[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]]
-----------------------------------------------------------------------
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.
-----------------------------------------------------------------------
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