[Federal Register Volume 60, Number 160 (Friday, August 18, 1995)]
[Proposed Rules]
[Pages 43066-43089]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-20347]



 ========================================================================
 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
 
 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
 ========================================================================
 

  Federal Register / Vol. 60, No. 160 / Friday, August 18, 1995 / 
Proposed Rules  


[[Page 43066]]


DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Part 1040

[Docket No. AO-225-A45-R01; DA-92-10]


Milk in the Southern Michigan Marketing Area; Decision on 
Proposed Amendments to Marketing Agreement and to Order

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Proposed rule.

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

SUMMARY: This final decision adopts a multiple component pricing (MCP) 
plan in the Southern Michigan Federal milk order. The three components 
to be priced are butterfat, protein, and a ``fluid carrier'' residual. 
The proposed plan includes adjustments to the producer protein price 
based on the somatic cell count of producer milk. The decision also 
adopts changes in qualifying shipments from pool supply plants and 
gives the market administrator the authority to adjust the monthly 
shipping percentage requirements for both proprietary and cooperative 
supply plants or units of supply plants. In addition, the maximum 
allowable administrative and marketing service assessment rates are 
increased to 4 and 7 cents, respectively. The amendments are based on 
industry proposals considered at public hearings held during February 
1993 and March 1994 in Novi, Michigan, and in Grand Rapids, Michigan, 
respectively.

FOR FURTHER INFORMATION CONTACT: Constance M. Brenner, Marketing 
Specialist, USDA/AMS/Dairy Division, Order Formulation Branch, Room 
2968, South Building, P.O. Box 96456, Washington, DC 20090-6456, (202) 
720-7183.

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 rule will not have a 
significant economic impact on a substantial number of small entities. 
The amended order will promote more orderly marketing of milk by 
producers and regulated handlers.
    These proposed amendments have been reviewed under Executive Order 
12778, Civil Justice Reform. This rule is not intended to have a 
retroactive effect. If adopted, this proposed rule will 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 3, 1992; published December 10, 
1992 (57 FR 58418).
    Supplemental Notice of Hearing: Issued January 19, 1993; published 
January 29, 1993 (58 FR 6447).
    Recommended Decision: Issued November 29, 1993; published December 
6, 1993 (58 FR 64176).
    Notice of Reopened Hearing: Issued February 18, 1994; published 
February 24, 1994 (59 FR 8874).
    Extension of Time for Filing Briefs: Issued April 6, 1994; 
published April 13, 1994 (59 FR 17497).
    Emergency Partial Final Decision: Issued May 12, 1994; published 
May 23, 1994 (59 FR 26603).
    Final Rule: Issued June 22, 1994; published June 29, 1994 (59 FR 
33418).
    Revised Recommended Decision: Issued December 2, 1994; published 
December 14, 1994 (59 FR 64464).
    Extension of Time for Filing Exceptions: Issued January 18, 1995; 
published January 24, 1995 (60 FR 4571).

Preliminary Statement

    Public hearings were held upon proposed amendments to the marketing 
agreement and the order regulating the handling of milk in the Southern 
Michigan marketing area. The hearings were held, 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 (7 CFR 
Part 900), at Novi, Michigan, on February 17-18, 1993, and at Grand 
Rapids, Michigan, on March 1, 1994. The February 1993 hearing was held 
pursuant to a notice of hearing issued December 3, 1992 (57 FR 58418), 
and a supplemental notice of hearing issued January 19, 1993 (58 FR 
6447). The March 1994 reopened hearing was held pursuant to a notice of 
hearing issued February 18, 1994 (59 FR 8874).
    Upon the basis of the evidence introduced at the February 1993 
hearing and the record thereof, the Administrator, on November 29, 
1993, issued a recommended decision containing notice of the 
opportunity to file written exceptions thereto. The proceeding was 
reopened; an emergency decision and final rule pertaining to the 
``lock-in'' provision (Issues 7 and 8) were published on May 23, 1994 
(59 FR 26603) and June 29, 1994 (59 FR 33418), respectively. On 
December 2, 1994, the Administrator issued a revised recommended 
decision containing notice of the opportunity to file written 
exceptions thereto.
    The material issues, findings and conclusions, rulings, and general 
findings of the recommended decision are hereby approved and adopted 
and are set forth in full herein, subject to the following 
modifications:
    1. Under Issue 2, one sentence is added in paragraph 1, one 
paragraph is added after paragraph 7, paragraph 13 is revised, and one 
paragraph is added after paragraph 13. 

[[Page 43067]]

    2. Under Issue 3, two sentences are added to paragraph 2, two 
paragraphs are added after paragraph 46, the fourth sentence of 
paragraph 47 is revised, one paragraph is added after paragraph 47, one 
paragraph is added after paragraph 56, one paragraph is added after 
paragraph 69, one sentence is added after the third sentence of 
paragraph 70, the last sentence of paragraph 70 is revised, one 
paragraph is added after paragraph 71, two paragraphs are added after 
paragraph 72, one paragraph is added after paragraph 74, one paragraph 
is added after paragraph 78, one sentence is added after the first 
sentence of paragraph 87, one sentence is added at the end of paragraph 
89, and three sentences are added at the end of paragraph 90.
    3. Under Issue 4, paragraph 1 is revised, the third sentence of 
paragraph 3 is revised, the first sentence of paragraph 33 is modified, 
ten paragraphs are added after paragraph 41, the second sentence of 
paragraph 42 is deleted, three paragraphs are added after paragraph 42, 
paragraph 45 is revised, one paragraph is added after paragraph 45, one 
paragraph is added after paragraph 50, four paragraphs are added after 
the table following paragraph 50, paragraphs 51, 52, 53, and 54 are 
deleted, paragraph 58 is revised, and one paragraph is added after 
paragraph 58.
    4. Under Issue 9, paragraph 1 is revised, two paragraphs are added 
after paragraph 1, the second sentence of paragraph 3 is revised, five 
paragraphs are added after paragraph 3, paragraph 4 is deleted, 
paragraph 5 is revised, and one paragraph is added after paragraph 5.
    5. Throughout this proposed rule, non-substantive changes to the 
revised recommended decision, such as referring to Michigan Milk 
Producers Associations as MMPA, were made to increase consistency.
    The material issues on the record of the hearing relate to:
    1. Pool supply plant definition.
    2. Modification of cooperative pool supply plant shipping 
requirement by market administrator.
    3. Multiple component pricing.
    4. Somatic cell adjustment.
    5. Administrative assessment.
    6. Marketing service assessment.
    7. Pool distributing plant definition (UHT plant ``lock-in'').
    8. Emergency action with respect to Issue 7.
    9. Conforming changes.
    No comments were received in response to the November 1993 
recommended decision regarding the pool supply plant definition, 
administrative assessment, and marketing service assessment provisions 
(Issues 1, 5, and 6, respectively) that were considered at the initial 
1993 hearing. Therefore, this decision contains no changes regarding 
those issues from the decisions published December 6, 1993 (58 FR 
64176), and December 14, 1994 (59 FR 64464).
    Issues 2, 3, 4, and 9 were addressed in the reopened hearing on 
March 1, 1994, and discussed in the revised recommended decision. 
Comments on the revised recommended decision were received regarding 
modification of the pool supply plant shipping standard, multiple 
component pricing, and somatic cell adjustment (Issues 2, 3, and 4, 
respectively). The comments are summarized and addressed under the 
appropriate issue. The discussion of Issue 3, multiple component 
pricing, is revised to reflect comments received and responses to those 
comments. The conclusions of Issue 3 remain as recommended in the 
revised decision. Based on comments received and reexamination of the 
hearing record, Issues 2 and 4 are revised in this final decision. 
Issue 9, conforming changes, has been revised to reflect changes in the 
decision regarding Issues 2 and 4.
    Issues 7 and 8 were addressed in an emergency partial final 
decision issued May 12, 1994, and the resulting final order amendments 
were made effective for June 1994. The amendments were issued June 22, 
1994, and published June 29, 1994 (59 FR 33418).

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. Pool supply plant definition. A witness for Michigan Milk 
Producers Association (MMPA) testified during the initial hearing in 
support of the cooperative's proposal which would amend the pool supply 
plant definition to include as qualifying shipments transfers of milk 
to a partially regulated distributing plant. The witness testified that 
MMPA supplies bulk milk to a local partially regulated distributing 
plant that has substantial Class I and Class II utilization but 
receives no credit for such sales toward fulfilling the pool supply 
plant shipping requirement. The witness explained that the shipment is 
a bulk transfer from the cooperative (MMPA) to the nonpool plant, with 
its classification determined during the pooling process. MMPA's post-
hearing brief contended that adoption of the proposed amendment would 
eliminate the inequity caused by such transfers.
    According to the cooperative's brief, the current month's 
marketwide Class I utilization percentage, which includes the portion 
of the transfer classified as Class I, determines the minimum 
qualifying shipping requirement for the same month of the following 
year but does not contribute to the cooperative's Class I use in 
determining whether pooling standards have been met.
    The MMPA witness testified that the partially regulated plant 
historically had been a pool distributing plant but recently had become 
involved in the production of extended-life Class II products. As a 
result, he stated, the plant now has Class I utilization of 
approximately 40 percent. According to the witness, the partially 
regulated plant to which MMPA transfers milk is the only such plant to 
which the proposed amendment would apply. A post-hearing brief filed by 
National Farmers Organization (NFO) supported adoption of the proposed 
amendment. There was no opposition to the proposal.
    Testimony in the record illustrates that the partially regulated 
distributing plant is indeed satisfying Class I needs in the 
marketplace through the use of pooled milk, thereby benefitting the 
pool. Therefore, the proposal to include shipments of producer milk to 
a partially regulated distributing plant when determining the 
qualifications of pool supply plants should be adopted.
    2. Modification of pool supply plant shipping standard by market 
administrator. A proposal to give the market administrator the 
discretionary authority to administratively change the shipping 
percentages upward or downward for a supply plant or a unit of supply 
plants being qualified by a cooperative association should be adopted. 
This decision extends the market administrator's discretionary 
authority to include proprietary supply plants. The proposed provisions 
would operate similarly to ``call'' provisions in other order markets 
where the market administrator, upon request or upon recognizing a 
potential problem, notifies the handlers in the order that action may 
be taken to change the shipping percentage requirements. The percentage 
change required would be based upon the evidence that the market 
administrator receives and/or the supply and use data for the market.
    The order currently provides that for a cooperative's balancing 
plant or unit of such plants, the minimum qualifying percentage for 
each month is established according to the amount of producer milk used 
in Class I as a percent of total producer milk within the order for the 
same month of the previous year. The order currently does not provide 
for any 

[[Page 43068]]
sort of discretionary authority to change pool supply plant shipping 
requirements. To adjust the shipping percentage requirements, either 
the requirements must be suspended or permanent changes must be sought 
through amendments to the order.
    The director of bulk milk sales for MMPA testified in support of 
the cooperative's proposal at the reopened hearing. The proponent's 
intent is to allow for the adjustment of these requirements on a more 
timely basis than can be done under the current provisions.
    The MMPA witness testified that the current order provision is 
designed to establish a performance standard that reflects the Class I 
needs of the local market and assures fluid processors that their 
requirements will be fulfilled. He stated that the provision contains a 
self-adjusting mechanism because the current month's shipping 
requirements are based on the market requirements from the previous 
year. He further stated that the provision normally works well. The 
witness testified, however, that occasions exist in which the market 
conditions have changed to such an extent that necessary corrections to 
the self-adjusting mechanism cannot be made on a timely basis.
    As an example, the MMPA witness stated that because the minimum 
shipping percentages are determined by the percentage of producer milk 
utilized in Class I, the percentage can be influenced by changes in the 
monthly producer receipts. The witness stated that if milk that 
normally would be pooled is not, producer receipts and the Class I 
utilization percentage for the order would change, in turn affecting 
the following year's shipping requirement. The witness also stated that 
combining this possible decrease in pool receipts with an increase in 
bulk milk sales to other markets also may impact the following year's 
shipping requirements. He said that the shipping percentages 
established may not reflect the following year's actual fluid 
requirements from the local and distant markets.
    The witness noted that two current options to adjust the shipping 
percentage requirements, suspension or permanent amendment to the order 
provisions, are time-consuming and may require unwarranted drastic 
action.
    In a post-hearing brief, MMPA reiterated support for the proposal. 
No other support or opposition was expressed at the hearing or in 
briefs.
    Dean Foods Company's (Dean Foods) exception to the revised 
recommended decision agreed that this proposal's adoption would allow 
for greater flexibility than currently exists. However, Dean Foods 
contended that by not extending authority for the market administrator 
to modify shipping standards for proprietary supply plants, the revised 
recommended decision excludes proprietary and favors cooperative supply 
plants. The exception noted that market conditions would affect 
proprietary and cooperative supply plants similarly; hence, the 
flexibility of standards should be available to all supply plants.
    The record evidence indicates that empowering the market 
administrator with the authority to adjust the pool supply plant 
shipping requirements should result in more timely changes in 
comparison to current procedures. A more flexible and efficient process 
would result by authorizing the market administrator to adjust the 
requirements to either encourage shipments or discourage uneconomic 
movements of milk as a result of changes in marketing conditions.
    It appears that there is a need to provide flexibility of supply 
plant performance standards when market conditions change from one year 
to the next. Under such conditions, which could occur at any time, the 
normal mechanism for change in the order program, which is the hearing 
process, would not provide a timely response.
    Thus, the proposal to give the market administrator discretionary 
authority to revise the supply plant shipping standards should be 
adopted. Doing so will provide a means of making appropriate 
adjustments in this pooling provision as market conditions indicate a 
need for adjustments. It must be recognized that a more timely response 
to changed conditions can be provided under such a provision.
    There is no apparent reason why restrictions should be imposed to 
limit the market administrator's authority to change the pooling 
provisions. It is intended and expected that this authority will be 
exercised with impartiality and integrity. Moreover, without 
restrictions more appropriate responses over a broader range of changed 
conditions may be obtained. Limitations on the authority to revise 
shipping percentages could result in the market administrator being 
unable to either increase or decrease the requirements to the full 
extent necessary in a given situation.
    It should be noted that, to the extent appropriate shipping 
requirements for supply plants can be determined in advance, it would 
be desirable for the market administrator to revise the requirements 
for several months at a time, if necessary. If conditions subsequently 
changed, the market administrator would again review the situation and 
make further adjustments as necessary. It is hoped that such an 
arrangement will serve the market well and provide less uncertainty as 
to what the requirements will be.
    Testimony by proponent at the hearing stated that because 
proprietary supply plants have different qualifying standards than 
cooperative supply plants, the proposal did not need to be applied to 
proprietary supply plants. Proprietary plants have a fixed 
qualification percentage of 30 percent of the total quantity of Grade A 
milk received at the plant each month. The order allows both 
proprietary and cooperative supply plants to qualify automatically 
during the months of March through August based on performance during 
the previous September through February.
    The proposal published in this proceeding's hearing notice did not 
limit the scope of the market administrator's authority to adjust 
shipping percentages to cooperative-operated supply plants only. Though 
no testimony was offered to include proprietary supply plants, it is 
reasonable to extend the market administrator's authority to adjust the 
shipping percentages for either or both cooperative- or proprietary-
operated pool supply plants. Market conditions affect all plants, no 
matter whether operated by cooperatives or proprietors, and the 
recommended decision would have been unnecessarily restrictive.
    Whenever the market administrator believes that a change in the 
shipping standards may be needed, whether by request or on his own 
initiative, he will give written notice that such a change is being 
considered and invite interested persons to comment. This procedure 
will assure that all potentially affected persons can have their views 
and other pertinent information fully considered by the market 
administrator before a decision is made and announced. Such a procedure 
now is followed under other orders when a ``call'' for additional 
shipments by supply plants is contemplated and also is an appropriate 
requirement for the new authority provided herein.
    3. Multiple Component Pricing. A multiple component pricing (MCP) 
plan should be adopted in the Southern Michigan Federal milk marketing 
order. The pricing plan would be patterned after the multiple component 
pricing plan initially proposed by Leprino Foods Company (Leprino) and 
supported by MMPA, Independent Cooperative Milk Producers Association 
(ICMPA), and several other dairy 

[[Page 43069]]
organizations. Producers would be paid on the basis of three components 
in the milk: butterfat, protein, and the remaining fluid portion that 
is the ``fluid carrier'' of the butterfat and protein ingredients. 
Producers would also share in the value of the pool's Class I and Class 
II uses. A somatic cell adjustment would apply to the protein prices 
paid to all producers no matter how the milk was used.
    Regulated handlers would pay for the milk they receive on the basis 
of total butterfat, the protein and fluid carrier used in Classes II 
and III, skim milk used in Class I, and the hundredweight of milk used 
in Classes I and II. The protein price paid by handlers for Class II 
and Class III milk will be adjusted based on the somatic cell content 
of the milk. This somatic cell adjustment is discussed fully under 
Issue 4.
    At the present time, milk received by handlers 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 order 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 for 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 (USDA), by 0.138 and subtracting the 
Minnesota-Wisconsin price (the M-W) at test, also as reported by USDA, 
multiplied by 0.0028.
    The initial hearing in this proceeding was held February 17 and 18, 
1993. MMPA and ICMPA, the two original proponents of multiple component 
pricing under the order, requested reopening the February 1993 
proceeding to consider proposals to modify the MCP plan recommended by 
the USDA for the Southern Michigan Order in a decision issued November 
29, 1993 (58 FR 64176). MMPA and ICMPA represent approximately 80 
percent of producer milk in the Order.
    The November 1993 recommended decision included a thorough analysis 
and discussion of the need for MCP pricing and the desirability of 
including protein as a pricing component based on the record of the 
proceeding initiated on February 17, 1993. This revised recommended 
decision includes some of the discussion and basis for adoption of MCP 
contained in the initial recommended decision, but is based on the 
entire record of the proceeding which includes the reopened hearing 
held March 1, 1994.
    The MCP plan in the original recommended decision would have priced 
milk on the basis of its protein and butterfat components. The 
recommended MCP plan generally was patterned after the plan adopted for 
the Ohio Valley, Eastern Ohio-Western Pennsylvania, and Indiana orders. 
Producers would have been paid on the basis of the pounds of milkfat 
and protein contained in their milk and would have shared in the value 
of the pool's Class I and Class II uses on a per hundredweight basis. 
The butterfat price would have been based on the market value of 
butter, while the protein price would have been computed by attributing 
all of the residual value of the M-W, after its butterfat value had 
been subtracted, to protein. Regulated handlers would have paid for the 
milk they received on the basis of total milkfat, the protein used in 
Classes II and III, the skim milk used in Class I, and the 
hundredweight of total product used in Classes I and II. Protein prices 
paid to producers on all producer milk would have been adjusted by the 
somatic cell count of the milk.
    MMPA and ICMPA endorsed the recommendation to adopt MCP, but 
proposed a specific change to the recommended MCP plan. The MMPA and 
ICMPA (proponent) witness stated in testimony at the reopened hearing 
that the cooperatives remain committed to the adoption of a MCP plan 
administered through the Federal order system. Proponents' witness 
testified that the adopted plan should be equitable to both producers 
and processors and should send the correct economic signals from the 
marketplace to the farmer. The witness testified that when the 
proponents initially proposed a multiple component pricing plan for the 
Southern Michigan order, their intent was not to create conflicting 
economic signals for farmers and processors. Proponents' witness stated 
that the recommended MCP plan could send conflicting signals to 
handlers and producers by overstating the value of protein in producer 
milk. The witness stated that such overstatement would create an 
incentive for processors to purchase low-protein milk while at the same 
time would encourage farmers to produce high-protein milk.
    In the reopened hearing, MMPA and ICMPA specifically requested 
further consideration of the MCP approach proposed by Leprino in the 
original proceeding. Because other hearing participants had been given 
insufficient advance notice of Leprino's pricing plan to adequately 
evaluate the proposal and cross-examine the Leprino witnesses, the 
Leprino proposal was not considered as a viable alternative in the 
recommended decision. After having an opportunity for extensive review 
of the Leprino proposal after the initial hearing, the proponents 
concluded that the Leprino alternative was a better alternative than 
the one in the recommended decision.
    The Leprino proposal is a three-component pricing system, with the 
butterfat and protein component prices based on market values for 
butter and cheese, and a ``fluid carrier'' component representing the 
residual value of the M-W price after the protein and butterfat values 
are subtracted. Proponents' witness testified that because butterfat 
and protein values can be determined by the butter and cheese markets, 
respectively, they are reflective of economic conditions with a known 
degree of precision. Proponents' witness agreed with the original 
Leprino proposal that the balance of the M-W value should be attributed 
to a fluid residual price applied to milk volume after the butterfat 
and protein portions of the M-W price have been accounted for, stating 
that it is not feasible to assign as precise a value to the other 
nonfat nonprotein solids in milk as can be assigned to the butterfat 
and protein components.
    Proponents' witness gave two reasons for wanting to consider the 
Leprino proposal instead of supporting the recommended MCP plan. The 
first reason involves the method of determining the value of protein. 
The witness stated that the recommended decision equates the protein 
value to the skim residual of the M-W price, while the Leprino proposal 
values protein on the basis of its cheese yield potential.
    The proponents' witness stated that the Leprino proposal uses a 
current market value for cheese and a modified version of the Van Slyke 
formula, which relates changing protein levels in milk to changes in 
cheese yield, to calculate the value of protein. The witness stated 
that the protein price determined through the Van Slyke formula 
accurately reflects the incremental value of protein in milk and would 
result in a fair measure of protein value to the dairy producer and 
handler. 

[[Page 43070]]

    The proponents' witness suggested that the protein price should be 
derived from the National Cheese Exchange (NCE) price for 40-pound 
blocks of Cheddar cheese as representing the current market value for 
cheese. The witness stated that the block cheese price is the most 
commonly used base price for cheese and is a standard that many cheese 
manufacturers recognize in pricing their product. The witness testified 
that the block price better reflects the Southern Michigan commercial 
market for cheese than the barrel cheese price. He contended that a 
barrel cheese price would reflect a surplus commodity price, a 
situation that does not exist in this order.
    The second reason that proponents' witness gave for supporting the 
Leprino proposal is that this plan moderates the impact that component 
pricing would have on processors of dairy products that have not been 
scientifically shown to have as direct a relationship between yield and 
protein content as does cheese. For example, the witness testified, in 
some instances processors may be unable to recover the same value for 
protein from products such as packaged fluid cream, condensed milk, and 
powder in comparison to the value from cheese manufacture.
    MMPA's post-hearing brief asserted that under Leprino's proposal, 
the cost and value of protein is neither too low nor too high. The 
brief contended that the current butterfat/skim pricing system, in 
which only the value of butterfat is specifically recognized, places no 
value on protein. The brief further contended that the recommended 
decision, in which the entire value of the skim portion of milk is 
assigned to protein, places too much value on protein, for the true 
economic value of protein to dairy product processors may bear little 
resemblance to the skim residual.
    A Leprino witness testified again at the reopened hearing in 
support of Leprino's proposal. Leprino operates two manufacturing 
plants in the Southern Michigan marketing area that process over 40 
percent of the Class III milk and approximately 16 percent of all milk 
marketed in the Southern Michigan order area. Leprino also manufactures 
and distributes mozzarella cheese to the food service industry 
throughout the country.
    In testimony at the reopened hearing, the Leprino witness supported 
the pooling and producer pay price proposals suggested by MMPA and 
ICMPA. The witness reiterated the characteristics and merits of 
Leprino's three-component proposal submitted at the original hearing.
    The Leprino witness argued at the reopened hearing that one of the 
major inadequacies of the current butterfat/skim pricing system is that 
skim is priced without any consideration to the components in this skim 
milk. The witness said that under the current pricing provisions, the 
skim value of milk accounts for almost 79 percent of the total Class 
III (M-W) price; however, the protein or solids-not-fat components 
included in the skim are not valued. The witness said that producers 
and handlers receive or pay the same price for milk containing lower or 
higher levels of protein.
    The Leprino witness stated that the original recommended decision 
in the proceeding would have replaced this current system with another 
system that inequitably allocates almost 79 percent of the M-W price to 
only the protein component of skim milk. The witness testified that 
allocating all of the skim value of milk to the protein component 
creates a residual protein value which reflects more than the true 
value of protein to manufacturers. The witness stated that the 
recommended decision ignores the value and importance of milk 
components other than butterfat and protein and places a value on 
protein that cannot be recovered from the marketplace by most 
manufacturers of butter, nonfat dry milk, or cheese.
    The Leprino witness stated that encouragement needs to be given to 
producers to produce milk with higher protein content and to 
manufacturers to utilize these higher levels of protein. He stated that 
the intent of Leprino's proposal is to send an economic message to 
producers to produce higher-protein milk while allowing handlers to 
recover the cost of milk components from the market and cover operating 
costs. The witness asserted that the concepts offered in its proposal 
are economically sound, fair to handlers and producers, and in the best 
interest of long-term stability in milk pricing.
    Leprino's post-hearing brief stated that under the original 
recommended decision, a Cheddar cheese manufacturer's gross margin may 
decline when paying more for milk with a higher protein content. The 
brief described Leprino's proposal as achieving the economic balance 
necessary for processors to pay producers for milk with higher protein 
levels without reducing processors' profit margins. Leprino's brief 
stated that consumers also would benefit by receiving dairy products 
with potentially higher-protein contents without unwarranted 
inflationary price increases.
    The Leprino witness stated that pricing the butterfat component 
provides producers with an economic incentive to produce the butterfat 
in raw milk. The witness asserted that a related revenue value for 
processors exists for butterfat in finished products such as butter, 
fluid milk, cheese, and other products.
    As in the case of butterfat, the witness stated, pricing the 
protein component gives producers an economic incentive to increase the 
protein content of their milk. The Leprino witness stated that the 
protein component's value and related revenue to processors is based on 
its market value in cheese, with the formula for the protein price 
based on recognized Cheddar cheese yields using the modified Van Slyke 
formula.
    The Leprino witness suggested that the NCE price reflects the 
market value of cheese and that the NCE price multiplied by a 
representative yield factor (calculated via the Van Slyke formula) 
would establish the value of a pound of protein to a cheese 
manufacturer. He stated that either the block or the barrel price could 
be used to represent the Cheddar cheese market price, and stated a 
preference for the barrel price.
    Leprino's exception to the original recommended decision and 
testimony in the reopened hearing noted that a single component such as 
protein is not an appropriate means of accounting for all of the value 
of the skim portion of milk to a handler. Instead, the exception and 
witness suggested, the value of the protein component should be based 
on the value of protein in cheese, and the fluid carrier should be used 
to carry the residual M-W value (M-W price less fat and protein values) 
which currently cannot be tied specifically to an individual component 
of milk or derived from a market value for individual components of 
milk.
    A witness for the National Cheese Institute (NCI), the national 
trade association for manufacturers, processors, and marketers of all 
varieties of cheese, stated that NCI did not testify at this 
proceeding's initial hearing because at that time a NCI task force made 
up of cheese manufacturers and processors was studying the MCP issue. 
The witness testified that NCI supports the adoption of a single 
uniform three-component pricing system in all orders where a 
significant amount of cheese is produced. At the reopened hearing, the 
NCI witness supported MCP on Class III milk but had no position 
regarding Class II milk. In a post-hearing brief, NCI asserted that 
applying MCP to Class I milk would be inappropriate because there 
exists no measurable or 

[[Page 43071]]
discernable advantage to varying protein levels for milk used as a 
fluid beverage.
    The pricing plan supported by NCI is identical to the proposal 
advanced by Leprino, MMPA, and ICMPA. NCI's post-hearing brief noted 
that its proposal (the Leprino plan) allows cheesemakers to break even 
from processing milk with higher protein contents by seeking out and 
rewarding producers with higher-protein milk. The NCI witness asserted 
that any formula which prices protein higher than its value in 
producing cheese will cut into processor margins and cause cheese 
manufacturers to seek out lower-protein milk.
    As an industry-wide consensus resulting from the NCI task force, 
the NCI witness suggested that the NCE barrel price should be used to 
represent the market value of cheese. The witness stated that Cheddar 
cheese is recognized as an industry standard, and the barrel price was 
chosen because a significant amount of barrel cheese is traded on the 
National Cheese Exchange.
    Kraft General Foods (Kraft) testified at the initial hearing in 
this proceeding but not at the reopened hearing. A post-hearing brief 
filed on behalf of Kraft supported the Leprino proposal. The brief 
supported using a barrel cheese price to derive a value for protein in 
milk. The brief also supported maintaining the quality/somatic cell 
count adjustment included in the recommended decision.
    The Kraft brief asserted that the Leprino plan would avoid 
establishing conflicting economic signals from a protein price which is 
so high that manufacturers are encouraged to procure low-protein milk. 
As such, according to the brief, the Leprino proposal represents a 
positive refinement in the evolution of MCP plans under the Federal 
order system. The brief stated that the Leprino proposal's protein 
price tracks the added value of extra protein in added cheese yield and 
is more closely aligned to the competitive value of milk protein as 
reflected in many existing industry-sponsored MCP plans than is the 
plan contained in the recommended decision.
    The Kraft brief stated that no proposal at the reopened hearing 
accounted for handler manufacturing costs when protein is converted 
from producer milk to finished products. Therefore, the brief noted, 
all proposals overstate the protein component in raw producer milk.
    The Kraft brief noted that the absence of a make allowance causes 
exaggeration of the component value of protein in raw producer milk and 
that using the barrel price will tend to moderate any overstatement of 
the protein value. The brief argued that the price difference between 
the barrel and the block prices of cheese is due primarily to packaging 
costs, not milk or cheese value, and concluded that use of the block 
price instead of the barrel price to calculate a protein price would 
effectively assign some finished product packaging value to milk 
protein.
    In opposition to one feature of the Leprino plan, a witness for 
National All-Jersey, Incorporated, (NAJ) argued at the reopened hearing 
that attributing the residual M-W value to volume does not recognize 
the value of solids in milk other than protein and fat. The witness 
asserted that MCP plans that price a portion of the skim milk value on 
a volume basis would only partially correct the current provisions 
because all of the solids in skim milk should be priced. The witness 
stated that increasing returns for milk on a volume basis relative to 
the price of protein would tend to reduce the producer's incentive to 
employ feeding, genetics, and management practices to increase protein.
    NAJ is a national dairy farmer organization that assists members in 
marketing their milk. The NAJ witness testified that NAJ's primary 
mission since 1976 has been the promotion of multiple component pricing 
with the goal of implementing a uniform MCP plan throughout the Federal 
order system.
    In the reopened hearing, the NAJ witness supported the proposal 
submitted by MMPA and ICMPA, with two modifications. The witness stated 
that under the NAJ proposal, the protein price is calculated using a 
different formula than in the proponents' proposal, and the protein 
price includes a market value for whey. The NAJ witness also stated 
that the NAJ proposal, after pricing the butterfat and protein 
components, places the residual value on other nonfat nonprotein 
solids.
    The NAJ witness stated that the major objective of any MCP plan is 
to provide dairy producers with an economic incentive to produce 
protein, the most valuable component in milk. The witness stated that 
because a direct relationship exists between product yields and the 
level of protein and other solids contained in milk, Class II and III 
handlers are able to pay for milk in more direct relation to its 
economic value. The witness stated that an economically and justifiably 
high protein price is needed to encourage producers to increase the 
ratio of protein to fat in their milk production.
    The NAJ proposal was characterized by the witness as a total solids 
plan which prices all components in milk. The witness stated that 
pricing all components in skim milk corrects the inadequacy of the 
current butterfat/skim pricing system in which a pound of water 
receives the same price as does a pound of protein or nonfat solids in 
the skim portion of producer milk. The witness asserted that the NAJ 
proposal allows handlers to purchase milk more in accordance with its 
economic return and still gives handlers the incentive to procure and 
producers to produce higher-protein milk. The NAJ witness supported 
calculating the same protein and other solids price for both handlers 
and producers.
    The NAJ witness stated that the NAJ proposal includes whey in its 
protein price calculation in an effort to account for all of the value 
in milk protein, and described the whey protein concentrate (WPC) price 
as the best indicator of the market value of protein in whey. The 
witness contended that the protein price computed under the NAJ 
proposal provides more equitable returns to both handlers and producers 
in comparison to the other proposals presented at the reopened hearing. 
NAJ's brief asserted that under its proposal, as high a percentage of 
skim value is allocated to protein as can be economically justified. 
NAJ maintained that whether or not a cheese plant processes whey should 
have no bearing on the inclusion of whey in the pricing formula.
    For the protein calculation, the NAJ witness said that the NAJ 
proposal uses the NCE block price for Cheddar cheese because this price 
is used more widely than other announced cheese prices. Also, the 
witness stated that the NCE block price is used as a base for pricing 
other cheeses more than any other cheese price.
    The witness stated that the residual under the NAJ proposal 
represents both the value of other milk solids besides protein and the 
difference between the value determined by product prices and the 
competitive M-W price. The NAJ witness testified that the purpose of 
placing the residual value on other solids is to provide farmers with 
an incentive to produce something in milk other than water.
    Also supporting NAJ's proposal is Tri-State Milk Producers 
Cooperative (Tri-State), a qualified cooperative with about 640 members 
marketing milk in several orders, including the Southern Michigan 
order.
    Several participants in the proceeding expressed opposition to 
portions of the NAJ plan during the hearing and in post-hearing briefs. 
MMPA's post-

[[Page 43072]]
hearing brief asserted that placing market values on whey protein and 
non-fat non-protein solids (principally lactose) assigns values to 
these solids that are not present in the marketplace.
    The Leprino witness opposed including whey in the computation of 
the protein price for the following reasons: (1) the value of whey is 
not based on the inherent value of protein or other solids in raw milk; 
(2) investment in a whey operation is based on a return calculated from 
the value-added nature of the process and/or the cost of other disposal 
options rather than the raw ingredient cost; (3) raw unprocessed whey 
recovered from the cheese making process has no inherent value in the 
United States; (4) unprocessed whey cannot be sold beyond the factory; 
(5) raw unprocessed whey is a disposal problem for many cheese 
operations; and (6) whey returns are excluded from calculation of the 
cheese support price.
    Leprino's brief asserted that the main interest of NAJ is to 
maximize producer returns for high protein milk and that the NAJ plan 
achieves this objective by providing for a higher protein component 
price than can be justified in the marketplace. NCI's brief gave 
reasons similar to Leprino's for excluding whey in a MCP plan.
    The Leprino witness stated that use of a residual solids approach 
requires a total solids test on milk in addition to a protein test. The 
witness stated that using a residual fluid approach ascribes all the 
remaining value to volume, eliminating the need for additional testing, 
and thus is easier and less costly to administer.
    At the initial hearing session, two witnesses testified that 
protein testing is already widespread in the Southern Michigan market 
and that testing methods are reliable and accurate. A witness employed 
in the field of dairy chemistry testified on behalf of MMPA that in the 
case of protein, the infra-red milk analyzer calibrated with reference 
to the Kjeldahl test is the method most used by the industry. This 
method is approved by the Association of Official Analytical Chemists, 
and the repeatability and accuracy of this method is much better than 
those of the Babcock test for butterfat.
    A MMPA quality control witness testified that protein tests on 
producer milk in Order 40 are conducted on infra-red test instruments. 
The witness emphasized that all cooperatives in Order 40 have infra-red 
instruments and currently are testing producer milk for protein a 
minimum of five times a month. Therefore, he stated, the inclusion of 
protein testing would not result in increased cost. The proponent's 
witness recommended that if the proposal is adopted, the payment to 
producers should be based on an average of a minimum of five fresh 
tests per month for both protein and somatic cell count.
    After issuance of the revised recommended decision, comments that 
specifically pertained to multiple component pricing generally 
supported its adoption in the Southern Michigan marketing area. Of the 
comments received by hearing participants, Leprino and NCI supported 
the recommended ``Leprino Plan.''
    Several exceptions to the revised recommended decision advocated 
consistency of multiple component pricing plans across orders. NCI 
advocated the importance of consistent plans in those orders with a 
significant quantity of manufacturing milk and production of a 
significant quantity of cheese. A joint exception filed on behalf of 
Country Fresh, Inc. (Country Fresh) and Parmalat USA Corporation 
(Parmalat) advocated consistency of plans across orders, and commented 
that component pricing plans implemented within the Federal milk order 
system have become more complex. NAJ and Tri-State also commented on 
the lack of uniformity between the recommended multiple component 
pricing plans for this Southern Michigan proceeding and the proceeding 
involving five midwest markets (DA-92-27).
    The Southern Michigan order should be amended to include multiple 
component pricing. On the basis of both the initial and reopened 
records of this proceeding, the proposed multiple component pricing 
plan would entail pricing milk used in Class II and Class III on the 
basis of protein and a fluid carrier residual. The Class I and Class II 
differential prices would be applied to milk used in Classes I and II, 
and Class I milk would continue to be priced on the basis of volume. 
Handlers would pay all producers for butterfat directly and would 
adjust protein prices paid to producers for the somatic cell count of 
Class II and Class III milk. Because milk used for Class III-A purposes 
is allocated on a pro rata basis with total receipts of Class III milk, 
MCP is applicable to milk used in Class III-A in this recommended 
pricing plan.
    Dean Foods and several other fluid milk processors concurred with 
the revised recommended decision that multiple component pricing should 
apply to Class II and Class III milk only, while Class I milk should 
continue to be priced on a butterfat-skim volume basis. Numerous 
comments filed regarding the proposed somatic cell adjustment on Class 
I milk also stated that MCP should not be applied to Class I. This 
decision has neither recommended nor adopted provisions that would 
price Class I milk on its protein and fluid carrier residual 
components.
    The record indicates that a large percentage of the producers 
pooled under the Southern Michigan order are already eligible for or 
receive some form of multiple component pricing and that nearly all 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 cause non-uniform bases of payments to producers.
    The adoption of multiple component pricing will allow the Order to 
recognize the additional value in milk with a higher-than-average 
protein content. At the same time, by establishing a residual value 
based on milk volume, the protein component will not be over-valued, as 
proponents argue would be the case under the original recommended 
decision.
    Attributing at least a portion of the value of milk to protein in a 
market such as Southern Michigan, where most of the milk not used for 
bottling purposes is processed into cheese, is appropriate. Record 
evidence in this proceeding clearly shows that demand for protein is 
higher than for 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 

[[Page 43073]]
components which have the greatest demand in the marketplace.
    Pricing milk on the basis of its protein content also meets the 
criteria of measurability, intrinsic value, and variability. The 
evidence in the record shows that protein can be easily measured and, 
in fact, that the variability in measurement may be less than the 
variability in butterfat testing because protein does not separate as 
does butterfat. The record evidence shows that protein has value to the 
manufacturing sector in the form of improved product yield and product 
structure. The value to the fluid sector was not quantified in the 
hearing record; however, testimony indicated some benefit to the fluid 
sector from higher-protein milk, resulting in a more wholesome and 
nutritional product. The criterion of variability is necessary to 
justify pricing a component separately from the product in which it is 
contained. In the case of protein in milk the record indicates that the 
level of protein varies from season to season, region to region, and 
farm to farm. In view of its functional, nutritional, and economic 
value in dairy products, its widespread use as a pricing component in 
the Southern Michigan market, and its qualification under the three 
criteria above, protein appears to be an appropriate component for 
pricing milk in Federal Order 40.
    Hearing evidence from all parties indicates that pricing milk in 
Order 40 on either the current butterfat/skim basis or the basis of two 
components--butterfat and either protein or nonfat solids--will not 
adequately describe, accurately value, or be a sufficiently precise 
method for classifying and pricing milk used for manufactured products.
    As proposed, prices for butterfat and protein should be market-
driven. Deriving butterfat and protein values from finished product 
prices will send the appropriate economic signals to producers and 
handlers by indicating current market supply and demand conditions for 
dairy products containing these components of milk.
    At issue is the specific design for the revised recommended MCP 
plan. Two basic MCP plans were proposed in the reopened hearing: The 
plan proposed by proponents MMPA and ICMPA and supported by Leprino, 
NCI, and Kraft (the Leprino plan) and the plan proposed by NAJ and 
supported by Tri-State and the American Jersey Cattle Club (the NAJ 
plan).
    The Leprino plan derives a protein price from either the NCE block 
or barrel cheese price and assigns the residual skim value of the M-W 
price to a ``fluid carrier'' component of milk. The NAJ plan derives a 
protein price from the NCE block cheese and whey protein concentrate 
prices and assigns the residual skim value of the M-W price to the 
remaining nonfat nonprotein solids. Each component of the multiple 
component pricing plan recommended for adoption will be discussed 
separately.
    The variety of multiple component pricing plans in Federal milk 
orders reflect different industry proposals, different hearing records, 
different marketing conditions, a continual refinement in multiple 
component pricing plans, and an attempt to acknowledge and lend 
uniformity to what is occurring in the marketplace. It seems reasonable 
to believe that multiple component pricing plans will improve as the 
industry develops more experience with them.
    Butterfat. The value of butterfat in the amended order will be the 
same as under the current order. There was no proposal or testimony to 
change the way butterfat currently is valued.
    This decision continues the historical relationship of the values 
of butterfat and butter. 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 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 the value of fat 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.
    Protein. The protein price for milk pooled under the Southern 
Michigan Federal milk order should be calculated by multiplying the 
monthly average of 40-pound block cheese prices on the National Cheese 
Exchange at Green Bay, WI, 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.
    The original Leprino proposal would calculate the protein price by 
multiplying the monthly average of 40-pound block cheese prices on the 
NCE by 1.32. Leprino's formula would have resulted in average protein 
prices, per pound, of $1.6925 in 1992 and $1.6971 in 1993.
    The NCI proposal supported by Kraft (modifying the Leprino plan) 
would calculate the protein price by multiplying the monthly average 
NCE Cheddar barrel price by 1.32. NCI's formula would have resulted in 
average protein prices, per pound, of $1.6408 in 1992 and $1.6475 in 
1993.
    NAJ uses a ``justifiably higher protein value'' established from 
block Cheddar (normally higher than barrel) and adds a WPC price in 
order to account for all milk protein and to give farmers an incentive 
to produce protein rather than to reflect the additional value 
manufacturers realize from increased protein. The NAJ proposal would 
calculate the protein price in two parts: (1) multiply the NCE monthly 
average 40-pound block cheese price by 1.32, and (2) add the monthly 
average WPC price multiplied by a yield factor of 0.735. The sum of 
these two values would equal the protein price. NAJ's formula would 
have resulted in average protein prices, per pound, of $2.0738 in 1992 
and $2.1664 in 1993.
    Each of the proposals would result in a lower protein value than in 
the recommended decision or in orders containing MCP plans, such as the 
Indiana, Ohio Valley, and Eastern Ohio-Western Pennsylvania Federal 
orders. The handler protein price per pound for these orders would have 
averaged $2.77 and $2.82 in 1992 and 1993, respectively.
    Because the percent of the skim milk value allocated to protein 
differs under the two proposed plans, the protein price also differs. 
Under the original recommended MCP plan, 79 percent of the total milk 
price would be allocated to protein on the basis of 1993 prices. For 
1993, the NAJ proposal would allocate 59 percent to protein, and the 
Leprino proposal would allocate 46 percent of the total M-W price to 
protein. The Leprino plan assigns less value to protein than the NAJ 
plan because this plan does not value the protein in whey.
    Undisputed by hearing participants was the 1.32 factor, which 
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 as calculated by the modified Van Slyke cheese yield formula. 
The hearing record indicates that the modified Van Slyke formula 
accurately measures incremental changes in protein. This accuracy 
supports the concept that 

[[Page 43074]]
cheese plants would be able to maintain consistent margins from the 
processing of small increases of protein content in milk. Assuming 
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 an order protein price based on a market-
determined cheese price.
    Use of a Cheddar cheese price as a basis for valuation recognizes 
that, for Cheddar cheese: (1) a well-established national market price 
exists; (2) standards for manufacture and grading are accepted widely 
on a national basis; (3) the Van Slyke formula calculates yields that 
are well-known and verifiable; (4) a majority of other cheese 
manufactured in the U.S. is traded in relation to Cheddar values with 
economic differences in costs of manufacturing being reflected in the 
marketplace; and (5) using Cheddar as a standard significantly 
simplifies the process.
    The question of which cheese price to use in the market protein 
value calculation, either the NCE block or barrel price, will determine 
the degree to which the value of the skim portion of milk will be 
assigned or allocated to protein. For the purpose of reflecting changes 
in Cheddar cheese market prices (as opposed to the level of such 
prices), it makes little difference whether the barrel or block price 
is used because the prices move very similarly, with the barrel price 
approximately 3 to 4 cents per pound lower than the block price during 
1991-93. The difference between the average block and barrel prices 
from 1992 to 1993 was $0.0383 per pound. Multiplying this difference by 
the 1.32 factor results in an average difference of $0.0506 per pound 
of protein between the prices derived from the barrel and the block 
cheese prices.
    In comments filed in response to the revised recommended decision, 
NAJ and Tri-State supported the use of the NCE 40-pound block cheese 
price to calculate the protein price and adjust the protein price for 
somatic cell count level. However, Dean Foods, Farmers Dairies, Inc., 
Anderson-Erickson Dairy Company (Anderson-Erickson), and Southern Food 
Groups, Inc., took exception to using the 40-pound block Cheddar cheese 
price in determining the protein value and the somatic cell adjustment, 
and instead supported using the barrel Cheddar cheese price. The 
exceptions stated that prices in the Federal order program are based on 
a concept of minimum prices and the barrel Cheddar cheese price would 
better approximate a minimum price.
    The monthly average price for 40-pound block Cheddar cheese on the 
NCE 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. Use of the block 
price is also consistent with the Eastern Ohio-Western Pennsylvania, 
Ohio Valley, and Indiana Federal orders, where the block price is used 
to adjust the producer pay price for somatic cell count. The block 
Cheddar cheese price has been determined to be the appropriate price to 
be used in determining the protein value and adjust for somatic cell 
count in a separate proceeding involving five midwest markets. The 
Cheddar cheese block price is used as a standard by many cheese 
manufacturers to price different types of cheese; used in the Coffee, 
Sugar, and Cocoa Exchange futures price of cheese; and in California's 
4b price.
    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.
    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 protein formula proposed by NAJ also would include the value of 
whey protein in the protein price so that all of the protein in the 
milk would be accounted for. NAJ's inclusion of whey value would 
increase the protein price computed from the NCE block price by an 
average of $0.3813 and $0.4690 per pound in 1992 and 1993, 
respectively.
    Dean Foods concurred with the revised recommended decision that the 
value of protein in whey should not be included in the protein price 
calculation.
    NAJ and Tri-State excepted to the calculation of the protein price 
in the revised recommended decision, advocating instead their proposal 
from the reopened hearing. The groups disagreed with the revised 
recommended decision's conclusion that because whey processing 
facilities do not currently exist in the Southern Michigan marketing 
area, whey should not be included in the protein price calculation. The 
groups also contended that the NAJ plan would allow for more uniform 
gross margins for all component levels than would the Leprino plan. The 
exception questioned whether the Department was more interested in 
providing returns to producers or manufacturers.
    The whey protein factor should not be included in the computation 
of the protein price. Hearing evidence shows that the whey protein 
portion of the NAJ protein price is not necessarily based on a value 
that a manufacturer can recover from a whey operation. Use of the 
market price for whey protein concentrate, the highest-priced whey 
product, ignores the diversity of whey handling operations and 
practices that exist throughout the dairy industry.
    Whey protein concentrate manufacturing involves sophisticated and 
expensive technology used by very few manufacturers, and apparently by 
none in Michigan. Until recently, the dairy industry has treated whey 
as having negative value, and the production of whey in connection with 
cheese manufacturing represented a disposal problem involving costs 
rather than a byproduct opportunity. Inclusion of a whey value in the 
protein price at this point in the development of whey disposal 
technology would result in including the potential revenue associated 
with whey, but none of its actual cost.
    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. Analysis of the data in this decision shows that using the 
block cheese price results in a protein price that accomplishes three 
goals: 1) components will be priced at levels that reflect their value 
in the market place, 2) components will be priced at levels that inform 
producers about which component has the greatest 

[[Page 43075]]
value and that make it worthwhile to produce that component, and 3) 
components will be priced at a level that will return a positive result 
to the manufacturing industry. All three of these goals are constrained 
by the requirement that the total value of the component prices must be 
equal to the M-W price.
    Fluid Carrier. The balance of the M-W price, after the values of 
protein and butterfat are removed, should be priced on the basis of a 
``fluid carrier'' residual. The fluid carrier price per hundredweight 
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 month's 
average protein test of the M-W price survey milk. Because the 
computation of the fluid carrier price is based on a residual value, 
the fluid carrier price could be negative. In this instance, the fluid 
carrier price would remain negative, instead of adjusting either the 
butterfat or protein prices.
    Because the M-W price is a competitive pay price rather than a 
price determined from calculating each component's value, the M-W price 
reflects factors such as volume premiums, cheese yield premiums, 
solids-not-fat premiums, butterfat values offered by some manufacturers 
that exceed the butterfat differential, and pure competition for 
supply. The fluid carrier residual helps to place a value on these 
factors that is not accounted for elsewhere. Also, the standards for 
all finished products require inclusion of some fluid from raw milk; 
for example, skim milk powder has approximately 4 percent moisture, and 
Cheddar cheese has a 38-percent moisture standard. Therefore, the water 
in producer milk has some value in manufactured products, resulting in 
revenue to the processor as that fluid is captured in products such as 
butter, yogurt, cheeses, and nonfat dry milk.
    MMPA, ICMPA, Leprino, NCI, and Kraft all supported a fluid carrier 
component to represent the residual value of the hundredweight of 
producer milk in Class II and Class III. Each party supported a formula 
identical to that which is recommended for adoption. The fluid carrier 
residual would have provided an average value, per hundredweight, of 
$3.39 in 1992 and $3.68 in 1993.
    An alternative residual price was proposed by NAJ, which would 
price the residual value of the M-W price after the removal of the 
butterfat and protein values on the basis of ``other nonfat solids.'' 
The other solids price would be calculated by subtracting from the M-W 
price the sum of the value of 3.5 pounds of butterfat and the average 
protein content of milk included in the M-W price survey times the 
protein price. The result would be divided by the M-W other solids 
content (M-W nonfat solids minus M-W protein) to obtain the other 
solids price per pound. This proposed residual would have provided 
average values, per pound, of $0.40 and $0.41 in 1992 and 1993, 
respectively.
    NAJ and Tri-State took exception to the revised recommended 
decision's placement of the residual value of the M-W price, after 
butterfat and protein are accounted for, on a fluid carrier component. 
These two groups advocated the position contained in their proposal 
that the residual value should be placed on other nonfat nonprotein 
solids. The groups contended that the solids in milk have value, allow 
manufactured products to hold water, and thus should be included in the 
MCP plan. They argued that the fluid carrier residual would not provide 
the correct incentive for producers.
    There is no readily available measure of the market value of the 
other nonfat solids. The nonfat nonprotein solids component principally 
consists of lactose. The other solids price would represent not only 
the value of the lactose and ash, but would include an adjustor between 
the butterfat and protein component values of milk, which are 
determined by the market value of those components in dairy products, 
with a competitively set producer pay price (the M-W). While there is a 
value to lactose, attributing the entire residual value of milk to the 
nonfat nonprotein component would overstate the true economic value of 
lactose after accounting for processing costs and ignore the value of 
water in milk. It would be inequitable and uneconomical to place the 
residual value of milk on lactose instead of on the residual fluid 
volume. The other solids price may send a signal to producers to 
produce higher solids while sending a conflicting signal to 
manufacturers.
    Because the M-W price is 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. The fluid carrier is this component.
    In addition, if the other solids price had a negative value, either 
the protein or butterfat price would need to be adjusted in order for 
the other solids price to retain at least a value of zero. If this 
situation were to arise, the adjusted protein price, for example, would 
no longer represent the true market value associated with protein. 
Consequently, producers and handlers would receive an inappropriate 
economic signal from the adjusted price.
    The residual skim value of the M-W, after accounting for protein, 
should be placed on the fluid carrier component. Hearing record 
evidence indicates that the M-W price represents various factors that 
may not have a known market value, such as various premiums or pure 
competition for milk supply. The fluid carrier value would represent 
these factors. The hearing record also shows that moisture standards 
exist for all dairy products. The fluid carrier component recognizes 
the fact that the water in milk does hold value for the processor and 
the producer. Lastly, the correct economic signals relating to 
butterfat and protein will be sent to both producers and processors if 
the residual calculation is negative. The function of the residual is 
to connect the value of milk components in manufactured dairy products 
with a market-determined price for milk used in those products.
    Miscellaneous. The butterfat and protein component prices will be 
expressed on a per-pound basis to the nearest one-hundredth cent. 
Analysis has shown that by expressing these prices to the nearest one-
hundredth of a cent, the accuracy of the prices is enhanced 
significantly over expressing the prices to the nearest cent. The fluid 
carrier price will be expressed on a per hundredweight basis, rounded 
to the nearest whole cent.
    For the purpose of allocating protein and fluid carrier to the 
classes of use, the assumption will be made that the protein and fluid 
carrier cannot easily be separated. The protein and fluid carrier will 
therefore be allocated proportionately based on the percentage of 
protein and fluid carrier in the skim milk received from producers.
    In contrast to other orders that have multiple component pricing 
provisions, this decision incorporates only one protein 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 resulting confusion over which 
price, handler or producer, should be used in different situations. In 
addition, a handler's per-pound price for protein 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 

[[Page 43076]]
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 to Class I, receipts from 
unregulated supply plants, and location adjustments.
    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 fluid carrier contained in the skim milk 
allocated to Class II and Class III will be added to, and the values of 
the protein and fluid carrier contained in all producer milk subtracted 
from, the differential pool. The difference in the somatic cell 
adjustment on the value of protein in Class II and Class III and on 
producers' value of protein also will be absorbed in the differential 
pool. The accumulated total for all handlers then will be adjusted by 
total producer location adjustments and one-half the unobligated 
balance in the producer-settlement fund. The resulting value then will 
be divided by the total pounds of producer milk in the pool, with an 
amount not less than six cents or more than seven cents per 
hundredweight 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 
one or more 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 prices. A negative producer 
price differential would be equivalent to a uniform price less than the 
Class III price.
    The Leprino panel testifying at the initial hearing session 
suggested that payment for protein be based on true protein rather than 
total Kjeldahl nitrogen because only true protein has real value to 
processors. In comments filed after the revised recommended decision, 
Leprino encouraged the Department to develop information concerning the 
testing for true protein in the future.
    Testing for true protein may have considerable merit. However, the 
hearing record lacks sufficient discussion of the benefits of 
specifying testing for true protein versus total protein. Approved 
testing methods currently vary among states, and the orders at this 
time should not mandate specific protein tests. If more and more states 
begin to mandate specific types of protein testing, it may become 
necessary to specify such testing in the orders. When (or if) the 
industry does move to testing for true protein, this decision should 
not be viewed as a hindrance to that conversion. In no way does this 
decision mandate a specific testing procedure. At such time as a change 
to testing for true protein may occur, a change in the 1.32 factor may 
be necessary.
    4. Somatic cell adjustment. The value of milk should reflect the 
level of somatic cells contained in that milk. The adjustment in value 
should be made by adjusting the protein price paid by handlers for 
Class II and Class III milk, and the protein price paid to producers, 
for the somatic cell count (SCC) of the milk. This decision modifies 
the revised recommended decision, in which a somatic cell count 
adjustment would have been made to protein prices paid to producers for 
all classes of milk. The somatic cell adjustment recommended is derived 
from the reduction in cheese yield as the somatic cell level goes from 
zero to 1,000,000, converted to a value per pound of protein.
    Adjusting protein prices paid to producers by SCC was proposed 
during the initial hearing as part of a multiple component pricing 
system and was included in the recommended decision. Three fluid milk 
processors and a trade association for fluid milk processors filed 
exceptions to the recommended decision. Although this specific issue 
was outside the scope of the reopened hearing notice, two witnesses at 
the reopened hearing session testified against inclusion of a somatic 
cell adjustment in addition to filing exceptions to the recommended 
decision and briefs after the reopened hearing.
    Each of these four parties opposed the recommended application of 
an SCC adjustment on milk used in Class I. Support for the SCC 
adjustment on Class I milk was stated in MMPA's post-hearing brief. 
Following is a summary of the initial hearing somatic cell testimony, 
exceptions to the original recommended decision, reopened hearing 
testimony, briefs filed after the reopened hearing, and exceptions to 
the revised recommended decision. Most of the exceptions, reopened 
hearing testimony, and briefs reiterated what was presented during the 
initial hearing and in post-hearing briefs. Unless specified, the 
following evidence was given at the initial hearing.
    The director of milk sales for MMPA stated that the functional 
value of protein in the production of manufactured dairy products and 
its role in providing wholesome flavor and nutritional value in fluid 
milk products is affected by the SCC level of the raw milk supply. 
Therefore, the witness asserted, elevated SCC levels and raw bacteria 
counts diminish the functional value of all milk. According to the 
witness, the damage is irreversible and cannot be restored by a 
mechanical process at a dairy plant.
    The MMPA witness testified that high SCC levels are accompanied by 
an increase in the amount of undesirable enzymes in milk as well as an 
increased susceptibility of the fat component to attack by these 
enzymes. The witness explained that the undesirable enzymes attack the 
fat in milk and release free fatty acids. The witness stressed that 
even at very low concentrations, free fatty acids are responsible for 
producing off-flavors in any dairy product that contains milkfat. The 
MMPA witness noted that research has shown that the free fatty acid 
content of raw milk with high SCCs is higher than that of raw milk with 
low SCCs. The witness also pointed out that the enzymes are able to 
survive normal pasteurization and continue the process of deterioration 
of the flavor of finished fluid products, thus reducing shelf life. 
Therefore, he testified, protein payments to producers should reflect 
the influence of somatic cells on the quality of all milk.
    The director of member services and quality control for MMPA 
testified that mastitis, an inflammation of the mammary gland, is a 
reaction to a cow's immune system fighting off invading bacteria. The 
witness explained that white blood cells and epithelial cells known as 
somatic cells are secreted during the process to destroy the invading 
bacteria. The witness stated that the level of somatic cells indicates, 
and is proportionate to, the infection level of a cow's udder.
    Another witness testified for MMPA that somatic cells seem to have 
an impact on milk quality through their ability to cause changes in the 
enzymatic characteristics of milk. The witness explained that the 
enzymes generated by somatic cells degrade the casein and change its 
functional attributes. He pointed out that some changes include higher 
losses in cheese yield, differences in flavor characteristics, and 
changes in other functional characteristics that may weaken the 
structure of curd in a curd formation when making a product. The 
witness stated that high SCCs in milk cause an increased rate of rancid 
off-

[[Page 43077]]
flavors, which produce a flavor that would be noticeable to a consumer. 
The witness explained that free fatty acids are one component that 
determines the shelf life of a fluid product and correlates to rancid 
off-flavors.
    MMPA's witness went on to say that the enzyme which causes the 
damage is always present in an inactive form in milk. The active form 
of the enzyme, once it is produced in milk, is heat-stable and 
therefore unaffected by pasteurization or ultra-high temperature 
processing. The witness explained that most of the damage to protein 
occurs while milk is in the udder of the cow. However, if milk is 
cooled quickly and held at refrigeration temperature, further damage is 
minimized. The witness explained that producers can reduce the average 
somatic cell count of their milk through better management and proper 
adjustment and maintenance of milking equipment.
    The MMPA quality control employee stated that SCC standards were 
adopted as a measure of milk quality and are included in the 
Pasteurized Milk Ordinance (PMO) because of the recognition of their 
public health significance in the milk supply. The witness explained 
that the condition of mastitis and the subsequent increase of somatic 
cell levels decrease the quality of milk by reducing the levels of 
butterfat, lactose, total casein and total solids in milk and 
increasing whey protein, chloride, and sodium levels.
    The MMPA witness noted that SCCs have been included as a criterion 
within quality premium programs throughout the United States, including 
Michigan, for several years. The witness testified that all milk 
marketing cooperatives in Michigan use the Optical Somatic Cell Count 
(OSCC), an electronic method, for measuring levels of somatic cells. 
According to the witness, the OSCC method is the most accurate method 
available for testing somatic cells and is a method approved by the 
Association of Official Analytical Chemists (AOAC). Another MMPA 
witness stated that instruments are available and currently are being 
used to test a large number of samples on a reliable basis for both 
protein and somatic cell count.
    The MMPA witness noted that the SCC standards under the PMO would 
be lowered from 1,000,000 to 750,000 on July 1, 1993. The witness 
pointed out that under the PMO, all Grade A producers are required to 
be tested a minimum of four times in six months for somatic cells. He 
explained that most producers whose milk is pooled under Federal Order 
40 have been tested five times a month for the past several months, 
with test results reported to the producers. The witness stated that 
MMPA's average SCC for 1992 was 308,000, according to record data. 
However, he stated, this average is based upon one SCC test per farm 
per month. The witness explained that in comparing data collected for 
the past six months, one test per month versus five tests per month, 
the cooperative's average SCC could increase by as much as 50,000. 
Another MMPA representative testified that the proposed neutral zone 
had been reduced from the initial proposal to between 300,000 and 
450,000 to better reflect current data with regard to average SCCs in 
Order 40.
    According to an MMPA witness, an adequate number of times per month 
to test a herd for SCC would be the number of times currently used for 
butterfat, four or five times. The witness stated that the functional 
value of milk changes as soon as the SCC exceeds about 100,000. He 
stated that one of his research studies, which was conducted under 
ideal conditions, indicated that as SCCs change from zero to 1,300,000, 
cheese yields decline an additional two to three percent. The witness 
also stated that there is a maximum yield loss of about two percent 
when SCCs change from 100,000 to 750,000.
    MMPA supported the SCC adjustment on all milk in a brief filed 
after the reopened hearing. The brief asserted that the recommended 
decision recognizes the impact that SCC levels have on the functional 
value of milk for both fluid and manufacturing processors. The brief 
noted that the difference in the Class I differentials between the Ohio 
and Indiana orders greatly exceed the four to six cents per 
hundredweight identified as the potential effect on a Class I handler's 
price resulting from the somatic cell adjustment.
    The regional dairy director for National Farmers Organization (NFO) 
testified in opposition to the inclusion of a somatic cell adjustment. 
The witness stated that uniformity in the pricing provisions of Orders 
40, 33, 36, and 49 is of overriding importance and urged the Secretary 
to adopt the same MCP programs for all orders. The witness argued that 
because of the degree of overlap in milksheds and sales between these 
orders, differences in order provisions will cause confusion and 
disorderly marketing conditions.
    The NFO witness observed that SCC is only one of several factors in 
NFO's and other quality programs. The witness stated that the 
incorporation of an SCC adjustment would destroy the flexibility of 
voluntary quality programs. The NFO witness stated that adoption of an 
SCC adjustment would overstate the importance of SCC among other 
factors used in determining milk quality and elevate SCCs to a 
disproportionate role in determining the value of milk. He argued that 
this disproportionate emphasis on SCCs is exacerbated by the inherent 
vagaries of testing for SCCs.
    The NFO representative stated that somatic cell count is one of the 
more volatile variables in the measurement of milk quality and can vary 
significantly within the same herd. The witness noted that a MMPA 
witness testified at the multiple component pricing hearing for Orders 
33, 36, and 49 that tests for SCC are much less precise than tests for 
butterfat or protein. The NFO witness explained that the variations in 
SCC tests within a herd during a month are much greater than for 
butterfat or protein.
    A Kraft witness stated at the initial hearing that Kraft supports 
the inclusion of somatic cell adjustments in any component pricing 
plan. The witness noted that testimony and evidence in previous 
hearings, as well as in this hearing, reveal that there is a reduction 
in cheese yield as somatic cell levels increase, thus lowering the 
value of protein in milk.
    During the initial hearing, the witness for Country Fresh, a fluid 
milk and Class II processor in Order 40, supported an SCC adjustment on 
all classes of milk, but recommended that the size of the proposed 
adjustment be reduced substantially. Under his recommended changes to 
the proposal, the witness stated that based on the peak cheese prices 
during 1992, the maximum plus and minus somatic cell adjustments would 
have been 15 cents a hundredweight. He argued that combined, this would 
create a range of about 30 cents, as the most the market can bear 
without creating a disincentive against receiving high-quality milk.
    The witness noted that effective July 1, 1993, the cap on the SCC 
for Grade A milk will be 750,000. The witness and Country Fresh's brief 
argued that the proposed neutral zone of 300,001 to 500,000 and MMPA's 
modified proposed neutral zone of 300,001 to 450,000 are too high. The 
witness testified that the average somatic cell count in the Southern 
Michigan marketing area is approximately 340,000, according to the 
market's largest cooperative. Therefore, the witness suggested that the 
appropriate neutral zone be 300,000 to 399,999 and the highest bracket 
700,000 and up.
    The witness continued by stating that if the somatic cell program 
is modified as suggested, Country Fresh could support its inclusion in 
the Southern 

[[Page 43078]]
Michigan order. He testified that Country Fresh urges that the somatic 
cell program be tried in a moderate rather than a radical manner. 
Otherwise, the witness claimed, chaotic marketing conditions could be 
created which would result in a new hearing being held in the not-too-
distant future to amend the order. Country Fresh's brief further noted 
testimony of MMPA, Leprino, and NFO which asserted that there are other 
factors involved in high quality milk besides SCC.
    In an exception to the recommended decision, in testimony during 
the reopened hearing, and in a post-hearing brief, Country Fresh 
changed its position and expressed opposition to an SCC adjustment to 
milk used in Class I. During the reopened hearing and in a post-hearing 
brief, Country Fresh proposed to modify the recommended Southern 
Michigan somatic cell adjustment to be similar to the SCC adjustment on 
Class II, III, and producer milk adopted in the Ohio Valley, Eastern 
Ohio-Western Pennsylvania, and Indiana marketing orders. Country 
Fresh's brief filed after the reopened hearing stated that the handler 
currently does not adjust for SCC on the milk it purchases.
    The Country Fresh witness testified that uniformity of pricing 
provisions across Federal orders is important because a substantial 
overlap in Class I sales and raw milk procurement exists between 
Indiana, Ohio, and Michigan. The witness stated that the SCC adjustment 
on Class I milk in the recommended decision does not apply in either 
the Indiana or the Ohio Valley Federal orders.
    Country Fresh's brief asserted that implementing an SCC adjustment 
on Class I milk in Southern Michigan but not the surrounding areas 
would change the Class I price relationship between these orders. The 
brief stated that disruptive and inequitable marketing conditions would 
result for handlers regulated under the Southern Michigan order 
relative to handlers regulated under orders in which no SCC adjustment 
is made. The brief contended that evidence presented at either the 
initial or reopened hearing did not justify an increase in the cost of 
Class I milk in Southern Michigan relative to neighboring orders.
    The Country Fresh witness estimated that on a total milk supply 
basis, the SCC adjustment for each Class I handler could potentially 
affect the Class I price from four to six cents per hundredweight. The 
witness stated that the impact of SCC has not been this great in the 
Indiana Federal order, where the adjustment is not based on the total 
milk supply as was recommended in Southern Michigan.
    Country Fresh's exception and brief agreed that lower SCC levels 
have some value to fluid milk processors. However, both the exception 
and brief argued that no difference exists whether milk is processed in 
Michigan or in Indiana, thus no distinction should be made between 
these markets based on SCC pricing. In addition, the witness stated 
that it is not possible to relate somatic cell levels to a value on 
Class I milk or to the specific value adjustments recommended in the 
decision.
    Witnesses for, and briefs and exceptions filed by, the Kroger 
Company (Kroger), Dean Foods, and the Milk Industry Foundation (MIF) 
opposed the inclusion of somatic cell counts as part of the pricing 
structure as it would relate to Class I fluid handlers. Kroger operates 
a pool distributing plant regulated under Order 40. Dean Foods has been 
marketing milk in the Southern Michigan market for over 30 years and 
operates a bottling plant known as Liberty Dairy in Evert, Michigan. 
MIF is a national trade association with 215 member companies located 
in all 50 states that process nearly 80 percent of all fluid milk 
products nationwide.
    The division manager of milk procurement for Kroger argued that 
there is no economic justification to include a somatic cell adjustment 
on Class I sales or any Class II and III products such as raw fluid 
milk inventory, half and half, eggnog, Class III shrinkage, and sales 
of surplus cream. According to the witness, the price or product yields 
of these items are not influenced by the amount of protein in the raw 
milk used in their manufacture. Additionally, the witness argued, 
adoption of the MMPA proposal would make it impossible for processors 
to recover the cost of these products and would create inequitable and 
uncompetitive Class II and Class III market conditions for Order 40 
processors compared to their competitors regulated under other orders.
    The Kroger representative continued by stating that Kroger is not 
opposed to a proposal which introduces multiple component pricing with 
protein pricing and a somatic cell adjustment for milk processed in 
Class II and III used-to-produce products. The witness stated that if 
the MMPA proposal is modified accordingly the MCP plan combined with a 
somatic cell count adjustment would have a potential benefit to 
producers and processors. Kroger's opposition to an SCC adjustment on 
Class I milk was reiterated in an exception to the recommended 
decision.
    The Kroger witness and MIF's brief argued that adoption of an SCC 
adjustment on milk used in Class I would result in disruptive and 
inequitable marketing conditions for Order 40 handlers versus their 
competitors in other markets where the provision does not exist. The 
Kroger witness and MIF noted that a somatic cell count adjustment would 
eliminate the advance knowledge fluid milk processors currently have of 
the Class I price and force handlers to estimate the value of somatic 
cells for the current month's price. The Kroger representative claimed 
that the proposal would influence the value of Class I milk based on 
the SCC level in raw milk.
    MIF expressed concern that milk processors would incur increased 
costs from milk with low SCCs that they would be unable to recover from 
product sales because consumers are unable to differentiate between low 
and high SCC milk. MIF's exception also contended that increased costs 
from both procuring low SCC milk and more frequent product testing 
would lead to higher retail prices for milk and a decrease in fluid 
milk sales. Exceptions to the recommended decision, testimony during 
the reopened hearing, and post-hearing briefs filed by MIF reiterated 
these arguments opposing an SCC adjustment on Class I milk.
    According to MIF's brief, there is no quantifiable scientific 
evidence that the level of somatic cells results in any appreciable 
difference in the attributes of fluid milk, particularly attributes 
which would be discernable by consumers. MIF described the testimony of 
MMPA as failing to make an absolute statement regarding quantifiable 
economic benefits to fluid milk use resulting from lower somatic cell 
counts. MIF stressed that there is no need to pay a premium for reduced 
SCCs when the permissible count is being reduced by regulations. In 
briefs, MIF and NFO questioned whether it is appropriate for the 
Federal order system to adopt a policy and administer practices which 
allocate economic advantages and disadvantages among certain segments 
of the dairy industry.
    The witness for Dean Foods stated that there is no scientific 
evidence which shows that handlers or consumers benefit from lower 
somatic cell counts and that the inclusion of SCC adjustments in the 
pricing structure of producer milk within the Federal order system 
would ultimately be borne by the consumer. However, the witness stated, 
Dean Foods supports the 

[[Page 43079]]
inclusion of SCC premiums in Class II or Class III producer milk where 
there is evidence of improved yields due to reduced levels of somatic 
cells.
    Dean Foods' exception to the original recommended decision 
reiterated arguments made by Country Fresh and MIF. Additionally, Dean 
Foods' exception noted that a six cent per hundredweight adjustment in 
the Class I price would equal 0.005 cents per gallon and would amount 
to additional costs between $180,000 and $200,000 per year for the 
Liberty Dairy bottling plant. The exception stated that the plant, at 
which 85 to 90 percent of receipts are used in Class I, currently has a 
premium program which includes an SCC adjustment as one of the factors 
in pricing milk. Dean Foods noted, however, that SCC alone is not 
considered to be a quality enhancer for Class I products.
    The Leprino panel that testified in the original hearing stated 
that Leprino supports the inclusion of SCC adjustments to value protein 
properly as long as other basic milk quality criteria are achieved, 
notably low psychrotrophic bacteria count and low raw bacteria count. 
Additionally, the panel also testified that Leprino opposes quality 
adjustments for Class I milk unless it can be clearly demonstrated that 
there is a discernable benefit to the Class I handler. The panel 
recommended that yield factors used to value somatic cell counts should 
be conservative, given the conflicting scientific evidence, and should 
be uniform across Federal orders.
    According to testimony at the original hearing by the Leprino 
production manager, Leprino participates in milk quality programs based 
on several parameters, providing incentives for producers with high-
quality milk and disincentives for inferior-quality milk. The witness 
noted that in the MCP hearing for Orders 33, 36, and 49, three studies 
were introduced into evidence and referenced in the recommended 
decision to justify adjusting the protein payment by SCCs. However, the 
witness argued that each study shows different yield impacts at 
different SCC levels in raw milk. The witness also noted a study which 
indicates that SCCs may affect yields, but day-to-day changes in milk 
composition obscure the effect. The witness pointed out that a study by 
one of the MMPA witnesses states that payment for milk quality should 
not rest solely on somatic cell counts.
    The Leprino witness testified that scientific evidence indicates 
that the greatest yield benefits are at a level of 100,000 to 200,000 
and greatest yield losses are above 500,000. The witness noted that the 
SCC limit under the PMO soon will be adjusted to 750,000. He stated 
that Leprino's proposal offers an adjustment of plus 20 cents to minus 
20 cents for legal Grade A milk and includes a prerequisite of other 
milk quality conditions that can affect cheese yield. The witness 
recommended that USDA use a conservative approach given the 
Department's limited experience with mandated milk quality criteria for 
payment purposes. The witness urged that the adjustments be uniform 
between all Federal orders to ensure orderly marketing.
    The Leprino quality assurance director testified that the two 
methods for testing for the level of SCC are direct microscopic cell 
count (DMSCC) and optical somatic cell count (OSCC). She stated that 
the DMSCC is a tedious method which takes extensive training and 
precision to perform and is used to calibrate electronic methods. She 
estimated that equipment for performing SCC tests by the DMSCC method 
costs about $4,000. According to the witness, the OSCC methods are 
easily performed, generally more precise, and are less labor intensive 
than the DMSCC. The witness stated that the unit cost for equipment is 
between $40,000 and $100,000 and, when combined with infra-red 
component testing systems, could range from $150,000 to $200,000.
    The Leprino quality witness expressed opposition to the proposed 
order amendment which would allow no adjustment to a producer's protein 
price if an average SCC was not available for the month. The witness 
claimed that processors would not be able to reduce payments on high 
SCC milk if testing is not mandated. Therefore, the witness urged that 
testing be conducted no less than five times per month with at least 
one test per week. Furthermore, the witness recommended that if no 
tests are available, the handler should assume the milk falls in the 
highest adjustment category of 750,000 SCC per milliliter.
    The quality witness for Leprino testified that in addition to SCC, 
raw bacterial count (SPC) and psychrotrophic bacteria also have a 
direct influence on milk quality and hence its value to a processor. 
The witness stated that SPC gives an indication of sanitary practices 
around milking, and the transfer and storage of milk. The witness 
claimed that SPC has been recognized and widely used as a basis for 
valuing milk. She added that psychrotrophic bacteria are those bacteria 
capable of appreciable growth under commercial refrigeration, 
regardless of the optimal growth temperature of the organisms. 
According to the witness, such bacteria degrade protein and fats, 
causing off-flavors, odors, slime formation, and reduction in cheese 
yields.
    Leprino's exception to the recommended decision stated that the 
adoption of one quality attribute (SCC) as a requirement for milk 
payment purposes without consideration of the other raw milk quality 
attributes opposes all the market practices currently operating in the 
Southern Michigan order. The exception urged that if milk quality is to 
be regulated under the order, the adopted model should be similar to 
those currently used by almost all of the handlers. The exception 
asserted that this program would include multiple minimum raw milk 
quality attributes such as raw bacteria counts and psychrotrophic 
bacteria counts.
    In a brief filed after the reopened hearing, NCI contended that a 
specific schedule of SCC adjustments, such as was included in the 
recommended decision, should not be included as part of the order. The 
brief suggested that the order provisions should include authority for 
handlers to submit individual plans for market administrator approval 
to pay premiums or make deductions based on SCC as long as the total 
payment to all producers reflects the monthly minimum pay price under 
the order. The brief contended that this system would permit individual 
handlers the option to use adjustments that reflect the effect of low 
or high SCC milk on manufactured product production without requiring a 
rigid schedule of order-specified adjustments in milk costs based on 
various levels of SCC.
    Although there was little opposition to the incorporation of some 
form of somatic cell adjustment, a number of exceptions were filed in 
response to the revised recommended decision on this issue. The 
exceptions focused primarily on the effect the proposed somatic cell 
adjustment would have on fluid milk handlers. None of the comments 
filed in response to the revised recommended decision supported a 
somatic cell adjustment on Class I milk.
    Dean Foods, NCI, Prairie Farms Dairy, Inc., and Kroger each opposed 
including any somatic cell adjustment within the Federal milk order 
program. Dean Foods contended that the quality of milk and milk 
products has been and should continue to be tested and enforced by 
other agencies through the PMO. However, Dean Foods did not oppose an 
adjustment on Class III milk, stating that if any segment of the dairy 
industry is able to promote a component in milk or enhance quality that 
will increase 

[[Page 43080]]
profitability, that component or quality factor should be included in 
Federal milk orders.
    Thirty of the 31 exceptions received to the revised recommended 
decision commented on the proposed somatic cell adjustment to protein 
prices paid to producers for all classes of milk. Six of the exceptors 
had participated in either or both of the hearings in this proceeding: 
Country Fresh and Parmalat (joint brief), Dean Foods, Kroger, Leprino, 
MIF, and NCI. Of the other 24 exceptions received, only one handler is 
located physically in the Southern Michigan marketing area. Most 
exceptions primarily addressed the issue of a proposed somatic cell 
adjustment on Class I milk.
    Most exceptions regarding a somatic cell adjustment repeated 
opposition to a somatic cell adjustment on Class I milk as set forth by 
MIF in testimony, post-hearing brief, and exceptions to the revised 
recommended decision. The exceptors all gave the same six reasons for 
their opposition: 1) there was not enough scientific evidence at the 
hearing to support a somatic cell adjustment on Class I milk, 2) 
somatic cells are not the only quality factors that should be included, 
3) a somatic cell adjustment on Class I milk would cause disruptive and 
inequitable marketing conditions for fluid handlers, both between and 
within marketing areas, 4) fluid handlers cannot recover the added cost 
of the somatic cell adjustment from the market place, 5) a somatic cell 
adjustment would eliminate advance Class I pricing, and 6) Federal 
orders should not be involved in quality issues.
    Dean Foods' exception contended that placing a somatic cell 
adjustment on Class I milk does not conform to the Agricultural 
Marketing Agreement Act of 1937 because the price will not be ``uniform 
as to all handlers.'' Dean Foods claimed that including a somatic cell 
adjustment on all classes of milk would add to the profitability of 
manufacturing handlers but result in a loss of profitability to fluid 
milk handlers. This would occur, according to the exception, because 
while both types of handlers would be charged more for low SCC milk, 
the manufacturing handlers would be able to recover the cost (through 
increased yields) while the fluid milk handlers would not.
    Regarding arguments that the advance nature of Class I price 
announcements would be eliminated, Dean Foods' exception disputed the 
revised recommended decision's comment that any change would be 
expected to be minimal. Dean Foods contended that any change that is 
unknown is not ``minimal'' when bidding for contracts.
    Dean Foods' exception also contended that basing the somatic cell 
adjustment formula on cheese yields proves that fluid milk does not 
gain a quantifiable economic benefit from milk with low somatic cells.
    Country Fresh and Parmalat's joint exception noted that under the 
revised recommended decision, the somatic cell adjustment on Class I 
milk would benefit producers by rewarding lower herd SCC. The brief 
contended that the somatic cell adjustment would give Class I handlers 
an incentive to procure lower quality, thus less costly, milk.
    Sani-Dairy filed an exception to the somatic cell adjustment 
included in the revised recommended decision. This handler, partially 
regulated under the Eastern Ohio-Western Pennsylvania Federal milk 
order (Order 36), which adjusts the protein price for the somatic cell 
count in Class II and Class III milk, claimed that the somatic cell 
adjustment on Class II milk has increased Sani-Dairy's costs. The 
exception contended increased costs have occurred because 1) SCC levels 
in milk are improving due to higher milk standards, 2) the calculation 
tables for Order 36 are set to higher counts than the milkshed average, 
and 3) difficulty exists in recouping extra costs, particularly from 
cottage cheese, in a plant with mixed utilization of milk.
    In addition to opposing a somatic cell adjustment on Class I milk, 
Anderson-Erickson also opposed a somatic cell adjustment on specific 
Class II products (dairy desserts and ice cream).
    A somatic cell count adjustment should be adopted because it 
reflects the value of the level of somatic cells contained in milk. 
There was significant testimony during the initial hearing that 
elevated levels of somatic cells diminish the functional value of milk 
in all uses. A reduction in the yield of cheese and other curd-based 
manufactured products, an increased rate of off-flavors, and a 
reduction in the shelf-life of fluid products all result from elevated 
levels of somatic cells.
    The recommended decision proposed that the adjustment be applied to 
protein prices received by producers for all producer milk, regardless 
of the class in which it is used. Such an application would have 
avoided including the difference between the handler and producer 
somatic cell adjustments in the computation of the producer price 
differential; a procedure that, during some months, could result in a 
significant adjustment in the producer price differential per 
hundredweight. The recommended application also would have assured that 
all handlers' obligations would reflect the quality of the milk they 
receive.
    Although many of the objections to a somatic cell adjustment on all 
milk are not persuasive, as noted in the revised recommended decision, 
this decision has been changed to include an adjustment to the value of 
milk based on the level of somatic cells contained in all producer milk 
and in Class II and Class III. As a result, the somatic cell adjustment 
will be included in the pool computation, so handlers will have to 
report producer somatic cell count information for all producers with 
their reports of receipts and utilization.
    The decision to omit application of a somatic cell adjustment on 
milk used in Class I is based on several factors. As observed by 
exceptors, the hearing record contained little if any testimony or 
evidence to quantify the economic effect of varying somatic cell levels 
on Class I milk, although there was considerable testimony as to the 
effect somatic cells have on shelf life, off flavors and rancidity in 
fluid milk products. Because no specific data about the value of using 
high-quality milk in fluid products was presented and opposition to the 
application of a somatic cell adjustment on Class I milk was so strong, 
the somatic cell adjustment will not be applied to milk used in Class I 
as a result of this proceeding.
    The proponents' proposed neutral zone of 300,000 to 450,000 has 
been reduced to between 301,000 and 400,000 to better reflect the 
market's average somatic cell count and to correspond more closely with 
the multiple component pricing plan adopted for Orders 33, 36 and 49. 
Although increments of 100,000 were proposed, this decision breaks down 
somatic cell adjustments into increments of 50,000. Increments of 
50,000 assure producers that if slight testing inaccuracies (which may 
be greater in the case of somatic cells than for butterfat or protein) 
cause their protein price to be adjusted to the next level, that 
adjustment will not represent the entire value of a 100,000 increment 
of SCC.
    In addition, because of the reduction in the maximum permissible 
SCC, 750,000 and over will become the maximum increment for which 
protein prices will be adjusted for somatic cell content. It is 
possible that some Grade A producers may have an average SCC of 750,000 
or more for a month without losing Grade A status because of 
differences between the market administrators and health departments in 
the number of leucocyte (somatic 

[[Page 43081]]
cell) tests taken in a given period of time. In cases where a handler 
has not determined a monthly average SCC for a producer, it will be 
determined by the market administrator.
    Because the value of milk has been shown to be affected by the 
level of somatic cells, appropriate adjustments must be determined to 
apply to the various levels of somatic cells. These adjustments will be 
used to adjust handlers' values of protein in Classes II and III and 
the protein prices paid to individual producers. The somatic cell 
adjustment to handlers' value of milk will be computed by multiplying 
the appropriate constant for each handler's weighted average somatic 
cell count by the monthly average 40-pound block cheese price at the 
National Cheese Exchange as published monthly by the Dairy Division. 
The resulting somatic cell adjustment applied to the protein in milk 
used in Class II and Class III will be combined with plus and minus 
somatic cell adjustments to the protein in producer milk. Because of 
the necessity of pooling the somatic cell adjustments in order to avoid 
affecting the Class I price of milk to handlers, it will be necessary 
for the somatic cell information for all producer milk to be reported 
with handlers' reports of receipts and utilization.
    The inclusion of this 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. 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.
    The somatic cell adjustment to be used in determining protein 
prices paid to producers is derived from the reduction in cheese yield 
as the somatic cell level goes from zero to 1,000,000, converted to a 
value per pound of protein. The evidence contained in the hearing 
record shows that there is a one percent reduction in cheese yields as 
somatic cells increase to 100,000, and cheese yields decline an 
additional two to three percent as somatic cells increase from 100,000 
to 1,000,000. There is also a maximum yield loss of about two percent 
as SCCs increase from 100,000 to 750,000. This decision reflects the 
proportional change in cheese yields as the SCC level changes.
    The constant to be used for calculating somatic cell adjustments 
was computed by dividing the change in cheese yields attributable to 
changes in somatic cell counts by a representative protein test of 
producer milk (3.2 percent). As proposed, the adjustment to the 
producer protein price for somatic cell content would be computed by 
multiplying the cheese price by a factor that varies with the somatic 
cell level and dividing the result by the representative protein 
percent used in calculating the handler protein price.
    MMPA's proposed factors varied from .20 for a somatic cell count 
below 100,001 to -.20 for a somatic cell count above 750,000. Leprino's 
proposed factors varied from .20 to -.25, and Country Fresh proposed 
factors varied from .128 to -.128. This decision includes factors that 
vary from .25 to -.25 and are based on the reduction in cheese yield 
associated with varying somatic cell counts. Although .20 was the 
maximum positive factor proposed, .25 should not overcompensate 
producers for producing the highest quality milk.
    The factors adopted in this decision are similar to the ones 
proposed, with the largest difference occurring at SCC levels below 
151,000 and above 500,000. Record testimony reveals that milk 
containing between 100,000 and 200,000 SCC yields the greatest benefits 
and milk containing more than 500,000 SCC yields the greatest losses in 
cheese production. Evidence also reveals that SCC per milliliter of 
milk typically ranges between 200,000 and 400,000. Therefore, it is 
logical to assume that the majority of Order 40 producers' SCCs will 
fall within the 200,000 to 400,000 range.
    As shown in Table 1, the factors to be used in adjusting handler 
and producer protein prices for somatic cell content do not reflect a 
linear relationship between cheese yields and somatic cells because the 
relationship between these factors is not linear. Dividing these 
factors by a standard protein content of 3.2 yields the constants shown 
in Table 1 to be used for computing the somatic cell adjustment. Use of 
a constant substantially simplifies the computation of the somatic cell 
adjustment without changing the corresponding value. This result occurs 
because the protein percentage must change by a considerable amount 
before the adjustment will change. Therefore, the somatic cell 
adjustment will be calculated by multiplying the constant corresponding 
to each somatic cell count interval by the average price of 40-pound 
block cheese at the National Cheese Exchange as reported monthly by the 
Dairy Division.
    As an example, using the 1993 average 40-pound NCE block cheese 
price of $1.2857 per pound, the adjustment results in an estimated 
range of 20 cents per pound of protein (or 64 cents per hundredweight 
of 3.2 percent protein milk). The range of the adjustment is from a 
somatic cell count of fewer than 50,000 (plus 10 cents per pound of 
protein) to a somatic cell count of 750,000 or above (minus 10 cents 
per pound of protein).

Table 1.--Factors and Constants To Be Used in Computing the Somatic Cell
                               Adjustment                               
------------------------------------------------------------------------
                                                              Constants 
                                                                 for    
                                                              computing 
             Somatic cell counts                 Factors     the somatic
                                                                cell    
                                                             adjustment 
------------------------------------------------------------------------
1 to 50,000..................................         .250      .078125 
51,000 to 100,000............................         .200      .062500 
101,000 to 150,000...........................         .150      .046875 
151,000 to 200,000...........................         .100      .031250 
201,000 to 250,000...........................         .050      .015625 
251,000 to 300,000...........................         .025      .0078125
301,000 to 350,000...........................         .000      .0000000
351,000 to 400,000...........................         .000      .0000000
401,000 to 450,000...........................        -.025     -.0078125
451,000 to 500,000...........................        -.050     -.015625 

[[Page 43082]]
                                                                        
501,000 to 550,000...........................        -.075     -.0234375
551,000 to 600,000...........................        -.100     -.031250 
601,000 to 650,000...........................        -.125     -.0390625
651,000 to 700,000...........................        -.150     -.046875 
701,000 to 750,000...........................        -.200     -.062500 
751,000 to above.............................        -.250     -.078125 
------------------------------------------------------------------------


    Monitoring by the market administrator of somatic cell testing, 
which already clearly affects the payments made to most of the 
producers pooled under the Southern Michigan order, will assure as much 
uniformity and accuracy as possible in the testing procedures. Also, 
because over 50 percent of the milk pooled under this order is used in 
Classes II and III, application of a somatic cell adjustment to that 
proportion of the milk used by handlers will doubtless result in a 
favorable effect on the general quality of the milk in the marketing 
area.
    The hearing evidence indicates that low SCC levels contribute to 
both increased yields of manufactured products and quality 
characteristics (taste and keeping) for milk and dairy products. In 
terms of yield, the economic benefits from low SCC levels are more 
tangible and measurable to manufacturing handlers than to fluid milk 
handlers. Placing a somatic cell adjustment on Class II and Class III 
milk is reasonable because milk quality will be reflected in product 
yields and manufacturing handlers will be better able to recover their 
costs than would fluid milk handlers.
    The PMO states, ``Regulatory requirements have a fundamental 
purpose, protection of public health, and are not intended to and do 
not address microbiologic issues that relate to economic factors and 
consumer preference or acceptance of products such as cheese.'' The 
intent of placing an adjustment for somatic cell count under Federal 
milk order provisions is not to set standards for milk. Instead the 
intent is to recognize that the quality of milk, as measured by the 
SCC, is a factor in improving yields of cheese and other manufactured 
products and therefore is an indication of the economic value of the 
milk.
    It should be remembered that as milk from farms is commingled, the 
SCC of the entire load will tend toward the average for the market. 
Over the course of a month, it is unlikely that the average producer 
milk receipts will vary more than 100,000 SCCs from the average for the 
market, even for handlers who make a concerted effort to attract a 
high-quality milk supply. The primary impact of the SCC adjustment 
would be felt by producers.
    The argument that somatic cell counts have wider fluctuations than 
butterfat or protein tests is apparently valid. However, the hearing 
record does not contain evidence that any problems resulting from 
variability in testing outweighs the benefits of including SCC 
adjustments in the MCP plan. As specified in the Agricultural Marketing 
Agreement Act of 1937, one of the functions of the market administrator 
is ``Providing  . . . for the verification of weights, sampling and 
testing of milk purchased from producers.'' 7 U.S.C. 608c(5)(E). 
Because the market administrator will now be verifying the sampling and 
testing of milk for somatic cells, the variation in somatic cell levels 
due to testing should be minimized much as the differences in butterfat 
tests due to testing variations were minimized when the Federal milk 
order program was first instituted.
    The Agricultural Marketing Agreement Act of 1937 in 7 U.S.C. 
Sec. 608c(5) authorizes the Secretary to adjust minimum prices paid to 
producers based upon the quality of the milk purchased. Therefore, the 
argument that somatic cells cannot be used as a criterion for adjusting 
a producer's pay price is invalid. Furthermore, the hearing record 
shows that the level and presence of somatic cells directly affect the 
quality and grade of milk in that SCCs above a certain level result in 
the loss of a producer's Grade A permit.
    Record evidence indicates that SCC is only one of the factors that 
affect milk quality. However, there is not enough substantial evidence 
to include other factors, such as psychotrophic and raw bacteria count, 
as criteria used to determine milk quality for payment purposes. 
Testimony indicates that there may be merit in including other quality 
factors besides SCC in Federal milk order pricing, but further study of 
the role of such other factors in affecting the value of milk is 
needed. In any case, the inclusion of other quality factors in this 
proceeding goes beyond the scope of the hearing notice.
    Because the NCI suggestion for individual handler SCC payment plans 
was made in a brief filed after the reopened hearing rather than being 
included in the notice for either the initial or the reopened hearing, 
interested persons had no opportunity for cross-examination. Therefore, 
the concept cannot be considered as an alternative to the proposed SCC 
adjustment schedule, as it is beyond the scope of the proceeding. It 
should be noted that adjusting the minimum producer milk price for SCC 
does not preclude other premiums paid by a handler.
    In addition, although the Agricultural Marketing Agreement Act of 
1937 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 as suggested by NCI 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.
    5. Administrative assessment. The maximum allowable rate of 
assessment to be paid by handlers to cover the cost of administering 
the Southern Michigan order should be increased to 4 cents per 
hundredweight. The assessment would continue to be applied to the same 
milk to which the present assessment applies. The Act specifies that 
persons who are regulated shall pay the cost of operating the program 
through an assessment on the milk handled by regulated persons who are 
defined as 

[[Page 43083]]
handlers under the order. The present 2-cent per hundredweight maximum 
allowable rate of assessment has been provided for the administration 
of Order 40 since the order became effective on December 1, 1960.
    The 2-cent increase in the maximum allowable rate was proposed by 
MMPA. During the initial hearing, a witness for the cooperative 
association testified that the present ceiling on the deduction rate 
for administrative services does not adequately compensate the market 
administrator for all services rendered. In a post-hearing brief, MMPA 
stated that the market administrator should have the authority to 
collect revenue necessary to perform the duties required by 
regulations. There was no other testimony on this proposal at the 
hearing. NFO's brief expressed support for MMPA's proposal.
    The Ohio Valley, Eastern Ohio-Western Pennsylvania, Southern 
Michigan and Michigan Upper Peninsula orders (Orders 33, 36, 40 and 44) 
are administered under the supervision of a single market 
administrator, headquartered in Cleveland, Ohio. Prior to 1992, Federal 
Orders 33 and 36 were administered by another market administrator.
    The Balance Sheets and Income and Expense Statements for the 
Administrative Fund are compiled by the market administrator and 
reported annually to regulated handlers as well as to other interested 
parties. Record data for the years 1990 and 1991 show that the 
administrative expenses associated with the operation of Orders 40 and 
44 exceeded the income the market administrator received from 
assessments by $80,000. However, when the four markets were 
consolidated in 1992, income exceeded expenses by $400,000. The change 
indicates that Orders 33 and 36 are bearing some of the financial 
responsibilities of Orders 40 and 44.
    The witness for MMPA stated that the current rates of assessment 
for Federal Orders 33 and 36 are higher than for Orders 40 and 44. 
Furthermore, the witness noted, the recent recommended decision for 
Orders 33 and 36 sets the maximum allowable deduction rate for 
administrative services at 4 cents per hundredweight.
    Handlers and producers serving the market have jointly asked that a 
new multiple component pricing program be provided to adjust the value 
of milk used by regulated handlers and payments to producers. The 
implementation and administration of that pricing plan for Order 40 may 
require the purchase of some new laboratory equipment and the 
performance of additional administrative duties. Many of the testing 
expenses associated with the multiple component pricing plan would be 
paid for with money from the marketing service fund. However, because 
the value of milk used by handlers in Classes I, II and III would be 
established on the basis of the milk's butterfat, protein, fluid 
carrier, and somatic cell content, some of the expenses related to 
establishing the level of these factors in producer milk likely would 
be paid for with money from the administrative fund. Thus, there is no 
reason to expect the expenses of administering the order to decline.
    Providing a higher maximum rate of assessment in the order does not 
mean that the higher rate will apply automatically when the amended 
order becomes effective. The amendment gives the market administrator 
the discretionary authority to set the rate at any level up to the 
maximum specified in the order. When the amended order becomes 
effective, the market administrator may decide that no change in the 
effective assessment rate is necessary or that some increase to a level 
less than the maximum allowed is warranted. Further, an increase in the 
maximum rate will assure that Order 40 will bear, with Orders 33 and 
36, an equitable share of the cost of operating the market 
administrator's office.
    6. Marketing service assessment. The maximum rate of deduction from 
payments to nonmember producers for the cost of providing marketing 
services such as butterfat, protein, somatic cell testing, and market 
information for nonmember producers should be increased to 7 cents per 
hundredweight under the Southern Michigan order. The increase is needed 
to assure sufficient revenue to cover the expenses incurred by the 
market administrator in providing such services to producers who are 
not members of a qualified cooperative association. Currently, the 
maximum allowable deduction for such services is 5 cents per 
hundredweight. Like the administrative assessment, this maximum rate 
has been effective since December 1, 1960.
    During the initial hearing, MMPA proposed that the maximum 
allowable assessment rate for marketing services be increased to 7 
cents per hundredweight. The MMPA representative testified that the 
market administrator provides services which involve verification of 
weights, samples and tests of milk received from producers, as well as 
providing market information to producers who are not members of a 
cooperative association. The witness and MMPA's post-hearing brief 
stated that in order for the market administrator to adequately perform 
the duties required by the order, he must be allowed to have the 
authority to collect the revenue necessary to provide those services. A 
post-hearing brief filed on behalf of NFO supported MMPA's proposal. 
There was no opposition to the proposal.
    The Ohio Valley, Eastern Ohio-Western Pennsylvania, Southern 
Michigan and Michigan Upper Peninsula orders (Orders 33, 36, 40 and 44) 
are administered under the supervision of a single market 
administrator, headquartered in Cleveland, Ohio. Prior to 1992, Federal 
Orders 33 and 36 were administered by another market administrator.
    The Balance Sheets and Income and Expense Statements for the 
Marketing Service Fund are compiled by the market administrator and 
reported annually to nonmember producers as well as to other interested 
parties. Record data for the years 1990 and 1991 show that the expenses 
incurred by the market administrator in providing marketing services 
exceeded income by about $54,000. In 1992, when the statements for the 
four markets were combined, expenses exceeded income by approximately 
$116,000.
    It is evident from the foregoing that the 5-cent deduction from 
producer payments for marketing services in the Southern Michigan order 
has been inadequate to cover the costs incurred in the performance of 
such duties by the market administrator. It also shows that the 
financial situation worsened when the statements were combined in 1992. 
The increase will align the maximum marketing service assessment rate 
of Order 40 with that recently adopted for Orders 33 and 36. In 
addition, the multiple component pricing plan recommended in this 
decision will require additional testing activities. Because not all 
handlers are equipped to make all of the determinations that will be 
required under the amended order, many of these duties will have to be 
performed by the market administrator responsible for administering the 
order.
    The 7-cent maximum rate of deduction for marketing services 
proposed by MMPA should be provided in Order 40. The higher rate should 
give the market administrator the necessary flexibility to conduct 
effective marketing service programs, including any additional duties 
relating to the implementation and administration of the new pricing 
program that will be incorporated in the order.
    Provision of a 7-cent maximum rate does not mean that the 7-cent 
rate will 

[[Page 43084]]
become effective automatically. Maximum rather than fixed rates of 
deduction are specified in the orders because the relationship between 
income and expenses for the fund is subject to many variables. Changes 
in the pounds of nonmember milk marketed and the rate assessed on these 
marketings increase or decrease the income of the marketing service 
fund, while changes in order requirements and the expenses of providing 
marketing services result in changes in total outlays.
    An increase in the maximum allowable assessment will give the 
market administrator the discretionary authority to set the rates of 
deduction for marketing services at levels necessary to cover the 
expense of providing marketing services. The market administrator may 
use his discretionary authority to determine if rates below the upper 
limits adopted in the amended order will provide sufficient funding to 
conduct an adequate program for nonmember producers.
    9. Conforming changes. To accommodate multiple component pricing, a 
number of changes need to be made in the current order provisions of 
the Southern Michigan order. 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. The Class III-A differential price should be 
defined as the difference between the current month's Class III-A price 
and the current month's Class III price.
    These differential prices should not be confused with the fixed 
values that are added to the M-W price for the second preceding month 
to arrive at the Class I and Class II prices for the current month. It 
should also be pointed out that these differential prices may be 
negative, which currently happens when the M-W price is greater than 
any of these prices.
    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, rounded to the nearest full cent. Prices for 
butterfat, protein, and fluid carrier residual were defined previously 
within this decision.
    Because producer location adjustments are not changed in this 
decision, the application of such adjustments to the producer price 
differential remains unchanged.
    To enable 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 somatic cell information. 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.
    Handlers purchasing milk from cooperative pool plants will have 
their obligations for Class I milk computed 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 and 
Class III-A milk at the Class II and Class III-A differential prices, 
respectively, plus the pounds of protein at the protein price adjusted 
for somatic cell count, plus the hundredweight of fluid carrier at the 
fluid carrier price, plus the pounds of butterfat at the butterfat 
price; and for Class III milk the protein pounds times the protein 
price adjusted for somatic cell count, plus the hundredweight of fluid 
carrier at the fluid carrier price, plus the pounds of butterfat at the 
butterfat price. Payment for 9(c) milk will be based on the producer 
price differential adjusted for location at the plant of receipt plus 
the value of protein adjusted for somatic cell count, fluid carrier, 
and butterfat contained in the milk.
    Because 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 with: (a) the pounds of 
butterfat, the pounds of protein, and the hundredweight of fluid 
carrier 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 pricing factor and, if a different rate is paid, 
the effective rate also.
    A 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, (f) the value of 
handler location adjustments, (g) Class III-A credits, (h) the pounds 
of skim milk in Class I times the skim milk price, (i) the pounds of 
protein in Class II and Class III times the protein price adjusted for 
the average somatic cell count of the handler's producer milk receipts, 
and (j) the hundredweight of fluid carrier in Class II and Class III 
times the fluid carrier price.
    The pounds of protein in Class II and Class III will be determined 
by multiplying the percent protein 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. The hundredweight of fluid carrier 
in Class II and Class III will be determined by subtracting from the 
pounds of skim milk allocated to Class II and Class III the pounds of 
protein in Class II and Class III.
    Handlers' 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, plus or minus the net somatic cell adjustment of producer milk 
received by the handler, (c) the total hundredweight of fluid carrier 
contained in the producer milk times the fluid carrier 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 decision are 
based on the current language of the Southern Michigan order, which 
includes any changes to the orders made necessary by the two national 
amendatory proceedings (Class II pricing and the M-W replacement) that 
were completed in March and April 1995.
    NCI's exception requested that sufficient time be allowed following 
issuance of the final decision to implement the MCP plan. Although a 
similar request in the five midwest markets multiple component 
proceeding was responded to favorably, that request was made by a 
number of producer groups and handlers in those marketing areas. There 
were no Southern Michigan handlers or producer groups who indicated any 
need for a delay in the 

[[Page 43085]]
implementation of the provisions proposed in this decision. Therefore, 
such a delay is not warranted in this proceeding.

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 Southern Michigan order 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 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, insure a sufficient quantity of pure and wholesome 
milk, and be in the public interest;
    (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; and
    (d) It is hereby found that the necessary expense of the market 
administrator for the maintenance and functioning of such agency will 
require the payment by each handler, as his pro rata share of such 
expense, 4 cents per hundredweight or such lesser amount as the 
Secretary may prescribe, with respect to milk specified in Sec. 1040.85 
of the aforesaid tentative marketing agreement and the order as 
proposed to be amended.

Rulings on Exceptions

    In arriving at the findings and conclusions, and the regulatory 
provisions of this decision, each of the exceptions received was 
carefully and fully considered in conjunction with the record evidence. 
To the extent that the findings and conclusions and the regulatory 
provisions of this decision are at variance with any of the exceptions, 
such exceptions are hereby overruled for the reasons previously stated 
in this decision.

Marketing Agreement and Order

    Annexed hereto and made a part hereof are two documents, a 
Marketing Agreement regulating the handling of milk, and an Order 
amending the order regulating the handling of milk in the Southern 
Michigan marketing area, which have been decided upon as the detailed 
and appropriate means of effectuating the foregoing conclusions.
    It is hereby ordered that this entire decision and the two 
documents annexed hereto be published in the Federal Register.

Determination of Producer Approval and Representative Period

    May 1995 is hereby determined to be the representative period for 
the purpose of ascertaining whether the issuance of the order, as 
amended and as hereby proposed to be amended, regulating the handling 
of milk in the Southern Michigan marketing area is approved or favored 
by producers, as defined under the terms of the order as amended and as 
hereby proposed to be amended, who during such representative period 
were engaged in the production of milk for sale within the aforesaid 
marketing area.

List of Subjects in 7 CFR Part 1040

    Milk marketing orders.

    Dated: August 11, 1995.
Patricia Jensen,
Acting Assistant Secretary, Marketing and Regulatory Programs.
Order Amending the Order Regulating the Handling of Milk in the 
Southern Michigan Marketing Area

    This order shall not become effective unless and until the 
requirements of Sec. 900.14 of the rules of practice and procedure 
governing proceedings to formulate marketing agreements and marketing 
orders have been met.

Findings and Determinations

    The findings and determinations hereinafter set forth supplement 
those that were made when the order 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) Findings. A public hearing was held upon certain proposed 
amendments to the tentative marketing agreement and to the order 
regulating the handling of milk in the Southern Michigan marketing 
area. The hearing was held 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 (7 CFR Part 
900).
    Upon the basis of the evidence introduced at such hearing and the 
record thereof, it is found that:
    (1) The said order as hereby amended, and all of the terms and 
conditions thereof, will tend to effectuate the declared policy of the 
Act;
    (2) 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 aforesaid marketing area. The minimum 
prices specified in the order as hereby 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;
    (3) The said order as hereby amended regulates the handling of milk 
in the same manner as, and is applicable only to persons in the 
respective classes of industrial or commercial activity specified in, a 
marketing agreement upon which a hearing has been held; and
    (4) It is hereby found that the necessary expense of the market 
administrator for the maintenance and functioning of such agency will 
require the payment by each handler, as his pro rata share of such 
expense, of 4 cents per hundredweight or such lesser amount as the 
Secretary may prescribe, with respect to milk specified in 
Sec. 1040.85.

Order Relative to Handling

    It is therefore ordered, that on and after the effective date 
hereof, the handling of milk in the Southern Michigan marketing area 
shall be in conformity to and in compliance with the terms and 
conditions of the order, as amended, and as hereby amended, as follows: 


[[Page 43086]]

    The provisions of the proposed marketing agreement and order 
amending the order contained in the revised recommended decision issued 
by the Administrator, Agricultural Marketing Service, on December 2, 
1994, and published in the Federal Register on December 14, 1994 (59 FR 
64464), shall be and are the terms and provisions of this order, 
amending the order, and are set forth in full herein, subject to the 
following modifications:
    a. A change in the application of the market administrator's 
discretion to modify supply plant shipping percentages has been made to 
Sec. 1040.7(b) by removing (6)(iii) and adding (7).
    b. Changes in the treatment of the somatic cell adjustment require 
modification of reporting requirements in Sec. 1040.30(a).
    c. Additional changes due to the treatment of the somatic cell 
adjustment have been made by adding Sec. 1040.50(l), deleting 
Sec. 1040.64, and modifying Sec. 1040.60(a)(5).
    d. Changes for the purpose of more easily accommodating Class III-A 
provisions have been made by adding Secs. 1040.50(g) and 1040.60(a)(3) 
and deleting Sec. 1040.61(a)(3).
    e. A change for the purpose of conforming with amendments resulting 
from the Class II pricing proceeding has been made in Sec. 1040.53(b).
    f. Changes for the purpose of conforming with amendments resulting 
from the M-W replacement proceeding have been made in Sec. 1040.74.
    g. Changes for the purpose of correcting or clarifying order 
language have been made in the introductory text and paragraph (k) 
(formerly (j)) of Sec. 1040.50, Sec. 1040.60(a)(6), Sec. 1040.61(a)(4) 
and (5), Sec. 1040.62(e), Sec. 1040.63(a), (c), and (d), 
Sec. 1040.71(a)(2)(ii) and (a)(2)(iv), Sec. 1040.73(b)(1)(ii) and (c), 
and Sec. 1040.75(a)(1).
    Accordingly, this decision proposes 7 CFR Chapter X be amended as 
follows:

PART 1040--MILK IN THE SOUTHERN MICHIGAN MARKETING AREA

    1. The authority citation for 7 CFR Part 1040 continues to read as 
follows:

    Authority: 7 U.S.C. 601-674.

    2. Section 1040.7 is amended by adding paragraphs (b)(5)(iii) and 
(b)(7) to read as follows:


Sec. 1040.7   Pool Plant.

* * * * *
    (b) * * *
    (5) * * *
    (iii) Partially regulated distributing plants that are neither 
other order plants, producer-handler plants, nor exempt plants and from 
which there is route disposition in consumer-type packages or dispenser 
units in the marketing area during the month.
* * * * *
    (7) The shipping percentages determined pursuant to paragraphs 
(b)(1) or (b)(6) of this section may be increased or decreased by the 
market administrator if the market administrator finds that such 
revision is necessary to encourage needed shipments or to prevent 
uneconomic shipments. Before making such a finding, the market 
administrator shall investigate the need for revision either on the 
market administrator's own initiative or at the request of interested 
parties. If the investigation shows that a revision of the shipping 
requirements might be appropriate, the market administrator shall issue 
a notice stating that the revision is being considered and invite data, 
views, and arguments. Any request for revision of shipping percentages 
shall be filed with the market administrator no later than the 15th day 
of the month prior to the month for which the requested revision is 
desired to be effective.
* * * * *
    3. Section 1040.30 is amended by revising paragraphs (a) and (c), 
and removing paragraph (d), to read as follows:


Sec. 1040.30  Reports of receipts and utilization.

* * * * *
    (a) Each handler described in Sec. 1040.9(a), (b), and (c) shall 
report for each of its operations the following information:
    (1) Product pounds, pounds of butterfat, pounds of protein, and the 
value of the somatic cell adjustment contained in or represented by:
    (i) Receipts of producer milk, including producer milk diverted by 
the handler, and
    (ii) Receipts of milk from handlers described in Sec. 1040.9(c).
    (2) Product pounds and pounds of butterfat contained in:
    (i) Receipts by transfer or diversion of bulk fluid milk products;
    (ii) Receipts of fluid milk products not included in (a)(1) or 
(a)(2)(i) of this section and bulk fluid cream products from any 
source;
    (iii) Receipts of other source milk; and
    (iv) Inventories at the beginning and end of the month of fluid 
milk products and products specified in Sec. 1040.40(b)(1).
    (3) The utilization or disposition of all milk, filled milk, and 
milk products required to be reported pursuant to this paragraph.
    (4) Such other information with respect to the receipts and 
utilization of skim milk, butterfat, milk protein, and somatic cell 
information, as the market administrator may prescribe.
* * * * *
    (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.
    4. Section 1040.31 is amended by revising paragraph (a) to read as 
follows:


Sec. 1040.31  Payroll reports.

    (a) On or before the 20th day after the end of each month, each 
handler described in Sec. 1040.9(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:
    (1) The producer's name and address;
    (2) The total pounds of milk received from such producer, with its 
protein and butterfat percentage;
    (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 somatic cell count of the producer's milk;
    (6) The amount, or the rate per hundredweight, or rate per pound of 
component, the somatic cell adjustment to the protein price, the gross 
amount due, the amount and nature of any deductions, and the net amount 
paid.
* * * * *
    5. Section 1040.41 is amended by revising the second sentence of 
paragraph (c) to read as follows:


Sec. 1040.41  Shrinkage.

* * * * *
    (c) * * * If the operator of the plant to which the milk is 
delivered purchases such milk on the basis of weights determined by 
farm bulk tank calibration, with protein and butterfat tests and 
somatic cell counts determined from farm bulk tank samples, the 
applicable percentage for the cooperative association shall be zero.
    6. Section 1040.50 is amended by revising the section heading, 
introductory text and paragraph (a), and adding paragraphs (e) through 
(l), to read as follows:


Sec. 1040.50  Class and component prices.

    Subject to the provisions of Sec. 1040.52, the class prices per 
hundredweight of milk containing 3.5 percent butterfat 

[[Page 43087]]
and the component prices per hundredweight or per pound 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 $1.75.
* * * * *
    (e) Class I differential price. The Class I differential price 
shall be the difference between the current month's Class I and Class 
III price (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 price (this price may be negative).
    (g) Class III-A differential price. The Class III-A differential 
price shall be the difference between the current month's Class III-A 
and Class III price (this price may be negative).
    (h) 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.
    (i) 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.
    (j) 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.
    (k) Fluid carrier price. The fluid carrier price per hundredweight, 
rounded to the nearest whole cent, shall be the basic formula price at 
test less the average butterfat test of the basic formula price as 
reported by the Department times the butterfat price, less the average 
protein test of the basic formula price as reported by the Department 
for the month times the protein price (this price may be negative).
    (l) Somatic cell adjustment. For each producer, an adjustment to 
the protein price for the somatic cell count of the producer's milk 
shall be determined by multiplying the constant associated with the 
appropriate somatic cell count interval in the following table by the 
simple average price for the month of 40-pound blocks of Cheddar cheese 
at the National Cheese Exchange as reported by the Department. If a 
handler has not determined a monthly average somatic cell count, it 
will be determined by the market administrator.

------------------------------------------------------------------------
                                                              Constants 
                                                                 for    
                                                              computing 
                    Somatic cell counts                      the somatic
                                                                cell    
                                                             adjustment 
------------------------------------------------------------------------
1 to 50,000...............................................      .078125 
51,000 to 100,000.........................................      .062500 
101,000 to 150,000........................................      .046875 
151,000 to 200,000........................................      .031250 
201,000 to 250,000........................................      .015625 
251,000 to 300,000........................................      .0078125
301,000 to 350,000........................................      .000000 
351,000 to 400,000........................................      .000000 
401,000 to 450,000........................................     -.0078125
451,000 to 500,000........................................     -.015625 
501,000 to 550,000........................................     -.0234375
551,000 to 600,000........................................     -.031250 
601,000 to 650,000........................................     -.0390625
651,000 to 700,000........................................     -.046875 
701,000 to 750,000........................................     -.062500 
751,000 and above.........................................     -.078125 
------------------------------------------------------------------------

    7. Section 1040.53 is revised to read as follows:


Sec. 1040.53  Announcement of class and component prices.

    On or before the 5th day of the month, the market administrator 
shall announce the following prices and any other price information 
deemed appropriate:
    (a) The Class I price for the following month;
    (b) The Class II price for the following month;
    (c) The Class III price for the preceding month;
    (d) The Class III-A price for the preceding month;
    (e) The skim milk price for the preceding month;
    (f) The butterfat price for the preceding month;
    (g) The protein price for the preceding month;
    (h) The fluid carrier price for the preceding month;
    (i) The butterfat differential for the preceding month;
    8. The section heading in Sec. 1040.60 and the undesignated 
centerheading preceding it, the introductory text, and paragraphs (a) 
and (f) are revised to read as follows:

Producer Price Differential


Sec. 1040.60  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 with respect to each of the handler's pool 
plants and of each handler described in Sec. 1040.9(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. 1040.44(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. 1040.44(c) 
by the Class II differential price for the month;
    (3) Add an amount obtained by multiplying the total hundredweight 
of producer milk eligible to be priced as Class III-A by the Class III-
A differential price for the month;
    (4) Add an amount obtained by multiplying the hundredweight of skim 
milk in Class I as determined pursuant to Sec. 1040.44(a) by the skim 
milk price;
    (5) Add an amount obtained by multiplying the pounds of skim milk 
in Class II and Class III as determined pursuant to Sec. 1040.44(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 for the month computed pursuant to Sec. 1040.50(j) and adjusted 
pursuant to Sec. 1040.50(l) for the weighted average somatic cell 
content of the handler's receipts of milk; and
    (6) Add a fluid carrier value calculated as follows: Subtract from 
the pounds of skim milk allocated to Class II and Class III pursuant to 
Sec. 1040.44(a) the protein pounds contained therein, determined by 
multiplying the pounds of skim milk in Class II and Class III by the 
average protein content of producer skim milk received by the handler; 
then multiply the resulting pounds (in hundredweight) of fluid carrier 
by the fluid carrier price.
* * * * *
    (f) Add an 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. 1040.43(e) and 
Sec. 1040.44(a)(7)(i) and the pounds of skim milk and butterfat 
subtracted from Class I pursuant to Sec. 1040.44(a)(11) and the 
corresponding steps of Sec. 1040.44(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;
* * * * *
    9. Section 1040.61, including the section heading, is revised to 
read as follows: 

[[Page 43088]]



Sec. 1040.61  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. 1040.60(a)(1), (a)(2), 
(a)(3) and (b) through (i) for all handlers who made reports pursuant 
to Sec. 1040.30 for the month and who made payments pursuant to 
Sec. 1040.71 for the preceding month;
    (2) Add the values computed pursuant to Sec. 1040.60(a)(4), (a)(5), 
and (a)(6); and subtract the values obtained by multiplying the 
handlers' total pounds of protein and total hundredweight of fluid 
carrier contained in such milk by their respective prices;
    (3) Add an amount equal to the total value of the applicable 
location adjustments computed pursuant to Sec. 1040.75(a)(1); and
    (4) Add an amount equal to not less than one-half of the 
unobligated balance in the producer-settlement fund.
    (b) Divide the aggregate value computed pursuant to paragraph (a) 
of this section by the sum of the following:
    (1) The total hundredweight of producer milk; and
    (2) The total hundredweight for which a value is computed pursuant 
to Sec. 1040.60(f).
    (c) Subtract not less than 6 cents nor more than 7 cents per 
hundredweight. The result shall be the ``producer price differential.''
    10. Section 1040.62 is revised to read as follows:


Sec. 1040.62  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 fluid carrier price;
    (d) The butterfat price;
    (e) The average butterfat content and protein 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.
    11. A new section 1040.63 is added under the undesignated 
centerheading ``Producer Price Differential'' to read as follows:

Producer Price Differential


Sec. 1040.63  Value of producer milk.

    The value of producer milk shall be the sum of:
    (a) The producer price differential computed pursuant to 
Sec. 1040.61 and adjusted for location pursuant to Sec. 1040.75, 
multiplied by the total hundredweight of producer milk received from 
the producer;
    (b) The butterfat price computed pursuant to Sec. 1040.50(i), 
multiplied by the total pounds of butterfat contained in the producer 
milk received from the producer;
    (c) The protein price computed pursuant to Sec. 1040.50(j), 
adjusted for somatic cell count pursuant to Sec. 1040.50(l), multiplied 
by the total pounds of protein contained in the producer milk received 
from the producer; and
    (d) The fluid carrier price computed pursuant to Sec. 1040.50(k), 
multiplied by the total hundredweight of fluid carrier contained in the 
producer milk received from the producer.
    12. Section 1040.71 is amended by revising paragraphs (a)(1) and 
(a)(2) to read as follows:


Sec. 1040.71  Payments to the producer-settlement fund.

    (a) * * *
    (1) The total value of milk of the handler for such month as 
determined pursuant to Sec. 1040.60.
    (2) The sum of:
    (i) An amount obtained by multiplying the total hundredweight of 
producer milk as determined pursuant to Sec. 1040.44(c) by the producer 
price differential, excluding any applicable location adjustment 
pursuant to Sec. 1040.75(a)(3);
    (ii) An amount obtained by multiplying the total pounds of protein 
contained in producer milk by the protein price adjusted pursuant to 
Sec. 1040.50(l) for the weighted average somatic cell content of the 
handler's receipts of milk;
    (iii) An amount obtained by multiplying the total hundredweight of 
fluid carrier contained in producer milk by the fluid carrier price; 
and
    (iv) An amount obtained by multiplying the pounds of skim milk and 
butterfat for which a value was computed pursuant to Sec. 1040.60(f) by 
the producer price differential.
* * * * *
    13. Section 1040.73 is amended by revising the first sentence of 
paragraph (a), paragraph (b)(1)(ii), and paragraph (c), to read as 
follows:


Sec. 1040.73  Payments to producers and to cooperative associations.

    (a) Except as provided by paragraph (b) of this section, on or 
before the 15th day of each month, each handler (except a cooperative 
association) shall pay each producer for milk received from the 
producer during the preceding month not less than the value determined 
pursuant to Sec. 1040.63 adjusted by the location differential pursuant 
to Sec. 1040.75, less the payment made pursuant to paragraph (d) of 
this section. * * *
    (b) * * *
    (1) * * *
    (ii) The total pounds of butterfat, total pounds of protein, and 
total pounds of fluid carrier contained in the producer's milk, and the 
average somatic cell count of the producer's milk;
* * * * *
    (c) On or before the 13th day after the end of each month, each 
handler shall pay a cooperative association which is a handler with 
respect to milk received by the handler from a pool plant operated by 
such cooperative association, or by bulk tank delivery pursuant to 
Sec. 1040.9(c), not less than an amount computed pursuant to 
Sec. 1040.63.
* * * * *
    14. Section 1040.74 is revised to read as follows:


Sec. 1040.74  Butterfat differential.

    The butterfat differential, rounded to the nearest one-tenth cent, 
shall be 0.138 times the current month's butter price less 0.0028 times 
the preceding month's average pay price per hundredweight, at test, for 
manufacturing grade milk in Minnesota and Wisconsin, using the ``base 
month'' series, adjusted pursuant to Sec. 1040.51(a) through (e), as 
reported by the Department. The butter price means the simple average 
for the month of the Chicago Mercantile Exchange, Grade A butter price 
as reported by the Department.
    15. Section 1040.75 is amended by revising paragraphs (a)(1) and 
(c), to read as follows:


Sec. 1040.75  Plant location adjustments for producers and on nonpool 
milk.

    (a) * * *
    (1) May deduct from the producer price differential the rate per 
hundredweight applicable pursuant to Sec. 1040.52(a)(1) or (2) for the 
location of the plant at which the milk was first physically received.
* * * * *
    (c) For purposes of computation pursuant to Secs. 1040.71 and 
1040.72, the statistical uniform price shall be 

[[Page 43089]]
adjusted at the rates set forth in Sec. 1040.52 applicable at the 
location of the nonpool plant from which the other source milk was 
received except that the statistical uniform price, so adjusted, shall 
not be less than the Class III price. 16. Section 1040.76 is amended by 
revising paragraph (a)(4) and the third sentence of paragraph 
(b)(1)(ii), to read as follows:


Sec. 1040.76  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 (but not to be less than the Class III price); 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. 1040.60 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
* * * * *


Sec. 1040.85  [Amended]

    17. In Section 1040.85 the introductory text is amended by removing 
the words ``2 cents'' and adding in their place the words ``4 cents''.


Sec. 1040.86  [Amended]

    18. In Section 1040.86 paragraph (a) is amended by removing the 
words ``5 cents'' and adding in their place the words ``7 cents''.

    Note: This marketing agreement will not appear in the Code of 
Federal Regulations.

Marketing Agreement Regulating the Handling of Milk in Certain 
Marketing Areas

    The parties hereto, in order to effectuate the declared policy 
of the Act, and in accordance with the rules of practice and 
procedure effective thereunder (7 CFR Part 900), desire to enter 
into this marketing agreement and do hereby agree that the 
provisions referred to in paragraph I hereof as augmented by the 
provisions specified in paragraph II hereof, shall be and are the 
provisions of this marketing agreement as if set out in full herein.
    I. The findings and determinations, order relative to handling, 
and the provisions of Secs. 1040.1 to 1040.86, all inclusive, of the 
order regulating the handling of milk in the Southern Michigan 
marketing area (7 CFR PART 1040) which is annexed hereto; and
    II. The following provisions: Sec. 1040.87 Record of milk 
handled and authorization to correct typographical errors.
    (a) Record of milk handled. The undersigned certifies that he/
she handled during the month of May 1995, ____________ hundredweight 
of milk covered by this marketing agreement.
    (b) Authorization to correct typographical errors. The 
undersigned hereby authorizes the Director, or Acting Director, 
Dairy Division, Agricultural Marketing Service, to correct any 
typographical errors which may have been made in this marketing 
agreement.
    Sec. 1040.88 Effective date. This marketing agreement shall 
become effective upon the execution of a counterpart hereof by the 
Secretary in accordance with Section 900.14(a) of the aforesaid 
rules of practice and procedure.
    In Witness Whereof, The contracting handlers, acting under the 
provisions of the Act, for the purposes and subject to the 
limitations herein contained and not otherwise, have hereunto set 
their respective hands and seals.

Signature

By (Name)--------------------------------------------------------------

(Title)----------------------------------------------------------------

(Address)--------------------------------------------------------------

(Seal)

Attest

[FR Doc. 95-20347 Filed 8-17-95; 8:45 am]
BILLING CODE 3410-02-P