[Federal Register Volume 61, Number 182 (Wednesday, September 18, 1996)]
[Proposed Rules]
[Pages 49081-49086]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-23825]



[[Page 49081]]

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

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


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

------------------------------------------------------------------------
 7 CFR                                                                  
 part               Marketing area                      AO Nos.         
------------------------------------------------------------------------
1001..  New England..........................  AO-14-A64                
1002..  New York-New Jersey..................  AO-71-A79                
1004..  Middle Atlantic......................  AO-160-A67               
1005..  Carolina.............................  AO-388-A3                
1006..  Upper Florida........................  AO-356-A29               
1007..  Southeast............................  AO-366-A33               
1011..  Tennessee Valley.....................  AO-251-A35               
1012..  Tampa Bay............................  AO-347-A32               
1013..  Southeastern Florida.................  AO-286-A39               
1030..  Chicago Regional.....................  AO-361-A28               
1032..  Southern Illinois-Eastern Missouri...  AO-313-A39               
1033..  Ohio Valley..........................  AO-166-A60               
1036..  Eastern Ohio-Western Pennsylvania....  AO-179-A55               
1040..  Southern Michigan....................  AO-225-A42               
1044..  Michigan Upper Peninsula.............  AO-299-A26               
1046..  Louisville-Lexington-Evansville......  AO-123-A62               
1049..  Indiana..............................  AO-319-A38               
1050..  Central Illinois.....................  AO-355-A27               
1064..  Greater Kansas City..................  AO-23-A60                
1065..  Nebraska-Western Iowa................  AO-86-A47                
1068..  Upper Midwest........................  AO-178-A45               
1075..  Black Hills, South Dakota............  AO-248-A21               
1076..  Eastern South Dakota.................  AO-260-A30               
1079..  Iowa.................................  AO-295-A41               
1106..  Southwest Plains.....................  AO-210-A52               
1124..  Pacific Northwest....................  AO-368-A19               
1126..  Texas................................  AO-231-A60               
1131..  Central Arizona......................  AO-271-A29               
1134..  Western Colorado.....................  AO-301-A22               
1135..  Southwestern Idaho-Eastern Oregon....  AO-380-A9                
1137..  Eastern Colorado.....................  AO-326-A26               
1138..  New Mexico-West Texas................  AO-335-A36               
1139..  Great Basin..........................  AO-309-A30               
------------------------------------------------------------------------

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Second Amplified Decision.

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SUMMARY: On May 16, 1996, the United States District Court for the 
District of Minnesota issued an opinion and order that directed the 
Secretary of Agriculture to issue a second Amplified Decision that more 
fully explains the conclusions reached in a Final Decision published in 
the Federal Register on March 5, 1993, and in the first Amplified 
Decision published in the Federal Register on August 17, 1994. This 
document responds to that order and supplements and clarifies the 
findings and conclusions of the Final Decision and first Amplified 
Decision.

FOR FURTHER INFORMATION CONTACT: Gino M. Tosi, Marketing Specialist, 
Order Formulation Branch, USDA/AMS/Dairy Division, Room 2968, South 
Building, P.O. Box 96456, Washington, DC 20090-6456, (202) 720-6274.

SUPPLEMENTARY INFORMATION: When the administrative proceeding in this 
matter was initiated, the Notice of Hearing listed separately the 
Lubbock-Plainview, Texas (Part 1120); the Texas Panhandle (Part 1132); 
and Rio Grande Valley (Part 1138) orders. These orders were merged 
effective December 1, 1991, under the name of the New Mexico-West Texas 
order, which is 7 CFR Part 1138. Additionally, the Georgia (Part 1007), 
Alabama-West Florida (Part 1093), New Orleans-Mississippi (Part 1094), 
Greater Louisiana (Part 1096), and Central Arkansas (Part 1108) orders 
were merged to form a new order named the Southeast order effective 
July 1, 1995 and is now 7 CFR Part 1007. The Memphis, Tennessee and 
Nashville, Tennessee, Orders were terminated effective July 31, 1993, 
and the Paducah, Kentucky, order was terminated on November 1, 1995.

Prior documents in this proceeding

    Advance Notice of Proposed Rulemaking: Issued March 29, 1990; 
published April 3, 1990 (55 FR 12369).
    Notice of Hearing: Issued July 11, 1990; published July 17, 1990 
(55 FR 29034).
    Extension of Time for Filing Briefs and Reply Briefs: Issued March 
28, 1991; published April 3, 1991 (56 FR 13603).
    Recommended Decision: Issued November 6, 1991; published November 
22, 1991 (56 FR 58972).
    Extension of Time for Filing Exceptions: Issued December 24, 1991; 
published January 6, 1992 (57 FR 383).
    Final Decision: Issued February 5, 1993; published March 5, 1993 
(58 FR 12634).
    Proposed Termination of Order: Issued April 20, 1993; published 
April 27, 1993 (58 FR 25577).
    Final Rule and Order: Issued April 20, 1993; published May 11, 1993 
(58 FR 27774).

[[Page 49082]]

    Referendum Order: Issued June 25, 1993; published July 1, 1993 (58 
FR 35362).
    Final Rule and Withdrawal: Issued August 9, 1993; published August 
17, 1993 (58 FR 43518).
    Correction of Final Rule: Issued November 29, 1993; published 
December 6, 1993 (58 FR 64110).
    Amplified Final Decision: Issued August 10, 1994; published August 
17, 1994 (59 FR 42422).

Related Prior Documents Germane to this Amplified Decision II

    M-W Replacement:
    Notice of Hearing: Issued May 12, 1992; published May 15, 1992 (57 
FR 20790).
    Recommended Decision: Issued August 3, 1994; published August 6, 
1994 (59 FR 40418).
    Final Decision: Issued January 27, 1995; published February 7, 1995 
(60 FR 7290).
    Final Rule: Issued April 6, 1995; published April 14, 1995 (60 FR 
18952).
    Examples of Setting/Changing Class I Differentials:
    Final Decision: Issued October 7, 1966; published October 13, 1966 
(31 FR 13272).
    Final Decision: Issued August 14, 1991; published August 27, 1991 
(56 FR 42240).
    Final Decision: Issued September 27, 1978; published October 2, 
1978 (43 FR 45520).

Preliminary Statement

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

The Court's First Memorandum Opinion and Order

    On April 14, 1994, the United States District Court for the 
District of Minnesota issued a memorandum opinion and order. The Court 
held that the Secretary of Agriculture's Final Decision for the ``1990 
National Hearing'' on amending Federal milk orders was deficient in 
part. The Court found that the Secretary's decision to retain the 
existing Class I pricing structure was tantamount to a finding that the 
structure continued to satisfy the requirements of the AMAA as set out 
in Sec. 608c(18). The Court stated this conclusion might or might not 
be supported by evidence from the 1990 National Hearing, but since 
explicit findings and explanations relative to the Sec. 608c(18) 
factors were not issued, the Court was unable to make that 
determination. The final decision was remanded to the Secretary for 120 
days for filing of an Amplified Decision.
    An Amplified Decision, published in the Federal Register on August 
17, 1994, provided additional findings and conclusions that addressed 
the material issue on the record of the 1990 National Hearing 
concerning Class I milk pricing and related issues. (See 59 FR 42422 et 
seq.). That document responded to the Court's questions and provided an 
amplified explanation of why the Secretary decided not to change the 
Class I pricing structure of Federal milk marketing orders and how such 
determination complied with the pricing requirements of Sec. 608c(18) 
of the AMAA.
    On May 16, 1996, the United States District Court for the District 
of Minnesota issued a second opinion and order expressing continued 
dissatisfaction with the Secretary's Final and Amplified Decisions. 
This second opinion again remanded the Final Decision to the Secretary 
of Agriculture for 120 days. According to the Court, the Final 
Decision, as further explained in the first Amplified Decision, failed 
to address adequately the Secretary's compliance with Sec. 608c(18) of 
the AMAA.
    After reviewing in detail the Court's second opinion and giving 
substantial consideration to the Court's views, the Secretary will 
attempt again to explain the final decisions to the Court. In this 
regard, however, the Secretary must first observe that the Court's 
conclusions appear to be based on an incomplete understanding of the 
purpose and evolutionary development of milk marketing orders which the 
Secretary attempts to clarify herein. Additionally, the approach to 
establishing minimum milk prices apparently envisioned by the Court 
would be virtually impossible to implement and, if attempted, would 
result in disorderly and unsettled market conditions. Therefore, before 
exploring in detail the Court's second opinion and the Secretary's 
Final and Amplified Decisions, the historical development of the 
classified pricing system, the realities of the dairy industry as it 
relates to the marketing of milk, the precise nature of the rulemaking 
underlying this litigation and the current status of the classified 
pricing system are considered.

Development of Classified Pricing for Milk

    Milk marketing orders are not imposed by the Federal government. To 
the contrary, dairy producers, often with the support of handlers, 
petition the Secretary to create an order regulating the handling of 
milk. The Secretary then investigates market conditions affecting 
supply and demand in the proposed order area, including the price and 
availability of feed. The Secretary then proposes an order which 
producers are entirely free to ratify or reject. (See 7 U.S.C. 
Sec. 608c(8)). Producers retain the right at all times to terminate 
their order. (See 7 U.S.C. Sec. 608c(16)). Thus, if producers believe 
that the minimum prices established under their orders do not reflect 
supply and demand conditions, including the cost and availability of 
feed, they are entirely free to seek amendment or termination of their 
orders or to refuse to ratify an amended order.
    As the Secretary explained in the first Amplified Decision, dairy 
producers, over time, elected to use the Minnesota-Wisconsin (M-W) 
price as the Class III price and to establish Class I prices under 
their orders. The M-W was first incorporated into the Chicago Regional 
order in 1961 and was adopted in all orders by 1975. In each and every 
instance in which the industry requested that an order be amended to 
adopt the M-W, the Secretary reviewed supply and demand conditions in 
the order, including the price and availability of feed. After this 
review and consistent with Sec. 608c(18), the Secretary found that the 
M-W price was a superior and appropriate measure of all of the factors 
required by Sec. 608c(18) than previous pricing formulae. In each case, 
producers ratified the amended orders incorporating the M-W price for 
milk used in Class III uses. Thus, for every order in the Federal order 
system, the Secretary has found, based on the Sec. 608c(18) factors, 
that use of the M-W price is consistent with the AMAA. If it would be 
instructive, the Secretary will

[[Page 49083]]

supply the Court with decisions from the proceedings leading to the 
adoption of the M-W in each milk marketing order.
    The Secretary also has established Class I differentials in all 
orders. These differentials, too, have been ratified by each order's 
producers. In setting these differentials, the Secretary (and the 
industry generally) has been aware for decades, the Upper Midwest 
region of the U.S. has produced much more milk than the region required 
to satisfy its demand for fluid milk. No other region of the country 
has ever generated such vast amounts of surplus milk nor does any other 
region do so today. Not surprisingly then, when other regions' supplies 
are insufficient to satisfy demand, the Upper Midwest tends to serve as 
the ultimate source of additional milk supplies. Thus, areas needing 
milk tend to receive it either through direct shipments from the Upper 
Midwest or from alternative supply areas that similarly can and do rely 
on the Upper Midwest's reserve supplies. The farther milk must move, 
the higher the cost of transportation and the resulting value of milk 
at the destination location. Therefore, Class I differentials are set 
at reasonable levels and provide the economic incentive to draw milk 
from surplus to deficit markets. They are largely reflective of the 
distance of the deficit market from the alternative supply areas, 
including the distance from the Upper Midwest. This system, based on 
the M-W price and aligned pricing, has applied for decades, was largely 
retained in the 1985 Food Security Act (FSA), and is reflected in the 
Class I differentials in place today. As the Secretary found in the 
Final Decision, this system did not require alteration because, among 
other articulated reasons, ``the industry for years has strongly 
supported a coordinated set of differentials based on fairly constant 
rates of change from market to market.'' (58 FR 12646).
    It is important to note that, like the order-by-order adoption of 
the M-W as the Class III price, Class I differentials were not simply 
developed by imposing gradually increasing differentials based on 
distance from the Upper Midwest. Rather, in the context of adopting 
each order, the Secretary examined the prevailing prices which handlers 
were paying to attract supplies of fluid milk from nearest areas of 
available supply to their location. Class I prices therefore reflect 
the price necessary to attract milk to a particular location from the 
nearest sources of supply. Thus, for example, to the extent that 
Florida's local milk supplies are not sufficient to meet demand, it 
must look northward for such additional supplies. Because the ultimate 
source of supply for most of the nation tends to be the Upper Midwest, 
handlers in turn seek supplies in a south to north general pattern. For 
this reason, but not due to any predetermined single basing point 
approach, the Class I differentials are reflective of the realities of 
such a south-north continuum.
    Three previous rulemaking decisions provide explicit examples in 
establishing or changing Class I differentials. Prevailing supply and 
demand conditions and alternative sources of supply, not distance from 
Eau Claire, determined the establishment of, or modification to, a 
market's Class I differential. In the Upper Florida promulgation 
decision, the nearest alternative source of supply was identified to be 
Nashville, Tennessee. (See 31 FR 13272). In two other decisions, Class 
I differentials were established based on prevailing supply and demand 
conditions and in light of the development of new alternative sources 
of supply. In the final decision merging three southwest orders into 
the New Mexico-West Texas marketing area (see 56 FR 42240), Class I 
differentials were established for the merged order in light of 
prevailing marketing conditions, the establishment of new alternative 
milk supplies, and the relationship between the new order and the 
adjoining Southwest Plains and Texas marketing areas. As a result, the 
Class I differential in the Texas marketing area was lowered to 
recognize the alternative milk supply available in New Mexico. 
Additionally, in the final decision concerning the New England 
marketing area (see 43 FR 45520), Class I differentials were adjusted 
in light of changed alternative sources of milk supply. In all three of 
these decisions, the distance from Eau Claire was not even mentioned or 
considered. If it would be instructive, the Secretary will supply the 
Court with decisions from other proceedings leading to the adoption of 
Class I differentials in each order which similarly set Class I 
differentials without Eau Claire being mentioned or considered.

The 1990 Rulemaking

    Turning to the rulemaking hearings conducted in 1990 which are the 
subject of the Court's second opinion, it is important to stress that 
this rulemaking did not address in any way the continued viability of 
the M-W as the automatic reflector of those supply and demand factors 
required by Sec. 608c(18). The 1990 rulemaking addressed, among other 
things, the concerns of certain sectors of the dairy industry that the 
Class I differentials established by the FSA should be overhauled. In 
response to those complaints, the Secretary invited the public to 
propose alternatives to the Class I pricing system which would provide 
a superior system for attaining the goals of the AMAA.
    The numerous proposals submitted and supporting testimony 
``portray[ed] a wide range of views regarding how Federal orders should 
be changed or not changed.'' (58 FR 12645). The organization 
representing the interests of the Minnesota Milk Producers Association 
(MMPA) (as well as other Upper Midwest dairy concerns) argued in the 
course of the hearing that a new approach to establishing Class I milk 
prices should be adopted. (Id. at 12646). MMPA's witness, however, like 
all other witnesses, did not provide any specific data on the price or 
availability of feed in any order market and nowhere suggested that the 
Secretary should tie classified prices to the price or availability of 
feed in any one or all Federal orders. (See generally id.). In fact, 
the witness for Upper Midwest interests (including MMPA) urged the 
Secretary to find that the cost of producing milk (presumably including 
the cost and availability of feed) did not vary across the order 
system. (See id. at 12646 (witness for Upper Midwest Federal Order 
Coalition (UMFOC) contended that ``costs of production are about the 
same across the country'')). (See also Trans., Sept. 12, 1990, pg. 162 
(there is ``equal cost of production across various regions.'')) 
Although not an issue in the rulemaking, the Secretary notes that this 
testimony supports the view that the M-W reflects market conditions in 
all orders and is properly included in the orders. After reviewing the 
various proposals for revamping the Class I pricing system, including 
the UMFOC's suggested flat Class I differential across the entire order 
system, (see 58 FR 12642) the Secretary determined to retain the extant 
Class I system because, based on his review of supply and demand 
conditions in all orders, the system furthered the goals and purposes 
of the AMAA.

The Secretary's Current Undertakings

    The Class I pricing system, indeed many aspects of the current 
order system itself, are now under renewed examination by the 
Secretary. Specifically, in the 1996 Farm Bill (formally known as the 
Federal Agriculture Improvement and Reform Act of 1996), Congress 
mandated that the Secretary consolidate the current number of milk 
marketing orders from 33 to not fewer than 10, and not more

[[Page 49084]]

than 14 milk marketing orders, and examine the Class I differentials 
for each of those new orders. In this legislation, Congress also 
authorized the Secretary to consider the Class I pricing system for 
fluid milk without reference to the existing system of Class I 
differentials. (See Secs. 143(a) (3) and (4)). Consistent with its 
longstanding approach, however, Congress did not question the use of 
the M-W as the price ``mover'' of other class prices, or the classified 
pricing system itself, in the 1996 Farm Bill.
    In light of the directives of the 1996 Farm Bill, the Secretary has 
undertaken proceedings to consider whether to fundamentally reshape 
milk pricing methods and standards. The Secretary has indicated that 
all options will be explored. The Secretary intends to define a 
preliminary order structure later this year and may, during the ensuing 
18 months, revise this structure based, among other sources, on 
industry comments and submissions. Furthermore, the Secretary at this 
time anticipates issuance of a final decision on these questions in 
approximately two years. It is certainly possible that the issues 
raised in this litigation will be rendered moot once the order program 
is reformed.

The Court's Second Opinion and Remand

    Opinion Background In its opinion, the Court correctly observes 
that the Upper Midwest is a chronic over-producer of milk for fluid 
uses and that certain regions of the country are, at times, unable to 
produce adequate supplies of milk to satisfy this demand. The Court 
then concludes, erroneously, that the Secretary established an 
elaborate system of price controls (i.e., Class I differentials) based 
directly on distance from the Upper Midwest to distant markets.
    As noted above, Federal milk marketing orders are not an elaborate 
system established to address the Upper Midwest's chronic oversupply 
situation. As the Secretary explained in his first Amplified Decision, 
the orders must be viewed in the context of the marketing conditions 
which led to their gradual adoption. The AMAA, insofar as it related to 
milk, embodies Congress's recognition that dairy farmers lacked 
adequate bargaining power in the market to ensure a fair price for 
their milk. The inherent characteristics of milk itself contribute, in 
large part, to this market inequity. For example, milk is highly 
perishable, cannot be stored for long periods of time and is bulky and 
expensive to transport.
    Furthermore, while demand for milk is relatively stable when 
measured season-to-season, demand varies on a daily basis. Therefore, 
to ensure that adequate supplies of fluid milk are available to supply 
the unpredictable and changing daily demand for milk, the industry must 
continually produce more milk than necessary.
    Milk not demanded for fluid uses, the so-called ``reserve,'' is 
manufactured into dairy products such as butter, nonfat dry milk and 
cheese. Unlike fluid milk, manufactured dairy products can be stored 
and shipped economically and therefore compete in broader, indeed 
national, markets. Since, based on improved transportation and other 
factors, the market for manufactured dairy products has for decades 
been national in scope, these products compete on an equal footing 
regardless of where they are produced.
    Manufactured products do, however, return a lower price to dairy 
farmers than milk used for fluid purposes. Before passage of the AMAA, 
dairy producers sometimes made uneconomic price concessions to maximize 
the use of their milk for fluid purposes. Thus, prior to the 
involvement of the Federal government, dairy farmers attempted to 
bargain with milk handlers for a flat price for all milk, regardless of 
use. But the pressures caused by the oversupplies of milk described 
above led to the breakdown of the flat pricing plans. Handlers would 
refuse to take excess milk from farmers at a flat price because it had 
a lower value when it was made into manufactured products. Handlers 
would respond by offering fluid milk to their customers at lower prices 
than their competitors. This in turn led to a lowering of the flat 
price paid to dairy farmers. In this regard, such pricing practices by 
handlers were viewed as ``predatory,'' placing the entire burden of 
destructive price competition solely on the backs of dairy farmers.
    Groups of dairy farmers, represented by their cooperatives, 
attempted to address such pricing practices by developing a 
``classified price system'' whereby milk was pooled and priced 
according to use, much like it is done today under the AMAA. Classified 
pricing had come into effect in a number of large markets in the 
country by about 1920. However, cooperative classified pricing plans 
were only partially successful because their success was dependent on 
participation by all groups in a market and because there remained 
certain advantages to staying out of these voluntary pricing 
arrangements. The economic depression of the 1930s accentuated the 
problems with voluntary classified pricing and pooling arrangements.
    The AMAA, enacted in 1937, provided, insofar as it relates to milk, 
the framework for long-term price and market stability. Of great 
importance in understanding the purpose and operation of classified 
pricing, Congress adopted a supply-demand pricing standard to replace 
parity pricing. The supply-demand pricing approach is not, as the 
Court's second opinion suggests, a system of price controls. Rather, 
under this system, the minimum prices for milk established in orders 
respond to changing supply and demand conditions in the marketplace. 
Marketing orders, in this context, only establish the terms of trade 
between dairy farmers and handlers under a Government-supervised 
marketing plan. They assure, from a producer point-of-view, that a 
minimum uniform price (also known as the blend price) is returned to 
dairy farmers and, from a handler point-of-view, equity in the cost of 
obtaining a supply of milk. Such a plan tends to promote orderly 
marketing and efficient disposal of surplus milk not demanded by the 
fluid market, and mitigates the need by handlers to engage in predatory 
pricing practices.
    Milk marketing orders have evolved since 1937 in response to ever-
changing market conditions. As noted above, dairy farmers, including 
those in the Upper Midwest, concluded that orders ensured far more 
orderly marketing of their highly perishable product. Since most orders 
have remained in place, it is clear that dairy farmers are largely 
satisfied with the system--which has operated in approximately the same 
way for nearly 30 years--as they have rarely exercised their right 
under the AMAA to seek termination of their order. Congress, too, has 
not sought to reorder the essential nature of the system, including the 
universal adoption of the M-W price.
    The foregoing provides a more complete description of the 
historical development of milk marketing orders and the purposes of 
classified pricing. In sum, it is not correct to characterize the order 
system, as the second Court opinion does, as the Government's response 
to overproduction in the Upper Midwest and periodic deficit conditions 
in other areas.
    The Court's second opinion also states that milk prices are not 
determined solely by market forces, and that the Federal government has 
assured dairy farmers a minimum price for their milk for decades. For 
purposes of this discussion, the Secretary assumes that the Court has 
not confused the existence of the Dairy Price Support Program,

[[Page 49085]]

established under the Agricultural Adjustment Act of 1949 (AAA), which 
is applicable to all dairy farmers, whether or not associated with a 
Federal marketing order, with the market-determined prices enforced by 
milk marketing orders for farmers associated with each particular 
order. The AAA, through the Dairy Price Support Program, establishes a 
price floor that is designed to prevent further price reductions that 
might otherwise be warranted by supply and demand conditions.

Class I Differentials and Pricing

    The Court states in its second opinion that Class I differentials 
are determined by the distance of a marketing area from Eau Claire, 
Wisconsin, and this alleged formula is ``the essence of controversy 
between the parties.'' (Opinion pg. 5). The Court further notes that 
this alleged formula constitutes a ``single basing-point pricing 
system.'' (Opinion pg. 5). The Court continues ``It is simply untrue to 
suggest, as the Secretary does, that it is irrelevant from which 
geographic point prices are determined. Different basing points 
(presumably reflecting different assumptions regarding market specific 
conditions) will necessarily yield different Class I differentials.'' 
(Opinion pg. 6.)
    Class I differentials were not established based on a market's 
distance from Eau Claire. Class I differentials were established by 
observations of market specific supply and demand conditions in each 
marketing area. The price needed to attract milk to a consumption 
center is constrained by the cost of obtaining and transporting milk 
from an alternative supply area which results in the need to establish 
a differential level specific to each market in achieving this end. For 
example, the Secretary could choose any location (or locations) and 
align prices to other orders based on relative fluid demand. The 
resulting system would be the same as the current system; prices will 
increase to reflect the cost of attracting milk to the deficit areas, 
and those prices will similarly decrease, in a stair step continuum, as 
the ultimate source of alternative milk supply--the Upper Midwest--is 
approached.
    That there is a high degree of correlation between distance from 
the Upper Midwest region and other marketing areas is interesting but 
is not, in and of itself, the basis for the Secretary's establishment 
of such differentials. As noted above, when setting Class I 
differentials, the Secretary did not simply gauge the distance of the 
market center of an order from Eau Claire and then add a differential 
representing transportation costs. To the contrary, in the promulgation 
of distinct and separate orders, the Secretary conducted intensive 
investigations of supply and demand conditions in each market. Germane 
to the investigations were the prevailing prices which handlers 
actually paid to attract a supply of milk and what supply sources the 
market actually tapped to get extra supplies. Only then was a Class I 
differential established for the market. Over time, as changing market 
conditions warranted, marketing orders were consolidated, covering 
increasingly larger geographical areas. As this occurred, there was 
heightened recognition of the need to coordinate class prices and to 
align Class I prices between orders. Thus, the mere fact that real-
world market forces necessarily yielded, over time, an aligned Class I 
pricing system that correlates to geography simply does not mean that 
the enormous reserve quantities of milk in the Upper Midwest relative 
to other marketing areas (east of the Rocky Mountains) constitute a 
``single basing point.'' The high degree of correlation between 
distance from the Upper Midwest, and another area's supply-demand 
relationship is reflective of this reality. It justifies the current 
Class I differentials, not the other way around.
    Of note, in the 1990 rulemaking, the Secretary solicited proposals 
which would, in order to be adopted, necessarily demonstrate that these 
assumptions were incorrect. As the Secretary found, industry 
participants proposed either no change, minor change, and in some 
instances, radical change, to the Class I pricing system. None 
demonstrated that the current Class I prices were not functioning, as a 
matter of demonstrable supply and demand patterns, sufficiently to 
attain the goals of the AMAA.

Class I Differentials and Class I Pricing and Sec. 608c(18) 
Findings

    As the Secretary explained at length, the M-W price which forms the 
basis for all classified pricing, automatically incorporates the price 
and availability of feed as well as numerous other factors. In this 
regard, in the underlying proceeding MMPA argued that the Secretary 
should find that the cost of production is uniform throughout the order 
system. To the extent that MMPA is correct, then, the M-W price must 
already reflect the cost of producing milk, including feed. Thus, under 
MMPA's view, by incorporating the M-W into all three classified prices 
the Secretary presumably has satisfied Sec. 608c(18).
    The validity of the M-W as an automatic reflector of the 
Sec. 608c(18) pricing factors has become a central issue in this 
proceeding even though it was specifically excluded from consideration 
at the 1990 rulemaking. (See 55 FR 29034). The M-W price was discussed 
in the First Amplified Decision, but only because the Court's first 
opinion seemed to confuse the role of the M-W with whether or not there 
was a standard for determining how much reserve milk should be, or 
needs to be, associated with each marketing order. Nevertheless, the 
Secretary also explained how the M-W reflects the Sec. 608c(18) pricing 
criteria factors and acts as the ``mover'' for all classified prices.
    The Court expresses dissatisfaction with the M-W because, in its 
view, the M-W does not directly reflect supply and demand conditions, 
including the price and availability of feed, in each marketing order. 
The Secretary notes, however, that the M-W has been a component of 
every marketing order for well over 20 years in some orders and over 30 
years in many others. Additionally, Congress has never suggested that 
the Secretary's reliance on this measure was not wholly consistent with 
the AMAA. Furthermore, far from maintaining that Class III prices must 
be order-specific, the MMPA, like every other witness at a recent 
national hearing concerning the M-W, argued that a uniform Class III 
price be used in all Federal orders. (See 60 FR 7276 (MMPA proposed 
that the Federal milk support price established under the AAA of 1949 
be the Class III price)). Thus, Congress, the Secretary and the dairy 
industry all understand that a uniform Class III price can and should 
be used in all orders as the ``mover'' of Class I and Class II prices 
under the AMAA.
    As the Court recognizes, the AMAA requires that the Secretary 
consider the various factors affecting supply and demand in setting 
minimum prices. The statute also prescribes that milk marketing orders 
ensure an adequate, but not excessive, supply of pure and wholesome 
milk and otherwise be in the public interest. Using the M-W price 
accomplishes precisely these goals by incorporating the fluctuations in 
supply and demand, as reflected by free market transactions, into 
classified pricing. Class I pricing therefore responds to, rather than 
dictates, supply and demand. The cost and availability of feed, by 
contrast, represent only two aspects of the supply side of the 
equation. Moreover, as supply factors, feed costs and availability 
similarly change and which the statute

[[Page 49086]]

specifically requires to be considered. It would not be appropriate for 
the Secretary to set prices which responded to constantly fluctuating 
conditions on one sole (and narrow) measurement when there are a host 
of other considerations affecting the supply of milk that themselves 
constantly change. Thus, to set milk prices based on these significant 
but limited factors rather than on the M-W, which automatically 
incorporates these aspects of supply, would tend to have the effect of 
ignoring all of the factors of supply and demand required for 
compliance with Sec. 608c(18).
    Of particular note, the Secretary conducted a subsequent national 
hearing to address the M-W price in 1992. The Secretary's call for 
proposals for the hearing (57 FR 26790) explicitly indicated that any 
proposals that would change the M-W method would have to be justified 
under the supply and demand pricing standards specified in 
Sec. 608c(18). Since that hearing, the Secretary has determined that a 
modified M-W price, adjusted by a product price formula, and now 
referred to as the Basic Formula Price (BFP), best satisfies the 
statutory pricing criteria of the AMAA. Accordingly, the Secretary 
amended all Federal milk orders and producers everywhere affirmed the 
amended orders. The BFP essentially retains the features of the old M-
W. It is a market-determined price, free of government regulation that 
represents the basic value for milk and used to adjust Class I and 
Class II prices. It is the basis for establishing the pricing terms-of-
trade between dairy farmers and handlers because it continually 
responds to changing supply and demand factors as prescribed by 
Sec. 608c(18). The use of a product price formula is a minor refinement 
that updates a previous month's price to better reflect current 
marketing conditions. In the final decision for improving the M-W, (60 
FR 7290) the Secretary found that the economic rationale stated when 
the M-W was first adopted remains sound today as it was when it was 
adopted order-by-order from 1961 until universally adopted in 1975.

Class I Differentials and Class I Prices

    As noted above, the M-W price is the key component in the Class I 
price, representing the many supply and demand factors referenced in 
Sec. 608c(18). The M-W price does not, however, reflect one factor 
uniquely relevant to Class I fluid milk pricing: the cost of 
transporting milk from alternative supply sources. When the Class I 
differential, which largely reflects transportation costs, is added to 
the M-W price, the minimum Class I price in each market is set. As 
marketing orders were consolidated, covering ever increasingly larger 
geographical areas, there was an increasing need to align Class I 
prices among the orders. Inter-market alignment of Class I prices is 
necessary so that the minimum prices do not exceed the cost of 
obtaining milk from alternative sources of supply. Such pricing 
constraints address Sec. 608c(5)(A) which requires, among other things, 
uniform prices to handlers.
    The Class I differential serves as that economic incentive to move 
milk from supply to areas where it is demanded. In reality, some milk 
is produced just about everywhere. Therefore, the mix of milk produced 
near where it will be consumed, along with milk needed from more 
distant locations needs to be only high enough to bring forth that 
additional supply that will satisfy consumer demands.
    It is important to reiterate that dairy farmers are not paid the 
Class I price for their milk. Class I prices are minimum prices paid by 
handlers who use milk for fluid purposes. Their alignment both within 
an order and between orders is critical so that all handlers compete on 
an equal footing for attracting milk to their location. Dairy farmers, 
by contrast, receive a blend price for their milk regardless of how it 
is used. The blend price is neither intended to be aligned by the 
Secretary, nor is it intended to correlate to geography. The blend 
price that producers receive represents the sum total of local supply 
and demand conditions for milk in each marketing order area. Blend 
price changes (and differences in blend prices among orders) provide 
the economic signal for producers to make production decisions and for 
making marketing adjustments.

General Findings

    The findings and determinations set forth herein have been issued 
in response to an opinion and order of the United States District 
Court, District of Minnesota, Fourth Division, issued on May 16, 1996. 
The findings and determinations supplement those that were previously 
set forth in the Final Decision issued on February 5, 1993, and 
published in the Federal Register on March 5, 1993, and in an Amplified 
Decision issued on August 10, 1994, and published in the Federal 
Register on August 17, 1994, with respect to the New England and other 
Marketing Area orders. No additional regulatory changes are necessary 
as a result of this second Amplified Decision.

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

    Milk marketing orders.

    Dated: September 10, 1996.
Michael V. Dunn,
Assistant Secretary, Marketing and Regulatory Programs.
[FR Doc. 96-23825 Filed 9-17-96; 8:45 am]
BILLING CODE 3410-02-P