[Federal Register Volume 61, Number 231 (Friday, November 29, 1996)]
[Proposed Rules]
[Pages 60639-60649]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-30459]


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DEPARTMENT OF AGRICULTURE
Agricultural Marketing Service

7 CFR Parts 1124 and 1135

[Docket No. AO-368-A25, AO-380-A15; DA-95-01]


Milk in the Pacific Northwest and Southwestern Idaho-Eastern 
Oregon Marketing Areas; Decision on Proposed Amendments to Marketing 
Agreements and to Orders and Termination of Proceeding With Respect to 
Proposals To Amend the Southwestern Idaho-Eastern Oregon Federal Milk 
Order

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Proposed rule.

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SUMMARY: This final decision adds two counties to the Pacific Northwest 
milk marketing area and modifies the component pricing provisions of 
the order. Other proposed amendments addressed at the hearing, 
including all of those pertaining to the Southwestern Idaho-Eastern 
Oregon Federal milk order, will not be considered further in this 
proceeding. The issues involved in those proposals will be addressed in 
the process of restructuring the Federal milk orders pursuant to the 
1996 Farm Bill. Dairy farmer cooperatives will be polled to determine 
whether dairy farmers favor issuance of the Pacific Northwest order as 
amended.

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) 
720-2357.

SUPPLEMENTARY INFORMATION: This administrative action is governed by 
the provisions of Sections 556 and 557 of Title 5 of the United States 
Code and therefore is excluded from the requirements of Executive Order 
12866.
    These proposed amendments have been reviewed under Executive Order 
12988, 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

[[Page 60640]]

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.

Small Business Consideration

    In accordance with the Regulatory Flexibility Act (5 U.S.C. 601 et 
seq.), the Agricultural Marketing Service has considered the economic 
impact of this action on small entities and has certified that this 
proposed rule will not have a significant economic impact on a 
substantial number of small entities. For the purpose of the Regulatory 
Flexibility Act, a dairy farm is considered a ``small business'' if it 
has an annual gross revenue of less than $500,000, and a dairy products 
manufacturer is a ``small business'' if it has fewer than 500 
employees. For the purposes of determining which dairy farms are 
``small businesses,'' the $500,000 per year criterion was used to 
establish a production guideline of 326,000 pounds per month. Although 
this guideline does not factor in additional monies that may be 
received by dairy producers, it should be an inclusive standard for 
most ``small'' dairy farmers. For purposes of determining a handler's 
size, if the plant is part of a larger company operating multiple 
plants that collectively exceed the 500 employee limit, the plant will 
be considered a large business even if the local plant has fewer than 
500 employees.
    Interested persons were invited to present evidence on the probable 
regulatory and informational impact of the hearing proposals considered 
in this proceeding on small businesses, or to suggest modifications of 
the proposals for the purpose of tailoring their applicability to small 
businesses. However, no one participating in the public hearing or 
filing comments or exceptions on the basis of the hearing record or the 
recommended decision contributed any information relevant to the effect 
of the proposals on small businesses. Information relating to the 
impact of the amendments contained in this decision have, therefore, 
been obtained from the market administrator outside the hearing record.
    During August 1996, the representative month for determining 
producer approval of this action, 1,297 dairy farmers were producers 
under the Pacific Northwest order. Of these, 808 would be considered 
small businesses, having under 326,000 pounds of milk production for 
the month. Of the dairy farmers in the small business category, 219 
produced under 100,000 pounds of milk, 328 produced between 100,001 and 
200,000 pounds of milk, and 261 produced between 200,001 and 326,000 
pounds of milk during August.
    Of the 489 producers producing in excess of 326,000 pounds during 
August 1996, 178 produced between 326,001 and 500,000 pounds and 186 
produced between 500,001 and 1,000,000 pounds. 125 producers produced 
at least 1,000,001 pounds during August 1996.
    In terms of total dollars, the negative impact on producer returns 
resulting from the multiple component pricing amendments generally 
would be less on small producers than it would be on large producers. 
However, the effect of the amendments on each individual producer would 
depend on the relative protein, other nonfat solids, and butterfat 
content of the producer's milk production rather than on the volume of 
its production.
    The effect of the multiple component pricing amendments on 
handlers, both large and small, would depend on how they use the milk 
they receive from producers. Handlers' cost of milk used in 
manufactured products would be reduced by approximately 10 cents per 
hundredweight, depending upon the component content of the milk. The 
cost of milk used in fluid products would be unchanged. In addition to 
butterfat, handlers would be required to report protein and ``other 
solids,'' instead of nonfat solids, tests of producer receipts. Because 
most of this testing is done using infra-red analysis equipment, there 
should be little additional cost connected with the testing and 
reporting of the protein component.
    Of the 23 dairy plants pooled under the Pacific Northwest milk 
order during August 1996, 15 would be considered to be operated by 
small businesses on the basis of having fewer than 500 employees. Eight 
of the pool plants were operated by handlers having fewer than 500 
employees.
    Expansion of the marketing area to include the two remaining 
Olympic Peninsula counties would have no effect on producers, and would 
result in the regulation of no additional handlers. Four handlers who 
currently distribute fluid milk products into the two counties would be 
benefitted by a reduction in their recordkeeping and reporting burden. 
Sales outside the marketing area are required to be reported separately 
for the purpose of determining a handler's pool status. Addition of 
these two counties to the marketing area will remove the requirement 
that these handlers keep separate records and file reports about sales 
in these counties. Two of the handlers affected would be considered to 
be small entities.
    Prior documents in this proceeding:
    Notice of Hearing: Issued June 15, 1995; published June 21, 1995 
(60 FR 32282).
    Extension of Time for Filing Briefs: Issued October 12, 1995; 
published October 23, 1995 (60 FR 54315).
    Extension of Time for Filing Briefs: Issued November 2, 1995; 
published November 9, 1995 (60 FR 56538).
    Recommended Decision: Issued August 19, 1996; published August 23, 
1996 (61 FR 43474).

Preliminary Statement

    A public hearing was held upon proposed amendments to the marketing 
agreements and the orders regulating the handling of milk in the 
Pacific Northwest and Southwestern Idaho-Eastern Oregon marketing 
areas. 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 (7 CFR Part 900), at 
Portland, Oregon on July 11-12, 1995. Notice of such hearing was issued 
on June 15, 1995 and published June 21,1995 (60 FR 32282).
    Upon the basis of the evidence introduced at the hearing and the 
record thereof, the Administrator, on August 19, 1996, issued a partial 
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, with the addition of six paragraphs 
at the end of the decision.
    The material issues on the record of the hearing relate to:

1. Pacific Northwest marketing area.
2. Supply plant definition.
    A. Southwestern Idaho-Eastern Oregon.
    B. Pacific Northwest.
3. Government agency plant.
4. Producer milk diversion limits.
    A. Southwestern Idaho-Eastern Oregon.
    B. Pacific Northwest.
5. Call provision.
6. Pacific Northwest multiple component pricing provisions.


[[Page 60641]]


    This decision deals only with issues 1 and 6, both of which pertain 
only to the Pacific Northwest milk order. The remaining issues on which 
testimony and data were gathered at the hearing, including all of those 
pertaining to the Southwestern Idaho-Eastern Oregon order will not be 
considered further in this proceeding. Instead, they will be dealt with 
in the process of restructuring the Federal milk orders pursuant to the 
1996 Farm Bill.

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. Pacific Northwest marketing area. A proposal to add the only 
remaining two counties on the Olympic Peninsula that currently are not 
part of the marketing area to the Pacific Northwest marketing area 
should be adopted. Darigold Farms, a cooperative association that is 
also a large handler under the Pacific Northwest order, testified that 
the necessity of separating out sales to Clallam and Jefferson 
Counties, Washington, for the purpose of reporting out-of-area sales is 
difficult and time-consuming, but of little real benefit. The record 
indicates that there are no handlers having sales within these two 
counties who would become regulated by the addition of the counties to 
the marketing area. In addition, inclusion of the two counties would 
reduce the reporting requirements for currently-regulated handlers, who 
must report sales into unregulated area separately so that the 
proportion of their sales within the marketing area can be used for 
determining pool qualification. Therefore, the proposal to add Clallam 
and Jefferson counties to the Pacific Northwest marketing area should 
be adopted.
    6. Modification of multiple component pricing. A revised multiple 
component pricing (MCP) plan should be adopted in the Pacific Northwest 
Federal milk marketing order. The pricing plan would contain elements 
of both the multiple component pricing plan initially submitted by 
Darigold Farms in Proposal 2, and that proposed by National All-Jersey, 
Inc., in Proposal 4. Producers would be paid on the basis of three 
components in milk: butterfat, protein, and other nonfat nonprotein 
solids (other solids). Producers' share of the value of the pool's 
Class I and Class II uses would be reflected in a separate weighted 
average differential price, or ``producer price differential.''
    Regulated handlers would pay for the milk they receive on the basis 
of total butterfat, the protein and other nonfat solids used in Classes 
II and III, skim milk used in Class I, and the hundredweight of total 
product used in Class I, II and III-A.
    At the present time, milk received by handlers pooled under the 
Pacific Northwest order is priced on the basis of the pounds of total 
butterfat, nonfat milk solids used in Classes II and III and the 
hundredweight of skim milk used in Class I, and the hundredweight of 
total product used in Classes I, II and III-A. 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 distributed 
to producers on the basis of the total pounds of nonfat milk solids and 
butterfat in each producer's milk, and each producer's per 
hundredweight share of the pool's Class I, Class II and Class III-A 
uses.
    Darigold Farms, the proponent cooperative of Proposal 2, proposed 
to change the pricing of milk in the Pacific Northwest Federal milk 
order from the current two-component pricing plan based on butterfat 
and solids-not-fat (SNF) to a three-component plan based on butterfat, 
protein, and ``other solids'' (solids other than butterfat and 
protein). The Darigold witness testified that the protein and butterfat 
prices would be computed on the basis of cheese and butter prices, 
respectively, and the yields of these respective products in the 
manufacturing process. The ``other solids'' price to handlers would be 
computed by subtracting the value of the protein and butterfat in a 
hundredweight of milk from the basic formula price, and dividing by the 
Pacific Northwest market average ``other solids'' content. Currently, 
the nonfat solids price is computed by subtracting the value of the 
butterfat in a hundredweight of milk from the basic formula price and 
dividing by the average nonfat solids content of the milk to which the 
basic formula price applies--Grade B milk received at manufacturing 
plants in the States of Minnesota and Wisconsin.
    Class I milk would continue to be paid for on a butterfat-skim 
basis. No somatic cell adjustment would be included in Pacific 
Northwest multiple component pricing. Rather than retaining the 
``weighted average differential price'' to producers, a hundredweight 
price that represents the value to producers of participation in the 
marketwide pool, the Darigold proposal would include class price 
differential values in the producer ``other solids'' price calculation.
    The proponent witness reviewed the evolution of pricing milk under 
various MCP plans, and refinements made since the first MCP plan was 
implemented in the Great Basin Federal order (Order 139) in 1988. The 
witness focused on MCP plans which specifically priced the protein 
portion of the skim milk, and noted that the plan first introduced in 
three Ohio and Indiana Federal milk orders in 1993 used protein pricing 
based on the Minnesota-Wisconsin price survey (M-W) average protein 
test rather than on the market average protein test. He stated that 
Darigold supported this pricing refinement (use of the average test of 
M-W milk instead of the market average test) at the first proceeding in 
which MCP was considered for the Pacific Northwest order, but neither 
understood its implications nor had detailed information regarding 
application of that concept to a plan pricing the SNF portion of skim 
milk instead of the protein portion.
    Prior to mid-1994, the Pacific Northwest milk order (Order 124) 
priced milk on the basis of volume and butterfat. In May 1994, Order 
124 adopted a MCP plan which priced the solids-not-fat (SNF) portion of 
the skim milk as well as the butterfat component. Proponent's witness 
stated that this pricing system recognized that much of the milk pooled 
under the order is dried into milk powder, and that yields on powder 
correlate with the SNF content of the milk.
    The Darigold witness observed that average Grade B milk in M-W 
plants typically tests lower for SNF content than does average Grade A 
milk in the Pacific Northwest, and that fewer M-W plants report SNF 
than report protein content. The witness stated that this difference in 
test does not apply to protein, as protein content in milk is 
comparable across regions or orders. He asserted that the higher 
average SNF test of milk in Order 124 than in the M-W plants resulted 
in over five million dollars in additional costs incurred by Darigold 
during the first 12 months of the current MCP plan.
    The Darigold witness asserted that the current MCP system has 
resulted in Order 124 handlers paying the highest regulated price in 
the U.S. for milk used to make cheese. As a result of this 
noncompetitive position, he stated, an increase in the northwest's 
share of the national cheese market is not possible. The witness also 
claimed that cheese market prices have decreased due to competition. He 
added that while under current pricing Darigold cannot forecast 
profitability in making bulk cheese,

[[Page 60642]]

consumer-sized units of cheese would be profitable.
    The witness stated that Darigold would like to encourage cheese 
production in the region. He noted that the cooperative has converted a 
nonfat dry milk plant to cheese-making capability to, in part, meet 
increasing demand for cheese and lessen the impact of Class III-A 
pricing (which reflects a lower value of nonfat dry milk, compared to 
cheese) on producers. The witness testified that a consultant analyzed 
the economic feasibility of the proponent increasing cheese production, 
thereby decreasing production of nonfat dry milk, and concluded that a 
new cheese plant may not be profitable because of Order 124's current 
MCP plan. The witness stated that conversion of another Darigold plant 
to mozzarella production has been delayed because of the consultant's 
analysis.
    The Darigold witness asserted that national cheese companies 
approached about investing in the Pacific Northwest region have no 
interest because the price of milk is too high and the region is too 
far from the processing centers generally located east of the 
Mississippi. He explained that a competitive price for Class III milk 
(primarily milk used in cheese) is essential to both maintain current 
levels of cheese production and encourage new investments in cheese 
plants.
    The proponent witness asserted that adoption of Darigold's proposal 
would bring the cooperative association back to a ``similar 
disadvantage'' as that held before May 1994. He explained that the 
proposal is structured to reduce the cost of milk to a level that 
approaches what was paid before MCP, although it still would be 
slightly higher.
    Proponent's post-hearing brief stated that the price of milk paid 
by cheese plants on the basis of components under Order 124 must be 
reduced to something close to the Order 135 (Southwestern Idaho-Eastern 
Oregon) price if parity is to exist among cheese plants and if Order 
124 cheese plants are to be able to compete with the Idaho plants.
    The Darigold witness said that the impact of the current MCP system 
also is felt by plants producing Class II and III-A products. Witness 
asserted that two of Darigold's true powder plants have become 
unprofitable since the implementation of MCP, impairing cash flow and 
reducing the cooperative's ability to fund capital investments without 
per-unit retains.
    Proponent's witness estimated that under Proposal 2, producer 
income would fall by about eight cents per hundredweight (cwt.) if 
Class III utilization remains constant, but would be two cents per cwt. 
higher than producers were paid prior to the current MCP system. He 
stated that a lower Class III price should result in an increase of 
Class III utilization (with a corresponding reduction in the volume of 
Class III-A utilization), which would increase the blend price to 
producers because milk would be used in cheese--a more valuable form 
than nonfat dry milk. As a result, he claimed, producer income would 
increase.
    The Darigold witness asserted that the current MCP plan in Order 
124 increased producer returns by an average of 10 cents per cwt. from 
the previous system but failed to give producers proper signals about 
the components needed in the market. Because the weighted average 
differential is included in the current pricing system, he claimed, 
producers continue to produce for volume to enhance returns. The 
witness argued that elimination of the producer weighted average 
differential as a separate price component that represents producers' 
share of the Class I, II and III-A differences in value from the basic 
formula price would also eliminate a source of confusion when the 
differential is a negative value. He stated that payments based only on 
pounds of components would show producers more directly the value of 
the individual components, giving the producer a direct incentive to 
produce the most valuable component.
    The witness testified that a somatic cell adjustment was not 
included in proponent's proposal because Order 124's monthly average 
SCC is between 190,000 and 210,000. Consequently, he stated, somatic 
cells do not need to be considered as a pricing factor in Order 124.
    Opposition to Proposal 2 was expressed by five Order 124 producers, 
all members of the proponent cooperative. Each producer asserted that 
the proposal would result in lower prices to producers and each 
producer expressed support for the pricing system currently in effect 
in Order 124.
    National All-Jersey, Inc. (NAJ), a national dairy farmer 
organization that assists its members in marketing their milk, is 
proponent of Proposal 4, a MCP plan which would modify the current plan 
in effect under Order 124. Also supporting Proposal 4 is the American 
Jersey Cattle Association. The two organizations have 220 dairy farmer 
members in Oregon and Washington.
    NAJ's witness expressed support for the concept presented in 
Proposal 2 but stated that Proposal 4 differs in two respects: the 
method of calculating the protein value and retention of the current 
feature of a weighted average differential paid on a hundredweight 
basis.
    The NAJ witness stated that the current system is an improvement 
over the butterfat/skim (pre-May 1994) plan. However, he asserted, 
market conditions are changing, with more milk in this marketing area 
predicted to be used in cheese production. He stated that since protein 
is the most important milk component in cheese manufacture, it is 
important to recognize protein in the Order 124 pricing plan.
    The witness stated that under the current plan, all nonfat solids 
components are priced at the same level--a pound of protein is assigned 
the same value as a pound of lactose. According to the witness, the 
current pricing plan does not give dairy farmers a direct incentive to 
increase production of protein compared to the other nonfat solids. He 
asserted that the current plan can be inequitable to both producers and 
handlers because protein should be assigned a higher value than 
lactose.
    The witness testified that a producer with milk containing a higher 
percentage of nonfat solids as protein is paid less per pound of 
protein than one with a lower percentage of nonfat solids that is 
protein. The NAJ representative stated that based on the relationship 
of protein to solids-not-fat in a particular milk, a cheese maker could 
either be overpaying or underpaying for the milk. He contended that a 
milk pricing plan that includes a separate payment for the protein 
component would be more equitable to both producers and handlers. He 
also noted that a MCP plan that includes protein would allow cheese 
manufacturers to purchase milk at a price that better reflects its 
cheese yield potential.
    NAJ's witness stated that the major objective of any milk pricing 
plan is to give dairy farmers the economic incentive to produce the 
most valuable component in milk, which currently is protein. He 
contended that to achieve this objective, the protein value needs to be 
as high as can be economically justified while being equitable to both 
producers and handlers. The witness asserted that within any MCP plan 
that is adopted, the ratio of the protein price to both the butterfat 
price and the other solids price must be high enough to encourage dairy 
farmers to increase the ratio of protein to butterfat and other solids 
in their milk production.
    Proposal 4's protein price would be derived from cheese and whey 
powder market prices and yield factors. The proponent witness stated 
that both

[[Page 60643]]

protein and butterfat are necessary for making cheese. He explained 
that in addition to protein's direct impact on yield, a higher level of 
the casein portion of protein allows more butterfat to be utilized in 
cheese-making, giving protein a value as a cheese ingredient beyond its 
actual contribution to yield.
    The NAJ witness contended that evidence exists to support a higher 
value for protein than provided for in Proposal 2. He stated that many 
cheese manufacturers add nonfat dry milk (NFDM) to producer milk to 
standardize or increase the ratio of casein or protein to butterfat; in 
doing so, the protein content of the milk used to make cheese is 
increased and therefore more of the butterfat contained in producer 
milk may be utilized. The witness stated that a higher protein value 
would give dairy farmers a greater economic incentive to produce 
protein rather than the less important component, ``other solids.''
    The NAJ witness explained that Proposal 4's protein price also 
includes a value determined from the whey price and a yield factor, 
both to recognize the additional value of protein beyond that 
calculated from the yield factor and a market cheese price and to 
account for all of the milk protein. The witness asserted that the 
majority of cheese plants do process their whey.
    The proponent witness asserted that the inclusion of whey in the 
calculation of the Proposal 4 protein price is consistent with current 
market practices. As an example, the witness cited the price of butter 
used to determine the price of butterfat in the Federal order system. 
He pointed out that the butterfat price, calculated from the price of 
butter, is paid by handlers that process or manufacture milk products 
other than butter. The NAJ witness stated that handlers who do not 
manufacture butter have not objected to paying for butterfat based on 
the price of a product they do not make, and argued that this is no 
different than the price of protein being based on the price of Cheddar 
cheese and dry whey solids for handlers that do not manufacture these 
products.
    According to the NAJ witness, the Proposal 4 ``other solids'' price 
would be calculated in a manner similar to that in Proposal 2, and the 
market average content for other solids would be used. Proposal 4 
retains the current weighted average differential price on a 
hundredweight basis rather than including the Class I, II, and III-A 
differential values in the computation of the producer ``other solids'' 
price as in Proposal 2. The witness contended that it is important for 
producers to see the direct value of participation in the Federal order 
pool and the sources of value for each milk component.
    The NAJ representative stated that Proposal 4 also uses the same 
protein and other solids prices for both producers and handlers, with 
any differences in component levels of milk used in Class I versus 
Classes II and III to be reconciled in the weighted average 
differential value. The witness stated that the need for separate 
handler and producer protein and other solids prices and the confusion 
resulting from use of more than one price for a single component would 
be eliminated.
    The NAJ witness said that since there is a direct relationship 
between manufacturing product yield and the level of protein and other 
solids contained in milk, Class II and III handlers' obligations to the 
pool under Proposal 4 would reflect more accurately the economic value 
of the milk they use. He stated that a MCP plan that provides equal 
manufacturing margins across all milk component levels would be the 
most uniform and equitable. He asserted that Proposal 4 comes closest 
to meeting this objective by providing more equity among handlers while 
providing an incentive to procure and produce higher-protein milk. The 
witness contended that adoption of Proposal 4 would direct milk to its 
most valuable use.
    The proponent witness said Proposal 4 would allow all producers to 
receive payment at the same price per pound for each component 
contained in their milk production, regardless of concentration. The 
witness stated that more equity in payment to producers would be 
provided than under either the current system or Proposal 2 and, 
consequently, that some redistribution of monies among producers would 
occur.
    A witness for Tillamook County Creamery Association (Tillamook), a 
cooperative which pools and processes one-third of the milk produced in 
Oregon, testified in opposition to Proposals 2 and 4. Tillamook's 
primary objections and concerns, supported by Portland Independent Milk 
Producers Association (PIMPA) in a post-hearing brief filed with 
Tillamook's, are that the proposed changes are not economically 
justified, the proposals would result in lower pay prices to Pacific 
Northwest dairy farmers, and the proposals should not have been heard 
given another recent proceeding held in 1992 regarding many of the same 
issues.
    The Tillamook witness stated that the cooperative has recently had 
a less-than-adequate supply of raw milk to meet production needs as a 
result of declining milk production within its membership brought on by 
severe economic stress in the Oregon coastal dairy industry. 
Tillamook's post-hearing brief contended that current supply and demand 
conditions in Order 124 cannot support a price reduction and, 
consequently, no justification exists for the lower pay prices that may 
result if Proposal 2 is adopted.
    The Tillamook representative stated that since the implementation 
of Class III-A in Federal orders in 1993, Tillamook member incomes have 
fallen 64 cents per hundredweight, while feed costs continue to rise. 
The witness stated that adoption of Proposal 2 would cause pool blend 
prices and producer payout prices to fall another 8 to 9 cents per 
hundredweight. He stated opposition toward any proposals that would 
further erode producer income.
    The Tillamook witness predicted that a reduction in producer pay 
prices would result in additional plant profits for manufacturers of 
cheese. Given the influence of NFDM manufacture and Class III-A prices 
on pool values, however, he expected little if any of that increase in 
plant margins to be passed back to producers. The witness stated that 
manufacturing plants should look toward production efficiencies and 
value-added marketing rather than reduced payments to producers for 
their source of income.
    The Tillamook witness stated a preference for the current pricing 
system. However, he conceded that adding protein as a component in 
pricing milk is a sound concept and stated that if a new form of MCP 
were adopted, Tillamook would support a system using the composition of 
M-W average milk to value all components. The witness argued that using 
a national standard to determine the value of components in milk is 
more appropriate than having a variety of isolated standards based on 
smaller production areas. Additionally, he asserted that using M-W 
component tests to calculate the value of each component would be the 
best method to assure that all processors are treated fairly and 
producers are paid properly for milk which produces greater cheese 
yields.
    Tillamook's post-hearing brief noted that the 1992 hearing which 
initially considered MCP for Order 124 considered specifically the 
question of whether to use the M-W average test or the market average 
test to compute the SNF price; interested parties ultimately requested, 
and USDA adopted in the final decision, the average M-W test for solids 
nonfat.
    The Tillamook representative agreed with other witnesses that the 
best hope for improving producer prices under the current provisions of 
Order 124 would

[[Page 60644]]

be to increase the utilization of Class III relative to Class III-A. He 
also agreed that because an economically competitive price of milk must 
exist to produce cheese, milk used to produce cheese in the region 
should not be priced higher than in other regions of the Federal order 
system.
    The Oregon-Washington Dairy Processors Association (OWDPA), 
representing proprietary processors who operate the majority of pool 
distributing plants regulated under Order 124, opposed Proposals 2 and 
4 because both would result in lower-than-current milk prices to 
producers. A witness for the association asserted that producers 
associated with Order 124 have been subjected to excessive price 
declines in recent years and oppose any further declines, particularly 
those which result from increasing returns to specific sectors of the 
processing industry.
    The OWDPA witness supported modifications to either Proposal 2 or 4 
which would use M-W average component composition in place of market 
average composition. He stated that this modification for either 
proposal would limit potential producer losses by following the current 
MCP plan more closely, and would be consistent with MCP plans in other 
markets.
    The witness stated OWDPA's opposition to incorporating Class I, II 
and III-A price differentials within the calculation of the other 
solids price, and supported instead continuing payment of a weighted 
average differential price to producers on a hundredweight basis. He 
asserted that Proposal 2 is an attempt to use differential funds to 
enhance returns on ``other solids'' and would represent an unfair 
advantage to producers of higher solids milk who may already be 
receiving additional payments to reflect the unique characteristics of 
their production for the market. The witness observed that the 
production of high-solids producers may be the least likely source of 
milk for those uses which normally generate class price differentials. 
The OWDPA witness asserted that it is inappropriate to penalize 
producers serving the Class I market by denying them equal access to 
funds derived from such sources. He argued that returning Class I or 
Class II differentials to producers on a hundredweight basis is the 
only equitable method of apportioning pool proceeds.
    Northwest Independent Milk Producers Association (NWI), a 
cooperative association regulated under Order 124, supported Proposal 
4. The NWI witness expressed the cooperative's support for continued 
refinements in MCP programs under Federal orders with the position that 
the component values of producer milk should reflect more closely the 
market value of products produced by these components. He stated that 
since January 1995 the cooperative has paid its members based on the 
components and values of the MCP plan recommended in late 1994 for five 
Midwest Federal order markets.
    The NWI witness stated that Proposal 2 would improve the current 
MCP system but would fail to price components used in Class III closely 
enough to the Class III value to result in appropriate returns to 
producers. The witness asserted that Proposal 4 would reflect more 
nearly the components' market value and convey more accurately to 
producers the right economic signals for component production and 
management decisions.
    The NWI representative noted that producer confusion and 
misunderstanding has existed regarding the weighted average 
differential, which sometimes has been positive and sometimes negative. 
However, he maintained that the current order provisions result in a 
weighted average differential that appropriately indicates market 
prices and class usages, and that this aspect of the current pricing 
plan should be continued.
    Olympia Cheese Company (Olympia Cheese) was not represented by 
testimony during the hearing, but did file a post-hearing brief. 
Olympia Cheese's brief contended that more time should be allowed to 
assess the current MCP plan and to allow for changes resulting from the 
pending Farm Bill. The brief opposed implementing the MCP portion of 
Proposal 2. However, should the MCP plan be revised, the brief 
supported using the Pacific Northwest market average test instead of 
the M-W test to compute component values, and opposed including a whey 
protein factor to calculate a protein price in any MCP plan. The brief 
contended that whey is more of a disposal problem than a profitable 
endeavor and that whole whey operations represent a disposal cost 
rather than a contribution to earnings. The brief stated that Olympia 
Cheese has invested capital and now makes whey protein concentrate, but 
stated that the resulting lactose is a disposal problem that will 
require another substantial investment.
    This decision recommends the adoption of a pricing plan for milk 
based on three components rather than two, and a weighted average 
differential, or ``producer price differential'' per hundredweight. 
Milk pooled under the Pacific Northwest Federal milk order should be 
priced on the basis of its protein, other nonfat solids, and butterfat 
components.
    The protein price contained in this decision is based on the value 
of protein in the manufacture of cheese, as determined by cheese market 
prices, and is not a residual of the basic formula price (BFP) minus 
butterfat value as is the case in the Southwest Idaho-Eastern Oregon 
(Order 135) MCP plan. The butterfat price would be based on the butter 
market, as it is in other multiple component pricing systems. ``Other 
nonfat solids'' will be priced as a residual of the BFP minus protein 
value and butterfat value, divided by a marketwide average ``other 
solids'' test. The butterfat, protein, and other nonfat solids prices 
would be expressed in dollars per pound carried to the fourth decimal 
place. In addition, payments to each producer should reflect the value 
of participation in the marketwide pool on a hundredweight basis.
    Recognition of both the protein and other solids components under 
the Pacific Northwest pricing plan will give producers the proper 
signal to concentrate on production of nonfat solids, especially 
protein, because it is the solids in milk rather than the water that 
give milk its functional and economic value. Additional emphasis on the 
importance of the value of protein in cheese manufacture is 
appropriate, as this use of producer milk results in greater value to 
producers than milk used in nonfat dry milk, and the record indicates 
that an increasing percentage of the producer milk in this market will 
be used in cheese.
    As in other orders for which multiple component pricing has been 
adopted, this decision assures that the value of the components of 
producer milk used in Class III remains equal to the BFP. Maintaining 
the price relationship of Class III use between orders helps to assure 
some basic uniformity in the Federal order pricing system nationally. 
If the sum of the butterfat and protein component values is greater 
than the BFP, a situation which would result in a negative other nonfat 
solids price, the protein price will be adjusted such that the other 
nonfat solids price will be zero.
    Three details of the revised pricing plan on which participating 
parties did not generally agree surfaced at the hearing. These were (1) 
the computation of an appropriate level of protein price, (2) whether 
the ``other solids'' price should be computed by dividing the residual 
value by the M-W or the marketwide ``other solids'' test, and (3) 
whether the differential values of milk

[[Page 60645]]

used in Classes I, II and III-A should continue to be paid to producers 
as a weighted average differential or be combined with the value from 
which the ``other solids'' price is computed.
    Protein is the most important component in cheese-making and 
increasing volumes of milk in Order 124 are being used, or are forecast 
to be used, in cheese production. A payment for protein should be 
directly included in the milk pricing plan in order to give producers 
an incentive to increase protein production. Under the current 
butterfat and solids-not-fat pricing system, all nonfat solids are 
priced at the same level. As a result, producers are not given a direct 
incentive to increase protein production over other nonfat solids.
    The inclusion of protein in the milk pricing system provides for 
greater equity for both handlers and producers. Under the current Order 
124 pricing system, a producer who delivers milk containing a higher 
percentage of nonfat solids as protein receives a lower price per pound 
of protein than one with a lower percentage of nonfat solids that is 
protein. In this situation, some cheese-makers could be overpaying, and 
some underpaying, for milk, resulting in unequal milk protein costs to 
handlers. The three-component milk pricing plan provides a system in 
which manufacturing handlers are obligated to pay the same price per 
pound for each of the components in milk. At the same time, all 
producers would receive the same price per pound for each component 
contained in their milk.
    Protein price. The protein price for milk pooled under the Pacific 
Northwest Federal milk order should be calculated by multiplying the 
monthly average of 40-pound block cheese prices on the Green Bay Cheese 
Exchange by 1.32, without including a value for whey protein. This 
price calculation, included in Proposal 2, would result in a lower 
protein price than that in Proposal 4. The 1.32 yield factor is 
obtained from the modified Van Slyke and Price cheese yield formula. 
Based on milk containing 3.2 percent protein, the formula predicts that 
for each pound of protein used for Cheddar Cheese-making, 75 percent of 
that pound of protein yields 1.32 pounds of cheese (with the remaining 
25 percent ending up in whey).
    The record indicates that both protein and butterfat are necessary 
for cheese-making. Protein has value beyond its actual contribution to 
cheese yield because it determines the amount of the butterfat in milk 
that will be used in cheese by forming the matrix that causes the 
butterfat to remain with the cheese. The Van Slyke formula indicates 
that with a favorable ratio of protein to butterfat, 90 percent of each 
pound of butterfat used for Cheddar cheese-making remains in the 
cheese.
    The total value of producer milk at market average component levels 
is basically the same under both Proposals 2 and 4; the difference is 
the percentage of the skim milk value allocated to protein and to other 
solids. When a value for whey is specifically included in the protein 
price calculation, as under Proposal 4 in which the value of protein in 
whey powder is included to account for all the milk protein beyond the 
portion contained in cheese, a higher protein price and lower other 
solids price result.
    Proposal 4 provides a higher protein price than Proposal 2, but 
results in a protein price lower than that under Order 135. Comparing 
the period May 1994 through May 1995, the average protein prices per 
pound under Proposals 2 and 4, and under Order 135 would have been 
$1.6547, $2.0205, and $2.87, respectively.
    The hearing record provides little basis for incorporating a whey 
powder price factor in the computation of the protein price. The record 
indicates that for one Order 124 handler the cost of whey production 
amounts to between 80 and 120 percent of the sales value. Although the 
protein in whey does have value, the cost of recovery is so great that 
it frequently has little, or a negative, value to handlers. In 
addition, certainly much less than 100 percent of the protein that is 
not incorporated in cheese is captured in whey products. The record 
also indicates that the capability of making a whey product, which is 
not available to every cheese-maker, leads to another disposal 
problem--that of lactose.
    The NAJ argument that an appropriate protein component price would, 
like the price of butterfat based on a butter market price, reflect all 
of the value of the component's use in one product overlooks the fact 
that the price of butterfat, based on its value in butter, prices that 
component at probably its lowest use value, and likely underprices it 
in other products. Pricing protein according to its value in cheese 
appears to be appropriate, but enhancing that price by the value of a 
product that the handler may not make (whey) would overstate the value 
of protein in cheese. In addition, Federal order pricing is intended to 
reflect minimum values rather than maximum values. Handlers who believe 
that they obtain more value from protein than they are required to pay 
for under the order may gain a competitive advantage in procuring 
supplies of high-protein producer milk by paying more than the minimum 
order price for protein.
    The difference in protein prices under Orders 124 and 135 should 
result in few, if any, disorderly conditions between the two marketing 
areas. On average, the amount by which the Order 135 protein price 
exceeds that in Order 124 will be compensated for by the additional 
``other solids'' payment component under Order 124. Very few producers' 
milk should contain protein and ``other solids'' that vary so greatly 
from average milk that they would find it advantageous to overcome the 
various institutional factors that would make it difficult to switch 
between the two markets. If some degree of such ``switching'' should 
occur, it is even more unlikely that the balance between protein and 
``other solids'' in individual producers' milk would be variable enough 
to make a change in markets more than a one-time occurrence.
    Computation of ``other solids'' price. The price for ``other 
solids'' should be computed by dividing the remaining value of the BFP, 
after the butterfat and protein values have been deducted, by the 
Pacific Northwest ``other solids'' content. If the resulting other 
solids price is less than zero, the protein price would be reduced so 
that the ``other solids'' price would equal zero.
    Record evidence indicates that the current pricing plan in the 
Pacific Northwest order does not value the composition of average milk 
correctly, and will continue to overvalue the ``other solids'' 
component if either Proposal 2 or 4 is adopted using the average nonfat 
solids test of M-W milk. The record indicates that while protein levels 
are comparable across regions or orders, the nonfat solids tests 
reported in the Pacific Northwest are consistently higher than those 
reported for M-W milk. The conclusion could be drawn that milk produced 
in the Pacific Northwest therefore should carry a higher value. 
However, because most plants within the M-W survey purchase milk for 
processing cheese, fewer plants within the survey report SNF than 
protein. Both the M-W survey price and the MCP system in the five north 
central markets reflect the fact that the M-W average test is used in 
markets that have a higher percentage of milk used to produce cheese.
    Since the implementation of the Pacific Northwest MCP plan in May 
1994, Grade B milk in the M-W region has tested lower for SNF by 0.14 
pounds per hundredweight than has Grade A milk in the Pacific 
Northwest, resulting in a price difference between the two regions of 
.016 cents per pound of SNF.

[[Page 60646]]

For a seven-month period during 1992, Darigold's SNF tests ranged from 
.04 to .19 higher than the M-W SNF tests. Thus, a discrepancy exists 
between the average SNF test stipulated in the order (the M-W test) and 
the average SNF test within the region. As a result, plants located in 
the Pacific Northwest pay more per hundredweight for milk used in 
manufactured products than do plants located in the M-W region. 
Additionally, Order 124's price per pound of SNF averages about 1 to 
1.5 cents higher than California, placing class prices for milk used in 
manufactured products under Order 124 higher than both California and 
the Midwest. If the 5-market MCP decision were incorporated in the 
Pacific Northwest order, the cost of milk used in manufacturing would 
be higher under Order 124 than in either California or the Midwest. In 
such a case, it is appropriate to use market composition of milk for a 
region so distant from the upper Midwest.
    Although use of the market, rather than the M-W, average of ``other 
solids'' to compute the ``other solids'' price will have the effect of 
reducing producer returns by approximately 10 cents per hundredweight, 
increased profitability of cheese manufacture should offset that effect 
by reducing the use of milk in Class III-A. If, as expected, increasing 
volumes of milk are used in cheese, rather than in (lower-value) nonfat 
dry milk, producer prices should increase accordingly.
    Producer price differential. Although inclusion of the differential 
values of producer milk used in classes other than Class III was 
proposed to be part of the ``other solids'' price calculation, the 
weighted average differential should be calculated as it is currently. 
Some confusion between orders may be avoided by referring to it 
hereafter as the ``producer price differential,'' as it is in the 5 
north central milk orders.
    Apparently, one of the reasons for proposing that the differential 
pool values be incorporated in computation of the other solids price is 
to avoid producer confusion when the differential value is negative. 
The record shows that a negative differential existed for about 6 of 
the first 12 months under the current MCP system. While the negative 
value may be a difficult concept for producers to understand or 
accept--it indicates that participation in the marketwide pool has a 
negative value to them--there is value in making producers aware of 
this aspect of the Pacific Northwest pool.
    Another of the reasons given for wanting to eliminate this 
remaining per hundredweight basis of paying producers for milk was to 
discourage producers from continuing to produce for volume, rather than 
solids, to enhance returns. It is difficult to describe the producer 
price differential as ``enhancing'' the hundredweight value of milk 
when it is sometimes negative. Inclusion of class price differentials 
in the ``other solids'' price would not necessarily enhance that price, 
but rather would add to it a random plus or minus factor of varying 
magnitude.
    It is appropriate to continue a component of producer payments that 
represents the differential value of participating in the market wide 
pool. Such a payment factor indicates market prices and the relative 
value of class usages.
    Comments and exceptions. Comments on the recommended decision were 
filed by Darigold and by National All-Jersey, Inc. The Darigold 
comments included no exceptions to the findings of the recommended 
decision, and urged the prompt adoption of the amendments. The National 
All-Jersey, Inc. (NAJ) comments included an exception to the 
recommended computation of the protein price. NAJ continued to urge 
that the protein price reflect the value of protein in whey powder as 
well as in cheese. Aside from the computation of the protein price, NAJ 
supported the findings of the recommended decision.
    NAJ's comments state that although the recommended decision 
recognizes value in butterfat used in cheese that is not reflected in 
the butterfat price, that additional value has not been reflected in an 
adjustment to the protein price. Instead it has been assigned to the 
``other solids'' component (primarily lactose) which has no impact on 
cheese yield at all.
    The fact that the molecular matrix formed by protein in cheese 
allows additional butterfat, priced on the basis of its (lesser) value 
in butter, to be used in cheese does not justify attributing that extra 
value to protein. The individual components should be priced on the 
basis of their own value, as far as is possible while maintaining the 
basic formula price as the total of the sum of the component values.
    As noted above, the protein price determined under this decision 
will act as a minimum price. As such, it should not include the value 
of a product (whey protein) that is not produced by all cheese 
manufacturers. In addition, cheese is not the only manufactured product 
processed in this marketing area. Nonfat dry milk remains an important 
use of milk surplus to the fluid needs of this market. Although 
lactose, the principal ``other nonfat solid,'' has little or no value 
in the composition of cheese, it is of equal value to protein in the 
production of nonfat dry milk and its value in that product should be 
represented in the order's pricing plan. If handlers determine that the 
protein in the producer milk they receive is worth more to them in 
cheese manufacture than the order price specifies, they are free to pay 
over-order protein prices.
    Proposals not addressed in this decision. None of the issues 
included in the hearing record that pertain to the Southwestern Idaho-
Eastern Oregon milk order, and the Pacific Northwest proposals dealing 
with the regulatory status of plants and producer milk will be 
addressed further in this proceeding. The partial recommended decision 
stated that these issues would be dealt with in the process of 
restructuring the Federal milk orders pursuant to the 1996 Farm Bill. 
Comments filed by Darigold Farms, proponent of some of the proposals 
not addressed in the recommended decision, fully supported the decision 
to defer consideration of the issues not dealt with until they can be 
included in Federal order restructuring under the 1996 Farm Bill. 
Neither of the two other proponents commented on the decision to defer 
consideration of the proposals (issues 2 through 5).
    It is more appropriate to consider the pooling issues raised in 
proposals 2 through 5 as part of the process of restructuring the 
Federal order than to spend the time and effort necessary to determine 
appropriate levels of pool performance standards for orders that may be 
consolidated with each other and/or with other Federal order markets 
within the next few years. The information contained in the hearing 
record, including the briefs filed on the record, will be considered in 
establishing pooling standards and plant definitions appropriate to 
whatever order under which the affected milk will be regulated. 
Accordingly, this proceeding is terminated with regard to all the 
proposals to amend the Southwestern Idaho-Eastern Oregon order, and 
with regard to the proposals to amend the Pacific Northwest order that 
are not addressed in this decision.

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

[[Page 60647]]

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 Pacific Northwest 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; and
    (c) The tentative marketing agreement and the order, as hereby 
proposed to be amended, will regulate the handling of milk in the same 
manner as, and will be applicable only to persons in the respective 
classes of industrial and commercial activity specified in, a marketing 
agreement upon which a hearing has been held; and
    (d) All milk and milk products handled by handlers, as defined in 
the tentative marketing agreement and the order as hereby proposed to 
be amended, are in the current of interstate commerce or directly 
burden, obstruct, or affect interstate commerce in milk or its 
products.

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.

Termination Order

    In view of the foregoing, it is hereby determined that the 
proceeding with respect to proposed amendments to the tentative 
marketing agreement and to the order regulating the handling of milk in 
the Southwestern Idaho-Eastern Oregon marketing area (Docket No. AO-
380-A15) should be and is hereby terminated.

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 Pacific 
Northwest 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

    August 1996 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 Pacific Northwest 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 1124

    Milk marketing orders.

    Dated: November 21, 1996.
Shirley R. Watkins,
Deputy Assistant Secretary, Marketing and Regulatory Programs.

Order Amending the Order Regulating the Handling of Milk in the Pacific 
Northwest 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 Pacific Northwest 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; and
    (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) All milk and milk products handled by handlers, as defined in 
the order as hereby amended, are in the current of interstate commerce 
or directly burden, obstruct, or affect interstate commerce in milk or 
its products.

Order Relative to Handling

    It is therefore ordered, that on and after the effective date 
hereof, the handling of milk in the Pacific Northwest 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:
    The provisions of the proposed marketing agreement and order 
amending the order contained in the recommended decision issued by the 
Administrator, Agricultural Marketing Service, on August 19, 1996, and 
published in the Federal Register on August 23, 1995 (61 FR 43474), 
shall be and are the terms and provisions of this order, amending the 
order, and are set forth in full herein.
    For the reasons set forth in the preamble, the following provisions 
in

[[Page 60648]]

Title 7, Part 1124, are amended as follows:

PART 1124--MILK IN THE PACIFIC NORTHWEST MARKETING AREA

    1. The authority citation for 7 CFR Part 1124 continues to read as 
follows:

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

    2. Section 1124.2 is amended by revising the list of Washington 
counties to read as follows:


Sec. 1124.2  Pacific Northwest marketing area.

* * * * *
    Washington counties:
    Adams, Asotin, Benton, Chelan, Clallam, Clark, Columbia, Cowlitz, 
Douglas, Ferry, Franklin, Garfield, Grant, Grays Harbor, Island, 
Jefferson, King, Kitsap, Kittitas, Klickitat, Lewis, Lincoln, Mason, 
Okanogan, Pacific, Pend Oreille, Pierce, San Juan, Skagit, Skamania, 
Snohomish, Spokane, Stevens, Thurston, Wahkiakum, Walla Walla, Whatcom, 
Whitman and Yakima.
* * * * *
    3. Section 1124.30 is amended by revising paragraphs (a)(1)(i) and 
(ii), and (c)(1) through (3) to read as follows:


Sec. 1124.30  Reports of receipts and utilization.

* * * * *
    (a) * * *
    (1) * * *
    (i) Milk received directly from producers (including such handler's 
own production), and the pounds of protein and pounds of solids-not-fat 
other than protein (other solids) contained therein;
    (ii) Milk received from a cooperative association pursuant to 
Sec. 1124.9(c), and the pounds of protein and pounds of solids-not-fat 
other than protein (other solids) contained therein;
* * * * *
    (c) * * *
    (1) The pounds of skim milk, butterfat, protein and solids-not-fat 
other than protein (other solids) received from producers;
    (2) The utilization of skim milk, butterfat, protein and solids-
not-fat other than protein (other solids) for which it is the handler 
pursuant to Sec. 1124.9(b); and
    (3) The quantities of skim milk, butterfat, protein and solids-not-
fat other than protein (other solids) delivered to each pool plant 
pursuant to Sec. 1124.9(c).
* * * * *
    4. Section 1124.31 is amended by revising paragraphs (a)(1) and 
(b)(1) to read as follows:


Sec. 1124.31  Payroll reports.

* * * * *
    (a) * * *
    (1) The total pounds of milk received from each producer, the 
pounds of butterfat, protein and solids-not-fat other than protein 
(solids nonfat) contained in such milk, and the number of days on which 
milk was delivered by the producer during the month;
* * * * *
    (b) * * *
    (1) The total pounds of milk received from each producer and the 
pounds of butterfat, protein and solids-not-fat other than protein 
(solids nonfat) contained in such milk;
* * * * *
    5. Section 1124.50 is amended by revising paragraph (f) 
introductory text, paragraph (g), and adding a new paragraph (h) to 
read as follows:


Sec. 1124.50  Class and component prices.

* * * * *
    (f) The butterfat price per pound, rounded to the nearest one-
hundredth cent, shall be the total of:
* * * * *
    (g) 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.
    (h) The other solids price per pound, rounded to the nearest one-
hundredth 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, and dividing the resulting amount by the 
average other solids test of producer milk pooled under Part 1124 for 
the month, as determined by the Market Administrator. If the resulting 
price is less than zero, then the protein price will be reduced so that 
the other solids price equals zero.
    6. Section 1124.53 is revised to read as follows:


Sec. 1124.53  Announcement of class and component prices.

    On or before the 5th day of each month, the market administrator 
shall announce publicly the following prices:
    (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 other solids price for the preceding month; and
    (i) The butterfat differential for the preceding month.
    7. Section 1124.60 is amended by redesignating paragraphs (f) 
through (m) as paragraphs (g) through (n), revising the section 
heading, the undesignated center heading preceding the section heading, 
paragraph (e), redesignated paragraphs (g) introductory text, (g)(3), 
the phrase ``assigned to shrinkage'' in paragraph (h) introductory text 
to ``assigned to inventory'', (h)(3), and (h)(6), and adding a new 
paragraph (f) to read as follows:

Producer Price Differential


Sec. 1124.60  Handler's value of milk.

* * * * *
    (e) Multiply the protein price for the month by the pounds of 
protein associated with the pounds of producer skim milk in Class II 
and Class III during the month. The pounds of protein shall be computed 
by multiplying the producer skim milk pounds so assigned by the 
percentage of protein in the handler's receipts of producer skim milk 
during the month for each report filed separately;
    (f) Multiply the other solids price for the month by the pounds of 
other solids associated with the pounds of producer skim milk in Class 
II and Class III during the month. The pounds of other solids shall be 
computed by multiplying the producer skim milk pounds so assigned by 
the percentage of other solids in the handler's receipts of producer 
skim milk during the month for each report filed separately;
    (g) With respect to skim milk and butterfat overages assigned 
pursuant to Sec. 1124.44(a)(15), (b) and paragraph (g)(6) of this 
section:
* * * * *
    (3) Multiply the pounds of protein and other solids associated with 
the skim milk pounds assigned to Class II and III by the protein and 
other solids prices, respectively;
* * * * *
    (h) * * *
    (3) Multiply the pounds of protein and other solids associated with 
the skim milk pounds assigned to Class II and III by the protein and 
other solids prices, respectively;
* * * * *

[[Page 60649]]

    (6) Subtract the Class III value of the milk at the previous 
month's protein, other milk solids, and butterfat prices;
* * * * *
    8. Section 1124.61 is amended by revising the section heading, 
introductory text, and paragraphs (a), (d) and (e) to read as follows:


Sec. 1124.61  Producer price differential.

    A producer price differential per hundredweight of milk for each 
month shall be computed by the market administrator as follows:
    (a) Combine into one total for all handlers:
    (1) The values computed pursuant to Sec. 1124.60 (a) through (c) 
and (g) through (n) for all handlers who filed the reports prescribed 
by Sec. 1124.30 for the month and who made the payments pursuant to 
Sec. 1124.71 for the preceding month; and
    (2) Add the values computed pursuant to Sec. 1124.60 (d), (e) and 
(f); and subtract the values obtained by multiplying the handlers' 
total pounds of protein and total pounds of other solids contained in 
such milk by their respective prices;
* * * * *
    (d) Divide the resulting amount by the sum, for all handlers, of 
the total hundredweight of producer milk and the total hundredweight 
for which a value is computed pursuant to Sec. 1124.60(k); and
    (e) Subtract not less than 4 cents per hundredweight nor more than 
5 cents per hundredweight. The result shall be the producer price 
differential.
    9. Section 1124.62 is removed, and Section 1124.63 is redesignated 
as Section 1124.62 and revised, including the section heading to read 
as follows:


Sec. 1124.62  Announcement of the producer price differential and a 
statistical uniform price.

    On or before the 14th day after the end of each month, the market 
administrator shall announce the following prices and information:
    (a) The producer price differential;
    (b) The protein price;
    (c) The other solids price;
    (d) The butterfat price;
    (e) The average protein and other solids content of producer milk; 
and
    (f) The statistical uniform price for milk containing 3.5 percent 
butterfat, computed by combining the Class III price and the producer 
price differential.
    10. Section 1124.71 is amended by revising paragraph (a)(1), the 
reference ``Sec. 1124.73(a)(2) (i), (ii), and (iii);'' in paragraph 
(b)(1) to ``Sec. 1124.73(a)(2) (ii) through (iv);'' and paragraph 
(b)(3) to read as follows:


Sec. 1124.71  Payments to the producer-settlement fund.

* * * * *
    (a) * * *
    (1) The total handler's value of milk for such month as determined 
pursuant to Sec. 1124.60; and
* * * * *
    (b) * * *
    (3) The value at the producer price differential adjusted for the 
location of the plant(s) from which received (not to be less than zero) 
with respect to the total hundredweight of skim milk and butterfat in 
other source milk for which a value was computed or such handler 
pursuant to Sec. 1124.60(k).
* * * * *
    11. Section 1124.73 is amended by revising paragraphs (a)(2) (ii) 
through (vi), (c) introductory text, (c)(1), the reference ``paragraph 
(a)(2) (i) through (iii) of this section'' in paragraphs (c)(2) and 
(d)(2) to ``paragraph (a)(2) (i) through (iv) of this section'', 
(f)(2), and adding paragraph (a)(2)(vii) to read as follows:


Sec. 1124.73  Payments to producers and to cooperative associations.

* * * * *
    (a) * * *
    (2) * * *
    (ii) Add the amount that results from multiplying the protein price 
for the month by the total pounds of protein in the milk received from 
the producer;
    (iii) Add the amount that results from multiplying the other solids 
price for the month by the total pounds of other solids in the milk 
received from the producer;
    (iv) Add the amount that results from multiplying the total 
hundredweight of milk received from the producer by the producer price 
differential for the month as adjusted pursuant to Sec. 1124.74(a);
    (v) Subtract payments made to the producer pursuant to paragraph 
(a)(1) of this section;
    (vi) Subtract proper deductions authorized in writing by the 
producer; and
    (vii) Subtract any deduction required pursuant to Sec. 1124.86 or 
by statute; and
* * * * *
    (c) Each handler shall pay to each cooperative association which 
operates a pool plant, or to the cooperative's duly authorized agent, 
for butterfat, protein and other solids received from such plant in the 
form of fluid milk products as follows:
    (1) On or before the second day prior to the date specified in 
paragraph (a)(1) of this section, for butterfat, protein, and other 
milk solids received during the first 15 days of the month at not less 
than the butterfat, protein, and other milk solids prices, 
respectively, for the preceding month; and
* * * * *
    (f) * * *
    (2) The total pounds of milk delivered by the producer, the pounds 
of butterfat, protein and other solids contained therein, and, unless 
previously provided, the pounds of milk in each delivery;
* * * * *


Sec. 1124.74  [Amended]

    12. Section 1124.74(c) is amended by revising, in two locations, 
the phrase ``weighted average differential price'' to ``producer price 
differential''.


Sec. 1124.75  [Amended]

    13. Section 1124.75 is amended by adding the phrase ``or 
statistical uniform price'' after the words ``estimated uniform price'' 
in the second sentence of paragraph (a)(1)(i), and by revising the 
phrase ``estimated uniform price'' in the first sentence of paragraph 
(b)(4) to ``statistical uniform price''.


Sec. 1124.85  [Amended]

    14. Section 1124.85 is amended by revising the reference 
``Sec. 1124.60 (h) and (j)'' in paragraph (b) to ``Sec. 1124.60 (i) and 
(k)''.

[FR Doc. 96-30459 Filed 11-27-96; 8:45 am]
BILLING CODE 3410-02-P