[Federal Register Volume 59, Number 218 (Monday, November 14, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-27922]


[[Page Unknown]]

[Federal Register: November 14, 1994]


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DEPARTMENT OF AGRICULTURE
Agricultural Marketing Service

7 CFR Part 1131

[Docket No. AO-271-A32; DA-92-24]

 

Milk in the Central Arizona Marketing Area; Revised Recommended 
Decision and Opportunity to File Written Exceptions on Proposed 
Amendments to Tentative Marketing Agreement and Order

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Proposed rule.

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SUMMARY: This revised decision recommends changes in the Central 
Arizona Federal milk order by revising the definition of producer-
handler to require, in certain cases, a pool payment on seasonal 
reserve milk supplies disposed of for fluid use. It also recommends 
removal of the ``associated producer'' and ``associated producer milk'' 
provisions. The decision is based on proposals presented at a public 
hearing held in Phoenix, Arizona, on February 2-3, 1993.

DATES: Comments are due on or before December 14, 1994.

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

FOR FURTHER INFORMATION CONTACT: Nicholas Memoli, Marketing Specialist, 
USDA/AMS/Dairy Division, Order Formulation Branch, Room 2971, South 
Building, P. O. Box 96456, Washington, DC 20090-6456, (202) 690-1932.

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 action 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) (the Act), provides that administrative proceedings 
must be exhausted before parties may file suit in court. Under section 
8c(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 entry of the ruling.
    Prior documents in this proceeding:
    Notice of Hearing: Issued December 21, 1992; published December 30, 
1992 (57 FR 62241).
    Recommended Decision: Issued December 15, 1993; published December 
22, 1993 (58 FR 67703).
    Extension of Time for Filing Extensions: Issued February 4, 1994; 
published February 14, 1994 (59 FR 6916).

Preliminary Statement

    Notice is hereby given of the filing with the Hearing Clerk of this 
revised recommended decision with respect to proposed amendments to the 
tentative marketing agreement and the order regulating the handling of 
milk in the Central Arizona marketing area. This notice is issued 
pursuant to the provisions of the Agricultural Marketing Agreement Act 
of 1937, as amended (7 U.S.C. 601-674), and the applicable rules of 
practice and procedure 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. Four 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 Phoenix, Arizona, on February 2-3, 1993, 
pursuant to a notice of hearing issued December 21, 1992 (57 FR 62241).
    The material issues on the record of hearing relate to:
    1. The definition and treatment of producer-handlers;
    2. The definition and treatment of associated producers; and
    3. Conforming changes and non-substantive 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. The Definition and Treatment of Producer-Handlers

    The order should be amended to require producer-handlers (P-H) who 
distribute packaged fluid milk products other than to retail customers 
to pay into the pool each month a sum that reflects the amount by which 
(a) the volume of own-farm production marketed as Class I milk in the 
current month exceeds (b) the volume of own-farm production marketed as 
Class I milk during the lowest production month within the immediately 
preceding 12 months. The rate of payment should be based on the 
difference between the Class I and Class III prices for the current 
month.
    A P-H whose sole distribution of packaged fluid milk products was 
to retail customers (i.e., through the P-H's own retail facility or 
home delivery route) would be exempt from the pool payment. Similarly, 
a newly operational P-H would be exempt from the pool payment during 
the first 12 months of operation.
    At the time of the hearing, Heartland Dairy was the largest P-H in 
the Central Arizona market. Since then, it voluntarily has become a 
fully regulated handler under the order. Testimony at the hearing 
indicated that Heartland had been sharing a joint account with a fully 
regulated handler, Jackson Foremost Foods, to supply Fry's Food Stores, 
the dominant supermarket chain in the Phoenix area.
    The Executive Director of The United Dairymen of Arizona (UDA), a 
cooperative association in the market, testified that Fry's Food Stores 
is the principal outlet for Heartland Dairy's fluid milk product 
distribution in the Central Arizona marketing area. The witness stated 
that Heartland shared the Fry's account with Jackson Foremost Foods, a 
fully regulated handler supplied by UDA. He said that when Heartland's 
deliveries to Fry's were insufficient to cover its commitment, Fry's 
called on Jackson to make up the deficit. Jackson, in turn, called on 
UDA to supply it with more milk. The witness indicated that this 
scenario had occurred repeatedly in the last three years, particularly 
during the low production months of July, August, September, and 
October, and throughout the year on Fridays and Saturdays.
    The UDA spokesman testified that this pattern of operation by 
Heartland Dairy violated the spirit of the P-H provision. He referenced 
the Secretary of Agriculture's 1962 decision (27 FR 3923) which states 
that:

    A producer-handler should be required to maintain his own 
reserve supply since he is exempted from pooling his Class I sales 
with other producers. The limitation on the amount of milk which an 
exempt producer-handler may purchase from pool plants will make it 
necessary for him to maintain herd production equal to his Class I 
sales plus a reserve to cover variations in production and sales.
    . . . [P]roducer-handlers' milk sales represent a potential 
threat to orderly marketing if producer-handlers are permitted to 
shift their excess burden to other producers. The Central Arizona 
market is composed of large producers delivering nearly one million 
pounds a month. If such large volume producers could market their 
own production entirely as Class I and buy reserve milk to balance 
daily fluctuations in their production and sales, they would be a 
disturbing element in the market.

    The Vice President of Sales for Shamrock Foods, one of the largest 
handlers in the Central Arizona market, testified that Heartland Dairy 
supplied private label milk to the Southwest Supermarket chain in 
December of 1992, when Shamrock was also supplying milk to Southwest 
stores. In addition, he said that from time to time Southwest would 
call Shamrock asking for additional milk when Southwest was not getting 
its orders filled by Heartland Dairy. It was his understanding, he 
testified, that when Southwest was required to buy this extra milk from 
Shamrock, Heartland Dairy would pay the difference in price between 
what it would have charged Southwest and what Shamrock charged 
Southwest for this milk.
    In this market, the annual variation in producer milk from the 
lowest production month to the highest production month has averaged 28 
percent during the past five years. Given this seasonality in 
production, a P-H must find a way to handle its seasonal production 
problem. One method would be to maintain a fluid milk distribution 
level equal to its highest month's production--typically, March--and 
purchase enough supplemental milk during the other eleven months. 
However, unrestricted supplemental purchases are conceptually 
antithetical to the principle of maintaining one's own reserve supply. 
Alternatively, a P-H could maintain a fluid milk product distribution 
level equal to its lowest month's production--typically, August--and 
send the additional production during the other 11 months to a 
manufacturing plant.
    At the present time, the only manufacturing plant within reasonable 
distance of Heartland Dairy is UDA's butter-powder plant at Tempe, 
Arizona. There are no other manufacturing plants in the Central Arizona 
marketing area, except for a cheese plant which is under the same roof 
as UDA's butter-powder plant and which is fully supplied by UDA, and a 
yogurt processing plant, LaCorona Yogurt, which, according to the 
manager of Heartland Dairy, was under contract to buy its milk from 
Shamrock. Consequently, the only surplus outlet available to Heartland 
Dairy in this area is UDA's butter-powder plant.
    The Heartland Dairy manager testified that when Heartland Dairy 
sent surplus milk to the UDA butter-powder plant for manufacturing use, 
it was in the position of having to accept whatever the cooperative was 
willing to pay for the milk. For example, he said that in December 1992 
Heartland sold 427,210 pounds of surplus milk to UDA and was paid 
$10.25 per hundredweight for it, which was $1.09 less than the order's 
Class III price.
    The evidence in the record indicates that Heartland used other ways 
to handle its seasonal production problem. It shared joint Class I 
sales accounts with fully regulated handlers and disposed of fluid milk 
products outside of the marketing area when extra milk was available.
    UDA's proposal to address these practices would require the market 
administrator to closely monitor the P-H's operations and to make 
several subjective judgments regarding whether the P-H was maintaining 
its own reserve supply. Specifically, the market administrator would be 
asked to: (1) compare weekly volumes sold to accounts serviced by the 
P-H and by other handlers under this or any other Federal milk order; 
(2) determine whether the P-H packaged milk in the same label as 
another handler under this or any other Federal milk order; (3) 
determine if the P-H's pro rata share of Class I route disposition in 
the marketing area during the flush milk production months (March, 
April, May) was substantially the same as during the short milk 
production months (July, August, September); and (4) use any other 
method that would indicate when the P-H was not maintaining the burden 
of its own reserve supply. Under the proposal, the P-H would be fully 
regulated for the next 12 months if the market administrator found that 
the P-H was not maintaining its own reserve supply.
    Another part of the UDA proposal was designed to preclude P-Hs from 
sharing Class I accounts with fully regulated handlers. In this case, 
the order would treat packaged fluid milk that is delivered by a P-H to 
a market outlet which is also serviced by a pool plant (using the same 
label as the P-H) as having been ``acquired for distribution'' by the 
pool plant. In such circumstances, the P-H's milk would be assigned a 
Class III classification at the pool plant. This procedure would force 
an equal amount of ``producer milk'' into Class I and thereby increase 
the pool plant's obligation to the pool.
    In its brief, UDA stated that, based on the evidence in the record, 
a producer-handler should be required to carry 135 percent of its 
monthly Class I sales in its own herd production. To implement this 
requirement, the cooperative suggested that its proposal be amended by 
inserting a new paragraph in Sec. 1131.10(a), which would read as 
follows:

    (2) Produces in his own herd a rolling average during the 
preceding three months of 135 percent of Class I route disposition. 
If such person's milk production from his own herd falls below 135 
percent of Class I route disposition in any such period, such person 
shall be pooled in the next succeeding month and continue to be 
pooled until production from his own herd equals or exceeds 135 
percent of Class I route disposition for a three month period.

    The UDA proposal should not be adopted. It lacks objective 
standards and instead relies on many subjective judgments, which would 
make it very difficult to administer and enforce. In addition, it would 
penalize P-Hs and fully regulated handlers even when a P-H was 
operating in a totally unobjectionable manner. For example, if a P-H 
serviced an account with a fully regulated handler and each party 
contributed a fixed amount of fluid milk products each month to the 
account, the order, as modified by UDA's proposal, would nonetheless 
treat the P-H's deliveries as receipts of the pool plant and penalize 
the pool plant as described above.
    A representative of the National Milk Producers Federation (NMPF) 
appeared at the hearing to present a proposal that was ruled by the 
Administrative Law Judge to be outside the scope of the hearing. The 
NMPF proposal would have limited the size of a P-H. The witness stated 
that the NMPF was offering the proposal as an alternative to the UDA 
proposal because, in his opinion, the UDA proposal would be impossible 
to administer or enforce.
    A consultant for Heartland Dairy testified in support of a modified 
Heartland Dairy proposal that would enable a P-H to purchase unlimited 
supplies of supplemental milk from any source, but which also would 
require the P-H to make a payment into the order's marketwide pool each 
month to compensate the market's producers for carrying Heartland's 
reserve supply of milk. The consultant stated that the goal of the 
Federal order program is to insure minimum prices to dairy farmers. 
This goal, he said, could be accomplished without fully regulating 
producer-handlers.
    The modified proposal of Heartland Dairy calls for the P-H to make 
a payment into the pool each month based on the difference between the 
P-H's production in the current month and its lowest month's production 
during the immediately preceding 12 months. The difference in 
production between the current month and the lowest month would be 
prorated to the P-H's utilization of milk in each class in the current 
month. The payment would then be computed by: (1) multiplying the 
pounds assigned to Class I by the difference between the Class I price 
and the blend price (a positive value); (2) multiplying the pounds 
assigned to Class II by the difference between the Class II price and 
the blend price (a positive or negative value); (3) multiplying the 
pounds assigned to Class III by the difference between the Class III 
price and the blend price (a negative value); and (4) adding these 
products together. If the current month's production were less than the 
lowest month's production during the preceding 12 months, no payment 
would be required.
    There can be no argument with certain basic facts that must be 
taken into consideration in resolving the problems described in the 
hearing record. First, the seasonal variation in production in this 
market is significant, and this variation in production adversely 
affects the cost of handling and manufacturing the market's reserve 
supply of milk. From the evidence in the record, it would appear that 
this burden falls largely on UDA.
    Second, there is really only one place to economically dispose of 
surplus milk for manufacturing use: UDA's butter-powder plant at Tempe. 
This lack of viable economic alternatives leads to marketing practices 
which some parties in the market deem to be ``disruptive'' and which 
nearly all parties in the market concede result in an unequal sharing 
of the cost of maintaining the market's reserve supply of milk.
    Third, there is really only one place to obtain supplemental 
supplies of milk in this market. UDA accounts for 88 percent of the 
producer milk in the market, and Shamrock Foods accounts for the 
remaining 12 percent, which is largely used for its own use, except for 
the amount which it supplies to LaCorona Yogurt.
    These facts lead to the conclusion that additional flexibility is 
needed in the order to permit a P-H to bear its pro rata share of the 
cost of maintaining the market's reserve supply while, at the same 
time, operating in a reasonably efficient manner.
    Given the limited manufacturing outlets available in the Central 
Arizona market, the solution to the problems described in the hearing 
record must be corrected through providing an alternative means for a 
P-H to bear its share for maintaining its reserve supply of milk. 
Specifically, we certify that the Administrative Law Judge made the 
correct decision at the hearing to permit testimony on the modified 
Heartland Dairy proposal, and we believe this proposal should be 
adopted but modified in several respects.
    First, the P-H's payment into the pool should be based on the 
difference between the Class I price and the Class III price, instead 
of the blend price. If a P-H were really bearing the burden of its own 
reserve supply, that reserve supply, by definition, must be used in the 
utilization of last resort: i.e., Class III. Therefore, it should be 
recognized that the P-H would obtain the Class III price or less for 
its seasonal excess production, which would likely be processed into 
butter and powder at UDA's manufacturing plant. Consequently, the 
payment to the pool should be based on the difference between the Class 
I price and the Class III price.
    If a P-H geared its Class I disposition to its low production month 
(e.g., August) and disposed of its seasonal excess as Class III 
utilization, there clearly would be no grounds for alleging that the P-
H was not bearing the burden of its own reserve supply. Accordingly, 
under such circumstances, a payment into the pool would be neither 
necessary nor appropriate.
    Therefore, the second modification concerns the computation to 
determine the amount of milk on which the payment should be based. 
Since, for the reason described above, there may be circumstances in 
which no payment would be appropriate, it would be incorrect to use the 
current month's ``production'' in determining the reserve supply upon 
which to base the payment. Instead, one should subtract the P-H's 
``Class I sales of own-farm milk during the month of lowest production 
(within the immediately preceding 12 months)'' from the current month's 
``Class I sales of own-farm milk'' in determining the reserve supply on 
which to compute the payment. Using this language will avoid penalizing 
the P-H who has not utilized all of its current month's production in 
Class I, but who, instead, has utilized some of the seasonal production 
increase for Class II or III use. It will also eliminate the 
possibility of double-charging the P-H for supplemental purchases of 
Class I milk from pool sources which have already been priced at the 
Class I price.
    In computing the seasonal increase in Class I sales as described 
above, some adjustment should be made for the number of days in the 
month. Accordingly, a daily average should be computed for each of the 
months being compared and any difference between these two averages 
would then be multiplied by the number of days in the current month. 
For example, in comparing Class I sales of own-farm milk in February to 
Class I sales of own-farm milk in August, the August daily average 
would be subtracted from the February daily average and any positive 
difference would then be multiplied by 28 (or 29 if it was a leap 
year).
    The third change which should be made to the Heartland Dairy 
proposal concerns the source of supplemental milk purchases. As 
proposed, a P-H would be allowed to purchase an unlimited amount of 
milk from any source. This should be changed to restrict such purchases 
to fluid milk products obtained by transfer or diversion from pool 
plants and other order plants, and by diversion from a cooperative bulk 
tank handler. In addition, a limit of 5,000 pounds or 5 percent of the 
P-H's monthly fluid milk product disposition should apply. No other 
sources of supply would be allowed regardless of whether such purchases 
entered the P-H's plant or were acquired elsewhere.
    Currently, P-Hs are not permitted to purchase milk directly from 
dairy farms. However, as noted previously, UDA accounts for 88 percent 
of the producer milk in the Central Arizona market. Accordingly, the 
cooperative is the likely source for supplemental milk supplies. Even 
if the P-H were to obtain transfers from a pool plant operated by 
another handler, in all likelihood it would be UDA milk since the 
cooperative association supplies all of the pool plants in this market. 
In view of this, it would be much more efficient to allow a P-H to 
obtain milk from a cooperative association in its capacity as a handler 
on milk delivered directly from producers' farms. This milk would be 
classified as Class I milk, and the cooperative association handler 
delivering the milk would account to the pool for it.
    While a P-H may now receive transfers from pool plants and other 
order plants, it may not receive diverted milk from these plants. This 
restriction also should be removed to allow a P-H to obtain 
supplemental milk by diversion from these plants directly from the 
farms of producers. Under most circumstances, this would be the most 
efficient way to obtain a load of supplemental milk, and there is no 
reason to preclude such shipments. Such receipts would be classified as 
Class I milk, and the diverting handler would account to the pool for 
this milk.
    In verifying the computation of the P-H's pool payment, the market 
administrator will require full access to all of the producer-handler's 
records, including all of the milk production and farm pickup records 
pertaining to the dairy operations of each of the P-H's farms.
    The changes adopted above are designed to apply to P-Hs that supply 
milk to wholesale outlets. With respect to P-Hs that distribute all of 
their milk to retail outlets, the order should continue to provide a 
complete exemption from any pool payment. As used herein, retail 
outlets would include only retail sales to consumers at the P-H's dock, 
at the P-H's own retail stores (wherever located), or on the P-H's home 
delivery route. Thus, P-Hs operating under this total exemption would 
not be permitted to make any sales to stores that are owned or leased 
by others, to distributors or jobbers, or to institutions such as 
schools, hospitals, prisons, nursing homes, etc.
    The limit on supplemental purchases that is now in the order will 
not only apply to bulk or packaged fluid milk products that are 
received by transfer or diversion at the P-H's plant, but also will 
apply equally to packaged fluid milk products that are acquired for 
route disposition to any of the P-H's retail outlets. This means that 
any acquisition of a fluid milk product, whether or not it entered the 
P-H's plant or retail facility, was picked up by the P-H's truck, or 
was acquired in some other way, would still count against the monthly 
5,000-pound/5 percent limit.
    Although UDA did not include any specific order language to address 
the appropriate size of a P-H, the cooperative attempted to modify the 
language of its proposal to restrict the P-H exemption to a ``family-
type farm operation.'' The Administrative Law Judge presiding at the 
hearing disallowed the modification but permitted the testimony as an 
``offer of proof.'' We concur with the Judge that this modification is 
beyond the scope of the hearing.
Exceptions to the Recommended Decision
    Several refinements have been made in the P-H provisions included 
in the December 15, 1993, recommended decision. Most of these 
refinements are in response to the exceptions to the recommended 
decision and are discussed below.
    Comment: UDA stated that adoption of the modified Heartland Dairy 
proposal was unlawful because there was no prior notice of it and that 
it deprived other hearing participants from fully exploring any 
operational or administrative loopholes embodied in the proposal. The 
cooperative requested that either the hearing be reopened for 
additional testimony on the provision or that the proceeding be 
terminated.
    Response: We believe that the modified Heartland Dairy proposal was 
within the scope of the hearing notice and, hence, was properly 
proposed. However, some significant further modifications are now being 
proposed in light of the participants' comments. Therefore, we are 
issuing this revised recommended decision to give all parties more time 
to analyze the P-H treatment embodied in Secs. 1131.10 and 1131.60(j) 
of the order. Any decision to reopen the hearing will be made following 
the receipt of exceptions to this revised recommended decision.
    Comment: UDA criticized the recommended decision for failing to 
address ``the basic problem of how to exempt a P-H from full pricing 
and pooling under the order while, at the same time, insuring at least 
an approach to competitive equity with fully regulated handlers by 
imposing on the P-H the burden of carrying the cost of the reserve 
production associated with its Class I sales in the marketing area.''
    It went on to explain:

    Under the recommended P-H provisions, a P-H could receive at its 
plant for Class I distribution in the marketing area a total of one 
million pounds of milk per month supplied partially from each of 
three of four farm units owned by the P-H with aggregate ``own farm 
production'' of four or five million pounds. In such a case, the P-
H's pounds of ``own farm production'' marketed as Class I would 
never exceed the pounds of ``own farm production'' during the lowest 
production month during the preceding month.
    An Arizona P-H with a plant on or near the California border, 
with farm units straddling the border or in California, would have 
no difficulty in disposing of its ``own farm production'' to fluid 
milk plants or as packaged fluid milk sales in California or Mexico. 
For such a P-H who would never need to ``dispose of its seasonal 
excess as Class III utilization,'' there is every ``ground for 
alleging that the P-H was not bearing the burden of its own reserve 
supply'' contrary to the conclusion of the Recommended Decision.
    Unless the P-H's ``own farm production'' is limited to the net 
pounds of milk actually received at the P-H's plant and it is 
required to account to the pool for the order values of all bulk 
dispositions for fluid use, the recommended P-H amendment will 
simply perpetuate the problem of competitive equity and disorder 
that gave rise to the need for this hearing.

    Response: In Sec. 1131.60(j) of this revised recommended decision, 
where a P-H's pool payment is computed, the
P-H's average daily Class I sales of own-farm milk during the lowest 
production month (within the preceding 12 months) is subtracted from 
the P-H's average daily Class I sales of own-farm milk in the current 
month, and the difference is multiplied by the number of days in the 
current month.
    If a P-H operated other farms or other plants in other States, it 
could receive the milk from these other farms at its Order 131 plant 
during the low production month and then transfer this milk in bulk to 
its own plant or someone else's plant in California or another State. 
By changing ``own-farm production during the lowest production month'' 
to ``average daily Class I sales of own-farm milk during the month of 
lowest production,'' this revised decision makes it clear that the P-
H's production includes only the milk ``actually received'' at its 
plant.
    Comment: UDA states that the P-H could circumvent the pool payment 
by disposing of its own-farm production to fluid milk plants in 
California or Mexico, either in bulk or in packaged form.
    Response: If the P-H distributed packaged fluid milk products 
outside of the Central Arizona marketing area, that distribution would 
be considered ``route disposition'' pursuant to Sec. 1131.3 of the 
order and would be counted as ``Class I sales of own-farm milk.'' 
Therefore, the pool payment would include those sales.
    If the P-H disposed of its seasonal excess production in the form 
of bulk transfers to an unregulated plant in California or Mexico, the 
market administrator would not follow those transfers to determine the 
ultimate utilization of the milk. If the P-H were able to find a fluid 
milk plant in California to take this milk, the State of California 
would prorate this bulk receipt to the receiving plant's utilization, 
but it would not price this milk since it has come from outside the 
State.
    At the present time, there is nothing in the order to preclude a P-
H from sending its surplus milk to California for disposition in any 
form, including as a fluid milk product. Nor is there any prohibition 
against this disposition in the P-H provision proposed by UDA. This 
type of out-of-order disposition presents no burden to Order 131 
producers. From the standpoint of California producers, on the other 
hand, it could certainly be construed as an intrusion on their market 
for a P-H to dispose of its seasonal surplus milk in anything but the 
lowest use classification.
    Comment: UDA states that a fully-regulated handler-supermarket 
operator with almost 100 percent Class I utilization would be able to 
establish or lease a production facility to supply all or the major 
share of its present Class I requirements and rely on UDA for unlimited 
supplies to expand or handle surges in its Class I sales.
    Response: This revised recommended decision does not permit the 
purchase of unlimited supplemental supplies by a P-H but instead sets a 
limit of 5,000 pounds per month or 5 percent of the P-H's total fluid 
milk product disposition for the month, whichever is less. With the 
provisions recommended in this decision, a supermarket chain would have 
less incentive to become a P-H than it now does.
    Comment: Shamrock Foods criticized the recommended decision for 
implying that UDA underpaid Heartland Dairy for its surplus milk when, 
in December 1992, UDA paid Heartland $10.25 or $1.09 below the Order's 
Class III price. It stated that in that month the Western States Class 
III-A price was only $10.42 and that this price did not include the 
balancing cost of maintaining idle production capacity during months 
when the UDA butter-powder plant is not operational. Shamrock also 
referred to the Department's October 29, 1993, final decision in which 
Class III-A pricing was adopted in 29 Federal milk orders, including 
the Central Arizona order. It stated that the recommended decision was 
incorrect in using the Class III price to compute a producer-handler's 
pool obligation because the appropriate measure of the value of surplus 
milk used in butter and powder is a weighted average of the Class III 
and III-A prices, reflecting the fact that only the portion of a 
hundredweight of milk that is used to make butter should be priced at 
the Class III price; the remainder should be priced at the Class III-A 
price. Thus, Shamrock argued that in December 1993, the appropriate 
weighted average price to use was $10.52 (i.e., 91.5 Class III-A pounds 
(.1 percent butterfat) valued at $7.63, plus 8.5 pounds of Class III 
(34.5 percent butterfat) valued at $2.89).
    Response: Shamrock is correct in its computation of the value of 
surplus milk used to make butter and nonfat dry milk. However, its 
proposed weighted average price should not be adopted because it is not 
certain that the Class III-A price will always be lower than the Class 
III price. In fact, prior to its incorporation in the Central Arizona 
order in December 1993,1 there were months when the Class III-A 
price exceeded the Class III price. Also, it is incorrect to assume 
that a producer-handler could not obtain more than a weighted average 
Class III/III-A price for its milk. In fact, a producer-handler could 
sell its surplus milk to a commercial food processor or the 
manufacturer of Class II products at the Class III price. Finally, the 
Class III-A price has not been adopted as a basis for computing 
compensatory payments under the order.
---------------------------------------------------------------------------

    \1\ Official notice is taken of the final decision issued 
October 20, 1993, and published October 29, 1993 (58 FR 58112), 
adopting Class III-A pricing for 27 Federal milk orders, including 
Order 1108.
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    Since Class III-A pricing was added to the Central Arizona order 
eleven months after the February 1993 hearing in this proceeding, there 
is no testimony in the record concerning its suitability for computing 
a P-H's pool obligation. For this reason, as well as those discussed 
above, it would not be appropriate to replace the Class III price with 
a weighted average Class III/III-A price for the purpose of computing a 
producer-handler's payment into the pool.
    Comment: Sarah Farms, a new P-H on the Central Arizona market, 
stated that the computation of a P-H's pool payment in 
Sec. 1131.60(j)(1) should not apply to a new P-H until two years after 
the P-H began operations.
    Response: Some accommodation should be made for a new P-H so as not 
to unfairly penalize them. Accordingly, for its first 12 months of 
operation, a
P-H should be totally exempt from the payment into the pool as computed 
in Sec. 1131.60(j). This exclusion is included in the introductory text 
of Sec. 1131.60(j).
    Another possible inequity that could arise in the application of 
the P-H payment obligation concerns a natural disaster that could 
artificially reduce a P-H's low month production and thereby increase 
its pool obligation in subsequent months. To prevent this problem, 
paragraph (j)(4)(i) has been added to Sec. 1131.60 to exclude ``a month 
of abnormally low production due to a flood, fire, or other natural 
disaster beyond the control of the producer-handler.'' If such a 
disaster should befall a P-H, the P-H should notify the market 
administrator as soon as possible and request that a different low 
month be used in the computations pursuant to Sec. 1131.60(j)(1)(ii).
2. The Definition and Treatment of Associated Producers
    A proposal by The United Dairymen of Arizona to remove all language 
from the order relating to ``associated producer'' should be adopted. 
UDA's general manager testified that UDA had proposed the associated 
producer provisions at a hearing held on November 9-10, 1982. The 
purpose of these provisions, he explained, was to enable a dairy farmer 
in the Phoenix area to retain ``producer'' status on a portion of his 
milk which he was unable to market to an Order 131 handler.
    The UDA witness stated that the Phoenix producer never availed 
himself of these provisions, but that a dairy farmer from California 
had ``exploited'' the provision during a 21-month period from June 1987 
through February 1989. He said that this dairy farmer had drawn 
$192,340 out of the pool in the form of ``phantom freight'' on more 
than 8 million pounds of milk diverted to a nonpool plant in 
California.
    The ``associated producer'' provision now in the order is not a 
provision that is commonly found in Federal orders. Normally, a pool 
plant operator who regularly receives a dairy farmer's milk will 
willingly serve as the handler for the milk when it is not needed at 
the pool plant and must be diverted to a nonpool plant for 
manufacturing use. In the Central Arizona market, however, a pool plant 
operator who had received a dairy farmer's milk was not willing to bear 
responsibility for the milk when it was diverted to a nonpool plant. 
Accordingly, UDA proposed--and the Secretary adopted, with some 
modifications--the ``associated producer'' provisions.
    The producer for whom the ``associated producer'' provision was 
intended did not appear at the hearing to present any opposition 
testimony but did submit a brief in which he explained that he was 
unable to attend the hearing because of a flooding problem. In his 
brief, he stated that the associated producer provision is needed 
because ``the pool should service all producers in it, not just a 
select few.'' He suggested, however, that it be modified to restrict it 
to ``producer milk originating in the geographical boundaries of Order 
131.'' He did not indicate that he has used the provision or plans to 
use it in the future but implied that it should be kept as a safeguard.
    Under the associated producer provisions, a producer is permitted 
to divert a certain portion of his/her milk to a nonpool plant for 
Class III use if 50 percent of that person's milk is ``producer milk'' 
in the current month and in each of the immediately preceding two 
months. On the milk diverted to the nonpool plant, the producer draws a 
payment from the pool based on the difference between the order uniform 
price and the Class III price for the month.
    The non-member dairy farmer who inspired the cooperative's 1982 
proposal has never used the associated producer provision and now 
markets his milk through UDA. According to the UDA general manager, the 
California producer who had used the provision for a 21-month period 
joined UDA in the fall of 1989 and stopped using the provision in 
February 1989.
    The associated producer provisions, when used, have been difficult 
to administer. In a letter referenced by the UDA witness at the 
hearing, the Order 131 market administrator is quoted as stating that 
he had ``no handle under the order for determining the volume of milk 
shipped from a producer's farm to a nonpool plant because there were no 
reporting requirements'' with which to verify the information supplied 
by the producer. In view of the difficulty of administering the 
associated producer provision, its lack of use during the past three 
years, the potential for its abuse, and the limited opposition to its 
removal, there is no valid reason to keep it in the order. Under these 
circumstances, it no longer effectuates the declared policy of the Act 
and should be removed.
    In removing the associated producer provisions from the order in 
the initial recommended decision, Sec. 1131.12(b)(4) was modified 
inadvertently. This paragraph is part of the order's ``dairy farmer for 
other markets'' provision, which was not the subject of the hearing and 
should not be modified.
3. Conforming and Non-Substantive Changes
    Certain conforming changes are needed to implement the proposed 
changes adopted above. In particular, Sec. 1131.9 (Handler) will have 
to be changed to allow a cooperative bulk tank handler or a pool plant 
operator to divert milk for their accounts to a producer-handler; 
Sec. 1131.30 (Reports of receipts and utilization) will have to be 
modified to report the P-H's own-farm production and supplemental milk 
purchases each month; Sec. 1131.42 (Classification of transfers and 
diversions) will have to be modified to provide for the classification 
of milk diverted to a P-H from a cooperative bulk tank handler or a 
pool plant operator; Sec. 1131.60 (i.e., Handler's value of milk for 
computing uniform price) will have to be amended to include the value 
of the P-H payment into the pool; and Sec. 1131.61 (Computation of 
uniform price) will have to be changed to remove obsolete language 
related to ``associated producer milk.'' In addition, Sec. 1131.71 
(Payments to the producer-settlement fund) will have to be amended to 
provide for the P-H's payment into the pool.
    Other changes of a minor and non-substantive nature should also be 
made to the order at this time to remove obsolete language from the 
Class I price provision and to correct errors in Sec. 1131.44 (i.e., 
change ``ilk'' to ``milk'') and Sec. 1131.72 (i.e., change ``for'' to 
``from''). In addition, in Sec. 1000.6(b) of the General Provisions, 
the words ``fails to notify'' should be changed to read ``so notifies'' 
in 7 CFR for Parts 1120 to 1199. Although the General Provisions are 
the same for all milk orders, the wording of Sec. 1000.6(b) for Parts 
1120 to 1199 was erroneously modified to read ``fails to notify'' in 
the 1978 printing of the code book. This correction will bring Parts 
1120 to 1199 into conformity with the 7 CFRs for Parts 1000 to 1059 and 
Parts 1060 to 1119.

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 Order 131 was first issued and when it was 
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 agreement and the order, 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 Central Arizona marketing area, and 
the minimum prices specified in the tentative marketing agreement and 
the order, as hereby proposed to be amended, are such prices as will 
reflect the aforesaid factors, ensure a sufficient quantity of pure and 
wholesome milk, and be in the public interest; and
    (c) The tentative marketing agreement and the order, 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, a marketing 
agreement upon which a hearing has been held.

Recommended Marketing Agreement and Order Amending the Order

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

List of Subjects in 7 CFR Part 1131

    Milk marketing orders.

    For the reasons set forth in the preamble, the following provisions 
of Title 7, Part and 1131, would be amended as follows:

PART 1131--MILK IN THE CENTRAL ARIZONA MARKETING AREA

    1. The authority citation for 7 CFR Part 1131 continues to read as 
follows:

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

    2-3. Sec. 1131.10(a)(1)(ii) is revised to read as follows:


Sec. 1131.10  Producer-handler.

* * * * *
    (a) * * *
    (1) * * *
    (ii) Fluid milk products obtained by transfer or diversion from 
pool plants, other order plants, or from a handler described in 
Sec. 1131.9(b), in an amount not to exceed 5 percent of its fluid milk 
product disposition for the month or 5,000 pounds, whichever is less;
* * * * *
    4. In Sec. 1131.13 paragraphs (a)(2) and (b)(1), the words ``that 
is not a producer-handler plant,'' are removed.
    5. Sections 1131.21 and 1131.22 are removed.
    6. In Sec. 1131.30, paragraph (d) is redesignated as paragraph (e), 
in newly designated (e) the words ``(a) through (c)'' are revised to 
read ``(a) through (d)'', and a new paragraph (d) is added to read as 
follows:


Sec. 1131.30  Reports of receipts and utilization.

* * * * *
    (d) Each handler described in Sec. 1131.10 shall report:
    (1) The pounds of milk received from each of the handler's own-farm 
production units, showing separately the production of each farm unit 
and the number of dairy cows in production at each farm unit;
    (2) Fluid milk products and bulk fluid cream products received at 
its plant or acquired for route disposition from pool plants, other 
order plants, and handlers described in Sec. 1131.9(b);
    (3) Receipts of other source milk not reported pursuant to 
paragraph (d)(2) of this section;
    (4) Inventories at the beginning and end of the month of fluid milk 
products and products specified in Sec. 1131.40(b)(1); and
    (5) The utilization or disposition of all milk and milk products 
required to be reported pursuant to this paragraph.
* * * * *
    7. Section 1131.33 is removed.
    8. In Sec. 1131.42 paragraph (d)(2)(vi), the words ``pursuant to 
Sec. 1131.22 or'' are removed, and the introductory text of paragraph 
(c) and paragraph (c)(1) are revised to read as follows:


Sec. 1131.42  Classification of transfers and diversions.

* * * * *
    (c) Transfers and diversions to producer-handlers. Skim milk or 
butterfat transferred or diverted from a pool plant or diverted from a 
handler described in Sec. 1131.9(b) to a producer-handler under this or 
any other order shall be classified:
    (1) As Class I milk, if transferred or diverted in the form of a 
fluid milk product; and
* * * * *
    9. In Sec. 1131.44(a)(4), the word ``.ilk'' is revised to read 
``milk''.
    10. In Sec. 1131.50, paragraph (a) is revised to read as follows:


Sec. 1131.50  Class prices.

* * * * *
    (a) The Class I price shall be the basic formula price for the 
second preceding month plus $2.52.
* * * * *
    11. Sec. 1131.60 is amended by revising the introductory text, 
removing the word ``and'' at the end of paragraph (h), removing the 
period at the end of paragraph (i) and adding in its place the words 
``; and'', and adding a new paragraph (j) to read as follows:


Sec. 1131.60  Handler's value of milk for computing uniform price.

    For the purpose of computing the uniform price, the market 
administrator shall determine for each month the value of milk of each 
handler with respect to each of the handler's pool plants and of each 
handler described in Sec. 1131.9 (b) and (c) and Sec. 1131.10 as 
follows:
* * * * *
    (j) Add, for each producer-handler described in Sec. 1131.10, 
except a producer-handler whose total distribution of packaged fluid 
milk products is solely to retail consumers or a producer-handler who 
has not been distributing fluid milk products for more than 12 months 
since commencing operations, an amount resulting from the computations 
in paragraph (j) (1) through (3) of this section:
    (1) Determine the producer-handler's:
    (i) Average daily Class I sales of own-farm milk for the current 
month; and
    (ii) Average daily Class I sales of own-farm milk during the month 
of lowest production within the immediately preceding 12 months 
pursuant to the instructions in paragraph (j)(4) of this section;
    (2) Subtract the amount computed in paragraph (j)(1)(ii) of this 
section from the amount computed in paragraph (j)(1)(i) of this section 
and multiply any positive difference by the number of days in the 
current month;
    (3) Multiply the pounds of milk calculated in paragraph (j)(2) of 
this section by the difference between the Class I price at the 
producer-handler's plant, as adjusted for location at the rates set 
forth in Sec. 1131.52(a), and the Class III price for the current 
month; and
    (4) In determining the amount computed pursuant to paragraph 
(j)(1)(ii) of this section:
    (i) A month of abnormally low production due to a flood, fire, or 
other natural disaster beyond the control of the producer-handler will 
be excluded from the computation; and
    (ii) Own-farm milk means only the milk produced by a producer-
handler that is actually received at its plant, exclusive of bulk fluid 
milk transfers.
    12. In Sec. 1131.61, paragraph (b) is removed, paragraphs (c) 
through (f) are redesignated as paragraphs (b) through (e), and newly 
redesignated paragraph (d) is revised to read as follows:


Sec. 1131.61  Computation of uniform price.

* * * * *
    (d) * * *
    (1) The total hundredweight of producer milk; and
    (2) The total hundredweight for which a value is computed pursuant 
to Sec. 1131.60(f).
* * * * *
    13. In Sec. 1131.71, the introductory text of paragraph (a) is 
revised, paragraph (b) is redesignated as paragraph (c), and a new 
paragraph (b) is added to read as follows:


Sec. 1131.71  Payments to the producer-settlement fund.

    (a) On of before the 13th day after the end of the month, each 
handler, except a handler described in Sec. 1131.10, shall pay to the 
market administrator the amount, if any, by which the amount specified 
in paragraph (a)(1) of this section exceeds the amount specified in 
paragraph (a)(2) of this section:
* * * * *
    (b) On or before the 13th day after the end of the month, each 
handler described in Sec. 1131.10, except those which are exempt from 
such payment pursuant to Sec. 1131.60(j), shall pay to the market 
administrator the amount computed pursuant to Sec. 1131.60(j).
* * * * *
    14. In Sec. 1131.72, the word ``for'' is revised to read ``from'' 
in the section heading, paragraph (b) is removed, and paragraph (c) is 
redesignated as paragraph (b).
    15. In Sec. 1131.77, the last sentence is removed.
    16. In Sec. 1131.85, paragraph (b) is removed.

    Dated: November 4, 1994.
Kenneth C. Clayton,
Acting Administrator.
[FR Doc. 94-27922 Filed 11-10-94; 8:45 am]
BILLING CODE 3410-01-P