk in the pool to 
calculate a price per hundredweight of milk testing 3.5 percent 
butterfat to be paid to producers for the milk they have delivered to 
handlers. The price paid to each producer is then adjusted according to 
the specific butterfat test of the producer's milk by means of a 
butterfat differential. The butterfat differential is computed by 
multiplying the wholesale selling price of Grade A (92-score) bulk 
butter per pound on the Chicago Mercantile Exchange, as reported for 
the month by the U.S. Department of Agriculture, by 0.138 and 
subtracting the Minnesota-Wisconsin price at test, also as reported by 
the U.S. Department of Agriculture, multiplied by .0028.
    The multiple component pricing (MCP) plan was originally proposed 
for Orders 30, 68 and 79 by National All-Jersey, Inc. (NAJ) and other 
dairy organizations. In addition, Land O'Lakes, Inc., proposed that the 
multiple component plan be considered for Orders 65 and 76. Most other 
proposals considered at the hearing were modifications of the NAJ 
proposal and are discussed below.
    The first NAJ witness stated that the current milk pricing system 
used in the five orders does not meet current marketing needs and 
should be replaced with a multiple component pricing system. Much of 
the general NAJ testimony in favor of multiple component pricing was 
later reiterated by witnesses expert in the field of economics and 
dairy chemistry testifying for NAJ, and a representative for Land 
O'Lakes. Also testifying in favor of the NAJ proposal were two dairy 
farmer members of the cooperative association Swiss Valley Farms 
Company, a representative of the Brown Swiss Cattle Breeders 
Association of U.S.A., Inc., and a representative of Tri-State Milk 
Cooperative. It was indicated in testimony that Alto Dairy Cooperative 
also supported the NAJ proposal.
    The representative for the proponents said the intent of their 
proposal was to:
    1. Use the M-W price as the base;
    2. Pay all producers on four factors--pounds of butterfat, pounds 
of protein, pounds of other solids, and each producer's share of the 
fluid differential on a per hundredweight basis;
    3. Leave Class I handler obligations on a skim-butterfat basis;
    4. Determine Class II and III handlers' obligations on the basis of 
pounds of butterfat, protein, and other solids; and
    5. Change only the order provisions needed to implement the NAJ 
proposal.
    The NAJ witness said that there were five reasons for replacing the 
current milk pricing system with a multiple component pricing system. 
The first reason, according to the NAJ witness, is that the current 
skim-butterfat pricing system does not give dairy farmers economic 
incentives to produce milk high in nonfat solids, especially protein. 
He stated that under the current pricing system a pound of water 
receives the same price as a pound of protein or other solids, yet it 
is these solids that give milk its functional and nutritional value.
    The second reason given by the NAJ witness for adopting MCP was 
that over a period of years much of the value of milk has shifted from 
butterfat to the skim portion of milk. The proponent's witness said 
that in 1960, butterfat represented 77% of the value of the M-W price, 
and skim represented 23%. By 1993, he testified, these values were 
reversed, with butterfat representing only 23% of the value of the M-W, 
while the skim portion of the milk represented 77%.
    According to the NAJ witness, the shift in value from butterfat to 
skim was partially caused by the USDA decision to decrease the support 
price for butter and increase the support price for nonfat dry milk. 
The support price for butter declined from $1.53 per pound in 1981 to 
65 cents per pound in 1993, with most of the decrease occurring since 
1989. Nonfat dry milk purchase prices under the support program 
increased from 72.75 cents per pound in 1988 to $1.034 per pound in 
1993. In addition, the witness said, the butterfat differential under 
Federal orders has been dropping since the mid-1980s because of a 
decline in the market price for butter. This drop was accelerated by a 
change in the method of computing the butterfat differential, 
implemented in 1990, that had the impact of reducing the butterfat 
differential even more.
    The third reason the witness gave for implementing multiple 
component pricing was the shift in types of dairy products consumers 
are purchasing. According to the witness, some of the decline in 
butterfat value relative to skim value has been caused by a shift in 
consumption from whole milk to lowfat and skim fluid milk products. The 
witness presented data to show that from 1970 to 1991, national fluid 
milk sales of lowfat and skim milk increased 232%, while sales of whole 
milk declined 50%. In addition, he stated, consumption of lowfat 
manufactured products is growing faster than consumption of relatively 
high-fat manufactured products.
    The NAJ witness discussed equity in Federal orders as the fourth 
reason for implementing multiple component pricing. He said that the 
current skim-butterfat pricing system is equitable for neither 
producers nor handlers since it does not properly recognize the value 
of protein, especially in manufactured products such as cheese. The 
witness provided examples to show how a producer with high protein milk 
may currently receive the same Federal order minimum price as a 
producer with low protein milk. Similarly, a cheese maker who purchases 
high protein milk could have a cost advantage at minimum order prices 
over a cheese maker who purchases low protein milk.
    The fifth reason presented by the NAJ witness was the existence of 
a number of voluntary multiple component pricing plans in the areas 
covered by the five orders. Data were presented to show that nearly all 
producers in the five orders currently are eligible to be paid under 
one of these voluntary multiple component pricing plans. The witness 
stated that many of the plans have inadequacies which contribute to 
disorderly marketing. According to the witness, these inadequacies 
would be addressed by adopting the NAJ proposal.
    A witness from Land O'Lakes, Inc. (LOL), testified in support of 
the adoption of MCP in the five orders in general, and the NAJ proposal 
specifically. He discussed how the NAJ multiple component pricing 
proposal would better reflect the market value of nutrients in the milk 
to the farmer. He stated that the proposed system, compared with the 
current system, would essentially eliminate the value of milk used in 
manufacturing that is currently associated with water which, he said, 
has very little market value in dairy products. The witness said that 
MCP would affect the cost of milk to LOL as a handler in that it will 
come closer to equalizing the cost of milk relative to the value of the 
products derived from the milk.
    The LOL witness also described four major weaknesses in the 
existing voluntary MCP plans. The first weakness, he said, was that the 
current plans emphasize component test instead of component yield. He 
said that the price paid to each producer should be tied more directly 
to the value of the products that can be produced from the producer's 
milk.
    The second weakness described by the LOL witness is that many 
existing plans do not provide for deductions for milk with low 
component levels. This, he said, indicates that the plans recognize the 
higher value of milk with more pounds of components, but do not 
recognize that milk with fewer pounds of components is worth less. He 
said that competitive, rather than economic, factors are the reason 
deductions for low component levels generally do not exist, as many 
producers do not like to see deductions on their milk checks.
    According to the LOL witness, an inequitable feature of the 
voluntary MCP plans is that they generally pay no component premiums 
when the somatic cell count of the milk is above a fixed level, 
resulting in high test producers losing their component premium because 
of high somatic cells, while low test producers with high somatic cell 
counts lose nothing.
    The fourth weakness described by the witness is that some existing 
MCP plans pay premiums for protein, while others pay premiums for 
solids-not-fat. He said that most producers in Wisconsin receive 
premiums based on protein, while most producers in Minnesota, Iowa, 
Nebraska and South Dakota receive premiums based on solids-not-fat. The 
witness claimed that the variety of payment plans currently in 
existence do a poor job of transmitting market signals to the 
producers, are not economically consistent, and lead to confusion among 
farmers. He said that the NAJ proposal would address the deficiencies 
in the current situation.
    Most participants at the hearing advocated the introduction of MCP 
for payments to producers and for milk delivered to handlers for Class 
II and Class III use in the five orders. There was no support for 
pricing Class I milk on other than the current butterfat and skim 
basis.
    In addition to NAJ and LOL, adoption of some form of multiple 
component pricing in the five orders was supported by Central Milk 
Producers Cooperative (CMPC), the Trade Association of Proprietary 
Plants (TAPP), Farmers Union Milk Marketing Cooperative (FUMMC), 
National Farmers Organization (NFO), Kraft General Foods (Kraft), 
Associated Milk Producers, Inc., North Central Region (AMPI North 
Central), Wisconsin Cheese Makers Association (WCMA), Dean Foods, and 
National Cheese Institute (NCI).
    The CMPC witnesses strongly supported the need for implementing 
multiple component pricing in the five orders and proposed a plan very 
similar to that of NAJ. The fundamental difference between the two 
plans is that the CMPC proposal would result in lower protein prices 
than the NAJ proposal. The appropriate level of the protein price is 
discussed under Issue 3a below.
    The CMPC proposal was supported in testimony and in a post-hearing 
brief by NFO. A witness for WCMA testified in support of the CMPC 
proposal for multiple component pricing. A witness for Dean Foods 
testified in support of the concept of MCP, and in response to a 
question about which proposal he favored, he expressed support for the 
CMPC proposal. AMPI North Central Region submitted a brief in support 
of the CMPC proposal for multiple component pricing.
    A witness for NCI testified in support of the CMPC multiple 
component pricing proposal with one primary modification. The NCI 
proposal would calculate a ``residual fluid price'', instead of an 
other solids price. This proposal is discussed further under Issue 3b 
below in this decision. Kraft testified and submitted a brief in 
support of the NCI proposal for multiple component pricing.
    A witness for the Trade Association of Proprietary Plants (TAPP) 
and Farmers Union Milk Marketing Cooperative (FUMMC) testified in 
support of the TAPP proposal, a variation of the CMPC proposal that 
would price both butterfat and protein on a differential basis, rather 
than on a per pound basis.
    The five north central Federal milk orders included in this 
proceeding should be amended to include multiple component pricing. On 
the basis of the record of this proceeding, multiple component pricing 
would entail pricing milk on the basis of the pounds of butterfat, 
protein and other nonfat solids contained in the milk, with a somatic 
cell adjustment to the hundredweight price paid to producers. The 
record indicates that a large percentage of the producers pooled under 
these orders are already eligible for or receive some form of multiple 
component pricing and that many of these component pricing plans use 
protein as a pricing component.
    The record also shows that the diverse component pricing programs 
that currently exist promote disorderly and inefficient marketing 
conditions in the procurement of milk supplies by competing handlers. 
The different programs establish non-uniform bases of payments to 
producers. The adoption of multiple component pricing will allow the 
Orders to recognize the additional value of milk with a higher-than-
average solids content.
    In the five orders included in this proceeding, the vast majority 
of the milk pooled is utilized in manufactured products. The total 
solids in the milk used for manufacturing are the primary determinants 
of product yield. In addition, it is the solids in fluid milk that give 
it its nutritional value and taste. In both types of products, the 
current pricing system used in the five orders does not properly 
recognize the value of nonfat milk solids, nor encourage producers to 
increase the quantity of nonfat milk solids in the milk they produce.
    As a result of the shift in value in recent years from the 
butterfat portion of milk to the skim portion, most of the value of 
milk is determined on a volume basis without any consideration of the 
value of the skim components. Adoption of the multiple component 
pricing plan recommended in this decision will enable the market to 
reflect the value of the skim components in milk to producers.
    In addition to butterfat, protein is clearly the most appropriate 
component of milk on which payment should be based. Most of the milk 
pooled under these five orders is used for manufacturing, and 86% of 
the milk used in manufacturing is used to produce cheese. Because 
protein is a main determinant of cheese yield, and it is cheese that 
determines the profitability for most of the dairy industry in the 5-
market area, the milk pricing system should recognize the value of the 
protein component of milk as it is used in the manufacture of cheese.
    Record evidence clearly shows that protein has a higher demand than 
other components of milk because of its functional, nutritional and 
economic value in the marketplace. The functional characteristics of 
protein allow it to form the matrix in the production of cheese and 
yogurt. Protein is also important to the air formation in the 
manufacture of certain products and provides some required nutrients in 
the human diet. Milk containing a higher percentage of protein will 
result in greater yields of most manufactured products than milk with a 
lower protein test. Additionally, handlers receiving milk that results 
in greater volumes of finished products such as cheese and cottage 
cheese than an equivalent volume of milk testing lower in protein 
should be required to pay more for the higher-testing milk. At the same 
time, the dairy farmer producing milk that yields greater amounts of 
finished products deserves to be paid more for it than a dairy farmer 
producing the same volume of milk that results in less product yield. 
Thus, sending an economic signal to dairy farmers will encourage them 
to maximize the production of those components which have the greatest 
demand in the marketplace.
    According to analysis of the record, proponents are correct that 
attribution of all of the skim value of the M-W price to protein would 
result in an overstatement of the value of protein used in cheese and 
most other uses. In order to maintain fairly uniform prices between 
orders for milk used in manufactured products, it is necessary to 
assign the residual value of the M-W price minus the butterfat and 
protein values to either other nonfat solids or a fluid carrier price. 
The discussion of this residual component may be found in Issue 3b 
below.
    A witness for the Galloway Company testified in support of TAPP and 
Galloway's own proposals to exclude sweetened condensed milk, ice cream 
and ice cream mix from pricing under a multiple component pricing 
system. The witness stated that such products should continue to be 
priced under the current pricing system.
    The Galloway witness said that some Class II manufactured products, 
together with other products such as sour cream, whipping cream, half 
and half, eggnog, yogurt, nonfat dry milk and butter, are not affected 
in yield by the protein content of the milk from which the products are 
manufactured. Instead, according to the witness, it is total skim 
solids that affect the yield of these products. Accordingly, the 
witness stated, it would not be equitable to price such products under 
a multiple component pricing system which prices protein at a level 
higher than the remaining skim solids in the milk. The witness argued 
that these products should be left out of any MCP plan adopted.
    The Galloway witness testified, and post-hearing briefs filed on 
behalf of Anderson-Erickson (A-E) and Galloway asserted, that yields 
are affected by the level of total skim solids rather than protein, 
making the pricing of protein irrelevant for Class II pricing. The 
Galloway witness testified that there have been months in which the 
monthly average protein level and other nonfat solids level of milk 
moved in opposite directions. In addition, the A-E and Galloway briefs 
asserted that MCP would significantly increase the cost of Class II 
milk, which would put them at an even greater disadvantage than 
currently with respect to products made from nonfat dry milk priced at 
the Class III-A price.
    The Galloway witness stated that the primary product manufactured 
by the Galloway Company is sweetened condensed milk. According to the 
witness, this product competes on a national basis with other 
manufacturers who do not have to procure their milk under Federal 
orders with MCP provisions. The witness stated that it would be unfair 
to force his organization to procure milk under a set of regulations 
that differ from those regulating his competitors.
    A portion of the TAPP proposal would require a classification 
change for sweetened condensed milk from Class II to Class III. 
Although the Galloway witness expressed strong concern over the impact 
of multiple component pricing on his company, the effect of the 
classification of sweetened condensed milk on the Galloway company is 
not part of the MCP issue. Reclassification of this product is a 
separate issue that was discussed thoroughly at a previous hearing, and 
in the decision issued as a result of that hearing (58 FR 27774). No 
new evidence was presented at this hearing that would justify 
reclassifying sweetened condensed milk.
    Milk used to produce sweetened condensed milk, or any other Class 
II product, should not be exempted from multiple component pricing. The 
MCP plan recommended for adoption will cover all Class II and Class III 
products.
    Testimony at the hearing indicated that there are essentially two 
groups of Class II products that differ with respect to the impact of 
multiple component pricing on the handlers that make these products. 
The first group of Class II products are those in which there generally 
seemed to be agreement in the hearing record that yields are greatly 
affected by the level of protein in the milk. These products include 
the various cottage cheeses and other similar soft, high-moisture 
cheeses. The handlers that make these products benefit directly from 
higher levels of protein in milk and should be accountable to the pool 
for this added benefit.
    The second group of Class II products are those where there was 
some disagreement in the record about the affect of protein on the 
yield. These products include ice cream and frozen desserts and mixes, 
fluid creams, sour creams, yogurt, sweetened condensed milk and others. 
Considerable debate took place on whether it was appropriate to include 
these products in a multiple component pricing system.
    Occurrences of average protein level and other nonfat solids level 
of milk moving in opposite directions appears to be an exception rather 
than the rule. Evidence presented in ``Analysis of Component Levels and 
Somatic Cell Counts in Individual Herd Milk at the Farm Level, 1992, 
Upper Midwest Marketing Area'', indicates that about 60% of the 
variation in solids-not-fat is caused by variation in protein, and that 
higher protein levels are positively correlated with higher solids-not-
fat levels. Data presented in this and other documents show that the 
level of other solids in milk tends to be relatively constant with, 
generally, small month-to-month variation. Thus, when a handler 
purchases milk with higher than average protein levels, he will also, 
generally, be purchasing milk with higher than average levels of 
solids-not-fat.
    In addition, the sum of the value of the protein and other solids 
under this recommended pricing plan equals the value of the total 
nonfat solids. The value of total nonfat solids, therefore, is a 
weighted average of the quantity and price of the protein and the 
quantity and price of the other nonfat solids contained in the milk. 
Analysis based on the average tests of the five markets shows that 
under the recommended pricing plan, the value of total nonfat solids 
would range from approximately $.002 per pound below the current value 
to approximately $.008 per pound above the current value.
    This estimated price difference is certainly not the significant 
increase that is claimed in the briefs. In hearing testimony, the 
Galloway witness stated that an analysis of the effect of the CMPC 
proposal on the Galloway Company showed a nine-cent increase per 
hundredweight in the cost of Galloway's milk only when the CMPC somatic 
cell adjustment was included. Without the somatic cell adjustment, the 
analysis showed that the cost of milk to Galloway would be reduced 
under the CMPC multiple component pricing plan.
    It is appropriate to include all Class II products in the multiple 
component pricing system being proposed here. All Class II products 
derive benefit from butterfat, protein and/or other solids in the milk. 
The benefit may be in enhanced yield, such as protein for cottage 
cheese, or a combination of protein and other solids (i.e. the solids-
not-fat in the milk) in many of the other Class II products. Or, the 
benefit may be in some other area. For example, the NAJ dairy chemist 
witness testified about the importance of protein in the functionality 
of many of these products, such as in ice cream, whipping cream, and 
yogurt. Some testimony even went so far as to discuss the importance of 
protein in fluid milk, in terms of the nutrient content and the mineral 
carrying content of the milk. However, since there was no substantial 
support for including Class I milk in the multiple component pricing 
system being proposed here, only Class II and Class III products will 
be priced on multiple components.

2. Orders To Be Included

    A proposal to incorporate the multiple component pricing plan 
adopted in this proceeding in the Nebraska-Western Iowa and Eastern 
South Dakota Federal milk orders as well as in the Chicago Regional, 
Iowa, and Upper Midwest orders should be adopted.
    The witness for Land O'Lakes (LOL), proponent of the proposal, 
listed a number of reasons for including the multiple component pricing 
plan in the Nebraska-Western Iowa and Eastern South Dakota orders as 
well as in the orders proposed by NAJ. The witness explained that all 
five orders are similar in that their predominant use of milk is for 
manufacturing Class III products. He testified that the primary 
organizations that supply the Nebraska-Western Iowa and Eastern South 
Dakota markets also are major participants in one or more of the 
Chicago Regional, Iowa, and Upper Midwest order marketing areas. The 
witness stated that inclusion of the Nebraska-Western Iowa and Eastern 
South Dakota orders in the multiple component pricing plan would allow 
those organizations that have producers and market milk in multiple 
orders to standardize their payrolls and billings, thus maintaining 
uniformity and reducing confusion among producers and handlers.
    The decision to include additional orders in this decision should 
not be made entirely on the basis of convenience to the parties 
marketing milk on the various orders. The decision is based on whether 
inclusion of the two orders would tend to effectuate the policy of the 
Agricultural Marketing Agreement Act. Certainly, including the 
Nebraska-Western Iowa and Eastern South Dakota orders in this decision 
will contribute to orderly marketing.
    The data supplied by the market administrators' offices describing 
the milksheds of the various orders shows a considerable overlap of 
milksheds. For example, many South Dakota counties have milk pooled on 
three of the five orders during the same month. In the absence of 
uniform pricing provisions between the five orders, disorderly 
marketing could occur, particularly when orders have overlapping 
milksheds, if one order were pricing milk on a skim and butterfat basis 
while another order was pricing milk on the basis of its components. If 
a producer's milk tests high for nonfat components but is pooled under 
an order that prices milk on a skim-butterfat basis, the producer would 
attempt to maximize returns by changing the market under which his milk 
is pooled to benefit from his high component levels. The opposite 
situation would occur if the milk of a producer testing below average 
for nonfat components is pooled under an order with MCP provisions. 
Such a producer would maximize returns by changing the order under 
which his milk is pooled to one with skim-butterfat pricing. This 
shuffling of producers in the same geographic area because of 
nonuniform pricing provisions would not constitute orderly marketing.
    Since the inclusion of the Nebraska-Western Iowa and Eastern South 
Dakota orders in the multiple component pricing decision would tend to 
reduce disorderly marketing in the region, benefit handlers by allowing 
a standardized payroll, and there was no opposition to their inclusion, 
multiple component pricing should be adopted for these two orders as 
well as the other three.
3. Components and Component Prices

    Unlike the multiple component pricing plans adopted previously in 
other Federal milk marketing orders, this decision recommends the 
adoption of a pricing plan for milk based on three components rather 
than two. Under the five orders involved in this decision, milk should 
be priced on the basis of its protein, other nonfat solids, and 
butterfat components.
    The protein price contained in this decision is based on the value 
of protein in the manufacture of cheese, as determined by cheese market 
prices, and is not a residual of the Minnesota- Wisconsin (M-W) price 
minus butterfat value as is the case in other MCP plans. The butterfat 
price would be based on the butter market, as it is in other multiple 
component pricing systems. ``Other nonfat solids'' will be priced as a 
residual of the M-W price minus protein value and butterfat value. The 
butterfat, protein, and other nonfat solids prices shall be expressed 
in dollars per pound carried to the fourth decimal place. In addition, 
payments to each producer should reflect the value of participation in 
the marketwide pools on a hundredweight basis.
    As in other orders for which multiple component pricing has been 
adopted, this decision maintains the relationship of the value of 
producer milk to the
M-W price. If the sum of the butterfat value and the protein value is 
greater than the M-W price, a situation which would result in a 
negative other nonfat solids price, the protein price will be adjusted 
such that the other nonfat solids price will be zero.
    In testimony and brief a witness for the Trade Association of 
Proprietary Plants (TAPP) and Farmers Union Milk Marketing Cooperative 
(FUMMC) presented a plan that would pay producers for protein above a 
neutral zone of 3.00% to 3.29%, and provide deductions for protein 
levels below the neutral zone. The level of adjustment would be tied to 
the price of barrel cheddar cheese on the National Cheese Exchange, and 
would be used to adjust pay prices to producers in a manner similar to 
the current butterfat differential.
    The witness said that milk traditionally has been purchased on a 
per hundredweight basis, with differential adjustments for levels of 
components. According to the witness, not only are producers usually 
paid on a per hundredweight basis, but milk is measured on a per 
hundredweight basis for purposes of plant accounting, payments between 
plants and to haulers, and by breed associations and DHIA with 
adjustments for percentages of components where necessary. The witness 
also claimed that using differential pricing would be revenue neutral.
    The TAPP/FUMMC witness is correct that switching payments to 
producers from a per hundredweight system to one of pounds of 
components, as adopted in this decision, is not a minor change. Some 
expense will be incurred by handlers and producers in adapting to the 
new system. However, the benefits to the industry in the affected areas 
of adopting a uniform multiple component pricing system outweigh the 
one-time costs of its adoption. The implication that everyone connected 
with the dairy industry must adopt this system is not correct. Pounds 
of milk must still be accounted for under the multiple component 
pricing system. For example, nothing in this decision would prevent a 
handler from continuing to pay haulers on a hundredweight basis. No 
testimony at the hearing from witnesses that have producers pooled 
under Federal orders that have already adopted multiple component 
pricing indicated that moving to a pricing system that prices milk 
component by the pound was an onerous burden. The transcript does 
reveal disagreement with the level of the protein price under some 
Federal orders with multiple component pricing, but little 
dissatisfaction with the system itself, nor complaints about the 
difficulty of switching to a component pricing system.
    As to the argument that pricing protein and butterfat on the basis 
of price differentials would be revenue neutral, the multiple component 
pricing system recommended for adoption is designed neither to enhance 
nor reduce total producer returns. The only changes in the total pool 
value that may occur because of the recommended changes would result 
from differences in the protein and other nonfat solids content between 
milk pooled under the orders included in this proceeding and the milk 
included in the Minnesota-Wisconsin survey. In addition, some 
redistribution of the dollars involved in each pool can be expected 
between producers, and between handlers.
    The proposal by TAPP and FUMMC to leave butterfat on a differential 
pricing basis and to price protein on a differential basis with a 
neutral range is not included in this decision. To continue to pay 
producers for butterfat and to add payment for protein on the 
``traditional'' differential system would confuse and frustrate 
producers in the understanding of their milk checks. Continued use of 
differentials would perpetuate the volume-based pricing system with a 
high value on water, and would fail to give producers a true price 
signal of what the marketplace wants.
    The use of differentials in pricing milk components is not widely 
understood. There is no valid reason to continue an outmoded and 
confusing pricing system in valuing milk components. Pricing components 
on a per-pound basis will allow producers to see clearly what 
components have the most value, a result which plainly fits the goal of 
encouraging producers to produce those components which have the 
highest value in the market place. Per-pound pricing also makes clear 
to producers that it is the pounds of components that result in 
payment, rather than the percentages of those components in milk. 
Producers would be better able to look at the cost of producing pounds 
of components, and compare those costs with possible returns. 
Application of a neutral zone would discourage producers from 
increasing protein production marginally unless such an increase would 
raise the protein level above the neutral range.
A. Protein
    The protein price for milk pooled under the five north central 
Federal milk orders should be calculated by multiplying the monthly 
average of 40-pound block cheese prices on the Green Bay Cheese 
Exchange by 1.32, without including a value for whey protein.
    No opposition was expressed at the hearing to pricing protein on 
the basis of its value in the manufacture of cheese. The differences 
between participants came in determining the appropriate level of the 
protein price.
    A proposal submitted and supported by National All-Jersey, Inc. 
(NAJ), and supported by a number of cooperative associations and other 
dairy organizations, would calculate the protein price in two parts: 
(1) Multiply the National Cheese Exchange monthly average 40-pound 
block cheese price by 1.32, and (2) add the monthly average whey 
protein concentrate price multiplied by .735. The sum of these two 
values would equal the protein price.
    The NAJ proponent witness explained that one of the objectives of 
the NAJ proposal was to establish a protein price that was high enough 
to give producers an incentive to produce protein. He added that a 
second objective was to determine the protein price from market forces 
rather than as a residual value, as is used in other Federal orders. 
The witness explained that the 1.32 factor used in the NAJ proposal 
comes from the modified Van Slyke cheese yield formula that is commonly 
used by the industry. The 1.32 factor represents the pounds of 38-
percent moisture Cheddar cheese obtained from one pound of protein with 
75 percent of the protein going into the cheese.
    The witness gave four reasons for using the National Cheese 
Exchange 40-pound Cheddar block price (block price): (1) The majority 
of the cheese in the five Federal orders is priced using the block 
price as the base price, (2) the block price is used in determining the 
somatic cell adjustment in the Eastern Ohio-Western Pennsylvania, 
Indiana, and Ohio Valley orders, as well as being used in the 
computation of the Class II price in all Federal orders, and in the 
determination of the Class 4a price in California, (3) since there is 
over twice as much American cheese manufactured in blocks as is made in 
barrels, and the Wisconsin assembly point barrel cheese price is within 
one cent of the block price, the block price represents a minimum 
cheese price, and (4) the protein price determined pursuant to this 
proposal gives a greater incentive to producers to produce protein and 
is more equitable to handlers and producers than the (lower) protein 
price contained in the other proposals.
    The NAJ witness continued by explaining that the proposal includes 
the value of whey protein in the protein price so that all of the 
protein in the milk would be accounted for. As explained by the 
proponent witness, the .735 factor was determined by dividing 25 
percent, which is the protein left in whey after making cheese, by 34 
percent, which is the percent of protein in whey protein concentrate. 
The resulting value, .735, is multiplied by the monthly average 34 
percent whey protein concentrate price to yield the whey contribution 
to the protein price. The witness stated that the whey protein 
concentrate price was selected because it is a better indicator of the 
value of the protein contained in whey than is dry whey or animal feed 
whey.
    An economist supporting the NAJ proposal testified that even though 
the butterfat price is determined at its marginal value, that is, the 
value of butterfat in butter, the protein price should be determined by 
the value of protein in the most common use of protein in the five 
markets included in this proceeding. The witness pointed out that the 
most common use of protein is in the manufacture of cheese, with 85.9 
percent of the milk marketed in 1992 in Wisconsin being used in the 
manufacture of cheese. The witness testified that the appropriate 
cheese price to be used in computing the protein price was the block 
price because it is a ``conservative estimate of the price actually 
received for block cheddar cheese''. The witness went on to explain 
that the reported block price is closer to what manufacturing plants 
receive for barrel cheese than is the reported barrel price because 
when the customary premiums are added to the reported barrel cheese 
price the result is approximately equal to the block price.
    The academic NAJ witness reiterated the NAJ position that the value 
of whey protein should be included in the protein price because the 
total value of the protein in producer milk would thus be reflected in 
the protein price, giving producers an incentive to produce more 
protein.
    A witness for Central Milk Producers Cooperative (CMPC) explained 
that the CMPC proposal would use the monthly average Green Bay Cheese 
Exchange barrel price (barrel price) instead of the block price, and 
would not include the value of whey protein. The witness for CMPC 
testified that the barrel price better represents the value of cheese 
than the block price because there is a greater volume of trading in 
barrel cheese than in block cheese. The resulting protein price would 
be lower than the protein price computed under the NAJ proposal. A 
witness for CMPC explained that their proposed protein price was based 
on the understanding that Federal order prices are minimum prices, and 
that the CMPC proposal, using the barrel cheese price and not including 
a value for whey protein, would result in a minimum price for protein.
    The CMPC protein price proposal was supported at the hearing by 
other hearing participants, including National Farmers Organization 
(NFO), Kraft, Inc., Galloway Co., Wisconsin Cheese Makers Association 
(WCMA), National Cheese Institute (NCI), Farmers Union Milk Marketing 
Cooperative (FUMMC), and the Trade Association of Proprietary Plants 
(TAPP). A witness for NCI explained that if the protein price is set at 
too high a level, cheese manufacturers would experience a declining 
gross margin as the price for protein increases above the return the 
plant can obtain from additional protein. He explained that this would 
be the case with the protein price as proposed by NAJ, but not with the 
NCI and CMPC proposed protein price.
    Other witnesses supporting a lower protein price than that proposed 
by NAJ explained that protein should not be priced at a high level 
because the higher price may disadvantage handlers who do not 
manufacture cheese. They testified that the higher protein price would 
not be recoverable in certain products such as nonfat dry milk, 
condensed milk, or certain Class II products, and that even though the 
lower protein price still may not be recoverable, it offers the best 
alternative.
    The Galloway witness stated that if a multiple component pricing 
plan that derives a protein price from a cheese market value were 
adopted, the protein price should represent a minimum value, should be 
based on the barrel cheese market, and should not include a value for 
whey protein concentrate. He argued that such a price would have the 
impact of minimizing the difference between the protein and other 
solids prices.
    The TAPP/FUMMC witness testified that protein should be priced at a 
level somewhat below its full value in cheddar cheese and whey for 
several reasons. He said that too high a protein price could invite the 
use of non-dairy protein, whey solids, and casein, and thereby cause an 
increase in the production of imitation cheese. He also said that since 
some Class II and III products do not recoup as much value from high 
protein milk as cheese and cottage cheese, the protein price should be 
set at a level less than its full value for cheese. The witness 
expressed concern that too high a protein price could result in a zero 
value for the residual component, or other solids. According to the 
witness, a zero value for the residual would fail to reflect a 
realistic value, and would not cover a make allowance.
    In the post-hearing brief filed by NAJ, the position of using a 
``justifiably high'' protein price to send a signal to producers that 
protein is the most valuable component in milk was reiterated. In post 
hearing briefs filed by CMPC, NFO, Kraft, NCI, TAPP and FUMMC, 
Anderson-Erickson (A-E), and AMPI North Central Region, the computation 
of the protein price as proposed by CMPC was supported. The reasons 
given in testimony for using a lower protein price than that proposed 
by NAJ were reiterated in briefs. In addition, A-E, Kraft and AMPI 
North Central Region argued that the difference between the barrel 
cheese price and the block cheese price is due to the cost of packaging 
and other nonmilk factors, and therefore the barrel cheese price should 
be used for determining the protein price.
    In pure economic terms the price of a product represents the supply 
and demand for that product as affected by place, form, and time. The 
problem with determining a price for protein contained in milk is that 
the protein is not marketed as a separate unique product, but is 
marketed as an integral part of both fluid and manufactured dairy 
products. Therefore, in determining an appropriate protein price, the 
value of protein in dairy products is determined by using the value of 
a product whose yield is a function of the protein content of the milk. 
At this point in time no attempt is made to reflect the protein content 
of milk in the value of milk used for fluid use. For this reason, the 
component pricing plan recommended in this decision does not apply to 
milk used for Class I purposes.
    The level of protein in milk does have a measurable affect on the 
value of milk used for manufacturing. This value varies among the 
diverse manufactured products because of differences in the market 
values of manufactured dairy products and in the contribution made by 
protein to various finished products. For instance, testimony at the 
hearing showed that for a one-pound change in protein in the 
manufacture of cheddar cheese there is a 1.32 pound change in the 
quantity of cheese produced, whereas in the production of milk powder a 
one-pound change in the level of protein would change the amount of 
powder produced by approximately one pound. Since the vast majority of 
milk in the five orders included in this hearing is used to manufacture 
cheese, the protein price will be based on the contribution made by 
protein in the manufacture of cheese.
    The 1.32 factor used in both methods proposed for the computation 
of the protein price for these five orders is derived from a modified 
Van Slyke cheese yield formula, where the casein is assumed to be 75 
percent of the protein and the moisture content of the cheese is 38 
percent. Assuming the butterfat is constant, a change of protein by one 
pound in this formula will change cheese yield by 1.32 pounds. 
Therefore, the 1.32 factor is appropriate for determining the order 
protein price.
    In determining the level of the protein price, the question of 
whether to use the average block price versus the average barrel price 
is a lesser issue than the question of whether or not whey protein 
should be included in the computation of the protein price, as proposed 
by NAJ. The average difference between the Green Bay Cheese Exchange 
average block price and average barrel price during 1992 and 1993 was 
$.0388 per pound. Multiplying this difference by the 1.32 factor 
results in an average difference of $.05 per pound of protein between 
the protein prices derived from the barrel and the block cheese prices. 
Over the same 2 years the inclusion of whey protein in the computation 
of the protein price would have increased the protein price by an 
average of $.4265.
    The principal issues that must be addressed in determining the 
computation of the protein price are the factors that must be included 
to arrive at a price that most accurately reflects the value of protein 
in milk. In addition, the effect of the level of the protein price on 
the other nonfat solids price must be considered. Since the other 
nonfat solids price is computed as a residual of the Minnesota-
Wisconsin price, the other nonfat solids price is inversely related to 
the protein price. In determining an appropriate protein price and 
other nonfat solids price, the effects of both prices on payments to 
producers and margins to handlers buying milk must be determined.
    Inclusion of a protein price and an other solids price in 
determining payments to producers gives producers an incentive to 
increase their production of nonfat solids, especially protein. There 
was no evidence in the hearing record to indicate the cost to producers 
of increasing the protein content of milk. It is therefore difficult to 
determine what the absolute level of the protein price, or its relative 
level to the butterfat and other solids prices, must be to encourage 
producers to increase the protein content of milk.
    On average for the 21 months of data available in the record the 
protein price recommended for adoption in this decision, at $1.6851 per 
pound of protein, is twice both the $.6379 per pound average other 
solids price and the $.8374 per pound average butterfat price. 
Certainly, pricing protein at double the price of the other components 
in milk gives producers a clear message that protein is the component 
most desired in the marketplace without over-valuing that component. 
The significant difference in prices between protein and the other 
nonfat solids and butterfat components should give producers an 
incentive to increase protein output.
    Testimony by several proponents of component pricing explained that 
component pricing would be more equitable to handlers than the current 
skim-butterfat pricing system. The proponents explained that the 
increased equity would be due to handlers paying for milk based more 
closely on its economic value to them. This increased equity is 
reflected in a narrower spread in margins between handlers making 
cheese from low protein-low solids milk versus handlers making cheese 
from high protein-high solids milk. Several exhibits showed that 
handlers using ``average'' milk would experience little if any change 
in their net margins. However, handlers using low-testing milk would 
experience a higher net margin than under the present pricing plan, 
while handlers using high-testing milk would experience a lower net 
margin. This result, the narrowing of handlers' net margins when 
compared to the skim-butterfat pricing system, would occur no matter 
which of the proposed pricing plans is used to price the components.
    Analysis of data presented at the hearing, using price computations 
based on each of the proposals and averaged over the 21 months of data 
included in exhibits, shows a range of net manufacturing margins for 
cheese using the recommended pricing system of $1.57 per hundredweight 
compared with the $3.34 range in cheese manufacturing margins per 
hundredweight of milk purchased attributable to the current skim-
butterfat pricing system. The three component pricing plans discussed 
at the hearing would result in ranges in net cheese manufacturing 
margins of $1.16 per hundredweight for the NAJ proposal, $1.62 per 
hundredweight for the CMPC proposal, and $1.70 per hundredweight for 
the NCI proposal.
    Even though the NAJ proposal yielded the smallest spread in net 
margins, further analysis of the NAJ results shows that the net margins 
increase and then start to decline. The decline in margins occurs when 
there is not enough butterfat in the milk to fully utilize the protein 
available, thus reducing the increase in cheese yield as protein 
content continues to increase. Accordingly, if the price of protein is 
greater than the increased return from cheese, the net return will 
start to decline.
    The decline in net returns under the NAJ proposal indicates that 
the NAJ proposal would overprice protein, at least when there is not 
enough butterfat to fully utilize the protein. The result is that the 
marginal return using the NAJ proposal peaks within the protein and 
butterfat range of average milk while the marginal return using the 
protein and other solids price as recommended in this decision 
continues to increase, although at a decreasing rate. A mandated 
pricing system should not set prices at levels that result in a 
declining marginal return, particularly when the decline occurs at or 
near average market component levels. Therefore, the whey protein 
factor should not be included in the computation of the protein price.
    The monthly average price for 40-pound block cheddar cheese on the 
National Cheese Exchange in Green Bay, Wisconsin, is the appropriate 
price to use for determining the protein price. Use of the block price 
results in producers receiving a higher price for protein than if the 
barrel price were used without handlers incurring any significantly 
higher cost for milk. In addition, although the record showed that more 
cars of barrel cheese were sold on the Exchange than block cheese, the 
predominant cheese form in which American cheese is manufactured in the 
five-market region is in 40-pound or 640-pound blocks.
    The price difference between block and barrel cheese may be due to 
packaging and other nonmilk factors. However, the protein price must be 
established at a level that best meets the needs of all concerned. The 
block cheese price should be more effective than the barrel price in 
establishing a sufficiently high protein price to accomplish the goal 
of encouraging producers to produce protein without having a 
detrimental impact on handlers, and does result in a narrower range of 
manufacturing margins for cheese.
    Over the period January 1992 through September 1993, a protein 
price computed by multiplying the block price by 1.32 would have 
resulted in an average protein price of $1.6851 per pound. The CMPC and 
NCI proposals, using the barrel cheese price, would have resulted in an 
average protein price of $1.6337 per pound of protein over the same 
time period. A comparison of the net margins resulting from the 
recommended protein price versus the CMPC and NCI proposals shows that 
the slightly higher protein price and correspondingly lower other 
solids price recommended herein have a negligible affect on net 
margins. In fact, the spread between the highest and lowest cheese 
manufacturing margin declines slightly while the margin per pound of 
cheese remains virtually unchanged. At the same time, the producer is 
paid a higher protein price and thereby has a greater incentive to 
increase protein production.
B. Other Nonfat Solids
    The balance of the M-W price, after the values of protein and 
butterfat are removed, should be priced on the basis of ``other nonfat 
solids.'' The other nonfat solids price per pound will be computed by 
subtracting from the Class III price the sum of the butterfat price 
times 3.5 and the protein price times the test of the Minnesota-
Wisconsin price survey milk. The result will be divided by the other 
nonfat solids test of the Minnesota-Wisconsin price survey milk. 
Because the computation of the other solids price is based on a 
residual value, the other solids price could be negative without 
further adjustments. Therefore, if computation of the other solids 
price results in a negative price, the protein price will be adjusted 
(downward) to result in a zero value for the other solids price.
    As a residual, a NAJ witness stated, the other nonfat solids price 
would represent the value of lactose and ash, which are the primary 
constituents of the other nonfat solids, and the difference in value 
between a competitively set price for milk, the Minnesota-Wisconsin 
price, and the value of that milk based strictly on product prices.
    An expert witness for NAJ testified that a higher price for other 
solids than would be computed by using a protein price lower than that 
proposed by NAJ was not justified because a higher other nonfat solids 
price would defeat the purpose of multiple component pricing: To give 
producers an economic incentive to increase the protein content of 
their milk. The witness also explained that since the ``other nonfat 
solids'' consist primarily of lactose, for which there is a limited 
market and cheaper substitutes, there is no reason to have a high other 
nonfat solids price.
    A witness for CMPC explained that the CMPC proposal would result in 
a higher price for other nonfat solids than the NAJ proposal. The 
witness testified that reduced emphasis on the protein price and 
increased emphasis on the other solids price would reduce the impact of 
multiple component pricing on handlers and producers. The witness 
observed that the average difference in handlers' cost of milk between 
the current skim-butterfat pricing system and the CMPC proposal was 
less than one cent per hundredweight, while the NAJ proposal would 
result in a difference of slightly over three cents per hundredweight.
    The CMPC witness pointed out that the same relationship was 
applicable to returns to producers. In fact, the witness stated, when 
comparing the effect of the current skim-butterfat pricing system on 
handlers' obligations with both the NAJ proposal and the CMPC proposal, 
there is a narrower spread from the highest difference to the lowest 
difference and a smaller standard deviation with the CMPC proposal than 
the equivalent comparisons with the NAJ proposal.
    An alternative residual price was proposed by NCI and supported by 
Kraft. A witness for NCI testified that instead of placing the residual 
value on the other nonfat solids, the residual value should be placed 
on the remaining pounds of fluid milk. The witness explained that this 
residual fluid price would be calculated by subtracting the value of 
3.5 pounds of butterfat and the value of the protein based on the 
protein test of the milk in the Minnesota-Wisconsin price survey from 
the Minnesota-Wisconsin price. The resulting value would be divided by 
100 minus 3.5 minus the protein test of the milk in the Minnesota-
Wisconsin price survey.
    The NCI witness testified that placing the residual value on other 
nonfat solids would yield an ``other nonfat solids'' price that could 
not be recovered in the marketplace. In addition, he stated, although 
the butterfat price is based on the butter market and the protein price 
would be based on the return to cheese manufacture, the other nonfat 
solids price would have no relationship to any particular established 
market or component. The witness also testified that since an other 
nonfat solids test would not be needed for the NCI proposal, 
administration of the pricing plan would be easier and less expensive 
than the other pricing proposals.
    The proposal by NCI to place the residual value on a ``fluid 
carrier'' component has some merit in that it does not try to apply the 
residual value to a component such as other solids, on which the market 
may not place a value. The major drawback to the NCI proposal is that 
it ignores one of the components of milk, other nonfat solids, which is 
composed of lactose and ash.
    Although the other nonfat solids do not have as much market value 
as either butterfat or protein, they are an important component of 
milk. If a multiple component pricing system is to be effective it 
should price as many of the components in milk as possible, preferably 
based on the value of those components in the marketplace. There is, 
however, no readily available measure of the market value of the other 
nonfat solids. Since there was no testimony or any justification in the 
record for departing from the Minnesota-Wisconsin price as a basic 
price for milk, at least one of the components in the payment plan must 
represent the difference between a competitively-set pay price (the M-
W) and the product-derived component prices. This residual value 
therefore represents not only the value of the lactose and ash, but 
also equates the component values, some of which are determined by 
their market value, with a competitively set producer pay price.
    The prospect of lactose being added to milk by producers for the 
purpose of benefitting from the other solids price was discussed by 
several hearing participants. The incentive to adulterate milk with 
added lactose should be no more of a problem than the current incentive 
to adulterate milk with water. Testing to determine whether lactose has 
been added should, in fact, be easier than testing for water since it 
would be part of the testing necessary to determine producers' 
payments. In addition, added lactose can be detected during normal 
testing procedures currently conducted on milk.
    NCI's concern that testing for total solids would increase 
handlers' costs and difficulty of testing was not established in the 
hearing record. In fact, testimony indicated that many handlers are 
already testing for total solids. Hearing testimony also showed that 
the testing for total solids is as accurate or more accurate than 
testing for butterfat or protein. In addition, the infrared machines 
that are used by most laboratories will test for total solids at the 
same time the butterfat and protein tests are done. Therefore, there 
should be no significant increase in testing cost or testing difficulty 
with the implementation of the component pricing plan incorporated in 
this decision.
C. Butterfat
    The value of butterfat in the amended orders will be the same as 
under the current orders. There was no proposal or testimony to change 
the way butterfat currently is valued. One expert witness testified 
that the current system of basing the value of butterfat on the value 
of butter is proper.
    This decision continues the historical relationship of the values 
of butterfat and butter. The difference between the pricing of 
butterfat in the amended order and the current order is due to the way 
that value is expressed. Currently the value of butterfat is expressed 
as a differential; that is, the difference in value between 0.1 pound 
of butterfat and 0.1 pound of skim milk. The amended order will express 
the value of butterfat on the basis of a price per pound. Whichever 
method is used, the total value of butterfat in milk is the same. 
However, by expressing the value on a per pound basis instead of a 
differential, the objective of demonstrating clearly to producers where 
the value is in milk is easily achieved.
    As proposed, the butterfat price per pound in the amended order 
will be determined by multiplying the butterfat differential by 965 and 
adding the Class III price. The resulting price per hundredweight would 
then be divided by 100 to give a price per pound of butterfat.
D. Miscellaneous
    The three component prices: butterfat, protein, and the other 
solids, will be expressed on a per pound basis with four places to the 
right of the decimal. Analysis has shown that by expressing these 
prices to the nearest one-hundredth of a cent, the accuracy of the 
prices is significantly enhanced over expressing the prices to the 
nearest cent. Additionally, the difference between what is paid into 
the producer settlement fund and what is drawn from the producer 
settlement fund is much closer to zero than when prices are rounded to 
the nearest full cent.
    In contrast to other orders that have multiple component pricing 
provisions, this decision incorporates only one protein price as well 
as one other nonfat solids price. The pooling of the components to 
include the Class I skim portion is incorporated within the computation 
of the producer price differential. This feature of the pricing plan 
allows for the elimination of separate handler and producer protein 
prices and separate handler and producer other solids prices, and 
resulting confusion over which price, handler or producer, should be 
used when. In addition, a handler's per pound price for protein or 
other solids is the same whether the handler is buying milk from 
producers or from other handlers.
    The producer price differential, which represents the additional 
value of Class I and Class II milk in the pool and any positive or 
negative effect of Class III-A, will be determined by computing for 
each handler, and then accumulating for all handlers, the differential 
value (from Class III) of the Class I, Class II, and Class III-A 
product pounds. The differential value is adjusted, when appropriate, 
for shrinkage and overage, inventory reclassification, receipts of 
other source milk allocated as Class I, receipts from unregulated 
supply plants, location adjustments, and, in the Chicago Regional 
order, transportation and assembly credits.
    For the purpose of eliminating differences between handler and 
producer component values, the value of the Class I skim milk and the 
values of the protein and other solids contained in the skim milk 
allocated to Class II and Class III will be added to, and the values of 
the protein and other solids contained in all producer milk subtracted 
from, the differential pool. The accumulated total for all handlers is 
then adjusted by total producer location adjustments and one-half the 
unobligated balance in the producer settlement fund. The resulting 
value is then divided by the total pounds of producer milk in the pool, 
and an amount not less than four cents nor more than five cents is 
deducted. The result is the producer price differential to be paid to 
producers on a per hundredweight basis.
    It is possible for the producer price differential to be negative. 
A negative producer price differential can result for two reasons. Any 
of the Class I, II, or III-A differential prices may be negative and/or 
the minus adjustments may be large enough to offset any positive 
contribution from the differential price. A negative producer price 
differential would be equivalent to a uniform price less than the Class 
III price.
    An issue that was not directly addressed in this proceeding 
concerned testing for protein. The five orders included in this hearing 
currently base protein testing on the standard Kjeldahl method, which 
tests for nitrogen and then converts the nitrogen result to protein. 
Since there is a certain amount of free nitrogen in milk this test 
somewhat overstates the protein content of milk. Recent developments in 
testing allow for testing for true protein which is a more accurate 
reflection of protein content. In no way does this decision mandate a 
specific testing procedure. However, when (or if) the industry does 
move to testing for true protein, this decision should not be viewed as 
a hindrance to that conversion. At the time a change to testing for 
true protein may occur, a change in the 1.32 factor may be necessary.
4. Somatic Cell Adjustment

    The producer price differential paid to each producer should be 
adjusted on the basis of the somatic cell content of the producer's 
milk no matter how the milk is used by a handler. The value adjustment 
per hundredweight for each 1,000 somatic cells would be determined by 
multiplying .0005 times the monthly average National Cheese Exchange 
40-pound block cheese price. Each producer's monthly average somatic 
cell count (SCC), in thousands, would be subtracted from 350 and 
multiplied by the value adjustment per 1,000 SCCs. Somatic cell 
adjustments will not be included in the computation of the producer 
price differential.
    A wide range of somatic cell or quality plans were included in the 
notice of hearing and at the hearing itself. In general, all parties 
agreed that high-quality milk is important to all segments of the dairy 
industry. The major differences between the parties arose over the 
questions of how and whether quality and/or somatic cell adjustments 
should be included in the Federal order program.
    A witness expert in the field of milk testing and quality testified 
about the influence somatic cells have on milk and the resulting affect 
on products made from milk. The witness explained that in normal 
healthy cows the somatic cell count is around 50,000. When an infection 
occurs in the udder of the cow white blood cells enter to fight the 
bacterial infection. The SCC thus increases with the increasing number 
of white blood cells. In fact, white blood cells and somatic cells are 
synonymous in this context. The witness continued by explaining that 
white blood cells contain enzymes that are designed to break down the 
cell walls of the bacteria that are infecting the udder, but do not 
distinguish between milk protein and bacteria. As a result, milk 
protein is also degraded. The witness also stated that the enzyme 
causes some deterioration in milkfat. The witness continued by 
explaining that these white blood cells also cause to be activated a 
proteolytic enzyme that is present in all milk.
    The expert witness went on to explain that casein, which is the 
functionally important protein in milk, is broken down into smaller 
protein chains that cannot perform the same functions as the casein. In 
fact, the witness explained, the destruction of the casein affects all 
dairy products that rely on casein for structure or function. These 
products include cheeses, whipped cream, yogurt, ice cream, and 
condensed and dry products used in the manufacture of other products in 
which casein is a functional necessity. The witness also explained that 
higher SCC milks have a tendency to have a faster increase in ``acid 
degree value'', which is a measure of rancidity and off flavors, than 
milks with low SCCs. The witness testified that most of the damage 
occurs in the udder of the cow, where conditions are ideal for the 
various enzymes to work. Once the milk is removed from the udder and 
cooled and stored properly, further deterioration does not stop but is 
slowed down significantly, and further damage is minimized.
    The expert witness discussed the effect that somatic cell counts 
have on the manufacture of various dairy products, specifically cheese. 
He explained that high SCC milk results in lower cheese yields as well 
as problems with moisture control and the activity of the starter 
culture. The increased somatic cells result in less casein in 
relationship to the total protein so that less cheese is produced than 
would be indicated by the amount of protein present. The degraded 
protein ends up in the whey with the rest of the whey proteins. The 
witness explained that in studies using individual cow's milk cheese 
yield would drop dramatically as the somatic cell count went above 
100,000, with the yield staying fairly constant as the somatic cell 
count climbed to 1,000,000.
    The witness pointed out that the cheese yield effect of somatic 
cells differs when bulk tank milk is used instead of an individual 
cow's milk. He explained that in the case of bulk tank milk the 
relationship between cheese yield and somatic cell counts would be 
linear, with cheese yields declining as SCCs increase. The witness 
stated that the linear relationship is caused by the weighting of the 
SCCs in the bulk tank. Bulk tank tests are weighted averages rather 
than simple averages. For example, if 100 pounds of milk with a somatic 
cell count of 50,000 and 400 pounds of milk with a somatic cell count 
of 250,000 are added to the bulk tank the somatic cell count would be a 
weighted average of 210,000 and not the simple average of 150,000.
    The witness also testified that the effect of somatic cell levels 
on fluid milk products is reflected in higher acid degree values that 
indicate rancidity and off flavors, resulting in shorter shelf life.
    The expert witness testified that routine testing for somatic cells 
is conducted using a Foss-O-Matic infrared analyzer. The reference 
method for testing is the direct microscope somatic cell count in which 
the sample is stained and the somatic cells are counted using a 
microscope. The witness explained that if the electronic instruments 
are calibrated to the same reference samples the resulting test values 
and standard deviations should be in close agreement. The witness 
concluded that on a relative basis the results should be close to what 
would be obtained using other analytical tests.
    The notice of hearing contained a proposal by CMPC to include an 
adjustment for somatic cells. However at the hearing, a witness for 
CMPC explained that CMPC had decided neither to support nor oppose the 
inclusion of a somatic cell adjuster in the amended orders. The CMPC 
witness testified that the individual members of CMPC were free to 
support or oppose any of the somatic cell proposals as they saw fit.
    As originally proposed by CMPC, the somatic cell adjustment would 
be computed by multiplying the National Cheese Exchange barrel price 
times .0005. The resulting quantity would be multiplied by 500 minus 
the somatic cell count of the milk, in thousands. The resulting value 
would be applied on a per hundredweight basis. As explained by a 
witness for CMPC, the proposed somatic cell adjuster would apply to all 
producer milk, including that purchased by Class I handlers. The 
witness went on to explain that the effect of somatic cells on the 
value of producer milk and milk used in Class II and Class III would be 
included in the computation of the producer price differential. A 
somatic cell adjustment on Class I milk would not be included in the 
pool, and therefore would not affect Class I handlers' cost of milk.
    A witness for WCMA quoted extensively from the MCP recommended 
decisions for the Indiana, Ohio Valley, and Eastern Ohio-Western 
Pennsylvania milk marketing orders, and for the Michigan milk order, 
supporting the inclusion of an adjustment for somatic cells in Federal 
orders. The witness supported the CMPC proposal, but suggested that the 
somatic cell adjustment be applied to all milk; that is, Class I milk 
would not be exempted from a somatic cell adjustment. In addition, he 
proposed that the somatic cell adjustment be applied to the protein 
price rather than on a hundredweight basis.
    A witness for TAPP and FUMMC expressed support for including a 
somatic cell adjustment in the amended orders. The TAPP-FUMMC brief 
also supported such a provision. The witness stated that a somatic cell 
adjustment would benefit producers, handlers, and consumers by 
increasing the volume of milk marketed, improving yield, and supplying 
consumers with more nutritious, better quality dairy products. The 
TAPP/FUMMC witness explained that their proposal would have a neutral 
range of 301,000 to 400,000 somatic cells with a one-cent positive 
adjustment for each 50,000 somatic cell count below the neutral range 
up to a maximum of a six cents as the somatic cell count declined, and 
a one cent negative adjustment for each 50,000 somatic cell count above 
the neutral range up to a maximum of ten cents as the somatic cell 
count increased. The TAPP/FUMMC witness testified that under their 
proposal the somatic cell adjustment would apply to all producer milk, 
milk used in Class III, and, if the plan is to be revenue neutral, also 
to milk used in Class II.
    A witness for Swiss Valley Farms Company (Swiss Valley) testified 
in support of including additions and subtractions for somatic cells in 
the amended order. The Swiss Valley witness explained that somatic 
cells add proteolytic and lipolytic enzymes to the milk, as well as a 
plasmin enzyme that is extremely heat stable, such that it is not 
deactivated during pasteurization. Therefore, the enzyme continues to 
degrade the milk during storage. The witness added that low SCC milk is 
important to the Swiss Valley bottling operations because it results in 
fluid milk products of improved flavor, and to their cheese-making 
operations because of the resulting higher casein and lower whey 
protein content of the milk, which increases manufacturing returns.
    The Swiss Valley witness proposed that the somatic cell adjustment 
begin at 400,000, with a positive adjustment as the SCC declines, and a 
negative adjustment as the SCC increases, from that level. The 
adjustment would be five percent of the National Cheese Exchange block 
price per 100,000 somatic cells. The Swiss Valley witness explained 
that the adjustment for somatic cells should apply to all producer milk 
and that Swiss Valley would support a somatic cell adjustment on Class 
II and Class III milk for the handler.
    In its post-hearing brief, Swiss Valley reiterated the testimony of 
its witness in favor of including an adjustment for somatic cells in 
the amended order. Besides supporting the position of the Swiss Valley 
witness, Swiss Valley expressed general support for a somatic cell 
adjustment.
    Testimony by a fluid processor witness indicated that the handler 
pays a quality premium when buying milk from producers and specifies 
minimum quality standards on purchased tanker milk.
    A witness for Mid-America Dairymen, Inc. (Mid-Am), testified that 
Mid-Am favored the inclusion of an adjustment for somatic cells in the 
amended order. The witness quoted from the Final Decision of the 
Indiana, Ohio Valley, and Eastern Ohio-Western Pennsylvania proceeding 
to support the position of Mid-Am that an adjustment for somatic cells 
should be included based on the effect somatic cells have on all milk. 
The witness explained that quantifying the adjustment on an incremental 
basis was difficult, and since not all milk is used in the manufacture 
of cheese a moderate adjustment rate should be used. The witness 
explained that the Mid-Am proposal would apply the somatic cell 
adjustment to all producer milk, on a hundredweight basis, with a 
positive adjustment for a somatic cell count below 400,000 and a 
negative adjustment for SCCs above 400,000.
    The witness explained that under the Mid-Am proposal, the somatic 
cell adjustment would be computed by subtracting the monthly average 
somatic cell count (in thousands) of the producer from 400 and then 
multiplying the result by the National Cheese Exchange monthly average 
barrel cheese price multiplied by .0005. He stated that since the 
somatic cell adjustment would be included in the computation of the 
producer price differential, on the producer side only, the total size 
of the pool would not change but individual producers would receive 
more or less, depending on whether their milk had a somatic cell count 
above or below the average SCC of the market. The Mid-Am witness 
continued by explaining that the Mid-Am proposal would be a 
redistribution of money from high somatic cell testing producer milk to 
the lower somatic cell testing milk, since there would be no additional 
money in the pool from the somatic cell adjustments.
    Instead of supporting the inclusion of somatic cell adjustment 
provisions in the five Federal orders, witnesses testifying on behalf 
of Land of Lakes, Inc., and NCI supported those organizations' 
proposals to allow each handler to submit a somatic cell or quality 
adjustment plan for payments to its own producers to the market 
administrator.
    A witness for LOL testified that with the LOL proposal a handler 
could reduce a producer's payment by up to ten percent from that 
required by the order if other producers of the handler received 
positive adjustments to their payments, as long as the total payments 
were equal to at least the minimum total order payment requirements. 
The witness explained that LOL's proposal does not contain specific 
criteria for quality and/or volume adjustments. Each handler would 
submit an individual quality and/or volume adjustment plan to the 
market administrator which the handler would be required to adhere to 
until a new plan would be submitted. The witness testified that there 
is general agreement among handlers for the need to adjust payments for 
milk based on quality and volume. The witness continued by arguing that 
since the industry has not yet reached a consensus on how to adjust for 
quality and volume, it would be appropriate to allow each handler to 
develop its own quality and volume plan with the approval of the market 
administrator.
    A witness for NCI testified that even though somatic cells affect 
the quality of milk, particularly in the manufacture of cheese, it is 
difficult to place a value on their effect. The witness explained that 
the variability in somatic cell levels from day to day and producer to 
producer makes determining an appropriate payment adjustment imprecise. 
In addition, the witness pointed out that other factors affect milk 
quality, and that placing a precise value on their effect is even more 
difficult than in the case of somatic cells. The NCI witness explained 
that the NCI proposal would allow each handler to establish and apply 
its own somatic cell adjustment schedule, with the approval of the 
market administrator, as long as the total payments to producers met or 
exceeded the Federal order minimum value. The witness explained that 
each handler could change its payment plan as conditions warranted.
    A witness for Kraft emphasized the earlier testimony on the effect 
of somatic cells on milk quality and cheese yields. The witness listed 
several studies supporting the results testified to by the NAJ expert 
witness. The Kraft witness testified that Kraft has, since the early 
1980's, employed a quality payment program as part of its producer 
payroll. The witness went on to state that the plethora of somatic cell 
payment programs in use in the industry is strong evidence of the 
industry's recognition that somatic cells play a major role in milk 
quality. The Kraft witness explained that, in order of preference, 
Kraft supports the proposal submitted by NCI, followed by LOL's 
proposal and the TAPP/FUMMC proposal.
    Kraft, in its post-hearing brief, reiterated its support for a 
somatic cell adjustment to be included in the amended order. Kraft's 
brief did not support a particular adjustment plan but preferred the 
LOL-NCI concept. If that plan were not adopted, Kraft expressed support 
for the proposal by Mid-Am or the original CMPC proposal. A brief filed 
largely reiterative of NCI testimony was filed on behalf of NCI with 
the Dairy Division rather than the Hearing Clerk, and was received more 
than 3 weeks after the extended due date for filing briefs. The brief 
is not considered in this decision.
    In the Anderson-Erickson Dairy Company (A-E) post-hearing brief, A-
E opposed the application of an adjustment for somatic cells to Class I 
milk. They contended that the Class I handler is unable to recover the 
added cost of lower somatic cell count milk from the retail market. 
This position was supported in the post-hearing brief filed by Lamers 
Dairy and Hansen Dairy (Lamers). Lamers pointed to testimony that 
indicated that the monetary effect of somatic cells on Class I milk 
could not be quantified as it could be with the manufacture of cheese.
    NFO, in its post-hearing brief, opposed the inclusion of any 
somatic cell adjuster in the recommended order. NFO expressed the 
opinion that support for a somatic cell adjuster was rather weak, with 
none of the positions presented having strong support. As an example, 
the NFO brief pointed to the neutral position taken by CMPC at the 
hearing after including a somatic cell adjuster in the original CMPC 
proposal. The NFO brief continued by explaining that testimony at the 
hearing indicated that the relationship between somatic cell levels and 
economic return is not a clear and definite relationship. The NFO brief 
went on to point out that there was no consensus at the hearing on how 
to apply a somatic cell adjuster.
    There is ample testimony and evidence to support the inclusion of a 
somatic cell adjuster in these amended orders. The somatic cell 
adjuster per hundredweight per 1,000 somatic cells will be calculated 
by multiplying .0005 times the monthly average National Cheese Exchange 
40-pound block cheese price. To determine the value for an individual 
producer, the producers monthly average somatic cell count (in 
thousands) will be subtracted from 350 and multiplied by the somatic 
cell adjuster. The value of the somatic cell adjustment will be applied 
on a per hundredweight basis in the handlers' payment to producers. 
Somatic cells will not be included in the computation of the producer 
price differential.
    The application of the somatic cell adjustment contained herein 
will promote orderly marketing. As pointed out by several witnesses 
testifying at the hearing, producers in these markets are faced with a 
wide array of quality premium programs. These programs have no standard 
basis or standard value that is applied between handlers. Therefore a 
producer is faced with trying to decide which premium program will give 
the producer the greatest return without a standard with which to 
compare. Inconsistent premium programs also result in producers with 
identical milk receiving different prices for that milk depending on 
which handler is procuring the milk. The inclusion of this recommended 
somatic cell adjustment will tend to effectuate the declared policy of 
the Act by encouraging orderly marketing through the standardization of 
the basis for payment on the level of somatic cells in the milk and the 
standardization and checking of the testing and test procedures used 
for determining the somatic cell counts.
    As was stated earlier, all parties agreed that high quality milk is 
important to all segments of the dairy industry. In fact, there was 
little opposition to the inclusion of an adjustment for quality in the 
amended orders. Even though testimony indicated that there are other 
quality factors that are important in overall milk quality, there was 
no determination of their effect on milk quality or any attempt to 
compute a relevant associated value. Therefore, somatic cell count will 
be used as the quality adjustment factor in this decision.
    There are two basic reasons to apply the somatic cell adjustment 
rate on a hundredweight basis rather than to adjust the protein price. 
First, the somatic cell adjustment reflects the quality of milk in all 
uses rather than just cheese, and second, application of the somatic 
cell adjustment on a hundredweight basis makes it very clear to 
producers and to handlers that quality affects milk used in all 
products. Although testimony clearly showed that somatic cells affect 
the quality of milk in all uses, a value determined on the basis of the 
effect of somatic cells on cheese reflects the most prevalent use of 
milk in these markets and is the easiest way to determine a value for 
payment to producers.
    A lack of agreement among hearing participants occurred in trying 
to determine the application of a somatic cell adjustment. There was a 
general consensus that an adjustment should be made in the producer pay 
price for quality and/or somatic cells. The rate at which such 
adjustment should be made varied by proposal, but was tied to the 
reduction in cheese yield that occurs as somatic cell counts increase. 
Several witnesses testified that the somatic cell adjustment rate 
should be set at a moderate level. Testimony indicated that most of the 
decline in cheese yield occurs as the SCC increases from below 100,000 
to above 100,000, with a much slower decline in yield as the somatic 
cell count increases to one million. However, testimony also showed 
that declines in yield are much more linear when somatic cell tests and 
cheese yield studies are done with bulk tank milk than with the milk of 
individual cows. Several proposals suggested using a factor of .0005 
times the cheese price in determining the value of the somatic cell 
adjustment per 1,000 somatic cells. This factor is derived from the 
approximately four percent decline in cheese yield as the somatic cell 
count increases from 100,000 to one million. This is the same 
adjustment that is used in other Federal orders in which a somatic cell 
adjuster is included.
    The formula used to determine the somatic cell adjuster reflects 
the changes in the yield of cheese as the levels of somatic cells 
change. The formula also ties the adjustment to the value of the milk 
by using the block cheese price to determine the value per 1,000 
somatic cells. However, since record evidence clearly shows that the 
affect of somatic cells on Class I and Class II products is related 
more to the quality of the finished product than to the yield of the 
product, the formula should reflect less than the full value of the 
affect of somatic cells on cheese yield. Using the recommended formula, 
the somatic cell adjustment for the average producer under the Chicago 
Regional order would be three cents per hundredweight, far below the 25 
cents per hundredweight average quality premium that is shown in 
hearing exhibits as being paid currently.
    The corresponding somatic cell adjustments for average producers 
under the four orders in addition to Chicago are: Upper Midwest, zero 
cents; Iowa, minus one cent; Nebraska-Western Iowa, minus six cents; 
and Eastern South Dakota, minus three cents. The formula results in an 
estimated range of forty-eight cents per hundredweight from a somatic 
cell count of 1,000 to a somatic cell count of 750,000, or a positive 
twenty-two cents to a minus twenty-six cents, although there is no 
limit on the deduction that may be made since there is no limit on the 
maximum SCC in this decision.
    The use of a neutral point was supported by various proponents of a 
somatic cell adjuster. Several others suggested a neutral range. The 
record contains numerous references to a neutral range or point around 
a somatic cell count of 400,000. One witness expressed the opinion that 
the base level for the somatic cell adjustment should be near the 
average for the five markets. Another witness explained that their 
proposal used 400,000 SCC because that is where their present quality 
program begins. Based on data included in the hearing record, the 
average SCC for producers whose milk is pooled under the five orders is 
367,000. Therefore, a neutral point of 350,000 is appropriate. It is 
close to the average for the markets, and not substantially different 
from the values that witnesses found appropriate. Also, by using the 
formula included herein, proponents of both a neutral point or a 
neutral range are accommodated because the formula yields no value 
adjustment for approximately plus or minus 7,000 SCC around 350,000.
    The formula will give producers an incentive to reduce their SCCs 
while minimizing the effect of the somatic cell adjuster on those 
products in which somatic cells have a quality effect rather than a 
yield effect. The argument that a somatic cell adjuster will negate the 
forward pricing of Class I and Class II milk is also minimized by the 
proposed formula. Analysis shows that the month-to-month variation in 
the somatic cell adjustment at a particular somatic cell level is no 
more than one cent per hundredweight, with an approximate change of 1 
cent for every increment of 15,000 somatic cells. This small variation 
from month to month should allow handlers to determine accurately the 
cost of milk for forward pricing. In fact, the variation in the somatic 
cell adjustment is significantly less than the month-to-month variation 
in the current butterfat differential, which is not known until after 
the end of the month.
    Since this decision applies an adjustment for somatic cells to all 
milk, there is no need to include the somatic cell adjustment in the 
computation of the producer price differential. There are only two 
reasons to include somatic cells in the producer price differential 
computation: (1) To exclude a particular class or classes of milk from 
being affected by a somatic cell adjustment, or (2) to redistribute the 
somatic cell adjustment money among all of the producers in the market. 
Since this decision applies the somatic cell adjustment to all milk the 
first reason is not relevant.
    There may be some merit for redistributing money from high somatic 
cell producers to low somatic cell producers marketwide. However, if 
such a provision were adopted, the producer price differential would 
also be affected with changes in the market average SCC. In fact, as 
the market average SCC decreased, the producer price differential would 
decline below the level of the producer price differential in the 
absence of a somatic cell count adjustment, decreasing the incentive 
for producers to reduce the somatic cell counts of their milk and 
defeating the objective of a somatic cell count adjustment. Therefore 
the somatic cell adjustment will be applied to all producer milk 
without being included in the pool or producer price differential 
computation.
    Neither the quality proposal by LOL nor the somatic cell proposal 
by NCI, in which each handler would be allowed to submit an individual 
quality or somatic cell payment plan to the market administrator, is 
included in this decision. Although the Agricultural Marketing 
Agreement Act in 7 U.S.C. 608c(5) does allow for adjustments to minimum 
pay prices on the basis of quality, such adjustments should be at a 
uniform rate for all producers in the market. Allowing each handler to 
have its own payment schedule would defeat the concept of uniform 
pricing to producers, eliminate the purpose of allowing quality 
adjustments under the order, and lead to disorderly marketing. 
Producers with identical milk shipping to different handlers within the 
same market could, and probably would, have different minimum order pay 
prices if each handler had its own quality or somatic cell payment 
plan.
    A number of witnesses testified that the profusion of payment plans 
currently in effect in the market today are causing disorderly 
marketing, and that one of the benefits of incorporating multiple 
component pricing with a somatic cell adjustment in the five orders 
would be to reduce or at least standardize the vast array of producer 
payment plans currently in effect in the region. In view of such 
testimony, adoption of the LOL or NCI quality adjustment proposals 
would serve no purpose.

5. Conforming Changes

    To accommodate multiple component pricing a number of changes need 
to be made in the current order provisions of the five orders in this 
decision. To compute a handler's obligation and the producer price 
differential, several prices need to be defined. The Class I 
differential price should be defined as the difference between the 
current month's Class I price and the current month's Class III price. 
The Class II differential price should be defined as the difference 
between the current month's Class II price and the current month's 
Class III price. These differential prices should not be confused with 
the fixed value that is added to the Minnesota-Wisconsin price for the 
second preceding month to arrive at the Class I price for the current 
month, or the computed value that is used in the computation of the 
Class II price. It should also be pointed out that these differential 
prices may be negative, which currently happens when the Minnesota-
Wisconsin price is greater than the Class I or Class II price. The skim 
milk price will be calculated by subtracting from the Class III price 
the value determined by multiplying the butterfat differential by 35. 
The skim milk price will be expressed on a per hundredweight basis with 
four places to the right of the decimal.
    Since producer location adjustments are not changed in this 
decision, the application of such adjustments to the producer price 
differential remains unchanged. In some of the orders the uniform price 
is ``snubbed'' at the Class III price when producer location 
adjustments are applied. In these orders, the producer price 
differential will be adjusted for location until the producer price 
differential is zero if the producer price differential at the zero 
zone is zero or greater. However, if the producer price differential is 
negative, no minus producer location adjustment will be applied. Plus 
adjustments to a negative producer price differential would be made. In 
those orders in which the uniform price is not ``snubbed'' to the Class 
III price, producer location adjustments will be applied as they are 
currently.
    For the Market Administrator to compute the producer price 
differential handlers will need to supply additional information on 
their monthly reports of receipts and utilization. In addition to the 
product pounds and butterfat currently reported, handlers will be 
required to report pounds of protein and pounds of other solids. This 
information will be required from each handler for all producer 
receipts, including milk diverted by the handler, receipts from 
cooperatives as 9(c) handlers, and receipts of bulk milk received by 
transfer or diversion.
    For the Upper Midwest Order only, the due date for handlers to 
submit reports of receipts and utilization should be changed, from the 
10th of the month to the 8th of the month. Currently, the Upper Midwest 
Order requires handlers to submit reports by the 10th of the month, and 
the Uniform Price to be announced by the 11th of the month, allowing 
only one day for the pooling process. The other four orders involved in 
this decision allow a longer period of time for the processing of data 
and the announcement of the Uniform Price. In the Chicago Regional 
Order, handler reports are due on the 10th, and the Uniform Price is 
announced on the 14th, a period of 4 days. In the Iowa Order, handler 
reports are due on the 8th, and the Uniform Price is announced on the 
12th, a period of 4 days. In the Nebraska-Western Iowa Order, handler 
reports are due on the 7th, and the Uniform Price is announced on the 
12th, a period of 5 days. In the Eastern South Dakota Order, handler 
reports are due on the 8th, and the Uniform Price is announced on the 
12th, a period of 4 days.
    The order changes recommended in this decision will require the 
market administrator of each order to carry out a more comprehensive 
review and analysis of the data than is required currently. As noted at 
the hearing, the pooling process will become somewhat more complicated 
because data submitted will involve not only skim and butterfat pounds, 
but also pounds of protein and other solids. Thus, it is appropriate to 
allow the market administrator for the Upper Midwest Order a period of 
3 days to compute and announce the producer price differential and the 
statistical uniform price. By changing the due date for handler reports 
from the 10th to the 8th, but retaining the 11th as the day the 
producer price differential and statistical uniform price are to be 
announced, the pooling process will be better accommodated.
    For purposes of allocation of producer receipts the assumption will 
be made that the protein and other solids cannot easily be separated 
from skim milk. The protein and other solids will therefore be 
allocated proportionately with the skim milk based on the percentage of 
protein and other solids in the skim milk received from producers.
    The implementation of this multiple component pricing decision will 
require several changes in the way handlers pay for milk. Partial 
payment at the Class III price for the previous month for milk 
deliveries during the first 15 days of a month was proposed by both NAJ 
and CMPC. Although no objections to the proposal were expressed, there 
was no testimony supporting or opposing the proposal. Therefore, there 
is no basis in the record of the proceeding to make substantive changes 
in the payment provisions of the orders that provide for partial 
payments at a significantly different level.
    Currently, the Nebraska-Western Iowa order, the Upper Midwest 
order, and the Iowa order require partial payments to be based on the 
prior month's uniform price. Since this component pricing plan does not 
contain a uniform price, these three orders will be changed to require 
the partial payments to be made at the ``statistical uniform price'', 
announced by the market administrator on or before the 14th day of the 
month for which partial payment is to be made.
    The Chicago Regional order will also be changed from the current 
requirement that the partial payment be based on the lowest class price 
for the prior month to a partial payment based on the prior month's 
Class III price. The Eastern South Dakota order does not need to be 
changed.
    Final payment to producers will be determined by the total 
hundredweight of milk times the producer price differential adjusted by 
the applicable location adjustment, plus or minus the total 
hundredweight of milk times the adjustment for somatic cells, plus the 
pounds of protein times the protein price, plus the pounds of other 
solids times the other solids price, plus the pounds of butterfat times 
the butterfat price, minus any authorized deductions currently allowed.
    Handlers purchasing milk from cooperative pool plants will pay for 
Class I milk at the Class I differential price plus the pounds of skim 
milk in Class I at the skim milk price plus the pounds of butterfat at 
the butterfat price; for Class II milk at the Class II differential 
price plus the pounds of protein at the protein price, plus the pounds 
of other solids at the other solids price, plus the pounds of butterfat 
at the butterfat price; and for Class III milk at the protein pounds 
times the protein price, plus the pounds of other solids at the other 
solids price, plus the pounds of butterfat at the butterfat price. All 
milk purchased will be adjusted by the appropriate somatic cell 
adjustment. Payment for 9(c) milk will be based on the producer price 
differential adjusted for location at the plant of receipt and somatic 
cells, plus the value of protein, other solids, and butterfat contained 
in the milk.
    Since producers will be receiving payments based on the component 
levels of their milk, the payroll reports that handlers supply to 
producers must reflect the basis for such payment. Therefore the 
handler will be required to supply the producer not only with the 
information currently supplied, but also: (a) The pounds of butterfat, 
the pounds of protein, and the pounds of other solids contained in the 
producer's milk, as well as the producer's average somatic cell count, 
and (b) the minimum rate that is required for payment for each 
component and, if a different rate is paid, the effective rate also.
    The handler's value of milk will be determined by combining: (a) 
The pounds of producer milk in Class I times the Class I differential 
price, (b) the pounds of producer milk in Class II times the Class II 
differential price, (c) the value of overage, (d) the value of 
inventory reclassification, (e) the value, at the Class I minus Class 
III price difference, of other source receipts and receipts from 
unregulated supply plants allocated to Class I, (g) the value of 
handler location adjustments, (h) Class III-A credits, (i) the pounds 
of skim milk in Class I times the skim milk price, (j) the pounds of 
protein in Class II and Class III times the protein price, and (k) the 
pounds of other solids in Class II and Class III times the other solids 
price.
    The pounds of protein and other solids in Class II and Class III 
will be determined by multiplying the percent protein or percent other 
solids in the skim milk of the total producer milk received by the 
handler times the pounds of skim milk allocated to Class II and Class 
III.
    Handler's obligations to the producer settlement fund will be 
determined by subtracting from the handler's value of milk the 
following: (a) The total pounds of each handler's producer milk times 
the producer price differential adjusted for location, (b) the total 
pounds of protein contained in the producer milk times the protein 
price, (c) the total pounds of other solids contained in the producer 
milk times the other solids price, and (d) the value of other source 
milk at the producer price differential with any applicable location 
adjustment at the plant from which the milk was shipped deducted from 
the handler's value of milk.
    The amendments to order language accompanying this recommended 
decision are based on the current language of the five orders. There 
are two national amendatory proceedings in process (the M-W replacement 
and Class II pricing) that may result in changes to some of the 
provisions that will also be changed by this proceeding. No attempt has 
been made in drafting the order language amendments accompanying this 
decision to accommodate any of the changes that may result from the 
other two proceedings. Any adjustments needed will be made on the basis 
of the order language in effect at the time a final decision is issued.

Rulings on Proposed Findings and Conclusions

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

General Findings

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

Recommended Marketing Agreements and Order Amending the Orders

    The recommended marketing agreements are not included in this 
decision because the regulatory provisions thereof would be the same as 
those contained in the orders, as hereby proposed to be amended. The 
following order amending the orders, as amended, regulating the 
handling of milk in the aforementioned marketing areas is recommended 
as the detailed and appropriate means by which the foregoing 
conclusions may be carried out.

List of Subjects in 7 CFR Parts 1030, 1065, 1068, 1076 and 1079

    Milk marketing orders.

    For the reasons set forth in the preamble, 7 CFR Parts 1030, 1065, 
1068, 1076 and 1079 are proposed to be amended as follows:
    1. The authority citation for 7 CFR Parts 1030, 1065, 1068, 1076 
and 1079 continues to read as follows:

    Authority: Secs. 1-19, 48 Stat. 31, as amended; 7 U.S.C. 601-
674.

PART 1030--MILK IN THE CHICAGO REGIONAL MARKETING AREA

    1. Section 1030.30 is amended by revising paragraphs (a) and (c) 
and removing paragraph (d), to read as follows:


Sec. 1030.30  Reports of receipts and utilization.

* * * * *
    (a) Each handler described in Sec. 1030.9(a) shall report for each 
plant of the handler (except if a handler requests and the request is 
approved by the market administrator, a handler may file a consolidated 
report for supply plants and a consolidated report for distributing 
plants); and each handler described in Sec. 1030.9 (b) and (c) shall 
report the following information:
    (1) Product pounds, pounds of butterfat, pounds of protein, and 
pounds of solids-not-fat other than protein (other solids) contained in 
or represented by:
    (i) Receipts of producer milk, including producer milk diverted by 
the handler from the pool plant to other plants;
    (ii) Receipts of milk from handlers described in Sec. 1030.9(c); 
and
    (iii) Receipts by transfer or diversion of bulk fluid milk products 
from pool plants, including a separate statement of the net receipts 
from each supply plant computed pursuant to Sec. 1030.7(b)(4);
    (2) Product pounds and pounds of butterfat contained in:
    (i) Receipts of fluid milk products not included in paragraph 
(a)(1) of this section and bulk fluid cream products from any source;
    (ii) Receipts of other source milk; and
    (iii) Inventories at the beginning and end of the month of fluid 
milk products and products specified in Sec. 1030.40(b)(1); and
    (3) The utilization or disposition of all milk, filled milk, and 
milk products required to be reported pursuant to this paragraph.
* * * * *
    (c) Each handler not specified in paragraphs (a) and (b) of this 
section shall report with respect to its receipts and utilization of 
milk, filled milk, and milk products in such manner as the market 
administrator may prescribe.
    2. Section 1030.31 is amended by revising paragraph (a) to read as 
follows:


Sec. 1030.31  Payroll reports.

    (a) On or before the 25th day after the end of each month, each 
handler described in Sec. 1030.9 (a), (b), and (c) shall report to the 
market administrator its producer payroll for such month, in the detail 
prescribed by the market administrator, showing for each producer the 
information specified in Sec. 1030.73(e).
* * * * *
    3. Section 1030.50 is amended by revising the section heading, 
introductory text and paragraph (a), and adding paragraphs (e) through 
(k) to read as follows:


Sec. 1030.50  Class and component prices.

    Subject to the provisions of Sec. 1030.52, the class prices per 
hundredweight of milk containing 3.5 percent butterfat and the 
component prices for the month shall be as follows:
    (a) Class I price. The Class I price for the month per 
hundredweight of milk containing 3.5 percent butterfat shall be the 
basic formula price for the second preceding month plus $1.40.
* * * * *
    (e) Class I differential price. The Class I differential price 
shall be the difference between the current month's Class I and Class 
III prices (this price may be negative).
    (f) Class II differential price. The Class II differential price 
shall be the difference between the current month's Class II and Class 
III prices (this price may be negative).
    (g) Skim milk price. The skim milk price per hundredweight, rounded 
to the nearest cent, shall be the Class III price less an amount 
computed by multiplying the butterfat differential by 35.
    (h) Butterfat price. The butterfat price per pound, rounded to the 
nearest one-hundredth cent, shall be the Class III price plus an amount 
computed by multiplying the butterfat differential by 965 and dividing 
the resulting amount by one hundred.
    (i) Protein price. The protein price per pound, rounded to the 
nearest one-hundredth cent, shall be 1.32 times the average monthly 
price per pound for 40-pound block Cheddar cheese on the National 
Cheese Exchange as reported by the Department.
    (j) Other solids price. Other solids are herein defined as solids-
not-fat other than protein. The other solids price per pound, rounded 
to the nearest one-hundredth cent, shall be the skim milk price times 
.965, less the average protein test of the basic formula price as 
reported by the Department for the month times the protein price, and 
dividing the resulting amount by the average other solids test of the 
basic formula price as reported by the Department. If the resulting 
price is less than zero, then the protein price will be reduced so that 
the other solids price equals zero.
    (k) Somatic cell adjustment. The somatic cell adjustment per 
hundredweight shall be computed by subtracting the monthly average 
somatic cell count, in thousands, of the producer's milk from 350 and 
multiplying the remaining quantity by .0005 times the monthly cheddar 
cheese price as defined in paragraph (i) of this section.
    4. Section 1030.53 is revised to read as follows:


Sec. 1030.53  Announcement of class and component prices.

    (a) On or before the 5th day of the month, the market administrator 
shall announce the following prices:
    (1) The Class I price for the following month;
    (2) The Class III price for the preceding month;
    (3) The Class III-A price for the preceding month;
    (4) The skim milk price for the preceding month;
    (5) The butterfat price for the preceding month;
    (6) The protein price for the preceding month;
    (7) The other solids price for the preceding month; and
    (8) The butterfat differential for the preceding month.
    (b) On or before the 15th day of the month, the market 
administrator shall announce the Class II price for the following month 
computed pursuant to Sec. 1030.50(b).
    5. The section heading in Sec. 1030.60 and the undesignated 
centerheading preceding it, the introductory text, and paragraphs (a) 
and (f) are revised to read as follows:

Producer Price Differential


Sec. 1030.60  Handler's value of milk.
    For the purpose of computing a handler's obligation for producer 
milk, the market administrator shall determine for each month the value 
of milk of each handler described in Sec. 1030.9 (a), (b), and (c), as 
follows:
    (a) Calculate the following values:
    (1) Multiply the total hundredweight of producer milk in Class I as 
determined pursuant to Sec. 1030.44(c) by the Class I differential 
price for the month;
    (2) Add an amount obtained by multiplying the total hundredweight 
of producer milk in Class II as determined pursuant to Sec. 1030.44(c) 
by the Class II differential price for the month;
    (3) Add an amount obtained by multiplying the hundredweight of skim 
milk in Class I as determined pursuant to Sec. 1030.44(a) by the skim 
milk price;
    (4) Add an amount obtained by multiplying the pounds of skim milk 
in Class II and Class III as determined pursuant to Sec. 1030.44(a) by 
the average protein content of producer skim milk received by the 
handler, and multiplying the resulting pounds of protein by the protein 
price; and
    (5) Add an amount obtained by multiplying the pounds of skim milk 
in Class II and Class III as determined pursuant to Sec. 1030.44(a) by 
the average other solids content of producer skim milk received by the 
handler, and multiplying the resulting pounds of other solids by the 
other solids price;
* * * * *
    (f) Add the amount obtained from multiplying the Class I 
differential price applicable at the location of the nearest 
unregulated supply plants from which an equivalent volume was received 
by the pounds of skim milk and butterfat in receipts of concentrated 
fluid milk products assigned to Class I pursuant to Sec. 1030.43(d) and 
Sec. 1030.44(a)(7)(i) and the pounds of skim milk and butterfat 
subtracted from Class I pursuant to Sec. 1030.44(a)(11) and the 
corresponding steps of Sec. 1030.44(b), excluding such skim milk and 
butterfat in receipts of bulk fluid milk products from an unregulated 
supply plant to the extent that an equivalent amount of skim milk or 
butterfat disposed of to such plant by handlers fully regulated under 
any Federal milk order is classified and priced as Class I milk and is 
not used as an offset for any other payment obligation under any order;
* * * * *
    6. Section 1030.61 is amended by revising the section heading, 
introductory text, and paragraph (a) to read as follows:


Sec. 1030.61  Producer price differential.

    For each month the market administrator shall compute a producer 
price differential per hundredweight for Zone 1. If the unreserved cash 
balance in the producer settlement fund to be included in the 
computation is less than 2 cents per hundredweight of producer milk on 
all reports, the report of any handler who has not made the payments 
required pursuant to Sec. 1030.71 for the preceding month shall not be 
included in the computation of the producer price differential. The 
report of such handler shall not be included in the computation for 
succeeding months until he has made full payment of outstanding monthly 
obligations. Subject to the aforementioned conditions, the market 
administrator shall compute the producer price differential in the 
following manner:
    (a) Combine into one total for all handlers:
    (1) The values computed pursuant to Sec. 1030.60 (a)(1), (a)(2) and 
(b) through (k) for all handlers;
    (2) Add values computed pursuant to Sec. 1030.60 (a)(3), (a)(4), 
and (a)(5) and subtract the values obtained by multiplying the 
handlers' total pounds of protein and total pounds of other solids 
contained in such milk by their respective prices; and
    (3) Subtract the value obtained by multiplying the difference 
between the Class III price and the Class III-A price times the pounds 
of product determined pursuant to Sec. 1030.43(e);
* * * * *
    7. Section 1030.62 is revised to read as follows:


Sec. 1030.62  Announcement of producer prices.

    On or before the 14th day after the end of each month, the market 
administrator shall announce the following prices and information:
    (a) The producer price differential;
    (b) The protein price;
    (c) The other solids price;
    (d) The butterfat price;
    (e) The average protein test and other solids test of producer 
milk; and
    (f) The statistical uniform price for milk containing 3.5 percent 
butterfat, computed by combining the Class III price and the producer 
price differential.
    8. Section 1030.71 is amended by revising paragraph (a)(2) to read 
as follows:


Sec. 1030.71  Payments to the producer-settlement fund.

    (a) * * *
    (2) The sum of:
    (i) An amount obtained by multiplying the total hundredweight of 
producer milk as determined pursuant to Sec. 1030.44(c) by the producer 
price differential as adjusted pursuant to Sec. 1030.75;
    (ii) An amount obtained by multiplying the total pounds of protein 
contained in producer milk by the protein price;
    (iii) An amount obtained by multiplying the total pounds of other 
solids contained in producer milk by the other solids price; and
    (iv) An amount obtained by multiplying the pounds of skim milk and 
butterfat for which a value was computed pursuant to Sec. 1030.60(f) by 
the producer price differential as adjusted pursuant to Sec. 1030.52.
* * * * *
    9. Section 1030.73 is amended by revising paragraphs (a), (c), and 
(d) and adding paragraph (e), to read as follows:


Sec. 1030.73  Payments to producers and to cooperative associations.

    (a) Each handler shall pay each producer for producer milk received 
from such producer and for which payment is not made to a cooperative 
association pursuant to paragraph (b) or (c) of this section as 
follows:
    (1) On or before the 3rd day after the end of each month, to each 
producer who has not discontinued shipping milk to such handler before 
the end of the month, for producer milk received during the first 15 
days of the month at a rate per hundredweight not less than the Class 
III price for milk of 3.5 percent butterfat for the preceding month, 
less proper deductions authorized in writing by such producer; and
    (2) On or before the 18th day after the end of the month, payment 
for producer milk received during such month shall not be less than the 
sum of:
    (i) The hundredweight of producer milk received times the producer 
price differential as adjusted pursuant to Secs. 1030.75 and 1030.86;
    (ii) The pounds of butterfat received times the butterfat price for 
the month;
    (iii) The pounds of butterfat received times the protein price for 
the month;
    (iv) The pounds of other solids received times the other solids 
price for the month;
    (v) The hundredweight of milk received times the somatic cell 
adjustment for the month;
    (vi) Less any payment made pursuant to paragraph (a) of this 
section;
    (vii) Less proper deductions authorized in writing by such producer 
and plus or minus adjustments for errors in previous payments made to 
such producer; and
    (3) If by such date the handler has not received full payment from 
the market administrator pursuant to Sec. 1030.72 for such month, it 
may reduce pro rata its payment to producers by not more than the 
amount of such underpayment. Payment to producers shall be completed 
thereafter not later than the date for making payments pursuant to this 
paragraph next following receipt of the balance due from the market 
administrator.
* * * * *
    (c) Each handler shall pay a cooperative association for milk 
received by the handler from pool plant(s) operated by a cooperative 
association as follows:
    (1) For milk received during the first 15 days of the month, the 
handler shall pay the cooperative association on or before the 1st day 
after the end of the month during which the milk was received at a rate 
per hundredweight not less than the Class III price for milk of 3.5 
percent butterfat for the preceding month; and
    (2) For milk received during the month the handler shall pay the 
cooperative association on or before the 16th day after the end of the 
month during which the milk was received as follows:
    (i) The hundredweight of Class I milk received times the Class I 
differential price for the month plus the pounds of Class I skim milk 
times the skim milk price for the month;
    (ii) The hundredweight of Class II milk received times the Class II 
differential price for the month;
    (iii) The pounds of butterfat received times the butterfat price 
for the month;
    (iv) The pounds of protein received in Class II and Class III times 
the protein price for the month;
    (v) The pounds of other solids received in Class II and Class III 
times the other solids price for the month;
    (vi) The hundredweight of milk received times the somatic cell 
adjustment; and
    (vii) Less any payment made pursuant to paragraph (c)(1) of this 
section.
    (d) Each handler shall pay a cooperative association for milk 
received by the handler from a cooperative association acting as a 
handler described under Sec. 1030.9(c) as follows:
    (1) For milk received during the first 15 days of the month, the 
handler shall pay the cooperative association on or before the 1st day 
after the end of the month during which the milk was received at a rate 
per hundredweight not less than the Class III price for milk of 3.5 
percent butterfat for the preceding month; and
    (2) For milk received during the month the handler shall pay the 
cooperative association on or before the 16th day after the end of the 
month during which the milk was received as follows:
    (i) The hundredweight of milk received times the producer price 
differential as adjusted pursuant to Sec. 1030.75;
    (ii) The pounds of butterfat received times the butterfat price for 
the month;
    (iii) The pounds of protein received times the protein price for 
the month;
    (iv) The pounds of other solids received times the other solids 
price for the month;
    (v) The hundredweight of milk received times the somatic cell 
adjustment for the month;
    (vi) Less any payment made pursuant to paragraph (a) of this 
section;
    (vii) Less proper authorized deductions.
    (e) In making payments for producer milk pursuant to paragraph 
(a)(2) or (b)(2) of this section, each handler shall furnish each 
producer or cooperative association to whom such payment is made a 
supporting statement in such form that it may be retained by the 
recipient which shall show:
    (1) The month and the identity of the producer;
    (2) The daily and total pounds for each producer;
    (3) The total pounds of butterfat contained in the producer's milk;
    (4) The total pounds of protein contained in the producer's milk;
    (5) The total pounds of other solids contained in the producer's 
milk;
    (6) The somatic cell count of the producer's milk;
    (7) The minimum rate or rates at which payment to the producer is 
required pursuant to this order;
    (8) The rate that is used in making payment if such rate is other 
than the applicable minimum rate;
    (9) The amount, or the rate per hundredweight, or rate per pound of 
component, and the nature of each deduction claimed by the handler; and
    (10) The net amount of payment to such producer or cooperative.
    10. Sections 1030.74 and 1030.75 are revised to read as follows:


Sec. 1030.74  Butterfat differential.

    The butterfat differential, rounded to the nearest one-tenth cent, 
shall be 0.138 times the butter price less 0.0028 times the average 
price per hundredweight, at test, for manufacturing grade milk, f.o.b. 
plants in Minnesota and Wisconsin, as reported by the Department for 
the month. The butter price means the simple average for the month of 
the daily prices per pound of Grade A (92 score) butter. The prices 
used shall be those of the Chicago Mercantile Exchange as reported and 
published weekly by the Dairy Division, Agricultural Marketing Service. 
The average shall be computed by the Director of the Dairy Division 
using the price reported each week as the daily price for that day and 
for each following day until the next price is reported.


Sec. 1030.75  Plant location adjustments for producers and on nonpool 
milk.

    (a) The producer price differential for producer milk received at a 
plant shall be adjusted according to the location of the plant at the 
rates set forth in Sec. 1030.52(a).
    (b) The producer price differential applicable to other source milk 
shall be reduced at the rates set forth in Sec. 1030.52(a).
    11. Section 1030.76 is amended by revising paragraph (a)(4) and the 
third sentence of paragraph (b)(1)(ii), to read as follows:


Sec. 1030.76  Payments by handler operating a partially regulated 
distributing plant.

* * * * *
    (a) * * *
    (4) Multiply the remaining pounds by the amount by which the Class 
I differential price exceeds the producer price differential, both 
prices to be applicable at the location of the partially regulated 
distributing plant; and
* * * * *
    (b) * * *
    (1) * * *
    (ii) * * * Any such transfers remaining after the above allocation 
which are classified in Class I and for which a value is computed for 
the handler operating the partially regulated distributing plant 
pursuant to Sec. 1030.60 shall be priced at the statistical uniform 
price (or at the weighted average price if such is provided) of the 
respective order regulating the handling of milk at the transferee 
plant, with such statistical uniform price adjusted to the location of 
the nonpool plant (but not to be less than the lowest class price of 
the respective order), except that transfers of reconstituted skim milk 
in filled milk shall be priced at the lowest class price of the 
respective order; and
* * * * *
PART 1065--MILK IN THE NEBRASKA-WESTERN IOWA MARKETING AREA

    1. Section 1065.30 is amended by revising paragraphs (a) and (c) 
and removing paragraph (d), to read as follows:


Sec. 1065.30  Reports of receipts and utilization.

* * * * *
    (a) Each handler described in Sec. 1065.9 (a), (b), and (c) shall 
report for each of its operations the following information:
    (1) Product pounds, pounds of butterfat, pounds of protein, and 
pounds of solids-not-fat other than protein (other solids) contained in 
or represented by:
    (i) Receipts of producer milk, including producer milk diverted by 
the handler;
    (ii) Receipts of milk from handlers described in Sec. 1065.9(c); 
and
    (iii) Receipts by transfer or diversion of bulk fluid milk products 
from pool plants;
    (2) Product pounds and pounds of butterfat contained in:
    (i) Receipts of fluid milk products not included in paragraph 
(a)(1) of this section and bulk fluid cream products from any source;
    (ii) Receipts of other source milk;
    (iii) Inventories at the beginning and end of the month of fluid 
milk products and products specified in Sec. 1065.40(b)(1); and
    (3) The utilization or disposition of all milk, filled milk, and 
milk products required to be reported pursuant to this paragraph.
* * * * *
    (c) Each handler not specified in paragraphs (a) and (b) of this 
section shall report with respect to its receipts and utilization of 
milk, filled milk, and milk products in such manner as the market 
administrator may prescribe.
    2. Section 1065.31 is amended by revising paragraph (a) to read as 
follows:


Sec. 1065.31  Payroll reports.

    (a) On or before the 20th day after the end of each month, each 
handler described in Sec. 1065.9 (a), (b), and (c) shall report to the 
market administrator its producer payroll for such month, in the detail 
prescribed by the market administrator, showing for each producer the 
information described in Sec. 1065.73(e).
* * * * *
    3. Section 1065.50 is amended by revising the section heading, 
introductory text and paragraph (a), and adding paragraphs (e) through 
(k), to read as follows:


Sec. 1065.50  Class and component prices.

    Subject to the provisions of Sec. 1065.52, the class prices per 
hundredweight of milk containing 3.5 percent butterfat and the 
component prices for the month shall be as follows:
    (a) Class I price. The Class I price for the month per 
hundredweight of milk containing 3.5 percent butterfat shall be the 
basic formula price for the second preceding month plus $1.75.
* * * * *
    (e) Class I differential price. The Class I differential price 
shall be the difference between the current month Class I and Class III 
prices (this price may be negative).
    (f) Class II differential price. The Class II differential price 
shall be the difference between the current month Class II and Class 
III prices (this price may be negative).
    (g) Skim milk price. The skim milk price per hundredweight, rounded 
to the nearest cent, shall be the Class III price less an amount 
computed by multiplying the butterfat differential by 35.
    (h) Butterfat price. The butterfat price per pound, rounded to the 
nearest one-hundredth cent, shall be the Class III price plus an amount 
computed by multiplying the butterfat differential by 965 and dividing 
the resulting amount by one hundred.
    (i) Protein price. The protein price per pound, rounded to the 
nearest one-hundredth cent, shall be 1.32 times the average monthly 
price per pound for 40-pound block Cheddar cheese on the National 
Cheese Exchange as reported by the Department.
    (j) Other solids price. Other solids are herein defined as solids 
not fat other than protein. The other solids price per pound, rounded 
to the nearest one-hundredth cent, shall be the skim milk price times 
.965, less the average protein test of the basic formula price as 
reported by the Department for the month times the protein price, and 
dividing the resulting amount by the average other solids test of the 
basic formula price as reported by the Department. If the resulting 
price is less than zero, then the protein price will be reduced so that 
the other solids price equals zero.
    (k) Somatic cell adjustment. The somatic cell adjustment per 
hundredweight shall be computed by subtracting the monthly average 
somatic cell count, in thousands, of the producer's milk from 350 and 
multiplying the remaining quantity by .0005 times the monthly cheddar 
cheese price as defined in paragraph (i) of this section.
    4. Section 1065.53 is revised to read as follows:


Sec. 1065.53  Announcement of class and component prices.

    (a) On or before the 5th day of the month, the market administrator 
shall announce the following prices:
    (1) The Class I price for the following month;
    (2) The Class III price for the preceding month;
    (3) The Class III-A price for the preceding month;
    (4) The skim milk price for the preceding month;
    (5) The butterfat price for the preceding month;
    (6) The protein price for the preceding month;
    (7) The other solids price for the preceding month; and
    (8) The butterfat differential for the preceding month.
    (b) On or before the 15th day of the month, the market 
administrator shall announce the Class II price for the following month 
computed pursuant to Sec. 1065.50(b).
    5. The section heading in Sec. 1065.60 and the undesignated 
centerheading preceding it, the introductory text, and paragraphs (a) 
and (f) are revised to read as follows:

Producer Price Differential


Sec. 1065.60  Handler's value of milk.

    For the purpose of computing a handler's obligation for milk the 
market administrator shall determine for each month the value of milk 
of each handler described in Sec. 1065.9(a) with respect to each of its 
pool plants and each handler described in Sec. 1065.9(b) and (c).
    (a) The handler's obligation for producer milk shall be computed as 
follows:
    (1) Multiply the total hundredweight of milk in Class I as 
determined pursuant to Sec. 1065.44(c) by the Class I differential 
price for the month;
    (2) Add an amount obtained by multiplying the total hundredweight 
of milk in Class II as determined pursuant to Sec. 1065.44(c) by the 
Class II differential price for the month;
    (3) Add an amount obtained by multiplying the hundredweight of skim 
milk in Class I as determined pursuant to Sec. 1065.44(a) by the skim 
milk price;
    (4) Add an amount obtained by multiplying the pounds of skim milk 
in Class II and Class III as determined pursuant to Sec. 1065.44(a) by 
the average protein content of producer skim milk received by the 
handler, and multiplying the resulting pounds of protein by the protein 
price; and
    (5) Add an amount obtained by multiplying the pounds of skim milk 
in Class II and Class III as determined pursuant to Sec. 1065.44(a) by 
the average other solids content of producer skim milk received by the 
handler, and multiplying the resulting pounds of other solids by the 
other solids price;
* * * * *
    (f) Add the amount obtained from multiplying the Class I 
differential price applicable at the location of the nearest 
unregulated supply plants from which an equivalent volume was received 
by the pounds of skim milk and butterfat in receipts of concentrated 
fluid milk products assigned to Class I pursuant to Sec. 1065.43(d) and 
Sec. 1065.44(a)(7)(i) and the pounds of skim milk and butterfat 
subtracted from Class I pursuant to Sec. 1065.44(a)(11) and the 
corresponding steps of Sec. 1065.44(b), excluding such skim milk and 
butterfat in receipts of bulk fluid milk products from an unregulated 
supply plant to the extent that an equivalent amount of skim milk or 
butterfat disposed of to such plant by handlers fully regulated under 
any Federal milk order is classified and priced as Class I milk and is 
not used as an offset for any other payment obligation under any order;
* * * * *
    6. Section 1065.61 is amended by revising the section heading, 
introductory text, and paragraphs (a) and (f), to read as follows:


Sec. 1065.61  Producer price differential.

    For each month the market administrator shall compute a producer 
price differential per hundredweight of milk received from producers, 
as follows:
    (a) Combine into one total for all handlers:
    (1) The values computed pursuant to Sec. 1065.60(a)(1), (a)(2), and 
(b) through (i) for all handlers;
    (2) Add values computed pursuant to Sec. 1065.60(a)(3), (a)(4), and 
(a)(5) and subtract the values obtained by multiplying the handlers' 
total pounds of protein and total pounds of other solids contained in 
such milk by their respective prices; and
    (3) Subtract the value obtained by multiplying the difference 
between the Class III price and the Class III-A price times the pounds 
of product determined pursuant to Sec. 1065.43(e);
* * * * *
    (f) Subtract not less than 4 cents nor more than 5 cents from the 
price computed pursuant to paragraph (e) of this section. The result 
shall be the ``producer price differential.''
    7. Section 1065.62 is revised to read as follows:


Sec. 1065.62  Announcement of producer prices.

    On or before the 12th day after the end of each month, the market 
administrator shall announce the following prices and information:
    (a) The producer price differential;
    (b) The protein price;
    (c) The other solids price;
    (d) The butterfat price;
    (e) The average protein and other solids content of producer milk; 
and
    (f) The statistical uniform price for milk containing 3.5 percent 
butterfat, computed by combining the Class III price and the producer 
price differential.
    8. Section 1065.71 is amended by revising paragraph (a)(2) to read 
as follows:


Sec. 1065.71  Payments to the producer-settlement fund.

    (a) * * *
    (2) The sum of:
    (i) An amount obtained by multiplying the total hundredweight of 
producer milk determined pursuant to Sec. 1065.44(c) by the producer 
price differential as adjusted pursuant to Sec. 1065.75;
    (ii) An amount obtained by multiplying the total pounds of protein 
contained in producer milk by the protein price;
    (iii) An amount obtained by multiplying the total pounds of other 
solids contained in producer milk by the other solids price; and
    (iv) An amount obtained by multiplying the pounds of skim milk and 
butterfat for which a value was computed pursuant to Sec. 1065.60(f) by 
the producer price differential as adjusted pursuant to Sec. 1065.52.
* * * * *
    9. Section 1065.73 is amended by revising paragraphs (a), (c), (d) 
and (e) to read as follows:


Sec. 1065.73  Payments to producers and to cooperative associations.

    (a) Each handler shall pay for milk received from producers for 
which payment is not made to a cooperative association pursuant to 
paragraph (b) or (c) of this section as follows:
    (1) On or before the 27th day of the month, to each producer who 
has not discontinued shipping milk to such handler before the end of 
the month, for producer milk received during the first 15 days of the 
month at a rate per hundredweight not less than the statistical uniform 
price computed pursuant to Sec. 1065.62(f) for the preceding month, 
less proper deductions authorized in writing by such producer; and
    (2) On or before the 18th day after the end of the month, payment 
for producer milk received during such month shall not be less than the 
sum of:
    (i) The hundredweight of producer milk received times the producer 
price differential as adjusted pursuant to Sec. 1065.75;
    (ii) The pounds of butterfat received times the butterfat price for 
the month;
    (iii) The pounds of protein received times the protein price for 
the month;
    (iv) The pounds of other solids received times the other solids 
price for the month;
    (v) The hundredweight of milk received times the somatic cell 
adjustment for the month;
    (vi) Less any payment made pursuant to paragraph (a)(1) of this 
section;
    (vii) Less proper deductions authorized in writing by such producer 
and plus or minus adjustments for errors in previous payments made to 
such producer;
    (viii) Less deductions for marketing services pursuant to 1065.86 
and for advertising and promotion pursuant to Sec. 1065.107; and
    (ix) If by such date the handler has not received full payment from 
the market administrator pursuant to Sec. 1065.72 for such month, it 
may reduce pro rata its payment to producers by not more than the 
amount of such underpayment. Payment to producers shall be completed 
thereafter not later than the date for making payments pursuant to this 
paragraph next following receipt of the balance due from the market 
administrator.
* * * * *
    (c) Each handler shall pay a cooperative association for milk 
received by the handler from a cooperative association acting as a 
handler described in Sec. 1065.9(c) as follows:
    (1) For milk received during the first 15 days of the month, the 
handler shall pay the cooperative association on or before the 26th day 
of the month during which the milk was received at a rate per 
hundredweight not less than the statistical uniform price computed 
pursuant to Sec. 1065.62(f) for the preceding month; and
    (2) For milk received during the month the handler shall pay the 
cooperative association on or before the 17th day after the end of the 
month during which the milk was received as follows:
    (i) The hundredweight of milk received times the producer price 
differential applicable at the location of the receiving handler's 
plant;
    (ii) The pounds of butterfat received times the butterfat price for 
the month;
    (iii) The pounds of protein received times the protein price for 
the month;
    (iv) The pounds of other solids received times the other solids 
price for the month;
    (v) The hundredweight of milk received times the somatic cell 
adjustment for the month; and
    (vi) Less any payment made pursuant to paragraph (c)(1) of this 
section.
    (d) Each handler shall pay a cooperative association for fluid milk 
products received by transfer or diversion from a pool plant operated 
by the cooperative association as follows:
    (1) For milk received during the first 15 days of the month, the 
handler shall pay the cooperative association on or before the 26th day 
of the month during which the milk was received at a rate per 
hundredweight not less than the Class III price for the preceding 
month; and
    (2) For milk received during the month the handler shall pay the 
cooperative association on or before the 17th day after the end of the 
month during which the milk was received as follows:
    (i) The hundredweight of Class I milk received times the Class I 
differential price for the month applicable at the transferee plant, 
plus the pounds of Class I skim milk times the skim milk price for the 
month;
    (ii) The hundredweight of Class II milk received times the Class II 
differential price for the month;
    (iii) The pounds of butterfat received times the butterfat price 
for the month;
    (iv) The pounds of protein received in Class II and Class III times 
the protein price for the month;
    (v) The pounds of other solids received in Class II and Class III 
times the other solids price for the month;
    (vi) The hundredweight of milk received times the somatic cell 
adjustment; and
    (vii) Less any payment made pursuant to paragraph (d)(1) of this 
section.
    (e) In making payments for producer milk pursuant to paragraph 
(a)(2) or (b)(2) of this section, each handler shall furnish each 
producer or cooperative association to whom such payment is made a 
supporting statement in such form that it may be retained by the 
recipient which shall show:
    (1) The month and the identity of the producer;
    (2) The daily and total pounds for each producer;
    (3) The total pounds of butterfat contained in the producer's milk;
    (4) The total pounds of protein contained in the producer's milk;
    (5) The total pounds of other solids contained in the producer's 
milk;
    (6) The somatic cell count of the producer's milk;
    (7) The minimum rate or rates which payment to the producer is 
required pursuant to this order;
    (8) The rate that is used in making payment if such rate is other 
than the applicable minimum rate;
    (9) The amount, or the rate per hundredweight, or rate per pound of 
component, and the nature of each deduction claimed by the handler; and
    (10) The net amount of payment to such producer or cooperative.
* * * * *
    10. Sections 1065.74 and 1065.75 are revised to read as follows:


Sec. 1065.74  Butterfat differential.
    The butterfat differential, rounded to the nearest one-tenth cent, 
shall be 0.138 times the butter price less 0.0028 times the average 
price per hundredweight, at test, for manufacturing grade milk, f.o.b. 
plants in Minnesota and Wisconsin, as reported by the Department for 
the month. The butter price means the simple average for the month of 
the daily prices per pound of Grade A (92 score) butter. The prices 
used shall be those of the Chicago Mercantile Exchange as reported and 
published weekly by the Dairy Division, Agricultural Marketing Service. 
The average shall be computed by the Director of the Dairy Division 
using the price reported each week as the daily price for that day and 
for each following day until the next price is reported.


Sec. 1065.75  Plant location adjustments for producers and on nonpool 
milk.

    (a) The producer price differential for producer milk shall be 
adjusted according to the location of the plant of actual receipt at 
the rates set forth in Sec. 1065.52.
    (b) For purposes of computations pursuant to Secs. 1065.71 and 
1065.72, the producer price differential shall be adjusted at the rates 
set forth in Sec. 1065.52 applicable at the location of the nonpool 
plant from which the milk was received, except that the adjusted 
producer price differential shall not be less than zero.
    11. Section 1065.76 is amended by revising paragraph (a)(4) and the 
third sentence of paragraph (b)(1)(ii), to read as follows:


Sec. 1065.76  Payments by handler operating a partially regulated 
distributing plant.

* * * * *
    (a) * * *
    (4) Multiply the remaining pounds by the amount by which the Class 
I differential price exceeds the producer price differential, both 
prices to be applicable at the location of the partially regulated 
distributing plant, with the difference to be not less than zero; and
* * * * *
    (b) * * *
    (1) * * *
    (ii) * * * Any such transfers remaining after the above allocation 
which are classified in Class I and for which a value is computed for 
the handler operating the partially regulated distributing plant 
pursuant to Sec. 1065.60 shall be priced at the statistical uniform 
price (or at the weighted average price if such is provided) of the 
respective order regulating the handling of milk at the transferee-
plant, with such statistical uniform price adjusted to the location of 
the nonpool plant (but not to be less than the lowest class price of 
the respective order), except that transfers of reconstituted skim milk 
in filled milk shall be priced at the lowest class price of the 
respective order; and
* * * * *
PART 1068--MILK IN THE UPPER MIDWEST MARKETING AREA

    1. Section 1068.30 is amended by revising the introductory text and 
paragraphs (a) and (c) and removing paragraph (d), to read as follows:


Sec. 1068.30  Reports of receipts and utilization.

    On or before the 8th day after the end of each month, each handler 
shall report for such month to the market administrator, in the detail 
and on the forms prescribed by the market administrator, as follows:
    (a) Each handler described in Sec. 1068.9 (a), (b), and (c) shall 
report for each of its operations the following information:
    (1) Product pounds, pounds of butterfat, pounds of protein, and 
pounds of solids-not-fat other than protein (other solids) contained in 
or represented by:
    (i) Receipts of producer milk, including producer milk diverted by 
the handler;
    (ii) Receipts of milk from handlers described in Sec. 1068.9(c); 
and
    (iii) Receipts by transfer or diversion of bulk fluid milk products 
from pool plants;
    (2) Product pounds and pounds of butterfat contained in:
    (i) Receipts of fluid milk products not included in paragraph 
(a)(1) of this section and bulk fluid cream products from any source;
    (ii) Receipts of other source milk;
    (iii) Inventories at the beginning and end of the month of fluid 
milk products and products specified in Sec. 1068.40(b)(1); and
    (3) The utilization or disposition of all milk, filled milk, and 
milk products required to be reported pursuant to this paragraph.
* * * * *
    (c) Each handler not specified in paragraphs (a) and (b) of this 
section shall report with respect to its receipts and utilization of 
milk, filled milk, and milk products in such manner as the market 
administrator may prescribe.
    2. Section 1068.31 is amended by revising paragraph (a) to read as 
follows:


Sec. 1068.31 Payroll reports.

    (a) On or before the 22nd day of each month, each handler described 
in Sec. 1068.9 (a), (b), and (c) shall report to the market 
administrator its producer payroll for such month, in the detail 
prescribed by the market administrator, showing for each producer the 
information described in Sec. 1068.73(f).
* * * * *
    3. Section 1068.50 is amended by revising the section heading, 
introductory text and paragraph (a), and adding paragraphs (e) through 
(k) to read as follows:


Sec. 1068.50 Class and component prices.
    Subject to the provisions of Sec. 1068.52, the class prices per 
hundredweight of milk containing 3.5 percent butterfat and the 
component prices for the month shall be as follows:
    (a) Class I price.  The Class I price shall be the basic formula 
price for the second preceding month plus $1.20.
* * * * *
    (e) Class I differential price.  The Class I differential price 
shall be the difference between the current month's Class I and Class 
III prices (this price may be negative).
    (f) Class II differential price.  The Class II differential price 
shall be the difference between the current month's Class II and Class 
III prices (this price may be negative).
    (g) Skim milk price.  The skim milk price per hundredweight, 
rounded to the nearest cent, shall be the Class III price less an 
amount computed by multiplying the butterfat differential by 35.
    (h) Butterfat price.  The butterfat price per pound, rounded to the 
nearest one-hundredth cent, shall be the Class III price plus an amount 
computed by multiplying the butterfat differential by 965 and dividing 
the resulting amount by one hundred.
    (i) Protein price.  The protein price per pound, rounded to the 
nearest one-hundredth cent, shall be 1.32 times the average monthly 
price per pound for 40-pound block Cheddar cheese on the National 
Cheese Exchange as reported by the Department.
    (j) Other solids price.  Other solids are herein defined as solids-
not-fat other than protein. The other solids price per pound, rounded 
to the nearest one-hundredth cent, shall be the skim milk price times 
.965, less the average protein test of the basic formula price as 
reported by the Department for the month times the protein price, and 
dividing the resulting amount by the average other solids test of the 
basic formula price as reported by the Department. If the resulting 
price is less than zero, then the protein price will be reduced so that 
the other solids price equals zero.
    (k) Somatic cell adjustment.  The somatic cell adjustment per 
hundredweight shall be computed by subtracting the monthly average 
somatic cell count, in thousands, of the producer's milk from 350 and 
multiplying the remaining quantity by .0005 times the monthly cheddar 
cheese price as defined in paragraph (i) of this section.
    4. Section 1068.53 is revised to read as follows:


Sec. 1068.53  Announcement of class and component prices.

    (a) On or before the 5th day of the month, the market administrator 
shall announce the following prices:
    (1) The Class I price for the following month;
    (2) The Class III price for the preceding month;
    (3) The Class III-A price for the preceding month;
    (4) The skim milk price for the preceding month;
    (5) The butterfat price for the preceding month;
    (6) The protein price for the preceding month;
    (7) The other solids price for the preceding month; and
    (8) The butterfat differential for the preceding month.
    (b) On or before the 15th day of the month, the market 
administrator shall announce the Class II price for the following month 
computed pursuant to Sec. 1068.50(b).
    5. The section heading in Sec. 1068.60 and the undesignated 
centerheading preceding it, the introductory text and paragraphs (a), 
(f), and (g), are revised to read as follows:

Producer Price Differential


Sec. 1068.60  Handler's value of milk.

    For the purpose of computing a handler's obligation for producer 
milk, the market administrator shall determine for each month the value 
of milk of each handler described in Sec. 1068.9 (a), (b), and (c).
    (a) The handler's obligation for producer milk shall be computed as 
follows:
    (1) Multiply the total hundredweight of producer milk in Class I as 
determined pursuant to Sec. 1068.44(c) by the Class I differential 
price for the month;
    (2) Add an amount obtained by multiplying the total hundredweight 
of producer milk in Class II as determined pursuant to Sec. 1068.44(c) 
by the Class II differential price for the month;
    (3) Add an amount obtained by multiplying the hundredweight of skim 
milk in Class I as determined pursuant to Sec. 1068.44(a) by the skim 
milk price;
    (4) Add an amount obtained by multiplying the pounds of skim milk 
in Class II and Class III as determined pursuant to Sec. 1068.44(a) by 
the average protein content of producer skim milk received by the 
handler, and multiplying the resulting pounds of protein by the protein 
price; and
    (5) Add an amount obtained by multiplying the pounds of skim milk 
in Class II and Class III as determined pursuant to Sec. 1068.44(a) by 
the average other solids content of producer skim milk received by the 
handler, and multiplying the resulting pounds of other solids by the 
other solids price;
* * * * *
    (f) Add the amount obtained from multiplying the Class I 
differential price applicable at the location of the nearest 
unregulated supply plants from which an equivalent volume was received 
by the pounds of skim milk and butterfat in receipts of concentrated 
fluid milk products assigned to Class I pursuant to Sec. 1068.43(e) and 
Sec. 1068.44(a)(7)(i) and the pounds of skim milk and butterfat 
subtracted from Class I pursuant to Sec. 1068.44(a)(11) and the 
corresponding steps of Sec. 1068.44(b), excluding such skim milk and 
butterfat in receipts of bulk fluid milk products from an unregulated 
supply plant to the extent that an equivalent amount of skim milk or 
butterfat disposed of to such plant by handlers fully regulated under 
any Federal milk order is classified and priced as Class I milk and is 
not used as an offset for any other payment obligation under any order;
    (g) Subtract, for a handler described in Sec. 1068.9(c), the amount 
charged the preceding month for the skim milk and butterfat contained 
in inventory at the beginning of the month that was delivered to a pool 
plant during the month;
* * * * *
    6. Section 1068.61 is amended by revising the section heading, 
introductory text, and paragraphs (a) and (e), to read as follows:


Sec. 1068.61  Producer price differential.

    For each month the market administrator shall compute a producer 
price differential per hundredweight of milk as follows:
    (a) Combine into one total for all handlers:
    (1) The estimated values computed pursuant to Sec. 1068.60 (a)(1), 
(a)(2) and (b) through (j) for all handlers;
    (2) Add the estimated values computed pursuant to Sec. 1068.60 
(a)(3), (a)(4), and (a)(5) and subtract the values obtained by 
multiplying the handlers' total pounds of protein and total pounds of 
other solids contained in such milk by their respective prices; and
    (3) Subtract the estimated value obtained by multiplying the 
difference between the Class III price and the Class III-A price times 
the pounds of product determined pursuant to Sec. 1068.43(f);
* * * * *
    (e) Subtract not less than 4 cents nor more than 5 cents from the 
price computed pursuant to paragraph (d) of this section. The result 
shall be the ``producer price differential'' for milk received from 
producers.
    7. Section 1068.62 is revised to read as follows:


Sec. 1068.62  Announcement of producer prices.

    On or before the 11th day after the end of each month, the market 
administrator shall announce the following prices and information:
    (a) The producer price differential;
    (b) The protein price;
    (c) The other solids price;
    (d) The butterfat price;
    (e) The average protein and other solids content of producer milk; 
and
    (f) The statistical uniform price for milk containing 3.5 percent 
butterfat, computed by combining the Class III price and the producer 
price differential.
    8. Section 1068.71 is amended by revising paragraph (a)(2) to read 
as follows:


Sec. 1068.71  Payments to the producer-settlement fund.

    (a) * * *
    (2) The sum of:
    (i) The value of such handler's receipts of producer milk and milk 
received from a handler described in Sec. 1068.9(c). In the case of a 
handler described in Sec. 1068.9(c), less the amount due from other 
handlers pursuant to Sec. 1068.73(d). The value of producer milk shall 
be computed as follows:
    (A) An amount obtained by multiplying the total hundredweight of 
producer milk by the producer price differential as adjusted pursuant 
to Sec. 1068.75;
    (B) An amount obtained by multiplying the total pounds of protein 
contained in producer milk by the protein price;
    (C) An amount obtained by multiplying the total pounds of other 
solids contained in producer milk by the other solids price; and
    (ii) An amount obtained by multiplying the pounds of skim milk and 
butterfat for which a value was computed pursuant to Sec. 1068.60(f) by 
the producer price differential as adjusted pursuant to Sec. 1068.52.
* * * * *
    9. Sections 1068.73, 1068.74, and 1068.75 are revised to read as 
follows:


Sec. 1068.73  Payments to producers and to cooperative associations.

    Each handler shall pay for milk received from producers or 
cooperative associations as follows:
    (a) On or before the 25th day of the month, each handler shall pay 
for skim milk and butterfat received during the first 15 days of the 
month from a cooperative association:
    (1) That is a handler pursuant to Sec. 1068.9(a), at not less than 
the Class I price for the month at the location of the transferee or 
transferor plant, whichever is higher, adjusted by the butterfat 
differential for the preceding month;
    (2) That is a handler pursuant to Sec. 1068.9(c), at not less than 
the statistical uniform price at its plant location for the preceding 
month, adjusted by the butterfat differential for the preceding month; 
and
    (3) That is not a handler but which is authorized to collect 
payment on behalf of its member producers and has requested that 
payment be made to it in aggregate, at not less than the statistical 
uniform price at its plant location for the preceding month, adjusted 
by the butterfat differential for the preceding month.
    (b) On or before the 4th day after the end of the month, each 
handler shall pay for skim milk and butterfat received during the first 
15 days of the month from a producer for whom payment is not being made 
pursuant to paragraph (a) of this section and who has not discontinued 
shipping to such handler, at not less than the statistical uniform 
price at its plant location for the preceding month, adjusted by the 
butterfat differential for the preceding month.
    (c) On or before the 11th day after the end of the month, each 
handler shall pay for milk received during the month from a cooperative 
association which is a handler pursuant to Sec. 1068.9(a) adjusted at 
the location of the transferee or transferor plant, whichever is 
higher, payment shall be determined as follows:
    (1) The hundredweight of Class I milk received times the Class I 
differential price for the month plus the pounds of Class I skim milk 
times the skim milk price for the month;
    (2) The hundredweight of Class II milk received times the Class II 
differential price for the month;
    (3) The pounds of butterfat received times the butterfat price for 
the month;
    (4) The pounds of protein received in Class II and Class III times 
the protein price for the month;
    (5) The pounds of other solids received in Class II and Class III 
times the other solids price for the month;
    (6) The hundredweight of milk received times the somatic cell 
adjustment; and
    (7) Less any payment made pursuant to paragraph (a)(1) of this 
section.
    (d) On or before the 18th day after the end of the month:
    (1) Each handler shall make payment as described in this paragraph 
to:
    (i) A cooperative association that is a handler pursuant to 
Sec. 1068.9(c);
    (ii) A cooperative association that is not a handler but which is 
authorized to collect payment on behalf of its member producers and has 
requested that payment be made to it in aggregate;
    (iii) A producer for whom payment is not being made pursuant to 
paragraphs (d)(1)(i) and (ii) of this section.
    (2) Payment shall be determined by:
    (i) The hundredweight of producer milk received times the producer 
price differential as adjusted pursuant to Sec. 1068.75;
    (ii) The pounds of butterfat received times the butterfat price for 
the month;
    (iii) The pounds of protein received times the protein price for 
the month;
    (iv) The pounds of other solids received times the other solids 
price for the month;
    (v) The hundredweight of milk received times the somatic cell 
adjustment for the month; and
    (vi) Less any payment made pursuant to paragraph (a) or (b) of this 
section.
    (e) In making payments pursuant to paragraphs (a) (2) and (3), (b) 
and (d) of this section, deductions may be made for marketing services 
pursuant to Sec. 1068.86 and for any proper deductions authorized by 
the producer. In the event a handler has not received full payment from 
the market administrator pursuant to Sec. 1068.72 by the 18th day of 
the month, he may reduce pro rata his payments to producers pursuant to 
paragraph (d) of this section by not more than the amount of such 
underpayment. Following receipt of the balance due from the market 
administrator, the handler shall complete payments to producers not 
later than the next payment date provided under this section.
    (f) In making payment to individual producers as required by this 
section, each handler shall furnish each producer from whom it received 
milk a supporting statement, in such form that it may be retained by 
the producer, which shall show:
    (1) The month and the identity of the handler and producer;
    (2) The total pounds of milk received from the producer;
    (3) The total pounds of butterfat contained in the producer's milk;
    (4) The total pounds of protein contained in the producer's milk;
    (5) The total pounds of other solids contained in the producer's 
milk;
    (6) The somatic cell count of the producer's milk;
    (7) The minimum rate or rates at which payment to the producer is 
required pursuant to this section;
    (8) The rate that is used in making payment if such rate is other 
than the applicable minimum;
    (9) The amount, or the rate per hundredweight, or rate per pound of 
component, of each deduction claimed by the handler, including any 
deduction claimed under Sec. 1068.86, together with a description of 
the respective deductions; and
    (10) The net amount of the payment to the producer.


Sec. 1068.74  Butterfat differential.

    The butterfat differential, rounded to the nearest one-tenth cent, 
shall be 0.138 times the butter price less 0.0028 times the average 
price per hundredweight, at test, for manufacturing grade milk, f.o.b. 
plants in Minnesota and Wisconsin, as reported by the Department for 
the month. The butter price means the simple average for the month of 
the daily prices per pound of Grade A (92 score) butter. The prices 
used shall be those of the Chicago Mercantile Exchange as reported and 
published weekly by the Dairy Division, Agricultural Marketing Service. 
The average shall be computed by the Director of the Dairy Division 
using the price reported each week as the daily price for that day and 
for each following day until the next price is reported.


Sec. 1068.75  Plant location adjustments for producers and on nonpool 
milk.

    (a) The producer price differential for producer milk received at a 
pool plant or delivered to a nonpool plant shall be adjusted according 
to the location of the plant of actual receipt at the rates set forth 
in Sec. 1068.52.
    (b) The producer price differential applicable to other source milk 
shall be reduced at the rates set forth in Sec. 1068.52, except that 
the adjusted producer price differential shall not be less than zero.
    10. Section 1068.76 is amended by revising paragraph (a)(4) and the 
third sentence of paragraph (b)(1)(ii) to read as follows:


Sec. 1068.76  Payments by handler operating a partially regulated 
distributing plant.

* * * * *
    (a) * * *
    (4) Multiply the remaining pounds by the amount by which the Class 
I differential price exceeds the producer price differential, both 
prices to be applicable at the location of the partially regulated 
distributing plant, with the difference to be not less than zero; and
* * * * *
    (b) * * *
    (1) * * *
    (ii) * * * Any such transfers remaining after the above allocation 
which are classified in Class I and for which a value is computed for 
the handler operating the partially regulated distributing plant 
pursuant to Sec. 1068.60 shall be priced at the statistical uniform 
price (or at the weighted average price if such is provided) of the 
respective order regulating the handling of milk at the transferee-
plant, with such statistical uniform price adjusted to the location of 
the nonpool plant (but not to be less than the lowest class price of 
the respective order), except that transfers of reconstituted skim milk 
in filled milk shall be priced at the lowest class price of the 
respective order; and
* * * * *
PART 1076--MILK IN EASTERN SOUTH DAKOTA MARKETING AREA

    1. Section 1076.30 is amended by revising paragraphs (a) and (c) 
and removing paragraph (d) to read as follows:


Sec. 1076.30  Reports of receipts and utilization.

* * * * *
    (a) Each handler described in Sec. 1076.9 (a), (b), and (c) shall 
report for each of its operations the following information:
    (1) Product pounds, pounds of butterfat, pounds of protein, and 
pounds of solids-not-fat other than protein (other solids) contained in 
or represented by:
    (i) Receipts of producer milk, including producer milk diverted by 
the handler;
    (ii) Receipts of milk from handlers described in Sec. 1076.9(c); 
and
    (iii) Receipts by transfer or diversion of bulk fluid milk products 
from pool plants;
    (2) Product pounds and pounds of butterfat contained in:
    (i) Receipts of fluid milk products not included in paragraph 
(a)(1) of this section and bulk fluid cream products from any source;
    (ii) Receipts of other source milk;
    (iii) Inventories at the beginning and end of the month of fluid 
milk products and products specified in Sec. 1076.40(b)(1); and
    (3) The utilization or disposition of all milk, filled milk, and 
milk products required to be reported pursuant to this paragraph.
* * * * *
    (c) Each handler not specified in paragraphs (a) and (b) of this 
section shall report with respect to its receipts and utilization of 
milk, filled milk, and milk products in such manner as the market 
administrator may prescribe.
    2. Section 1076.31 is amended by revising paragraph (a) to read as 
follows:


Sec. 1076.31  Payroll reports.

    (a) On or before the 20th day after the end of each month, each 
handler described in Sec. 1076.9 (a), (b), and (c) shall report to the 
market administrator its producer payroll for such month, in the detail 
prescribed by the market administrator, showing for each producer the 
information described in Sec. 1076.73(e).
* * * * *
    3. Section 1076.50 is amended by revising the section heading, 
introductory text and paragraph (a), adding and reserving paragraph 
(d), and adding paragraphs (e), (f), (g) ,(h), (i), (j), and (k) to 
read as follows:


Sec. 1076.50  Class and component prices.

    Subject to the provisions of Sec. 1076.52, the class prices per 
hundredweight of milk containing 3.5 percent butterfat and the 
component prices for the month shall be as follows:
    (a) Class I price. The Class I price for the month per 
hundredweight of milk containing 3.5 percent butterfat shall be the 
basic formula price for the second preceding month plus $1.50.
* * * * *
    (d) [Reserved]
    (e) Class I differential price. The Class I differential price 
shall be the difference between the current month Class I and Class III 
prices (this price may be negative).
    (f) Class II differential price. The Class II differential price 
shall be the difference between the current month Class II and Class 
III prices (this price may be negative).
    (g) Skim milk price. The skim milk price per hundredweight, rounded 
to the nearest cent, shall be the Class III price less an amount 
computed by multiplying the butterfat differential by 35.
    (h) Butterfat price. The butterfat price per pound, rounded to the 
nearest one-hundredth cent, shall be the Class III price plus an amount 
computed by multiplying the butterfat differential by 965 and dividing 
the resulting amount by one hundred.
    (i) Protein price. The protein price per pound, rounded to the 
nearest one-hundredth cent, shall be 1.32 times the average monthly 
price per pound for 40-pound block Cheddar cheese on the National 
Cheese Exchange as reported by the Department.
    (j) Other solids price. Other solids are herein defined as solids 
not fat other than protein. The other solids price per pound, rounded 
to the nearest one-hundredth cent, shall be the skim milk price times 
.965 less the average protein test of the basic formula price as 
reported by the Department for the month times the protein price, and 
dividing the resulting amount by the average other solids test of the 
basic formula price as reported by the Department. If the resulting 
price is less than zero, then the protein price will be reduced so that 
the other solids price equals zero.
    (k) Somatic cell adjustment. The somatic cell adjustment per 
hundredweight shall be computed by subtracting the monthly average 
somatic cell count, in thousands, of the producer's milk from 350 and 
multiplying the remaining quantity by .0005 times the monthly cheddar 
cheese price as defined in paragraph (i) of this section.
    4. Section 1076.53 is revised to read as follows:


Sec. 1076.53  Announcement of class and component prices.

    (a) On or before the 5th day of the month, the market administrator 
shall announce the following prices:
    (1) The Class I price for the following month;
    (2) The Class III price for the preceding month;
    (3) [Reserved]
    (4) The skim milk price for the preceding month;
    (5) The butterfat price for the preceding month;
    (6) The protein price for the preceding month;
    (7) The other solids price for the preceding month; and
    (8) The butterfat differential for the preceding month.
    (b) On or before the 15th day of the month, the market 
administrator shall announce the Class II price for the following month 
computed pursuant to Sec. 1076.50(b).
    5. The section heading in Sec. 1076.60 and the undesignated 
centerheading preceding it, the introductory text, and paragraphs (a) 
and (f) are revised to read as follows:

Producer Price Differential


Sec. 1076.60  Handler's value of milk.

    For the purpose of computing a handler's obligation for milk the 
market administrator shall determine for each month the value of milk 
of each handler described in Sec. 1076.9(a) with respect to each of its 
pool plants and each handler described in Sec. 1076.9 (b) and (c).
    (a) The handler's obligation for producer milk and milk received 
from handler described in Sec. 1076.9(c) shall be computed as follows:
    (1) Multiply the total hundredweight of milk in Class I as 
determined pursuant to Sec. 1076.43(a) and Sec. 1076.44(c) by the Class 
I differential price for the month;
    (2) Add an amount obtained by multiplying the total hundredweight 
of milk in Class II as determined pursuant to Sec. 1076.43(a) and 
Sec. 1076.44(c) by the Class II differential price for the month;
    (3) Add an amount obtained by multiplying the hundredweight of skim 
milk in Class I as determined pursuant to Sec. 1076.44(a) by the skim 
milk price;
    (4) Add an amount obtained by multiplying the pounds of skim milk 
in Class II and Class III as determined pursuant to Sec. 1076.44(a) by 
the average protein content of the skim milk received by the handler, 
and multiplying the resulting pounds of protein by the protein price; 
and
    (5) Add an amount obtained by multiplying the pounds of skim milk 
in Class II and Class III as determined pursuant to Sec. 1076.44(a) by 
the average other solids content of the skim milk received by the 
handler, and multiplying the resulting pounds of other solids by the 
other solids price;
* * * * *
    (f) Add the amount obtained from multiplying the Class I 
differential price applicable at the location of the nearest 
unregulated supply plants from which an equivalent volume was received 
by the pounds of skim milk and butterfat in receipts of concentrated 
fluid milk products assigned to Class I pursuant to Sec. 1076.43(d) and 
Sec. 1076.44(a)(7)(i) and the pounds of skim milk and butterfat 
subtracted from Class I pursuant to Sec. 1076.44(a)(11) and the 
corresponding steps of Sec. 1076.44(b), excluding such skim milk and 
butterfat in receipts of bulk fluid milk products from an unregulated 
supply plant to the extent that an equivalent amount of skim milk or 
butterfat disposed of to such plant by handlers fully regulated under 
any Federal milk order is classified and priced as Class I milk and is 
not used as an offset for any other payment obligation under any order;
* * * * *
    6. Section 1076.61 is amended by revising the section heading, 
introductory text, and paragraphs (a) and (e), to read as follows:


Sec. 1076.61  Producer price differential.

    For each month the market administrator shall compute a producer 
price differential per hundredweight of milk received from producers as 
follows:
    (a) Combine into one total for all handlers:
    (1) The values computed pursuant to Sec. 1076.60 (a)(1), (a)(2), 
and (b) through (i) for all handlers;
    (2) Add values computed pursuant to Sec. 1076.60 (a)(3), (a)(4), 
and (a)(5) and subtract the values obtained by multiplying the 
handlers' total pounds of protein and total pounds of other solids 
contained in such milk by their respective prices;
* * * * *
    (e) Subtract not less than 4 cents nor more than 5 cents from the 
price computed pursuant to paragraph (d) of this section. The result 
shall be the ``producer price differential.''
    7. Section 1076.62 is revised to read as follows:


Sec. 1076.62  Announcement of producer prices.

    On or before the 12th day after the end of each month, the market 
administrator shall announce the following prices and information:
    (a) The producer price differential;
    (b) The protein price;
    (c) The other solids price;
    (d) The butterfat price;
    (e) The average protein and other solids content of producer milk; 
and
    (f) The statistical uniform price for milk containing 3.5 percent 
butterfat, computed by combining the Class III price and the producer 
price differential.
    8. Section 1076.71 is amended by revising paragraph (a)(2) to read 
as follows:


Sec. 1076.71  Payments to the producer-settlement fund.
    (a)* * *
    (2) The sum of:
    (i) An amount obtained by multiplying the total hundredweight of 
producer milk and milk received from a handler described in 
Sec. 1076.9(c) by the producer price differential as adjusted pursuant 
to Sec. 1076.75;
    (ii) An amount obtained by multiplying the total pounds of protein 
contained in producer milk and milk received from a handler described 
in Sec. 1076.9(c) by the protein price;
    (iii) An amount obtained by multiplying the total pounds of other 
solids contained in producer milk and milk received from a handler 
described in Sec. 1076.9(c) by the other solids price; and
    (iv) An amount obtained by multiplying the pounds of skim milk and 
butterfat for which a value was computed pursuant to Sec. 1076.60(f) by 
the producer price differential as adjusted pursuant to Sec. 1076.52.
* * * * *


Sec. 1076.72  [Amended]

    9. Section 1076.72 is amended by removing the last sentence.
    10. Section 1076.73 is amended by revising paragraphs (a), (c), (d) 
and (e) to read as follows:


Sec. 1076.73  Payments to producers and to cooperative associations.

    (a) Each handler shall pay each producer for milk received from 
producers for which payment is not made to a cooperative association 
pursuant to paragraph (b) or (c) of this section as follows:
    (1) On or before the last day of each month, for producer milk 
received during the first 15 days of the month at a rate per 
hundredweight not less than the Class III price for the preceding 
month; and
    (2) On or before the 18th day after the end of the month, payment 
for producer milk received during such month shall not be less than the 
sum of:
    (i) The hundredweight of producer milk received times the producer 
price differential as adjusted pursuant to Sec. 1076.75;
    (ii) The pounds of butterfat received times the butterfat price for 
the month;
    (iii) The pounds of protein received times the protein price for 
the month;
    (iv) The pounds of other solids received times the other solids 
price for the month;
    (v) The hundredweight of milk received times the somatic cell 
adjustment for the month;
    (vi) Less any payment made pursuant to paragraph (a)(1) of this 
section;
    (vii) Less proper deductions authorized in writing by such producer 
and plus or minus adjustments for errors in previous payments made to 
such producer;
    (viii) Less deductions for marketing services pursuant to 
Sec. 1076.86; and
    (ix) If by such date the handler has not received full payment from 
the market administrator pursuant to Sec. 1076.72 for such month, it 
may reduce pro rata its payment to producers by not more than the 
amount of such underpayment. Payment to producers shall be completed 
thereafter not later than the date for making payments pursuant to this 
paragraph next following receipt of the balance due from the market 
administrator.
* * * * *
    (c) Each handler shall pay a cooperative association for milk 
received by the handler from a cooperative association acting as a 
handler described in Sec. 1076.9(c) as follows:
    (1) For milk received during the first 15 days of the month, the 
handler shall pay the cooperative association on or before the 28th day 
of the month during which the milk was received at a rate per 
hundredweight not less than the statistical uniform price computed 
pursuant to Sec. 1076.62(f) for the preceding month; and
    (2) For milk received during the month the handler shall pay the 
cooperative association on or before the 15th day after the end of the 
month during which the milk was received as follows:
    (i) The hundredweight of milk received times the producer price 
differential applicable at the location of the receiving handler's 
plant;
    (ii) The pounds of butterfat received times the butterfat price for 
the month;
    (iii) The pounds of protein received times the protein price for 
the month;
    (iv) The pounds of other solids received times the other solids 
price for the month;
    (v) The hundredweight of milk received times the somatic cell 
adjustment for the month; and
    (vi) Less any payment made pursuant to paragraph (c)(1) of this 
section.
    (d) Each handler shall pay a cooperative association for fluid milk 
products received by transfer from pool plant(s) operated by the 
cooperative association as follows:
    (1) For milk received during the first 15 days of the month, the 
handler shall pay the cooperative association on or before the 28th day 
of the month during which the milk was received at a rate per 
hundredweight not less than the statistical uniform price computed 
pursuant to Sec. 1076.62(f) for the preceding month; and
    (2) For milk received during the month the handler shall pay the 
cooperative association on or before the 15th day after the end of the 
month during which the milk was received, as follows:
    (i) The hundredweight of Class I milk received times the Class I 
differential price for the month applicable at the transferee plant, 
plus the pounds of Class I skim milk times the skim milk price for the 
month;
    (ii) The hundredweight of Class II milk received times the Class II 
differential price for the month,
    (iii) The pounds of butterfat received times the butterfat price 
for the month;
    (iv) The pounds of protein received in Class II and Class III times 
the protein price for the month;
    (v) The pounds of other solids received in Class II and Class III 
times the other solids price for the month;
    (vi) The hundredweight of milk received times the somatic cell 
adjustment; and
    (vii) Less any payment made pursuant to paragraph (d)(1) of this 
section.
    (e) In making payments for producer milk pursuant to paragraph 
(a)(2) or (b)(2) of this section, each handler shall furnish each 
producer or cooperative association to whom such payment is made a 
supporting statement in such form that it may be retained by the 
recipient which shall show:
    (1) The month and the identity of the producer;
    (2) The daily and total pounds for each producer;
    (3) The total pounds of butterfat contained in the producer's milk;
    (4) The total pounds of protein contained in the producer's milk;
    (5) The total pounds of other solids contained in the producer's 
milk;
    (6) The somatic cell count of the producer's milk;
    (7) The minimum rate or rates which payment to the producer is 
required pursuant to this order;
    (8) The rate that is used in making payment if such rate is other 
than the applicable minimum rate;
    (9) The amount, or the rate per hundredweight, or rate per pound of 
component, and the nature of each deduction claimed by the handler; and
    (10) The net amount of payment to such producer or cooperative.
    11. Sections 1076.74 and 1076.75 are revised to read as follows:


Sec. 1076.74  Butterfat differential.

    The butterfat differential, rounded to the nearest one-tenth cent, 
shall be 0.138 times the butter price less 0.0028 times the average 
price per hundredweight, at test, for manufacturing grade milk, f.o.b. 
plants in Minnesota and Wisconsin, as reported by the Department for 
the month. The butter price means the simple average for the month of 
the daily prices per pound of Grade A (92 score) butter. The prices 
used shall be those of the Chicago Mercantile Exchange as reported and 
published weekly by the Dairy Division, Agricultural Marketing Service. 
The average shall be computed by the Director of the Dairy Division 
using the price reported each week as the daily price for that day and 
for each following day until the next price is reported.


Sec. 1076.75  Plant location adjustments for producers and on nonpool 
milk.

    (a) The producer price differential for producer milk shall be 
adjusted according to the location of the plant of actual receipt at 
the rates set forth in Sec. 1076.52; and
    (b) For the purpose of computations pursuant to Secs. 1076.71 and 
1076.72 the producer price differential shall be adjusted at the rates 
set forth in Sec. 1076.52 applicable at the location of the nonpool 
plant from which the milk was received, except that the adjusted 
producer price differential shall not be less than zero.
    12. Section 1076.76 is amended by revising paragraphs (a)(4) and 
the last sentence of (b)(1)(ii) to read as follows:


Sec. 1076.76  Payments by handler operating a partially regulated 
distributing plant.

* * * * *
(a)* * *
    (4) Multiply the remaining pounds by the amount by which the Class 
I differential price exceeds the producer price differential, both 
price to be applicable at the location of the partially regulated 
distributing plant, with the difference to be not less than zero; and
* * * * *
    (b)* * *
    (1)* * *
    (ii)* * * Any such transfers remaining after the above allocation 
which are classified in Class I and for which a value is computed for 
the handler operating the partially regulated distributing plant 
pursuant to Sec. 1076.60 shall be priced at the statistical uniform 
price (or at the weighted average price if such is provided) of the 
respective order regulating the handling of milk at the transferee-
plant, with such statistical uniform price adjusted to the location of 
the nonpool plant (but not to be less than the lowest class price of 
the respective order), except that transfers of reconstituted skim milk 
in filled milk shall be priced at the lowest class price of the 
respective order; and
* * * * *
PART 1079--MILK IN THE IOWA MARKETING AREA

    1. Section 1079.30 is amended by revising paragraphs (a) and (c) 
and removing paragraph (d), to read as follows:


Sec. 1079.30  Reports of receipts and utilization.

* * * * *
    (a) Each handler described in Sec. 1079.9(a), (b), and (c) shall 
report for each of its operations the following information:
    (1) Product pounds, pounds of butterfat, pounds of protein, and 
pounds of solids-not-fat other than protein (other solids) contained in 
or represented by:
    (i) Receipts of producer milk, including producer milk diverted by 
the handler;
    (ii) Receipts of milk from handlers described in Sec. 1079.9(c); 
and
    (iii) Receipts by transfer or diversion of bulk fluid milk products 
from pool plants;
    (2) Product pounds and pounds of butterfat contained in:
    (i) Receipts of fluid milk products not included in paragraph 
(a)(1) of this section and bulk fluid cream products from any source;
    (ii) Receipts of other source milk;
    (iii) Inventories at the beginning and end of the month of fluid 
milk products and products specified in Sec. 1079.40(b)(1); and
    (3) The utilization or disposition of all milk, filled milk, and 
milk products required to be reported pursuant to this paragraph.
* * * * *
    (c) Each handler not specified in paragraphs (a) and (b) of this 
section shall report with respect to its receipts and utilization of 
milk, filled milk, and milk products in such manner as the market 
administrator may prescribe.
    2. Section 1079.31 is amended by revising paragraph (a) to read as 
follows:


Sec. 1079.31  Payroll reports.

    (a) On or before the 22nd day after the end of each month, each 
handler described in Sec. 1079.9(a), (b), or (c) shall report to the 
market administrator its producer payroll for such month in the detail 
prescribed by the market administrator, showing for each producer the 
information described in Sec. 1079.73(e).
* * * * *
    3. Section 1079.50 is amended by revising the section heading, 
introductory text and paragraph (a), and adding paragraphs (e) through 
(k) to read as follows:


Sec. 1079.50  Class and component prices.

    Subject to the provisions of Sec. 1079.52, the class prices per 
hundredweight of milk containing 3.5 percent butterfat and the 
component prices for the month shall be as follows:
    (a) Class I price. The Class I price for the month per 
hundredweight of milk containing 3.5 percent butterfat shall be the 
basic formula price for the second preceding month plus $1.55.
* * * * *
    (e) Class I differential price. The Class I differential price 
shall be the difference between the current month Class I and Class III 
prices (this price may be negative).
    (f) Class II differential price. The Class II differential price 
shall be the difference between the current month Class II and Class 
III prices (this price may be negative).
    (g) Skim milk price. The skim milk price per hundredweight, rounded 
to the nearest cent, shall be the Class III price less an amount 
computed by multiplying the butterfat differential by 35.
    (h) Butterfat price. The butterfat price per pound, rounded to the 
nearest one-hundredth cent, shall be the Class III price plus an amount 
computed by multiplying the butterfat differential by 965 and dividing 
the resulting amount by one hundred.
    (i) Protein price. The protein price per pound, rounded to the 
nearest one-hundredth cent, shall be 1.32 times the average monthly 
price per pound for 40-pound block Cheddar cheese on the National 
Cheese Exchange as reported by the Department.
    (j) Other solids price. Other solids are herein defined as solids 
not fat other than protein. The other solids price per pound, rounded 
to the nearest one-hundredth cent, shall be the skim milk price times 
.965, less the average protein test of the basic formula price as 
reported by the Department for the month times the protein price, and 
dividing the resulting amount by the average other solids test of the 
basic formula price as reported by the Department. If the resulting 
price is less than zero, then the protein price will be reduced so that 
the other solids price equals zero.
    (k) Somatic cell adjustment. The somatic cell adjustment per 
hundredweight shall be computed by subtracting the monthly average 
somatic cell count, in thousands, of the producer's milk from 350 and 
multiplying the remaining quantity by .0005 times the monthly cheddar 
cheese price as defined in paragraph (i) of this section.
    4. Section 1079.53 is revised to read as follows:


Sec. 1079.53  Announcement of class and component prices.

    (a) On or before the 5th day of the month, the market administrator 
shall announce the following prices:
    (1) The Class I price for the following month;
    (2) The Class III price for the preceding month;
    (3) The Class III-A price for the preceding month;
    (4) The skim milk price for the preceding month;
    (5) The butterfat price for the preceding month;
    (6) The protein price for the preceding month;
    (7) The other solids price for the preceding month; and
    (8) The butterfat differential for the preceding month.
    (b) On or before the 15th day of the month, the market 
administrator shall announce the Class II price for the following month 
computed pursuant to Sec. 1079.50(b).
    5. The section heading in Sec. 1079.60 and the undesignated 
centerheading preceding it, the introductory text, and paragraphs (a), 
(f), and (g), are revised to read as follows:

Producer Price Differential


Sec. 1079.60  Handler's value of milk.

    For the purpose of computing a handler's obligation for milk the 
market administrator shall determine for each month the value of milk 
of each handler described in Sec. 1079.9(a) with respect to each of its 
pool plants, and each handler described in Sec. 1079.9 (b) and (c).
    (a) The handler's obligation for producer milk and milk received 
from a handler described in Sec. 1079.9(c) shall be computed as 
follows:
    (1) Multiply the total hundredweight of milk in Class I as 
determined pursuant to Sec. 1079.43(a) and Sec. 1079.44(c) by the Class 
I differential price for the month;
    (2) Add an amount obtained by multiplying the total hundredweight 
of milk in Class II as determined pursuant to Sec. 1079.43(a) and 
Sec. 1079.44(c) by the Class II differential price for the month;
    (3) Add an amount obtained by multiplying the hundredweight of skim 
milk in Class I as determined pursuant to Sec. 1079.44(a) by the skim 
milk price;
    (4) Add an amount obtained by multiplying the pounds of skim milk 
in Class II and Class III as determined pursuant to Sec. 1079.44(a) by 
the average protein content of the skim milk received by the handler, 
and multiplying the resulting pounds of protein by the protein price; 
and
    (5) Add an amount obtained by multiplying the pounds of skim milk 
in Class II and Class III as determined pursuant to Sec. 1079.44(a) by 
the average other solids content of the skim milk received by the 
handler, and multiplying the resulting pounds of other solids by the 
other solids price;
* * * * *
    (f) Add the amount obtained from multiplying the Class I 
differential price applicable at the location of the nearest 
unregulated supply plants from which an equivalent volume was received 
by the pounds of skim milk and butterfat in receipts of concentrated 
fluid milk products assigned to Class I pursuant to Sec. 1079.43(d) and 
Sec. 1079.44(a)(7)(i) and the pounds of skim milk and butterfat 
subtracted from Class I pursuant to Sec. 1079.44(a)(11) and the 
corresponding steps of Sec. 1079.44(b), excluding such skim milk and 
butterfat in receipts of bulk fluid milk products from an unregulated 
supply plant to the extent that an equivalent amount of skim milk or 
butterfat disposed of to such plant by handlers fully regulated under 
any Federal milk order is classified and priced as Class I milk and is 
not used as an offset for any other payment obligation under any order;
    (g) Subtract for a handler described in Sec. 1079.9(c) the amount 
charged the preceding month for the skim milk and butterfat contained 
in inventory at the beginning of the month that was delivered to a pool 
plant during the month;
* * * * *
    6. Section 1079.61 is amended by revising the heading, introductory 
text, and paragraphs (a) and (e) to read as follows:


Sec. 1079.61  Producer price differential.

    For each month the market administrator shall compute a producer 
price differential per hundredweight for Zone 1. If the unreserved cash 
balance in the producer settlement fund to be included in the 
computation is less than 2 cents per hundredweight of producer milk on 
all reports, the report of any handler who has not made the payments 
required pursuant to Sec. 1079.71 for the preceding month shall not be 
included in the computation of the producer price differential. The 
report of such handler shall not be included in the computation for 
succeeding months until he has made full payment of outstanding monthly 
obligations. Subject to the aforementioned conditions, the market 
administrator shall compute the producer price differential in the 
following manner:
    (a) Combine into one total for all handlers:
    (1) The values computed pursuant to Sec. 1079.60 (a)(1), (a)(2), 
and (b) through (j) for all handlers;
    (2) Add values computed pursuant to Sec. 1079.60 (a)(3), (a)(4), 
and (a)(5) and subtract the values obtained by multiplying the 
handlers' total pounds of protein and total pounds of other solids 
contained in such milk by their respective prices; and
    (3) Subtract the value obtained by multiplying the difference 
between the Class III price and the Class III-A price times the pounds 
of product determined pursuant to Sec. 1079.43(e);
* * * * *
    (e) Subtract not less than 4 cents nor more than 5 cents from the 
price computed pursuant to paragraph (d) of this section. The result 
shall be known as the ``producer price differential.''
    7. Section 1079.62 is revised to read as follows:


Sec. 1079.62  Announcement of producer prices.
    On or before the 12th day after the end of each month, the market 
administrator shall announce the following prices and information:
    (a) The producer price differential;
    (b) The protein price;
    (c) The other solids price;
    (d) The butterfat price;
    (e) The average protein and other solids content of producer milk; 
and
    (f) The statistical uniform price for milk containing 3.5 percent 
butterfat, computed by combining the Class III price and the producer 
price differential.
    8. Section 1079.71 is amended by revising paragraph (a)(2) and 
adding and reserving paragraph (b), to read as follows:


Sec. 1079.71  Payments to the producer-settlement fund.

    (a) * * *
    (2) The sum of:
    (i) An amount obtained by multiplying the total hundredweight of 
producer milk and milk received from a handler described in 
Sec. 1079.9(c) by the producer price differential as adjusted by 
Sec. 1079.75. In the case of a handler described in Sec. 1079.9(c), 
less the amount due from handlers pursuant to Sec. 1079.73;
    (ii) An amount obtained by multiplying the total pounds of protein 
contained in producer milk and milk received from a handler described 
in Sec. 1079.9(c) by the protein price;
    (iii) An amount obtained by multiplying the total pounds of other 
solids contained in producer milk and milk received from a handler 
described in Sec. 1079.9(c) by the other solids price; and
    (iv) An amount obtained by multiplying the pounds of skim milk and 
butterfat for which a value was computed pursuant to Sec. 1079.60(f) by 
the producer price differential as adjusted pursuant to Sec. 1079.52.
    (b) [Reserved]
    9. Sections 1079.73, 1079.74 and 1079.75 are revised to read as 
follows:


Sec. 1079.73  Payments to producers and to cooperative associations.

    (a) Each handler shall pay for milk received from producers for 
which payment is not made to a cooperative association pursuant to 
paragraph (b) or (c) of this section as follows:
    (1) On or before the last day of each month, to each producer who 
has not discontinued shipping milk to such handler before the end of 
the month, for producer milk received during the first 15 days of the 
month at a rate per hundredweight not less than the statistical uniform 
price computed pursuant to Sec. 1079.62(f) for the preceding month and 
adjusted pursuant to Sec. 1079.75, less proper deductions authorized in 
writing by such producer; and
    (2) On or before the 18th day after the end of the month, payment 
for producer milk received during such month shall not be less than the 
sum of:
    (i) The hundredweight of producer milk received times the producer 
price differential adjusted pursuant to Sec. 1079.75;
    (ii) The pounds of butterfat received times the butterfat price for 
the month;
    (iii) The pounds of protein received times the protein price for 
the month;
    (iv) The pounds of other solids received times the other solids 
price for the month;
    (v) The hundredweight of milk received times the somatic cell 
adjustment for the month;
    (vi) Less any payment made pursuant to paragraph (a)(1) of this 
section;
    (vii) Less proper authorized deductions authorized in writing by 
such producer and plus or minus adjustments for errors in previous 
payments made to such producer;
    (viii) Less deductions for marketing services pursuant to 
Sec. 1079.86; and
    (ix) If by such date the handler has not received full payment from 
the market administrator pursuant to Sec. 1079.72 for such month, it 
may reduce pro rata its payment to producers by not more than the 
amount of such underpayment. Payment to producers shall be completed 
thereafter not later than the date for making payments pursuant to this 
paragraph next following receipt of the balance due from the market 
administrator.
    (b) Each handler shall pay a cooperative association as follows for 
milk received from producers if the cooperative association has filed a 
written request for payment with the handler and if the market 
administrator has determined that such cooperative association is 
authorized to collect payment:
    (1) On or before the last day of the month, an amount not less than 
the sum of the individual payments otherwise payable to producers 
pursuant to paragraph (a)(1) of this section, less any deductions 
authorized in writing by such cooperative association; and
    (2) On or before the 18th day after the end of each month an amount 
not less than the sum of the individual payments otherwise payable to 
producers pursuant to paragraph (a)(2) of this section, less proper 
deductions authorized in writing by such cooperative association.
    (c) Each handler shall pay a cooperative association for milk 
received by the handler from a cooperative association acting as a 
handler described in Sec. 1079.9(c) as follows:
    (1) For milk received during the first 15 days of the month, the 
handler shall pay the cooperative association on or before the last day 
of the month during which the milk was received at a rate per 
hundredweight not less than the statistical uniform price computed 
pursuant to Sec. 1079.62(f), applicable at the location of the 
receiving handler's plant, for the preceding month; and
    (2) For milk received during the month the handler shall pay the 
cooperative association on or before the 18th day after the end of the 
month during which the milk was received as follows:
    (i) The hundredweight of milk received times the producer price 
differential applicable at the location of the receiving handler's 
plant;
    (ii) The pounds of butterfat received times the butterfat price for 
the month;
    (iii) The pounds of protein received times the protein price for 
the month;
    (iv) The pounds of other solids received times the other solids 
price for the month;
    (v) The hundredweight of milk received times the somatic cell 
adjustment for the month; and
    (vi) Less any payment made pursuant to paragraph (c)(1) of this 
section.
    (d) Each handler shall pay a cooperative association for fluid milk 
products received by transfer from pool plant(s) operated by a 
cooperative association as follows:
    (1) For milk received during the first 15 days of the month, the 
handler shall pay the cooperative association on or before the last day 
of the month during which the milk was received at a rate per 
hundredweight not less than the statistical uniform price computed 
pursuant to Sec. 1079.62(f), applicable at the transferee plant, for 
the preceding month; and
    (2) For milk received during the month the handler shall pay the 
cooperative association on or before the 18th day after the end of the 
month during which the milk was received, as follows:
    (i) The hundredweight of Class I milk received times the Class I 
differential price for the month applicable at the transferee plant, 
plus the pounds of Class I skim milk times the skim milk price for the 
month;
    (ii) The hundredweight of Class II milk received times the Class II 
differential price for the month;
    (iii) The pounds of butterfat received times the butterfat price 
for the month;
    (iv) The pounds of protein received in Class II and Class III times 
the protein price for the month;
    (v) The pounds of other solids received in Class II and Class III 
times the other solids price for the month;
    (vi) The hundredweight of milk received times the somatic cell 
adjustment; and
    (vii) Less any payment made pursuant to paragraph (d)(1) of this 
section.
    (e) In making payments for producer milk pursuant to paragraph 
(a)(2) or (b)(2) of this section, each handler shall furnish each 
producer or cooperative association to whom such payment is made a 
supporting statement in such form that it may be retained by the 
recipient which shall show:
    (1) The month and the identity of the producer;
    (2) The daily and total pounds for each producer;
    (3) The total pounds of butterfat contained in the producer's milk;
    (4) The total pounds of protein contained in the producer's milk;
    (5) The total pounds of other solids contained in the producer's 
milk;
    (6) The somatic cell count of the producer's milk;
    (7) The minimum rate or rates at which payment to the producer is 
required pursuant to this order;
    (8) The rate that is used in making payment if such rate is other 
than the applicable minimum rate;
    (9) The amount, rate per hundredweight, or rate per pound of 
component, and the nature of each deduction claimed by the handler; and
    (10) The net amount of payment to such producer or cooperative.


Sec. 1079.74  Butterfat differential.

    The butterfat differential, rounded to the nearest one-tenth cent, 
shall be 0.138 times the butter price less 0.0028 times the average 
price per hundredweight, at test, for manufacturing grade milk, f.o.b. 
plants in Minnesota and Wisconsin, as reported by the Department for 
the month. The butter price means the simple average for the month of 
the daily prices per pound of Grade A (92 score) butter. The prices 
used shall be those of the Chicago Mercantile Exchange as reported and 
published weekly by the Dairy Division, Agricultural Marketing Service. 
The average shall be computed by the Director of the Dairy Division 
using the price reported each week as the daily price for that day and 
for each following day until the next price is reported.


Sec. 1079.75  Plant location adjustments for producers and on nonpool 
milk.

    (a) The producer price differential for producer milk pursuant to 
Sec. 1079.61 received at a pool plant or diverted from a pool plant 
shall be reduced according to the location of the plant of actual 
receipt at the rates set forth in Sec. 1079.52.
    (b) For purposes of computations pursuant to Secs. 1079.71 and 
1079.72 the producer price differential shall be adjusted at the rates 
set forth in Sec. 1079.52 applicable at the location of the nonpool 
plant from which the milk was received, except that the adjusted 
producer price differential shall not be less than zero.
    10. Section 1079.76 is amended by revising paragraph (a)(4) and the 
last sentence of paragraph (b)(1)(ii) to read as follows:


Sec. 1079.76  Payments by handler operating a partially regulated 
distributing plant.

* * * * *
    (a) * * *
    (4) Multiply the remaining pounds by the amount by which the Class 
I differential price exceeds the producer price differential, both 
prices to be applicable at the location of the partially regulated 
distributing plant, with the difference to be not less than zero; and
* * * * *
    (b) * * *
    (1) * * *
    (ii) * * * Any such transfers remaining after the above allocation 
which are classified in Class I and for which a value is computed for 
the handler operating the partially regulated distributing plant 
pursuant to Sec. 1079.60 shall be priced at the statistical uniform 
price (or at the weighted average price if such is provided) of the 
respective order regulating the handling of milk at the transferee-
plant, with such statistical uniform price adjusted to the location of 
the nonpool plant (but not to be less than the lowest class price of 
the respective order), except that transfers of reconstituted skim milk 
in filled milk shall be priced at the lowest class price of the 
respective order; and
* * * * *
    Dated: October 25, 1994.
Lon Hatamiya,
Administrator.
[FR Doc. 94-26906 Filed 11-1-94; 8:45 am]
BILLING CODE 3410-02-P