[Federal Register Volume 62, Number 81 (Monday, April 28, 1997)]
[Proposed Rules]
[Pages 23032-23063]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-10831]



[[Page 23031]]

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Part IV





Northeast Dairy Compact Commission





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7 CFR Chapter XIII



Compact Over-Order Price Regulation; Proposed Rule

  Federal Register / Vol. 62, No. 81 / Monday, April 28, 1997 / 
Proposed Rules  

[[Page 23032]]


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NORTHEAST DAIRY COMPACT COMMISSION

7 CFR Chapter XIII


Compact Over-Order Price Regulation

AGENCY: Northeast Dairy Compact Commission.

ACTION: Proposed rule.

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SUMMARY: This rule proposes a compact cover-order price regulation for 
the territorial region of the six New England states, in the amount of 
$16.94 (Zone 1), for six months duration. The Northeast Dairy Compact 
Commission (Compact Commission) establishes this price regulation based 
on its determination that it is necessary to assure the viability of 
dairy farming in New England and to assure the region's consumers of a 
continued adequate, local supply of fresh and wholesome milk, 
reasonably priced.

DATES: Comments must be received by May 12, 1997.

ADDRESS: Comments should be submitted to the Northeast Dairy Compact 
Commission, 43 State Street, P.O. Box 1058, Montpelier, VT 05601. The 
complete file for this proposed rule is available for public inspection 
during normal business hours at the offices of the Commission.

FOR FURTHER INFORMATION CONTACT: Daniel Smith, Executive Director, 
Northeast Dairy Compact Commission at the above address or by telephone 
at (802) 229-1941 phone or by facsimile at (802) 229 -2028.

SUPPLEMENTARY INFORMATION:

Background

    The Compact Commission was established under authority of the 
Northeast Interstate Dairy Compact (Compact). The Compact was enacted 
into law by each of the six participating New England states as 
follows: Connecticut--Pub. L. 93-370; Maine--Pub. L. 89-437, as 
amended, Pub. L. 93-320; Massachusetts--Pub. L. 93-370; New Hampshire--
Pub. L. 93-184-A; Rhode Island--Pub. L. 93-336; Vermont--Pub. L. 89-95, 
as amended, 93-97. Consistent with Article I, Section 10 of the United 
States Constitution, Congress consented to the Compact in Pub. L. 104-
127 (FAIR ACT), Section 147, codified at 7 U.S.C. Sec. 7256. 
Subsequently the United States Secretary of Agriculture, pursuant to 
the FAIR ACT, authorized implementation of the Compact.
    Section 8 of the Compact empowers the Compact Commission to engage 
in a broad range of activities that are designed to ``promote 
regulatory uniformity, simplicity and interstate cooperation.'' For 
example, the Compact authorizes the Compact Commission to engage in a 
range of investigations of the existing milk programs of both the 
participating states and the federal milk marketing system, to make 
recommendations to participating states, and to improve industry 
relations as a whole. See Compact, Art. IV, Sec. 8.
    In addition to the powers conferred by Section 8, the Compact also 
authorizes the Compact Commission to consider adopting a compact over-
order price regulation. See Compact, Art., IV, Sec. 9. A ``compact 
over-order price'' is defined as:

    A minimum price required to be paid to producers for Class I 
milk established by the Commission in regulations adopted pursuant 
to sections nine and ten of this compact, which is above the price 
established in federal marketing orders or by state farm price 
regulation in the regulated area. Such price may apply throughout 
the region or in any part or parts thereof as defined in the 
regulations of the commission.

See Compact, Art. II, Sec. 2(8); see also Compact, Art. IV, Sec. 9 
(``The Commission is hereby empowered to establish the minimum price 
for milk to be paid by pool plants, partially regulated plants and all 
other handlers receiving milk from producers located in a regulated 
area.'')
    Such price regulation establishes the minimum procurement price to 
be paid by fluid milk processors to farmers used for New England fluid 
milk consumption. The regulated price established by the Compact 
Commission is actually an incremental amount above, or ``over-order'' 
(Federal Order #1) the minimum price for the same milk established by 
Federal Milk Market Order.
    Section 11 of the Compact specifically delineates the procedures 
that the Commission must employ in the event it wishes to promulgate an 
over-order price regulation.

    Before promulgation of any regulations establishing a compact 
over-order price or commission marketing order, including any 
provision with respect to milk supply under subsection 9(f), or 
amendment thereof, as provided in Article IV, the commission shall 
conduct an informal rulemaking proceeding to provide interested 
persons with an opportunity to present data and views. Such 
rulemaking proceeding shall be governed by section four of the 
Federal Administrative Procedures Act, as amended (5 U.S.C. 
Sec. 553). In addition, the commission shall, to the extend 
practicable, publish notice of rulemaking proceedings in the 
official register of each participating state. Before the initial 
adoption of regulations establishing a compact over-order price or a 
commission marketing order and thereafter before any amendment with 
regard to prices or assessments, the commission shall hold a public 
meeting. The commission may commence a rulemaking proceeding on its 
own initiative or may in its sole discretion act upon the petition 
of any person including individual milk producers, any organization 
of milk producers or handlers, general farm organizations, consumer 
or public interest groups, and local, state or federal officials.

    Pursuant to Sec. 11 of the Compact, the Compact Commission issued a 
Notice of Hearing on December 13, 1996, and held public hearings on 
December 17 and 19, 1996. The Notice also invited the public to submit 
written comments through January 2, 1997. Following the close of this 
comment period, the Commission met on January 16, 1997 and established 
three working groups to consider the testimony and data submitted. The 
Commission issued a Notice of Additional Comment Period on March 14, 
1997. This comment period closed on March 31, 1997; the reply comment 
period closed April 9, 1997.

Statement of Required Findings of Fact

    Sec. 12(a) of the Compact directs the Commission to make four 
findings of fact as the basis for promulgating a compact over-order 
price regulation.
    (a) In addition to the concise general statement of basis and 
purpose required by section 4(b) of the Federal Administrative 
Procedure Act, as amended (5 U.S.C. Sec. 553(c)), the commission shall 
make findings of fact with respect to:

    (1) Whether the public interest will be served by the 
establishment of minimum milk prices to dairy farmers under Article 
IV.
    (2) What level of prices will assure that procedures receive a 
price sufficient to cover their costs of production and will elicit 
an adequate supply of milk for the inhabitants of the regulated area 
and for manufacturing purposes.
    (3) Whether the major provisions of the order, other than those 
fixing minimum milk prices, are in the public interest and are 
reasonably designed to achieve the purposes of the order.
    (4) Whether the terms of the proposed regional order or 
amendment are approved by producers as provided in section thirteen.

Compact Art. V. Sec. 12.
    For purposes of clarity, the analysis of the testimony and comment 
first addresses the substance of findings (2) above, or the level of 
price needed by producers to cover their costs of production and which 
will elicit an adequate supply of milk for inhabitants. The conclusion 
of that analysis is that the current pay price is not sufficient to 
cover cost of production or to elicit an adequate supply of milk for 
inhabitants. Based on that determination the

[[Page 23033]]

resulting analysis addresses the substance of finding (1) above, or 
whether the establishment of minimum milk prices to dairy farmers would 
serve the public interest.

Summary of Comment

I. Finding

    What level of prices will assure that producers receive a price 
sufficient to cover their costs of production and will elicit an 
adequate supply of milk for the inhabitants of the regulated area and 
for manufacturing purposes.\1\
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    \1\ The Compact Commission has determined that the findings here 
required need not contain any determination with respect to the 
provision of milk supplies utilized for manufactured purposes. Under 
current circumstances, the Compact Commission is authorized to 
regulate only the price of milk used for fluid consumption. See 7 
U.S.C. Sec. 7256(2) (``The Northeast Interstate Dairy Compact 
Commission shall not regulate Class II, Class III, or Class III-A 
milk used for manufacturing purposes or any other milk, other than 
Class I fluid milk, as defined by a Federal milk marketing order 
issued under 7 U.S.C. Sec. 608c of this title, reenacted with 
amendments by the Agricultural Marketing Agreement Act of 1937.'') 
The Commission has concluded that the finding provision with regard 
to milk used for manufactured purposes stems from the Compact's 
alternative authority to regulate that additional milk supply with a 
Commission marketing order. See Compact, Article IV, Sec. 9(c). 
Under the Compact, however, this authority could be utilized only in 
the event the federal Market Order System is eliminated. See Compact 
Article IV, Secs. 9(a) and (c). This is not presently the case. 
Morever, this residual authority was struck by the Congress when it 
approved the Compact. Pub. L. 104-127(2). Accordingly, because the 
Commission has authority only to regulate the price of milk used for 
fluid milk purposes, its findings only deal with fluid milk supply 
and consumption issues.
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    This finding requires consideration of the core issues regarding 
the financial health of the region's dairy farmers and the Compact's 
associated purpose of assuring the region's adequate supply of milk. 
More specifically, this finding requires the Commission to make a 
determination of the price level necessary both to ensure the 
continuing financial viability of New England dairy farms and to elicit 
an adequate supply for the region's fluid, or milk beverage, 
consumption.
    Section 9(e) of the Compact provides guidance to the Commission 
with regard to the factors to be considered in analyzing the cost of 
production issue. That section directs the Commission.

to consider the * * * costs of production including, but not limited 
to the price of feed, the cost of labor including the reasonable 
value of the producer's own labor and management, machinery expense, 
and interest expense. Section 9(e) also guides this inquiry by 
requiring the Commission to consider ``the price necessary to yield 
a reasonable return to the producer and distributor.

    Based upon this statutory guidance, the Commission sought testimony 
and comment on the following subjects and issues:

    (1) Farmer costs of production, including the components 
identified by Compact Section 9(e), and the pay price needed to 
yield a reasonable rate of return to producers; and
    (2) Prevailing pay prices received by dairy farmers in the New 
England region; and
    (3) The balance between production and consumption of fluid milk 
products.\2\
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    \2\ 61 CFR 65604.
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A. Issue: Farmer Cost of Production and the Pay Price Needed To Yield a 
Reasonable Rate of Return to Producers

    The comment received makes clear that, despite the approach of 
Section 9(e), there is very little agreement on what ``costs'' should 
be included in the cost of production, and even how they should be 
calculated. Beyond actual cash costs, there is considerable 
disagreement over whether to include or exclude, and how best to 
consider, depreciation, family living costs, return or equity, a 
reasonable value for the farmer's own labor, and debt service. There 
was no common definition throughout the testimony among farmers or 
economists. Farmers, themselves, quite frequently, excluded the value 
of their own labor and or depreciation in calculating their own costs 
of production.
    The diversity of comment makes clear the difficulties of cost of 
production analysis. Cost of production can and do vary widely from 
farm to farm and year to year.\3\ Even one commenter who opposed the 
adoption of a price regulation agreed that there is a lack of consensus 
on the amounts that should be considered in calculating costs of 
production.\4\ University of Vermont dairy economist Rick Wackernagel 
suggests the difficulty of isolating the cost of producing a 
hundredweight of milk from what is typically a diversified farming 
operation, and that any such attempt is at best ``an approximation.\5\
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    \3\ See December 19, 1996 hearing transcript (12/19/96 HT): 
Putnam at 141, 148-49; Stevens at 158-60; Carlson, at 232-34; 
Buelow, at 248; Beach at 288-90; Platt, at 292.
    \4\ Vetne, 12/19/96 HT at 264-66.
    \5\ Wackernagel, Compilation of January 2, 1997 Written Comment 
(1/2/97 WC) at 482-83.
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    As will be discussed, despite the diversity of their analytical 
approach, the comments do reflect near unanimous agreement on at least 
three important aspects of the cost of production equation:

    (1) For an extended period of time prices have not covered the 
full costs of production, however defined,
    (2) price instability has caused financial stress and made it 
impossible for farmers to plan financially; and
    (3) over time, net, ``mail box'' price levels received by 
farmers have not kept up with inflation.

    In addition, the Compact Commission will review the comments 
relating to the structure and health of the New England dairy industry.
    The Compact Commission's review of comment under this section 
includes a comprehensive survey of the testimony and comment received 
from dairy farmers, and a response to opposing comments received. The 
Commission notes that very few conflicting comments were submitted for 
consideration.
(1) Price Insufficiency
    Commenters indicated again and again that, in general, farmers in 
New England had done a good job of holding down costs of production in 
response to flat milk prices by increasing productivity and 
efficiency.\6\ According to one survey of New England farmers, however, 
this efficiency and productivity has not equated to profitability. 
According to the survey conducted by the Farm Credit Services, forty-
two percent of the farms had a negative cash margin in 1995.\7\
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    \6\ See DeGues, 1/2/97 WC at 74; Sciabarrasi, 1/2/97 WC at 309; 
and Smith, 12/17/96 HT at 36.
    \7\ See Smith, 12/17/96 HT at 36.
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    This survey included seventy-three New England farmers who 
participate in Agrifax, a financial accounting service provided to 
farmers by local Farm Credit Associations. Despite the relatively small 
size of the survey sample, the results are useful to the Commission 
because, according to the authors, survey participants are generally 
larger and perhaps better managed than the average dairy farm in New 
England. The survey indicates that the average adjusted cost of 
producing milk by New England farms in this survey in 1995 was $15.37 
per hundredweight, when including a 4% rate of return on equity. Before 
the 4% rate of return on equity the net cost of production was 
14.25.\8\
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    \8\ See Smith, 12/17/96 HT at 36.
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    Smith concluded

When you consider the average price received by farmers in our 
survey for New England was $13.70 per hundredweight in 1995, it is 
not surprising that many dairy farms are having financial 
difficulty.\9\

    \9\ Smith, 12/17/96 HT at 36.
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    There was also abundant evidence in the record that costs of 
production for 1996 will likely be as high or even higher than in 1995 
and again not be covered by the price received. Jim Putnam, a Senior 
Vice President with First Pioneer Farm Credit Bank, for

[[Page 23034]]

example, testified that he ``would estimate probably a dime or more 
higher in 96'' primarily as a result of a 29% increase in purchased 
feed prices which can account for up to 50% of the cost of production 
in New England.\10\ The average 1996 mailbox price in New England was 
measured as $14.25, leaving a shortfall of over $1.00, against this 
commenter's estimated cost of production.
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    \10\ Putnam, 12/19/96 HT at 148-149; see also Smith, 12/17/96 HT 
at 38; Andrew, 1/2/97 WC at 5.
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    Farmers consistently referred to the fact that low farm prices made 
it difficult for them to reach their ``break-even'' point, let alone 
generate any meaningful return.\11\ As one witness testified:

    \11\ See Mason, 12/17/96 HT at 87; d'Boer, 12/17/96 at 192; 
Putnam, 12/19/96 HT at 144-45, 146.

    I have two young children and she'll say gee, Dad, we've had a 
break-even for less price this year for a lower milk price and let's 
go out and eat and I've got to explain to her that when you break 
even, you don't eat, that's just paying the operating expenses and 
says nothing about investing in your business and making it a long 
range commitment.\12\
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    \12\ Holmes, 12/17/96 at 93.

    Other farmer-witness testified that they, themselves, were living 
below the poverty line and were eligible to participate in the WIC 
program.\13\
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    \13\ See Mason, 12/17/96 HT at 85-86.
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    The result of these depressed prices and the inability to make ends 
meet will, according to one commenter, cause farmers to ``tighten their 
belt'' or ``hunker down'' and ``wait out the point in time when they'll 
go back to breakdown.'' \14\ Farmers, thus, are struggling to make ends 
meet.
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    \14\ Putnam, 12/19/96 at 147-48.
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    The testimony and comments also made clear that this failure of 
milk prices to cover, or even meet, the costs of production is not a 
short-lived phenomenon, but rather, is part of a long-term trend that 
extends back into the mid-1980s. Numerous studies, which were 
corroborated by substantial anecdotal evidence from farmers, documented 
the chronic price insufficiency over the last decade.
    The USDA Economic Research Service estimates that during the 1985 
to 1990 period, cash receipts of Northeastern dairy farmers rose from 
$13.96 to $16.00 per hundredweight while the cost of production jumped 
from $12.06 to $16.46. In 1990, dairy farmers in the Northeast average 
a net loss of .46 cents per hundredweight of milk sold.\15\
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    \15\ Pelsue, 1/2/97 W/C at 274.
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    Several other studies reached similar conclusions. For example, in 
a study commissioned by the Maine Milk Commission submitted by Mike 
Wiers, the Commission's Chair, economists Robert Milligan and Wayne 
Knoblauch analyzed total costs of production (cash costs, depreciation, 
a 5% return on equity, and a return on the farmer's labor) in Maine and 
the five Southern New England states of Vermont, New Hampshire, 
Massachusetts, Connecticut and Rhode Island--the six Compact states. 
They found that for Maine the total costs of production per 
hundredweight to be $17.24 in 1982 and $17.17 in 1987. For the Southern 
New England States, the costs were $16.65 and $16.62 respectively.\16\ 
For these years, the Market Administrator's Report indicates that the 
blend prices for Order 1, Zone 21 were $13.61 and $12.56, reflecting 
pay prices below the costs of production.
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    \16\ In reply comment, Bill Gillmeister indicated that the 
higher cost of production in southern New England was a significant 
issue that must be addressed. See Gillmeister, Reply Comment, (RC) 
April 9, 1997. The Commission agrees that the loss of milk supply 
nearest to the population centers is an issue of utmost concern, and 
the reasons for this particular decline should be most carefully 
scrutinized. As described at footnote 3, the Commission has 
concluded that it should initiate a regional cost of production 
study by the close of the regulation adopted under this rule. The 
comparative costs of production within the region will be a key part 
of this analysis.
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    University of Vermont Extension economist Rick Wackernagel 
submitted a study which relief upon an analysis of farm income and 
expense data from Agrifax and ELFAC farms to estimate costs of 
production for 1988 through 1990. The costs considered included cash 
operating expenses, capital costs (other than land) and the labor 
provided by the farm family; they did not provide for any return on the 
owner's equity in land. According to this study, net costs of 
production on these Vermont farms in 1988 were about $13 per 
hundredweight. In 1990, they had risen to $15 per hundredweight.\17\ By 
comparison, the Market Administrator's Report indicates blend prices 
for 1988 and 1990, Order 1, Zone 21 were $12.22 and $13.95, 
respectively. This study again confirms the fact that prices were 
inadequate to enable farmers to meet the break-even point.
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    \17\ Wackernagel, 1/2/97 W/C at 515.
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    Economist Neil Pelsue submitted another study of the costs of 
production in Vermont, conducted by the Community Development and 
Applied Economics Department at the University of Vermont.\18\ This 
study analyzed cost of production by considering all cash expenses, 
capital replacement costs, and unpaid farm labor, using a hired wage 
rate. For 1990, the study found the average cost of production to be 
$14.33 per hundredweight, or about $0.67 less than the Wackernagel 
study determination. When the economic or ``full ownership'' costs of 
production was analyzed, however, which included a residual return to 
management and risk, the measurement of cost of production ballooned to 
an average of $16.41 per hundredweight. This determination is 
substantially higher than the Wackernagel analysis and well above the 
reported blend price of $13.95 for the year.
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    \18\ Pelsue 1/2/97 W/C at 282.
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    The Pelsue study also determined that nearly two-thirds of the 
surveyed farms had negative residual returns. The study concluded, that 
``[m]ore than half of the survey farms had economic costs of production 
that exceeded their receipts. This implies that if current market 
conditions do not improve, those farms may find it hard to continue 
operating in the long run.'' \19\
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    \19\ Pelsue, 1/2/97 W/C at 282.
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    Vermont Department of Agriculture economist Reenie De Geus provided 
testimony indicating that:

    In 1995, the most recent year, costs of production averaged 
$14.06 for the group. (Vermont Dairy farmers) This is $0.83 lower 
[sic] than the actual milk prices received of $13.23. In fact, in 
each of the last 5 years, milk price received was lower than the 
cost of production by an average of $1.08.\20\
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    \20\ De Geus, 1/2/97 WC at 74.
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    Finally, as mentioned above, there was near unanimous testimony 
from farmers that price levels were inadequate to enable them to cover 
their costs of production. As one commenter summarized, the result of 
these chronically depressed prices will be ``attrition.'' \21\
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    \21\ Putnam, 12/19/96 HT at 148.
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    The evidence submitted to the Commission regarding the inadequacy 
of prices paid to farmers currently and over an extended period of time 
is persuasive. Although the degree of the price inadequacy varies from 
commenter to commenter, the evidence supports the conclusion that costs 
of production exceed prices paid to farmers. \22\
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    \22\ The Commission again notes the disparities in study 
methodologies. While repeating its belief in the broad breadth and 
strength of these studies for the conclusion that current prices are 
not covering costs of production, the Commission also has identified 
the need for a uniform, regional, cost of production study, to be 
initiated before the close of the regulation imposed by this rule.
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(2) Price Instability
    Abundant testimony in the record indicates that price instability, 
and wide fluctuations in the price of milk, were significant sources of 
financial stress for the dairy industry. These wide

[[Page 23035]]

variations in price made it difficult for farmers to make good business 
decisions and to plan financially. Robert Wellington, Vice President of 
Agri-Mark, testified that:

* * * data from the New England Market Administrator's office show*-
*-*the price volatility exhibited in the past 12 months is triple 
that experienced in 1981 and much larger than most of the 1980's and 
nearly all of the 1990's. This combination of lower prices with 
unpredictable volatility has made business planning nearly 
impossible and has put severe financial strain on most farms. \23\

    \23\ Wellington, 3/31/97 AC.
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    Robert Smith of the Farm Credit System testified with respect to 
price instability that:

    The volatility in milk prices makes it very difficult for 
farmers to effectively plan and make the type of investment 
necessary to position themselves for the future. The Commission can 
play a major role in helping to reduce this volatility through 
establishing a higher minimum Class I price. This will help keep 
farmers and land in business and maintain a stronger agriculture 
industry in New England for future generations. It will enable dairy 
farmers to make necessary investments to enhance efficiencies and 
will benefit communities with enhanced economic activity. \24\

    \24\ Smith, 12/17/96 at 39.
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    Comments from farmers expressing frustration over the wide swings 
in milk prices were abundant and adamant. Tom Magnant, a dairy farmer 
from Franklin Vermont testified: ``We find it very difficult to make 
ends meet with the milk prices that fluctuate between $11.00 and $15.00 
a hundredweight.'' \25\
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    \25\ Magnant, 12/17/96 at 227.
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    Jeffrey Holmes, a farmer from Langdon, New Hampshire testified 
that:

    I think one of the key things that's going to be gained from 
this potential floor price and Mr. Smith alluded to that is the 
stability of the price to the producer. We have no say in what we 
get and that's been true for years and years, but in this day and 
age of tight margins we really need to plan on a certain price. 
We're making borrowing decisions on variations of ten, twenty and 
thirty cents a hundred and the last two months we dropped 2 dollars 
and I don't know what the figure is--$2.50 with a little over a 
month warning that was coming and it's really a farce that we have 
to make long range plans based on that type of marketplace. \26\

    \26\ Holmes 12/17/96 at 92-93.
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    Jim Jenks, a farmer from Danville, Vermont, testified:

    I regret that I'm not a more prudent businessman but one thing I 
know is if we're going to make a good decision with respect to 
putting my family's equity on the line, we need to know something 
about the stability of our markets and our future. So with regard to 
the Compact Commission and the price that they could set, one thing 
that we're really looking for is stability. We need price. And 
there's a lot of other factors. But stability and a price that goes 
with it is really critical.\27\

    \27\ Jenks, 12/17/96 HT at 153.
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    Ralph McNall, a dairy farmer and a Director of the Vermont St. 
Albans Cooperative Creamery testified that:

    Price stability is the greatest potential benefit of the 
Compact. Within our own business costs have increased dramatically 
in the last five years. The improvements or expansions have been 
difficult to justify or prepare for with the fluctuations of the 
price paid for milk. I fully support the Compact and its potential 
to stabilize the milk price to allow my business to plan its 
future.\28\

    \28\ McNall, 12/17/96 HT at 221.
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    Charles Telly, a dairy farmer from Dunstable Mass testifying on 
behalf of the National Grange: ``I am increasingly concerned about the 
fluctuating prices * * * It is difficult for me to plan out--to 
financially plan out my future three, five or ten years in advance 
because of the uncertainty I face each month with the ever changing 
milk price''.\29\

    \29\ Telly, 12/19/96 HT at 123.
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    These comments are persuasive, and they demonstrate the need for 
price stability in the region in order to avoid the harmful effects of 
price volatility.
(3) Failure of Milk Prices to Account for Inflation
    Both economists and farmers identified the failure of milk prices 
to keep up with inflation as a factor contributing to farm financial 
stress. A recent study conducted and submitted by University of Vermont 
dairy economist, Rick Wackernagel presented a comprehensive analysis of 
the impact of these two variables--price insufficiency and inflation--
upon farm profitability.\30\ Because of its comprehensive approach, the 
Commission finds this study persuasive and relies on it extensively.
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    \30\ Wackernagel, 1/2/97 W/C at 467 et seq.
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    The Wackernagel study analyzes the economic effects of three 
different price trajectories for two different farm sizes--an 80 cow 
herd and a 350 cow herd. Wackernagel's first trajectory used a macro-
economic model developed by the Food and Agriculture Policy Research 
Institute (FAPRI) for 1997 modified to reflect local price levels and 
yields as a base. The base scenario is premised upon a Class I price of 
$16.17 per hundredweight at Zone 21 and a blend price of $14.70 per 
hundredweight. Under this scenario, both farms operate at low to modest 
levels of profitability. They are stressed financially during several 
periods of price instability and by a general downward trend in price, 
however. The financial results for these two farm sizes are ``marginal 
to somewhat unattractive'' at these price levels, providing ``an 
extremely modest return on investment of 0.4 to 3.0%''.\31\
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    \31\ Wackernagel, 1/2/97 W/C at 473.
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    The second trajectory attempts to moderate price instability by 
holding the Class I price constant. Wackernagel estimates that the 
Class I price accounts for about forty percent of the variation in the 
blend price and that stabilizing the Class I price could potentially 
reduce the variability of the blend price by about half. The economic 
impact of this approach upon farm income and survival, however, was 
similar to the base (first) trajectory, suggesting that price 
instability is not the only factor placing financial stress on these 
farming operations. Inflation, was a factor as well, as Wackernagel 
explains: ``The Consumer Price Index (CPI) shows a third source of 
financial stress for these farms, inflation. In contract to its steady 
upward progression, the first two trajectories have downward 
trends.\32\
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    \32\ Wackernagel, 1/2/97 W/C at 473.
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    Wackernagel's third price trajectory raises the Class I price to 
$17 per hundredweight (Zone 21), yielding a project blend price of 
$15.45, and increases the Class I price by one-half the rate of 
inflation in subsequent years. This price trajectory has the greatest 
positive impact on retention of equity, net farm income and 
survivability, even though its upward slope is less than that of the 
CPI.
    Farmers also identified inflation as a significant source of 
financial stress. Ellen Paradee, a dairy farmer from Grand Isle, 
Vermont testified that:

    Since 1985, our property taxes have increased two hundred 
percent. Our grain costs have increased one hundred percent. And our 
utility costs have increased one hundred and twenty five percent. In 
1985, the average blend price for Zone 25 was $12.57 per 
hundredweight. In 1995, the average blend price was $12.56 per 
hundredweight. Essentially, there has been no increase in the blend 
price. If the price of milk had kept pace with inflation, it would 
be approximately $26 per hundredweight.\33\

    \33\ Paradee, 12/17/96 HT at 232.
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    Ralph McNall commenting on his own farm finances and inflation 
said:

* * * utility cost, electricity, for example, has gone from, in the 
year 1991 it's gone from $3,600 to $5,800 for an increase of fifty 
two percent.
    Purchased feed is another example--$37,000 to $76,000 for an 
increase of one hundred and five percent. Fertilizer--$4,900 to 
$8,100 for an increase of sixty six percent  . . . It is important 
to note that steps have been taken to reduce electricity costs, for

[[Page 23036]]

instance through plate coolers and heat reclaimers within the milk 
house and yet as I said before the cost went up fifty percent. 
Reliance on purchased fertilizer has been reduced, supposedly, 
through the installation and utilization of liquid manure.\34\

    \34\ McNall, 12/17/96 HT at 222 and 223.
---------------------------------------------------------------------------

    John Mordasky, dairy farmer and Legislator from Stafford, 
Connecticut, said:

    I lost from eight to ten thousand dollars a year in the last 
four years and I feel that this has come about because the relative 
price of milk has stayed the same. Fuel has gone up, grain has 
jumped out of sight and it just--all the other costs that are 
involved--equipment, parts--have gone very, very, high and they're 
not relative anymore.\35\
---------------------------------------------------------------------------

    \35\ Mordasky, 12/19/06 HT at 12.
---------------------------------------------------------------------------

(4) Structure and Health of the New England Dairy Industry
    The comment received also makes clear the devastating impact that 
chronic price insufficiency, price instability, and the failure of milk 
prices to keep up with inflation over the last decade has had, and will 
continue to have, on the structure and health of the New England dairy 
industry absent intervention through regulation by the Compact 
Commission.\36\
---------------------------------------------------------------------------

    \36\ One commenter felt that the Commission should not take 
action because he believed that other regions of the country were 
losing dairy farmers at a faster rate than New England. See Tipton, 
WC 1/2/97 at 462. A finding that New England is losing farmers 
faster than any other part of the country is unnecessary to 
establishing an over-order price regulation.
---------------------------------------------------------------------------

    According to the extensive testimony by University of New Hampshire 
Extension Specialist Michael Sciabarrasi, the character of the New 
England dairy industry is still predominantly family owned and 
operated, made up of mostly small to medium sized producers, and is 
heavily dependent on family labor.\37\ Maintenance of this market 
structure premised on family farms is precisely the express purpose of 
the Compact. See Compact Article I, Sec. 1.\38\
---------------------------------------------------------------------------

    \37\ Sciabarrasi, 1/2/97 WC at 309.
    \38\ Three commenters expressed the opinion that the market 
should be left to work without regulation, even if this meant 
continued farm loss. (Baker, 12/17/96 HT at 185, Schnittker, 1/2/97 
WC at 313 and Vetne, 12/19/96 HT at 269.) As one Commenter 
recognized, this is essentially a question of public policy. In 
response, the Commission refers to the Compact's Statement of 
Purpose, that ``dairy farmers are essential to the region's rural 
communities and character'' and are ``an integral component of the 
region's economy.'' Compact Article I, Sec. 1.
---------------------------------------------------------------------------

    Mr. Sciabarrasi's conclusions were corroborated by much of the 
evidence adduced at the hearings. There is abundant evidence that many 
of the region's farms are small to medium-sized. Likewise, there is 
substantial anecdotal evidence of heavy dependency on family labor, 
much of which often goes unpaid.\39\
---------------------------------------------------------------------------

    \39\ See 12/17/96 HT: Mason at 87; Olson at 146; d'Boer at 192.
---------------------------------------------------------------------------

    The testimony of Robert Smith, with the Yankee Farm Credit Bank and 
Farm Credit of Maine, described the effect of the industry's chronic 
distress upon this basic market structure. According to Smith, ``The 
number of dairy farms in New England declined by 41% over the past 10 
years. (1985-1995) During this period the number of cows has declined 
24%, total production has declined 4% and land used in farms fell by 
nearly 600,000 acres.'' \40\ According to another commenter, New 
England has lost dairy farmers at a rate of about 40% faster than the 
national average, between 1987 and 1992.\41\
---------------------------------------------------------------------------

    \40\ Smith, 12/17/96 at 34.
    \41\ Ed Barron, 12/17/96 HT at 60.
---------------------------------------------------------------------------

    Statistics cited by another commenter indicate these problems are 
particularly severe in the southern portion of the Compact region. 
Massachusetts, the most populous state, has seen the greatest effect, 
showing a 35% decline in cow numbers and a 20% decline in milk 
production during the period of 1986 through 1995. Each of the two 
other southern New England states, Connecticut and Rhode Island, have 
also shown substantial declines in farms, cow numbers and production 
See New England Agricultural Statistics, 1995-96, USDA, Page 68.\42\
---------------------------------------------------------------------------

    \42\ William Zweigbaum, U-NH Extension 3/31/97 AC.
---------------------------------------------------------------------------

    The economic literature submitted into the record addressing this 
issue likewise concludes that inadequate milk prices threaten the long-
run survival of small and medium-sized farms. Quiroga & Bravo-Ureta, 
``Short- and Long-Run Adjustments in Dairy Production: A Profit 
Function Analysis,'' 24 Journal of Applied Economics 607-16 (1992).\43\ 
In this study, the authors extracted data from Vermont farms between 
1966 and 1988 and applied that data to econometric models to test the 
effects of milk price reductions on several factors, including farm 
size. The results of their analysis were consistent with the view that 
low milk prices threaten the economic viability of small- and medium-
sized dairy farms in the short run, and continue the trend towards 
fewer, and larger, dairy farms over the long run. Yet, it is precisely 
this fear of continuing attrition among the region's small rural dairy 
farmers that led to the enactment of the Compact, and prompted the 
Commission to undertake this proceeding. See, e.g., Compact, Art. I, 
Sec. 1.
---------------------------------------------------------------------------

    \43\ Bravo-Ureta, 1/2/97 WC.
---------------------------------------------------------------------------

(5) Comments and Testimony From Farmers
    In the language of economists, the Commission was told that a farm 
can continue to operate in the short term only if market prices cover 
variable costs. In the long term, it must cover the total cost of 
production and marketing or the farm will cease operating.
    (WC 282 Pelsue) Farmers were more likely to describe this situation 
as living off their depreciation or living off their equity, in terms 
evidencing both frustration and humor.
    Connecticut dairy farmer, Mavis Collins, testified that:

    People in fact used to ask us ``what will you do with all the 
money from selling your development rights'' and we jokingly would 
reply, ``We'll farm until the money is all gone.'' And 
unfortunately, that's almost what's happened. This year alone we had 
to use $24,000 of our savings plus $11,000 from creditors in order 
to keep up with current bills. * * * \44\

    \44\ Collins, 12/19/96 HT at 56.
---------------------------------------------------------------------------

    Wendy Kennedy a farm wife and owner of a farm accounting and tax 
service told the Commission:

    I pulled out the full time dairy farmers from my files. (25 
files) The average income from their Schedule F which is where you 
report farm income was a negative $5,263 for last year. (1995) * * * 
With a negative bottom line of $5,263 these families are living off 
their depreciation or selling off their assets to live * * * You 
can't run a business like that and be in business next year.\45\

    \4\ Kennedy, 12/19/96 HT at 239-240.
---------------------------------------------------------------------------

    Nowhere was the gap between cash receipts and costs of production 
more apparent than when farmers talked about family living expenses or 
any return for their family's labor: A Massachusetts dairy farmer 
testified: ``My brother Edward and I milk about one hundred cows in 
Westhampton, Mass. Ed and I take a draw of $300 per week and each of us 
work about one hundred hours per week (6 a.m.-8 p.m. 7 days).\46\
---------------------------------------------------------------------------

    \46\ Parsons, 1/2/97 WC at 236.
---------------------------------------------------------------------------

    Jan d'Boer who milks 95 cows with his family told the Commission: 
``We looked it over and we came up with about 35 hours of family labor 
a day * * * And the wages per hour we came up with after we figured it 
all out is $2.55 an hour.'' \47\
---------------------------------------------------------------------------

    \47\ d'Boer, 12/17/96 at 192.
---------------------------------------------------------------------------

    John Potter, a Washington, Connecticut dairy farmer: ``My costs 
show $7.17 to produce milk, January through November. That's not 
including anything for family living. That doesn't include anything for 
depreciation or paying back debt.'' \48\
---------------------------------------------------------------------------

    \48\ Porter, 12/19/96 HT at 226.

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

[[Page 23037]]

    Joanne Reynolds, nurse and farm wife: ``In 1996, our milk price 
averaged $14.88, but our expenses averaged $12.73. These expenses do 
not reflect depreciation, debt principal or family living expense. What 
other segment of society works 4000 hours a year, has a $500,000 
investment and is basically living off of depreciation.'' \49\
---------------------------------------------------------------------------

    \49\ Reynolds, 1/2/97 W/C at 293.
---------------------------------------------------------------------------

    John Mordasky testified that: ``In the last four years, in order to 
support my wife and myself we lived on our depreciation and my 
legislative pay.'' \50\
---------------------------------------------------------------------------

    \50\ Mordasky, 12/19/96 HT at 10.
---------------------------------------------------------------------------

    John Devine of Devine farms of Massachusetts testified, `` * * * we 
had the accountant pull off the facts from April to November and we had 
a net loss of $12,877.23.'' \51\
---------------------------------------------------------------------------

    \51\ Devine, 12/19/96 HT at 220.
---------------------------------------------------------------------------

    Wayne Bissonette a dairy farmer from Hinesburg, Vermont told the 
Commission that:

* * * long term decisions * * * [are] becoming increasingly 
difficult as milk prices swing more dramatically with no apparent 
link to other costs and market forces * * * ``I consider myself to 
be a fairly efficient farmer,'' he said, ``and I believe that I 
could make money with a blend price of $14.50. This does not allow 
for much return on my equity but at this level I would be paying 
income tax.''

    Alice Allen a dairy farmer from Wells River, Vermont said:

    In 1973, when my husband and I first began shipping milk, we 
were receiving $7.50/cwt (federal Order 1) for milk. We were paying 
$60 a ton for excellent quality 2nd cut hay and $80 a ton for 20% 
protein. In 1996, we are receiving $15.37/cwt and paying $145 a ton 
for second cut hay and $250 a ton for 20% protein concentrate.\52\

    \52\ Allen, 1/2/97 W/C at 3.
---------------------------------------------------------------------------

    Scott Mason, a registered jersey farmer from Coos County testified 
that:

    I'm looking at a break-even cost for my farm of $14.31. This 
price does not include any figure for return to equity or family 
labor. So 14.31 is I work 70 hours a week for nothing, my wife works 
approximately 30 hours a week on the farm for nothing, and we risked 
every last penny that we have for no return.\53\

    \53\ Mason, 12/7/96 HT at 87.
---------------------------------------------------------------------------

    Leon Berthiaume the general manager of the St. Albans Cooperative 
in St. Albans Vermont testified in summary with respect to the members 
of his cooperative that:

* * the average size farm for the St. Albans Coop Creamery produces 
1.6 million pounds of milk per year and through these statistics 
[UVM and USDA] we know the net cost of production, not including 
return on investment would be in the range of $13.50 to $14.25 per 
hundredweight.\54\

    \54\ Berthiaume, 12/17 HT at 93 et seq.
---------------------------------------------------------------------------

    The strength and consistency of the evidence in the record with 
respect to the impact on farmers of their inability to cover their 
costs of production provides stark evidence to the Commission of the 
severity of the problems facing the region's dairy farmers, as well as 
the consequences of inaction.

B. Issue: Prevailing Pay Prices Received by Dairy Farmers in the New 
England Region

    The issue of the pay prices received by New England dairy farmers 
is important because it bears directly on determining the necessary 
level of any Compact Over-order Price Regulation that might be imposed.
    According to a review of the statistical data and the comment 
received, prevailing farm prices are a function of two computations: 
federally regulated uniform (or ``blend'') prices and net or 
``mailbox'' price.
    Statistics published by the Market Order # 1 Administrator provide 
comprehensive and complete data to address the first part of this 
issue--the market structure of federal, minimum, price regulation. 
These statistics are compiled by the Market Administrator as part of 
the regulation of the federal order, by law, and are published monthly, 
annually, and in ten-year compilation form. See 7 C.F.R. 
Sec. 100.3(c)(4), (9). They serve as the common basis for all New 
England regional dairy marketing analysis and, together with similar 
statistics supplied for other regions, form the basis for national 
analysis.\55\
---------------------------------------------------------------------------

    \55\ submitted for reference by De Geus and Gilmeister, 3/3/97 
AC.
---------------------------------------------------------------------------

    These statistics report the precise minimum uniform or ``blend'' 
prices paid to dairy farmers under federal regulation. According to the 
statistics, these prices are announced and paid monthly, using one 
hundred pounds (cwt) of milk as the unit of measure.
    General managers and economists employed by cooperatives of dairy 
farmers which operate in the region described in comprehensive detail 
the integration of market forces at work in the regulated marketplace. 
According to these commenters, farmers receive from the marketplace a 
``mailbox'' or net pay price, which accounts for a variety of market 
payments received and costs incurred for the sale of the milk they 
produce. \56\
---------------------------------------------------------------------------

    \56\ According to Wellington et al, (AC 3/31/97) and pursuant to 
federal Market Order # 1, the cost of transporting the bulk fluid 
milk from the farm to the processing plant is a key cost to farmers 
which reduces the prevailing farm price. This issue is discussed in 
more detail in the next finding section.
---------------------------------------------------------------------------

    The following chart illustrates these two price computations of 
prevailing pay prices of the region's dairy farmers.

[[Page 23038]]



                                                                           Class I, Blend and Mailbox Prices 1995-1996                                                                          
                                                                                            [Per CWT]                                                                                           
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                              Jan.       Feb.       Mar.       Apr.       May        June        July       Aug.       Sept.       Oct.        Nov.       Dec.  
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                              1995                                                                                              
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Class I..................................................      15.10      14.62      14.59      15.03      15.13       14.4       14.36       14.66      14.47       14.79      15.32      15.85
Blend....................................................      13.12      13.13      13.25      13.19      13.27       12.84      12.83       13.24      13.32       13.7       14.24      14.43
Mail box.................................................      11.83      11.86      11.98      11.93      11.92       11.39      11.35       11.71      11.88       12.42      13.14      13.20
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                              1996                                                                                              
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Class I..................................................      16.11      16.15      15.97      15.83      15.94       16.33      17.01       17.16      17.73       18.18      18.61      17.37
Blend....................................................      13.79      13.63      13.55      13.53      13.84       14.53      15.25       15.48      15.96       16.04      15.65      14.37
Mail box.................................................      13.38      13.23      13.14      13.08      13.49       14.08      14.77       15         15.55       15.83      15.37      14.12
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 23039]]

C. Issue: The Balance Between Production and Consumption of Fluid Milk 
Products

    As noted, the finding analysis regarding the price calculation 
simultaneously accounts for the level required to ensure the region's 
local supply of fluid milk products and the amount needed to cover cost 
of production. Section 9(e) of the Compact specifically requires the 
Compact Commission to consider the balance between production and 
consumption of milk and fluid milk products in the regulated area.
    Inquiry under this issue assisted the Commission in determining 
whether the region presently is being supplied locally or has become 
dependent upon supply from distant sources, notwithstanding any present 
price disparity between cost of production and the pay price. This 
understanding allowed the Commission to determine the degree to which 
price regulation is needed to sustain current, sufficient, local 
supply, and the degree to which it is also needed to encourage and 
ensure new and added local supply.
    According to data, the six state, New England, region draws 
approximately seventy percent of the raw product supply needed for the 
consumption of all milk products, fluid and manufactured, from New 
England farmers. The total volume of milk supplied for the region is 
approximately five billion pounds. The predominant remainder is 
supplied by New York farmers, who have traditionally made up a 
substantial portion of the New England milkshed. Less than three 
percent of the raw milk supply for the New England market is produced 
outside of the six state/New York milkshed.
    According to the Market Order statistics, approximately fifty 
percent of this raw product milk supply is processed for consumption as 
fluid, or drinking milk, in the New England region. The raw product 
supply for this in-region fluid production and consumption draws from 
both the New England and New York farmers comprising the New England 
milkshed. At present, approximately 98 percent of the fluid milk 
products consumed in the region are produced by fluid processing plants 
located in New England. The remaining two percent of fluid milk 
consumption is supplied by packaged milk products imported by plants 
nearby to New England. A small percentage of the in-region fluid 
production is similarly exported for consumption in the immediate areas 
adjacent to New England.
    The Market Order statistics also describe with particularity that 
the remainder of the raw product milk supply is processed within New 
England into manufactured dairy products. In contrast to fluid milk 
products, these manufactured dairy products are consumed both within 
and outside the New England region.
    It is universally understood that the same raw product supply can 
be used for both fluid, processing and manufacturing purposes. Given 
this substitutability, and assuming reliance upon farmers in New York 
State as part of the milkshed, the Commission concludes that New 
England is, overall, presently in stable balance of regional production 
and consumption of fluid milk products.
    At the same time, the Market Order statistics describe a marked 
decline in production over time in every individual New England state 
except Vermont.\57\
---------------------------------------------------------------------------

    \57\ See also New England Agriculture statistics, submitted by 
William Zweigbaum, A/C 3/31/97.

                                                       Receipts of Milk From Producers, By States                                                       
                                                                    [Thousand Pounds]                                                                   
--------------------------------------------------------------------------------------------------------------------------------------------------------
                      Year                             CT           Me           MA           NH           NY           RI           VT       All States
--------------------------------------------------------------------------------------------------------------------------------------------------------
1985............................................      594,785      345,956      540,143      338,028    1,284,015       39,722    2,256,595    5,399,244
1986............................................      574,279      333,124      506,773      343,806    1,280,331       36,912    2,266,222    5,341,447
1987............................................      541,118      293,373      450,524      301,738    1,313,635       36,198    2,236,238    5,172,824
1988............................................      515,512      262,059      418,055      281,403    1,391,994       34,490    2,214,116    5,117,629
1989............................................      502,716      217,437      400,105      268,453    1,388,680       29,651    2,167,758    4,974,803
1990............................................      494,619      216,586      407,704      280,201    1,455,463       29,805    2,229,961    5,114,341
1991............................................      504,516      253,383      412,990      294,185    1,545,890       30,056    2,268,174    5,309,194
1992............................................      525,702      260,759      427,407      307,159    1,560,245       28,853    2,367,566    5,477,691
1993............................................      504,282      288,776      424,836      310,463    1,443,447       28,266    2,345,423    5,345,493
1994............................................      491,495      296,500      398,271      299,911    1,283,684       27,161    2,301,044    5,098,521
1995............................................      487,493      346,443      400,501      314,610    1,417,034       28,536    2,375,518    5,370,135
1996............................................      457,230      388,684      388,227      312,293    1,459,469       26,850    2,350,348    5,383,101
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: New England Market Order Administrator's Statistical Summaries.                                                                                 


                                            Milk Marketed by Producers: Sold to Plants and Dealers: by State                                            
                                                                    [Million Pounds]                                                                    
--------------------------------------------------------------------------------------------------------------------------------------------------------
                              YR                                    CT           ME           MA           NH           RI           VT        Total NE 
--------------------------------------------------------------------------------------------------------------------------------------------------------
1986.........................................................          575          670          535          362         36.0         2405       4583.0
1987.........................................................          540          654          480          314         36.0         2370       4385.0
1988.........................................................          515          620          437          296         35.0         2350       4253.0
1989.........................................................          500          585          422          286         30.0         2295       4118.0
1990.........................................................          495          590          436          297         30.2         2330       4178.2
1991.........................................................          505          600          440          313         33.4         2370       4261.4
1992.........................................................          526          623          454          328         32.3         2474       4437.3
1993.........................................................          527          645          452          320         31.9         2470       4445.9
1994.........................................................          514          621          431          308         31.2         2422       4327.2
1995.........................................................          508          625          426          322         32.1         2507       4420.1
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: MILK: Annual Quantities Used and Marketed by Producers, 1986-1995 New England Agricultural Statistics, 1995-1996.                               


[[Page 23040]]

    This statistical picture of decline is further corroborated by the 
previously cited testimony of Smith and Baron. According to Smith, 
``The number of dairy farms in New England declined by 41% over the 
past 10 years. (1985-1995) During this period the number of cows has 
declined by 24%, total production has declined 4% and land used in 
farms fell by nearly 600,000 acres.'' \58\ According to another 
commenter, New England has lost dairy farmers at a rate of about 40% 
faster than the national average, between 1987 and 1992.\59\
---------------------------------------------------------------------------

    \58\ Smith, 12/17/96 HT at 34.
    \59\ Barron, 12/17/96 HT at 60.
---------------------------------------------------------------------------

    According to statistics cited by another commenter, problems are 
especially severe in the southern portion of the Compact region. 
Massachusetts, the most populous state, has seen the greatest effect, 
showing a 35% decline in cow numbers and a 20% decline in milk 
production during the period of 1986 through 1995. Each of the two 
other southern New England states, Connecticut and Rhode Island, have 
also shown substantial declines in farms, cow numbers and 
production.\60\
---------------------------------------------------------------------------

    \60\ See New England Agricultural Statistics, 1995-96, USDA, 
Page 68.
---------------------------------------------------------------------------

    Another commenter indicates that milk production in New York state, 
the supplemental portion of the New England milkshed has also declined. 
Citing USDA statistics, this commenter states that ``New York milk 
production was down 4 percent in February 1997 compared to one year 
ago.'' \61\
---------------------------------------------------------------------------

    \61\ Wellington et al, 3/31/97 AC at 6.
---------------------------------------------------------------------------

    This commenter also indicates that the milkshed has expanded in 
area as production closer to the production centers has declined:

    The milk supply area for the New England market has steadily 
increased over time as dairy farmers in the region have gone out of 
business. When the New England Order was promulgated more than 
twenty years ago, the supply area, or milkshed, covered all the six 
New England states and a dozen or so eastern New York counties. 
Recent information provided by the Market Administrator's Office 
shows that the New England market now receives milk from thirty four 
New York counties as far west as Ontario County. Ontario County is 
about 360 miles distance from Boston. This distant milk is primarily 
needed to satisfy the daily Class I needs of New England bottlers 
during the peak demand period in late summer and fall when schools 
go back into session and milk supplies are seasonably at their 
lowest level. The New England milkshed has increased in size by 
approximately 10 miles.\62\

    \62\ Wellington et al, 3/31/97 AC at 6.
---------------------------------------------------------------------------

    From the comment and statistics, therefore, the Compact Commission 
concludes that production and consumption in New England, though 
presently in balance, are operating in a balance that is under 
tremendous stress. The supply most local to the population centers, or 
that provided by southern New England farms, has been greatly 
diminished and is in fact disappearing. Production at the outer reaches 
of the milkshed has been able to replace this loss of the most local 
supply. Yet this more distance supply is itself under stress and is in 
fact in decline, causing the outer boundaries of the milkshed to be 
expanded.
    The Compact Commission consequently concludes that the present 
stress on the balance between the region's production and consumption 
must be relieved if the region is to continue to be provided an 
adequate, local supply of fluid milk. The Commission concludes that the 
present balance likely will not be maintained and could soon begin to 
significantly erode, which would threaten the region's supply, if the 
stress is not relieved. To ensure a continuing balance, the present, 
local supply must at least be stabilized, if not increased. 
Furthermore, the present, distant supply itself must be stabilized as 
well, to ensure that the milkshed does not reach further west.

D. Summary Analysis of Costs of Production and Sufficient Price

    Based on this summary of comment and analysis under issues (1), (2) 
and (3) above, the Commission concludes the chronic loss of dairy 
operations in the region, and thereby the stress on the region's local 
supply of milk, is a direct result of the volatility of farmer milk 
prices and their chronic insufficiency, including the failure of prices 
to adjust for inflation.
    The Commission further concludes, accordingly, that price 
regulation is necessary to address the chronic pricing problems and to 
continue the assurance of an adequate, local supply of milk for the 
region.

Price Volatility, Cost of Production and Chronic Insufficiency of 
Price, and the Failure of Price To Adjust for Inflation

1. Price Volatility
    The concern with price volatility is described in detail above. The 
Commission concludes that this price volatility can and should be 
addressed directly by Compact Over-order price regulation. Compact 
Over-order price regulation can minimize and even eliminate price 
volatility by establishing a level, Class I, floor price that combines 
the Federal Order minimum price with a ``floating'' Over-order price. 
Such a combined floor price will serve to eliminate the volatile swings 
in federal Class I pricing.
    More specifically, the precise amount of the ``floating'' component 
of the Compact Over-order Price Regulation will be the difference in 
amount between the federal, regulated, price that is announced monthly 
and the amount of Compact Over-order Price Regulation itself. As 
explained below, the Commission is adopting a combined, federal Order 
and Compact Over-order, Class I price of $16.94 (Zone 1). The 
``floating'' or ``Over-order'' component of the Compact price 
regulation will be the difference between the announced Federal Order, 
Class I, Zone 1 price for each month and $16.94.
2. Cost of Production and Chronic Insufficiency of Price
    The evidence in the record suggests that the costs of production in 
the New England states, within the meaning of the required finding, is 
best defined as a range. The Compact Commission draws this conclusion 
for two reasons. First, both the farm testimony and that of the 
region's dairy economists indicates that costs of production vary from 
farm to farm. Second, the testimony of the dairy economists themselves 
define a wide range of values.
    The range presented in their study data varied widely, between 
approximately $13.50 and $17.24 per cwt. Leon Berthiaume testified that 
costs of production among members of a substantial Vermont cooperative 
ranged from $13.50-$14.25; on behalf of the Vermont Department of 
Agriculture, Reenie De Gues testified that Vermont production costs 
were $14.06; University of Vermont economist Rick Wackernagel testified 
that costs were at $15.00; Neil Pelsue testified of costs equaling 
$16.41; Bob Smith described costs of $15.37; The Economic Research 
Service provided an estimate of at $16.46; Milligan and Knoblauch 
concluded that production costs were as high as $17.24.
    These variances can be explained by several factors, including the 
different time frames surveyed, the different data relied upon, and the 
different costs included in the survey evaluations. Despite the 
recognized, inherent, limitations resulting from this variability, this 
data base is still most comprehensive, and allows the Commission to 
settle upon a range of cost of production that is most reliable.
    To establish its range, the Compact Commission has referred to the 
above series of summary numbers and eliminated the high and low values. 
The

[[Page 23041]]

Compact Commission then matched this range against the variety of 
anecdotal statements presented by dairy farmers in testimony and 
comment. Accordingly, the Compact Commission determines that, for 
purposes of analysis under this rule, the range of New England cost of 
production is reliably understood to be somewhere between $14.06 and 
$16.46 per cwt.
    As described earlier in detail, the data, comment and testimony 
received demonstrated overwhelmingly that New England farmer pay prices 
are and have been chronically below this defined range of cost of 
production. The Compact Commission further concludes that the amount of 
this insufficiency is also best described as a range.
    As described earlier, the USDA Economic Research Service estimate 
that during the 1985 to 1990 period, cash receipts of Northeastern 
dairy farmers rose from $13.96 to $16.00 per hundredweight while the 
cost of production increased from $12.06 to $16.46. This describes a 
deficiency in price range of $1.90-$0.46. Vermont Department of 
Agriculture economist Reenie De Geus provided testimony indicating 
that:

    In 1995, the most recent year, costs of production averaged 
$14.06 for the group. (Vermont Dairy farmers) This is $0.83 lower 
than the actual milk prices received of $13.23. In fact, in each of 
the last 5 years, milk price received was lower [sic] than the cost 
of production by an average of $1.08.\63\

    \63\ De Geus, 1/2/97 WC at 74.
---------------------------------------------------------------------------

    Using the figures here identified, the Commission accepts this 
comment and concludes that cost of production exceeds farmer pay price 
by an amount in the range of $0.46-$1.90.
    As cited earlier, Ms. De Gues provides some context for this 
apparent range in deficiency:

    In good years, we find that the cost of production tends to rise 
with the price of milk. With the extra cash farmers replace worn out 
equipment and make repairs that may have been delayed for years. 
When the price of milk drops below cost, they consume some of the 
equity in their farms to meet family living expenses and cash flow 
demands.\64\
---------------------------------------------------------------------------

    \64\ De Geus, 1/2/97 WC at 75.
---------------------------------------------------------------------------

3. Adjustment for Inflation--Determination of Specific Price Amount and 
Formula
    As described earlier, the chronic insufficiency in price can be 
traced to a number of sources. The Compact Commission has determined 
that the single most readily identifiable basis of price insufficiency 
is the failure of farm prices to adjust to inflation over time.\65\ 
Given this readily apparent concern from the hearing record, in the 
subsequent Notice of Comment, the Compact Commission specifically 
sought comment as follows:
---------------------------------------------------------------------------

    \65\ The Commission here specifically notes the determination of 
Professor Wackerngel's analysis regarding the significance of 
inflation. Wackernagel, 1/2/97 WC at 473.

    The Commission is considering a possible Compact over-order 
price regulation that will be based, at least in part, on an 
adjustment for inflation to the Class I, fluid milk price, over 
time. The Commission seeks comment on the advisability of such an 
approach, as well as possible methodologies for determining the 
impact that such an adjustment would have on the Class I, fluid milk 
price, over time.\66\
---------------------------------------------------------------------------

    \66\ 62 FR 12252.
---------------------------------------------------------------------------

    In response, the Commission received a combined comment from Reenie 
DeGeus and Bill Gillmeister, dairy economists for the Vermont and 
Massachusetts Departments of Agriculture, respectively, providing a 
detailed analysis on this point. They proposed a one-time adjustment of 
the Class I price, (Zone 1) using 1991 as the base year for the 
adjustment. They proposed using the 1990 CPI as the base index, given 
that the Compact expressly uses this base year for adjusting the cap on 
its regulatory authority. See Compact Section 9(b). They suggest 
further using the CPI-U Boston as the appropriate, more local indicator 
of the inflation factor.
    This equation yields a Class I, Zone 1 price of $16.94 per cwt. for 
1997.
    The Commission accepts the recommendation of these two state 
agriculture department economists. 1991 is a reasonable year to use for 
the historic period; 1991 prices were markedly low, following an 
historic year of high prices. This erratic fluctuation in prices was of 
similar type to the recent swing of November, 1996-January, 1997, and 
thus provides a recent and analogous, relevant time period for the 
inflation adjustment. In addition, as the commenters note, using the 
low point, 1991, of this last pricing cycle ensures that the inflation 
adjustment will be appropriately limited.
    Wellington, et al. also submitted comment in response, indicating 
concern with the use of an automatic inflation adjustment. They 
indicated that inflation must be accounted for as a dynamic factor of 
retail prices as well as farmer cost of production. They indicated that 
the price regulation, including all relevant factors, should be 
assessed every six to twelve months, rather than made to adjust to a 
single static indicator.\67\
---------------------------------------------------------------------------

    \67\ Wellington et al at 11. Another commenter expressed similar 
concern. See Vetne, 12/19/96 HT at 269.
---------------------------------------------------------------------------

    The Compact Commission accepts this comment, as well. The 
Commission agrees that the inflation adjustment should not serve as the 
single, permanent, function of price adjustment. Rather, it serves as 
the initial, limited, regulatory response to the defined chronic market 
problems of price insufficiency and volatility.
    The Compact Commission further agrees that the overall price 
regulation adopted by this rule must be revisited after the passage of 
some time rather than imposed permanently. As discussed throughout this 
summary of comment, the Commission has determined that the duration of 
the rule will be six months. This will allow the Commission to assess 
again the broader market circumstances in the manner contemplated by 
the commenters.
    Accordingly, the Compact Commission has adopted the price/inflation 
adjustment presented by DeGues and Gillmeister, which accounts for this 
six month duration of the rule. Given that this six month period will 
be from July-December, 1997, the Commission adopts their calculation of 
price, adjusted for inflation for 1997, of $16.94 (Zone 1).
    The Compact Commission recognizes that this price level, in itself, 
will not be sufficient to cover the defined range of deficiency between 
current farmer pay prices and cost of production. The Commission 
expects instead the combined benefits of price enhancement and 
stability to result in the positive impact on the region's milk supply, 
as contemplated by the finding analysis under this section.
    The Commission here expressly refers to and relies upon the 
analysis of Professor Wackernagel, which assessed the impact on 
profitability of a Class I price of $16.89 (Zone 1) ($16.17 Zone 21). 
The price analyzed is thus directly in line with that adopted by the 
Commission. According to this analysis, farms operating in such a 
stabilized pricing environment would remain under stress financially, 
but would show some improved financial performance, able to operate at 
low to modest levels of profitability.\68\
---------------------------------------------------------------------------

    \68\ Wackernagel, 1/2/97 WC at 473.
---------------------------------------------------------------------------

    The Commission, again, concludes that this price level is the 
appropriate, initial increment to establish, for the defined period of 
six months. This initial, limited duration of the regulation will allow 
the Commission

[[Page 23042]]

soon to revisit again the issues raised by this finding analysis. For 
that next time, The Commission's inquiry will have the benefit of the 
performance of the existing price regulation. Such a record will aid 
the Commission's analysis.

II. Finding

    Whether the public interest will be served by the establishment of 
minimum milk prices to dairy farmers under Article IV.
    The Commission referred to the Compact's express Statement of 
Purpose in determining the intended meaning of ``public interest'', as 
used in this finding. The Statement of Purpose declares at the outset 
that:

    The mission of the commission is to take such steps as are 
necessary to assure the continued viability of dairy farming in the 
northeast, and to assure consumers of an adequate, local supply of 
pure and wholesome milk.
    The participating states find and declare that the dairy 
industry is the paramount agricultural activity of the northeast. 
Dairy farms, and associated suppliers, marketers, processors and 
retailers, are an integral component of the region's economy. Their 
ability to provide a stable, local supply of pure, wholesome milk is 
a matter of great importance to the health and welfare of the 
region.

Compact Art. I, Sec. 1.
    Section 9(e) of the Compact provides further guidance with regard 
to the intended meaning of ``public interest''. This section provides a 
concise but non-exhaustive list of criteria for the Commission to 
consider ``in determining the price''. Compact Art. IV Sec. 9(e). 
Pursuant to that section:

    [T]he commission shall consider the balance between production 
and consumption of milk and milk products in the regulated area, the 
costs of production including, but not limited to the price of feed, 
the cost of labor including the reasonable value of the producer's 
own labor and management, machinery expense, and interest expense, 
the prevailing price of milk outside the regulated area, the 
purchasing power of the public and the price necessary to yield a 
reasonable return to the producer and distributor.

    Based on the inclusion of this broad list of criteria, the Compact 
Commission determined that it must balance the interest of all market 
participants described by the Statement of Purpose--processors, 
retailers and consumers, along with farmers.\69\ This necessarily 
requires a broad inquiry, one that takes into account the common 
interest of all market participants in the maintenance of dairy farming 
in the region.
---------------------------------------------------------------------------

    \69\ Neil Marcus, President of Marcus Dairy, Inc. emphasized the 
importance of considering the impact of the Compact on all market 
participants in his testimony. See HT 82-83; 12/19 Marcus.
---------------------------------------------------------------------------

    The Compact Commission thereby identified four main components of 
the ``public interest'' contemplated by this Finding: (i) Assuring the 
continued viability of dairy farming in the region, (ii) assuring 
simultaneously  the continued viability of associated suppliers, 
marketers, processors and retailers, (iii) benefiting consumers through 
the maintenance of an adequate supply of milk, reasonably priced, and 
(iv) maintaining a local supply of milk.
    Based on this definition of ``public interest'', the Commission 
sought comment on the following subjects and issues:
    (1) The balance between production and consumption in the region--
the pay price needed to yield a reasonable rate of return to producers 
and to ensure an adequate supply of milk for the region.
    (2) The prevailing farm prices for Class I, fluid milk, inside and 
outside the New England region,
    (3) The prevailing processing and wholesale costs for Class I, 
fluid milk, inside and outside the New England region,
    (4) The costs of transporting bulk fluid milk products to plants 
located within the New England region,
    (5) The costs of delivering fluid milk products processed outside 
the New England region to outlets within the region,
    (6) The purchasing power of the general public,
    (7) The elasticity of demand for fluid milk products,
    (8) The cost of retailing fluid milk products,
    (9) The prevailing retail prices for Class I, fluid milk, inside 
and outside the New England region,
    (10) The potential impact of a flat, combined, regulated, Federal 
Order and Compact Over-Order price on the wholesale market for fluid 
milk products,
    (11) The potential impact of a flat, combined, regulated, Federal 
Order and Compact Over-Order price on the retail market for fluid milk 
products,
    (12) The potential impact of a flat, combined, regulated, Federal 
Order and Compact Over-Order price on school lunch programs.
    (13) The potential impact of a flat, combined, regulated, Federal 
Order and Compact Over-Order price on the Women, Infants and Children 
Special Supplemental Nutrition Program of the United States Child 
Nutrition Act of 1966.\70\
---------------------------------------------------------------------------

    \70\ See 61 CFR 65604; 62 CFR 12252.
---------------------------------------------------------------------------

A. Issue: The Balance Between Production and Consumption in the 
Region--The Pay Price Needed To Yield a Reasonable Rate of Return to 
Producers and to Ensure an Adequate Supply of Milk for the Region

    This issue is the premise for the remaining discussion of the 
public interest in regulated milk pricing.\71\ The remaining discussion 
is triggered by the Compact Commission's determination that such farm 
price regulation is necessary, both to yield a reasonable rate of 
return to producers and to ensure an adequate, local, supply of milk 
for the region.
---------------------------------------------------------------------------

    \71\ As noted previously, this issue is raised specifically by 
Compact Section (e).
---------------------------------------------------------------------------

    This issue was previously addressed in detail in the previous 
finding section. In summary, the Compact Commission concluded that 
farmer pay prices must be enhanced, stabilized and adjusted for 
inflation. The Commission thereby determined that a flat, combined, 
federal Class I and Compact Over-Order Price Regulation in the amount 
of $16.94 (Zone 1) per cwt was necessary to accomplish these 
objectives.

B. Issue: Prevailing Farm Prices Inside and Outside the New England 
Region

    Compact Section 9(e) provides specifically for consideration of 
this issue. Mailbox price statistics allow for a determination of 
present comparison of milk prices in adjacent markets. The following 
chart submitted as part of a written comment describes these 
comparative prices.\72\
---------------------------------------------------------------------------

    \72\ Wellington et al, 3/31/97 AC appendix.

[[Page 23043]]



                                                                      Mailbox Milk Prices for Selected Federal Milk Orders                                                                      
                                                                                   [Dollars per hundredweight]                                                                                  
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Jan        Feb        Mar        Apr        May        Jun        Jul        Aug        Sep        Oct        Nov        Dec   
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                              1995                                                                                              
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
New England.................................................     $11.83     $11.86     $11.98     $11.93     $11.92     $11.39     $11.35     $11.71     $11.88     $12.42     $13.14        $13
NY/NJ.......................................................      12.00      12.02      12.14      11.88      11.82      11.45      11.39      11.74      12.01      12.61      13.17         13
Middle Atlantic.............................................      12.15      12.07      12.06      11.83      11.86      11.50      11.60      12.14      12.26      12.82      13.50         13
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                              1996                                                                                              
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
New England.................................................      13.38      13.23      13.14      13.08      13.49      14.08      14.77      15.00      15.55      15.83      15.37         14
NY/NJ.......................................................      13.44      13.29      13.18      13.16      13.70      14.10      14.82      15.05      15.68      15.68      14.82         13
Middle Atlantic.............................................      13.57      13.27      12.86      12.76      13.41      14.40      15.07      15.49      16.05      15.84      15.55         14
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Exhibit Co-op #1C & #1D, Additional Comment as submitted by Robert Wellington, on behalf of Agri-Mark Dairy Co-op, St. Albans Co-op Creamery, & Independent Dairymen's Co-op.           


[[Page 23044]]

    From this chart, it can be seen that 1995 mailbox prices for the 
New England market were consistently less than those for the New York-
New Jersey and Middle Atlantic markets, but by relatively small 
amounts. This data further indicates that prices throughout the three-
market area are presently in relative alignment.

C. Issue: Costs of Transporting Bulk Fluid Milk Products to Plants 
Located Within the New England Region

    As made clear by comment received, and based on common knowledge, 
the cost of transporting bulk fluid milk products is most significant 
to the calculation of the cost of the delivered raw product to the 
processing plant, because of the significant expense involved. It is 
thus a critical input of the wholesale and, hence, the retail 
price.\73\
---------------------------------------------------------------------------

    \73\ The broader issues of impact on the wholesale and retail 
markets are analyzed at the end of this finding section.
---------------------------------------------------------------------------

    According to Wellington et al, ``[d]ue to its bulkiness, milk is 
expensive to transport. Back haul opportunities to lower transportation 
costs are also more limited with milk due to its sanitary standards and 
large volume which moves on a daily basis.'' \74\
---------------------------------------------------------------------------

    \74\ Wellington et al, 3/31/97 AC at 4.
---------------------------------------------------------------------------

    According to the reported statistics, the regulated price itself 
accounts for the transportation costs of raw fluid milk supplies. 
Market Order #1 establishes a zone differential to account for this 
transportation cost. This differential is established per cwt. in an 
amount equal to 3.6 cents per ten miles transported. According to 
Wellington et al, this rate has not changed since 1982.
    Market Order #1 uses zone 21 as the representative zone for farm 
pricing. 7 CFR 1001.50(a). This zone is 210 miles from the Boston, or 
city, zone. 7 CFR 1001.52(d). The cost of transportation from this 
representative zone 21 to the city, zone 1, is 72 cents per cwt. 7 CFR 
1001.52(g).
    Further, according to Wellington et al, a 1994 consolidation of 
federal orders in the southern market established a rate of 3.9 cents/
cwt per ten miles transported. There is no explanation as to whether 
the higher rate for the new southern order better reflects costs in the 
Northeast, although that is the inference, or whether the higher cost 
is attributable to market conditions in the south. The comment does 
identify with specificity a higher cost of transportation for the Agri-
Mark cooperative, which represents approximately half of all New 
England farmers. This cost is represented as 4 cents/cwt for each ten 
miles transported.

D. Issue: Prevailing Processing and Wholesale Costs for Class I, Fluid 
Milk, Inside and Outside the New England Region

    This issue is significant because processing and delivery are the 
only intermediate stops in the commercial channel for milk between farm 
and retail outlet other than transport of the raw supply. The delivered 
cost to the retail outlet can thus be determined as a function of a 
relatively few variables.
    Although the Compact Commission requested comment on this issue, it 
did not receive data regarding processing and wholesale costs specific 
to the New England market. While two of the fluid milk processors doing 
business in the New England market did submit comment,\75\ along with a 
trade organization from New York state,\76\ none of these comments 
presented data with regard to costs of operation.
---------------------------------------------------------------------------

    \75\ Neil Marcus on behalf of Marcus Dairy, 12/19/96 HT at 81 
and 1/2/96 AC; Donald Turner, Turner's Dairy, 12/19/96 HT at 176.
    \76\ Bruce Krupke on behalf of New York State Dairy Foods, Inc. 
3/31/97 AC; John H. Vetne, on behalf of New England Dairies, Inc. 3/
31/97 AC.
---------------------------------------------------------------------------

    A very recent and comprehensive national study of 35 plant 
operations submitted by a group of dairy economists from Cornell 
University provides useful guidance to the Commission on this issue. R. 
Aplin, E. Erba, M. Stephenson, ``An Analysis of Processing and 
Distribution Productivity and Costs in 35 Fluid Milk Plants'', February 
1997, R.B. 97-03, Cornell University. The study is particularly useful 
because fourteen of plants studied, though unnamed, are identified as 
being located in the Northeast.
    The study indicates that the processing and wholesale costs for 
Class I milk are a function of three variables: (1) the procurement 
cost for the raw product supply, in significant part, combined with (2) 
processing, delivery and sales costs for servicing the retail outlet, 
and (3) return on capital.
    An extract entitled ``Presentation at IDFA Annual Meeting in 
Dallas, Texas (October 1996) was also submitted. This extract provides 
``estimated costs of marketing 2% lowfat milk through supermarkets, New 
York Metro Area, $ per gallon, 1995.'' In this extract, the raw product 
cost is identified as $1.31 per gallon. (This is in line with the net 
combined regulated and ``over-order'' Class I price for the New England 
market.) According to the study, there is an additional plant cost of 
$0.24 per gallon and a package cost of $0.10 per gallon. There are 
additional delivery, selling and general and administrative costs, 
totaling $0.22. Finally, the extract identifies a return for cost of 
capital in the amount of $0.06.
    The study thus identifies a total, delivered, processing and 
wholesale cost of $1.93 per gallon.
    The Economic Research Service of the United States Department of 
Agriculture also provides a breakdown of wholesale costs, nationally, 
per half gallon.\77\ According to this study, for 1992, the farm value 
was $0.597; assembly and procurement totaled $0.058; the processing 
cost was $0.191; and wholesaling costs were $0.196. Total costs per 
half-gallon equal $1.042 according to this ERS study. For comparison 
purposes, assuming equal costs per gallon as the costs per half gallon 
in the study, this would mean a total delivered cost of $2.08 per 
gallon, or $0.15 more than shown in the Aplin study.
---------------------------------------------------------------------------

    \77\ Food Cost Review, 1995/AER-729. (Submitted as reference 
source by DeGuess and Gilmeister, 3/31/97 AC.)
---------------------------------------------------------------------------

    The ERS study further notes that ``processing costs have remained 
stable since 1986 (through 1992), after rising 16 percent from 1982 
through 1986.\78\
---------------------------------------------------------------------------

    \78\ AER 726 at 26.
---------------------------------------------------------------------------

    Both the Aplin study and extract, and the ERS study, indicate that 
processing plants are covering their margins. The Aplin extract also 
provides a precise indicator of the ``return for cost of capital.'' 
This amount is identified by the extract as $0.06, or only a three 
percent return.

E. Issue: Costs of Delivering Fluid Milk Products Processed Outside the 
New England Region to Outlets Within the Region

    This issue is significant for two reasons. First, these identified 
costs complete the description of delivered cost to the retail outlet. 
Second, the issue inquires into whether finished, Packaged milk 
products transported from plants located away from the region's 
population centers can serve as a substitute supply for the finished 
product provided by more local plants.
    The Compact Commission requested but did not receive data regarding 
packaged product delivery costs specific to the New England market. The 
Cornell University study cited above \79\ sheds light on this issue. 
According to the study, costs of delivery for packaged fluid milk 
products range from $0.216 to $0.541 per case, with an average cost of 
38.8 cents per case, or about $0.097 cents per gallon. (There are 4 
gallons/case.) \80\
---------------------------------------------------------------------------

    \79\ Aplin et al, R.B. 97-03, Cornell University, February, 
1997.
    \80\ Aplin et al at 21.

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

[[Page 23045]]

    With regard to the possibility of substitution of packaged milk 
supply, as discussed in the first finding analysis, the Market Order 
statistics makes clear that the major processing facilities servicing 
the New England region are currently located nearby the population 
centers of the region they serve. These plants currently provide for 
almost all of the market's supply of finished product. At present, 
then, there is almost no substitution for this local supply of finished 
packaged product with finished product imported from distant plants.
    The detailed analysis of the Aplin study provides insight into this 
settled market pattern. Cost of operating a delivery vehicle 
contributed an average of 43 percent of the delivery cost per case. The 
remainder of the cost is attributable to driver labor cost. (Vehicle 
operating cost ranged from 21 percent to 53 percent. \81\ The study 
further indicated that these costs were for routes serving large 
customers, and that route costs for serving smaller customers ``is 
expected to be much higher.''
---------------------------------------------------------------------------

    \81\ Aplin et al at 48.
---------------------------------------------------------------------------

    Most significantly, route labor productivity was shown by the study 
to decrease substantially with greater distance traveled and on routes 
with numerous customer stops. A 1.0 percent increase in miles traveled 
per month increased direct delivery cost by 2.9 percent per case. A 1.0 
percent increase in customer stops made per month increased the cost by 
1.1 percent per case. Not surprisingly, the study concludes that plants 
located in more densely populated areas had lower direct delivery 
costs.\82\
---------------------------------------------------------------------------

    \82\ Aplin et al at 54
---------------------------------------------------------------------------

    This delivery cost analysis of the Cornell study thus explains the 
present market pattern: Plants located near population centers are the 
most cost effective. According to this pattern, the market should 
continue to consist of plants located nearby the population centers, 
plants which are supplied with raw product from the milkshed and which 
in turn provide finished product to the region's retail outlets.

F. Issue: The Price Needed to Yield a Reasonable Rate of Return to 
Processors of Fluid Milk Products

    This inquiry is derived directly from Section 9(e) of the Compact 
and is significant in view of the Compact's emphasis on the financial 
health of the entire dairy industry. The focus of the inquiry is the 
determination of a price that ensures a reasonable rate of return. It 
is of present significance for the baseline determination of whether 
processing plants are currently covering costs of production.
    The Compact Commission did not receive information with regard to 
the price required to yield a reasonable rate of return specifically to 
New England fluid processors. According to the extract of the Aplin et 
al, Cornell study cited above, return for cost of capital for the 
nearby New York metro area plant equaled $0.06 per gallon.
    The Compact Commission concludes that this data may be relied upon 
to determine that the region's fluid processors are presently covering 
their costs with a return on capital, however slight. As noted, the 
Aplin study was a number of nationally representative fluid plants, of 
which fourteen were from the Northeast. It is reasonable to assume that 
a representative number of these region-wide plants in turn were from 
the New England area, and that the extract chosen by the authors may be 
understood as representing this group as a whole, including New England 
plants.

G. Issue: The Purchasing Power of the General Public

    This inquiry is also drawn directly from Section 9(e) of the 
Compact. The Compact Commission concludes that the Compact focuses 
primary concern on the consumer interest because milk is a staple 
product. The impact of price regulation upon the consumer's ability to 
pay is thus a critical part of the Compact Commission's assessment of 
the public interest under this finding section.
    To sharpen inquiry under this broader issue, the Compact Commission 
sought comment on a number of issues relating to the potential impact 
of price regulation on consumers. These issues include: The elasticity 
of demand for fluid milk products, the costs of retailing Class I, 
fluid milk in the New England region, the prevailing retail prices for 
Class I, fluid milk, inside and outside the New England region, the 
cost of retailing fluid milk products, and the potential impact of a 
flat, combined regulated, Federal Order and Compact Over-Order price on 
the retail market for fluid milk products.\83\
---------------------------------------------------------------------------

    \83\ See 61 CFR 65604; 62 CFR 12252.
---------------------------------------------------------------------------

    The Compact Commission also focused specific attention on the 
potential impact of price regulation on lower income consumers. 
Specifically, the Commission sought comment on the potential impact of 
a flat, combined, regulated, Federal Order and Compact Over-Order price 
on the Women, Infants and Children Special Supplemental Nutrition 
Program of the United States Child Nutrition Act of 1966, and the 
impact of such a price on the school lunch program.\84\
---------------------------------------------------------------------------

    \84\ See 61 CFR 65604; 62 CFR 12252.
---------------------------------------------------------------------------

    Each of these issues is addressed in turn.

H. Issue: The Elasticity of Demand for Fluid Milk Products

    Citing recent studies, Wellington et al identify the demand 
coefficient for fluid milk as 3.1. This means that a ten percent 
increase in price will result in a 3.1 decrease in demand.\85\
---------------------------------------------------------------------------

    \85\ Wellington et al, 3/31/97 AC.
---------------------------------------------------------------------------

    In response to this comment, Thomas Conway, Esq., former Counsel 
and former Executive Director of the New York State Legislative 
Commission Dairy Industry Development, submitted a study of ``Consumer 
Response to the Unprecedented Rise in the Retail Price of Fluid Milk in 
1989-1990'' (Consumer Response).\86\ This study focused on the actual 
impact on consumption of a relatively large increase in retail milk 
prices during late 1989 and early 1990.
---------------------------------------------------------------------------

    \86\ New York State Legislative Commission of Dairy Industry 
Development, August, 1990.
---------------------------------------------------------------------------

    The study group was of four regions, including the Northeast. 
During this time, the price of milk rose to $2.67 a gallon, a $0.34 
increase. Directly contrary to the traditional analysis of the 
elasticity of demand for milk, consumption actually increased rather 
than decreased in two of the regions studied. In the Northeast, the 
15.04 percent price increase in the Northeast was matched by lower 
sales of only 0.98, or well below that expected based on any of the 
demand coefficients identified above.
    The study concludes ``that other factors were more important than 
price to the determination of consumer demand for fluid milk''.\87\ 
Other factors included growth in personal income, demographic factors, 
advertising and increased concerns over health and nutrition.
---------------------------------------------------------------------------

    \87\ Consumer Response at 11.
---------------------------------------------------------------------------

    While this study is now dated, the Compact Commission accepts its 
basic premise that analysis of the impact must account for the market 
function as a whole, rather than focus upon a strict elasticity of 
demand equation. Nonetheless, the Commission remains aware of the 
importance of accounting for the direct impact on consumption that an 
increase in retail prices may have.

I. Issue: Costs of Retailing Class I, Fluid Milk in the New England 
Region

    The Commission did not receive comment with specific regard to New 
England costs of retailing. As noted, the

[[Page 23046]]

Aplin et al, extract of the Cornell study identified a total delivery 
cost of $1.93. Adding an identified supermarket cost and return of 
$0.19 establishes for this extract a retail cost of $2.12.
    The ERS study identified a total delivered cost of $1.04 and a 
retailing cost of $0.35, for a total retail cost $1.39 per half gallon. 
The retail cost component for the ERS study is substantially higher 
than that for the Aplin study. The ERS study indicates part of this 
cost may represent wholesaling formerly performed by processors, which 
would explain at least part of the difference.
    The Commission concludes that the more recent Cornell extract 
provides a useful benchmark for assessing New England costs of 
retailing.

J. Issue: Prevailing Retail Prices for Class I, Fluid Milk, Inside and 
Outside the New England Region

    There are two significant concerns raised by this issue. First, the 
inquiry addresses the benchmark question of whether retail margins are 
covering costs, much as the earlier inquiry addressed whether processor 
margins were sufficient to cover costs. Second, the inquiry must 
consider the relative retail costs beyond the area subject to Compact 
Over-order Price Regulation, as part of the ongoing process of 
assessment of the potential impact of price regulation on the region's 
retail prices.
    James G. Hines, Director of Dairy Services, submitted for the 
record copies of the tracking studies of retail prices conducted by The 
International Association of Milk Control Agencies. The Association 
tracks and publishes monthly price surveys from a number of markets 
nationwide. The following is an extract from three markets:

[[Page 23047]]



                                                                                Retail Prices--Different Markets                                                                                
                                                                                           [1995-1996]                                                                                          
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Jan.       Feb.       Mar.      April       May        June       July       Aug.      Sept.       Oct.       Nov.       Dec.  
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                              1995                                                                                              
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
MA (Boston).................................................      $2.49      $2.09      $2.49      $1.99      $2.29      $2.39      $2.39      $2.49      $2.49      $2.49      $2.09      $2.49
NY (Albany).................................................       2.18       2.18       2.18       2.16       2.16       2.15       2.17       2.17       2.17       2.17       2.19       2.23
NJ (North)..................................................       2.55       2.56       2.53       2.53       2.53       2.53       2.54       2.53       2.52       2.55       2.56       2.57
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                              1996                                                                                              
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
MA (Boston).................................................       2.19       2.29       1.99       2.49       2.59       2.29       2.59       2.59       2.29       2.59  .........  .........
NY (Albany).................................................       2.23       2.23       2.25       2.26       2.25       2.32        2.4       2.42       2.42       2.46  .........  .........
NJ (North)..................................................       2.56       2.57       2.59       2.59       2.58       2.58       2.65  .........       2.67       2.67  .........  .........
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Source: International Association of Milk Control Agencies.                                                                                                                                     


[[Page 23048]]

    The Aplin et al extract identified a total, delivered cost of 
$1.93, and a total retail cost of $2.12, including combined retail cost 
and return on capital. The Compact Commission concludes from this 
survey of prices that, as measured against their identified delivered 
cost, New England retailers are currently covering their costs of 
production with an adequate return on capital.
    The Commission further concludes that this on-going Agencies' study 
of markets both within and outside the New England region provides the 
basis for the Commission to monitor the impact of regulation on New 
England retail prices. The Commission will be able to utilize this 
study data and compare the current, relative alignment in prices 
between the New England and New York regions against the relative 
alignment once price regulation is in place.\88\
---------------------------------------------------------------------------

    \88\ Retail prices are also being monitored currently in 
Connecticut, Vermont and Maine. The Commission will have to 
establish a tracking program in Rhode Island.
---------------------------------------------------------------------------

K. Issue: The Potential Impact of a Flat, Combined, Regulated Order and 
Compact Over-Order Price on the Wholesale Market for Fluid Milk in the 
Region

    The purpose of this most critical inquiry is to address the 
potential impact on the wholesale market of price regulation. 
Commenters described a number of potential concerns and potential 
benefits. The benefits described were premised on the value of price 
stabilization. The concerns raised related to the potential for market 
distortion and competitive harm to current market participants.
    In reply comment, Berthiaume \89\ described the benefit of a 
stabilized pricing as imposed by this rule. He indicated that Compact 
Over-order price regulation would bring stability to the regulated 
Class I price, and not merely as a floor price. ``The value of a flat 
regulated minimum Class I price is that the wholesale cost of milk 
would and could be anticipated.''
---------------------------------------------------------------------------

    \89\ Berthiaume, Reply comment; April 8, 1997 (RC).
---------------------------------------------------------------------------

    The Commission agrees with this statement and adopts it as a 
finding with respect to this issue. As discussed above, farm prices 
have been marked by persistent, erratic fluctuations which translate 
directly into the wholesale price. The Commission concludes that, while 
processors are currently covering their margins, minimization of such 
persistent fluctuations in price can only serve as a benefit to 
stability of firm participants in the wholesale market.
    Other commenters expressed concern about the potential for market 
distortion which price regulation could bring. Wellington et al 
expressed a concern that price regulation could distort the 
traditional, market driven, pattern of raw product supply provided by 
New England and New York farmers. The concern raised is that the 
Compact Over-order price regulation could create an incentive for 
increased milk supply from more distant portions of the milkshed in New 
York. This would represent a market distortion directly contrary to the 
intended purpose of the Compact.
    These commenters qualified their concern by noting that processors 
``will be reluctant to disrupt their current supply sources in reaction 
to a Compact program which is officially of limited duration.'' \90\ In 
his testimony at the hearing, Wellington also stated his opinion that 
such market change was not likely to occur as long as the Commission 
did not increase the regulated Class I price above $17.00.\91\
---------------------------------------------------------------------------

    \90\ Wellington et al, AC 3/3197 at 6.
    \91\ Wellington, 12/19/97 HT, pages 50-51.
---------------------------------------------------------------------------

    Neil Marcus, President of Marcus Dairy, Inc., described other 
potential market distortions that could result from price regulation. 
His concerns also centered on the alignment of a market subject to 
combined, Compact, and Federal Order regulation with adjoining markets 
regulated only under Federal Order.\92\ The particular circumstances of 
the Marcus Dairy operation heightened his concern. According to the 
commenter, Marcus Dairy is located in Connecticut, on the border of New 
York. The commenter described the supply of packaged dairy products 
subject to price regulation under Federal Order 2 which is sold in New 
England and expressed concern that this milk must not escape 
regulations under the Compact. According to Marcus, such uniform 
regulation is necessary to ensure that the current, market, pattern of 
the supply of packaged product in the marketplace is maintained.
---------------------------------------------------------------------------

    \92\ Marcus, 12/19/96 HT at 84-98.
---------------------------------------------------------------------------

    The Commission concludes that market alignment of prices and 
uniformity of regulation must be considered in establishing over-order 
price regulation. Present market patterns within the region and between 
the region and adjacent areas are derived from the integrated formula 
of Class I pricing in the federal Market Order System, which includes 
pricing under more than one federal Order. There is no doubt the 
Compact will introduce a new feature of market structure by adjusting 
the Class I price, in effect, for only one Order.
    At the same time, even given that the Compact will introduce a 
novel feature of market structure, the Commission does not determine 
that market distortion will necessarily occur. The technical provisions 
of the Compact Over-order price regulation are precisely patterned upon 
the underlying federal Order System in significant part. This provides 
a structural basis for concluding that such distortion should not 
occur.
    Nonetheless, the concerns raised by the commenters with regard to 
the potential for market distortion were a central consideration in the 
Commission's deliberations over price regulation. These concerns were 
also a controlling factor in the Commission's fashioning of the six 
months', limited duration, for the initial price regulation. The 
Commission here specifically notes Wellington et al's assertion that a 
``limited duration'' of price regulation will minimize the potential 
for distortion of the market caused by the Compact Commission's initial 
price regulation.

L. Issue: The Potential Impact of a Flat, Combined, Regulated Federal 
Order and Compact Over-Order Price on Retail Prices for Fluid Milk 
Products

    The Compact Commission sought comment on the critical issue of the 
potential impact, if any, of a flat, combined, regulated Federal Order 
and Compact Over-order price on retail prices for fluid milk products.
    After reviewing all of the comments and testimony submitted, the 
Compact Commission concludes that the price regulation will have a 
positive impact on retail prices. The Commission determines that 
preventing further erosion of the milkshed through price regulation 
will itself have a positive impact on retail prices, in large part 
because of the avoidance of increased transportation costs. The 
Commission concludes that the further benefits of price stability will 
trace through the farm and wholesale markets to the end-point, retail 
market, and have a further, positive impact on retail prices.
    The Commission bases its conclusion on the following analysis:
1. Change in the Epicenter of Milk Production and the Impact on Retail 
Prices
    The Compact Commission previously determined that there has been a 
distinct movement away over time of the epicenter of the region's milk 
supply. The loss of dairy farms in the New England region, and in 
particular,

[[Page 23049]]

in the Southern New England region, has forced the epicenter of the 
region's production further and further from the region's population 
centers. This movement has involved both the loss of supply by farms 
closest to the population centers and the replacement of that supply by 
more distant farms, primarily in New York and Vermont. The location of 
these more distant farms themselves, in turn, has moved ever father 
away from the region's population centers.\93\
---------------------------------------------------------------------------

    \93\ The 1989 Massachusetts Extension Order, at page 14, cites 
testimony that the transportation costs for this most distant supply 
``would currently run $2.00 to $2.50/cwt (17-22 cents/gal) and would 
require capital investments that few truckers would be willing to 
undertake.'' Extension Order at 14.
---------------------------------------------------------------------------

    This feature of the stressed circumstance of the region's milk 
supply described in the first finding analysis has had a direct, 
adverse impact on retail milk prices. The Commission bases this 
conclusion in part on the determination that transportation costs are a 
significant input of the retail price for milk. As noted, the federal 
Market Order System allows 72 cents per cwt to cover transportation 
costs from the representative ``country'' zone to the Boston, ``city'' 
zone.\94\ This single cost input, alone, accounts for over three 
percent of the total delivered cost to the retail outlet, when measured 
against the Aplin et al extract identification of $1.93 for delivered 
cost/gallon. (11.6 gallons per cwt). It follows, by definition, that an 
increase in transportation costs attributable to greater hauling 
distance will result in an increase in retail prices.
---------------------------------------------------------------------------

    \94\ The discussion, supra, of transportation costs indicates 
that this regulated calculation of cost does not fully account for 
the true cost.
---------------------------------------------------------------------------

    The Commission's conclusion is also premised on a similar finding 
contained in the December 29, 1989 extension of the Massachusetts Milk 
Stabilization Order. This Order found that a 50 mile shift in milk 
prices causes a three cent increase in milk prices.
    The evidence in the record thus demonstrates that the epicenter of 
the region's milkshed has moved away from the population center to a 
significant degree, and that this shift has had a measurable impact on 
retail prices. The Compact Commission concludes that this adverse 
impact on retail prices will continue as long as the milkshed is not 
stabilized.
2. Risk Avoidance in Commodity Purchasing--The Benefits of Price 
Stabilization
    Senator Patrick Leahy submitted extended comment referencing 
studies in the economic literature of the adverse effects of commodity 
price uncertainty and, conversely, the utility of price stability.\95\ 
One article described so-called ``risk avoidance'' pricing strategy in 
the wheat industry. The analysis indicated that increased price 
uncertainty and variability in the wheat industry led to significant 
increases in retail wheat marketing margins.\96\ The article determined 
both theoretically and empirically that increased price variability 
results in higher margins. The authors theorized and then demonstrated 
empirically that the uncertainty created by wholesale price volatility, 
in essence, drives the retailer to retain a larger margin. The retailer 
acts to retain such a larger margin to avoid the risk created by the 
uncertainty in wholesale costs.\97\
---------------------------------------------------------------------------

    \95\ Senator Patrick J. Leahy, WC 1/297.
    \96\ Brorsen, Chavas, Grant and Schnake, ``Marketing Margins and 
Price Uncertainty: The Case of the U.S. Wheat Market,'' Amer. J. 
Agr. Econ., (August, 1985) 521-527.
    \97\ The analysis is confirmed with regard to market conduct and 
performance in the beef industry. Holt, ``Risk Response in the Beef 
Marketing Channel: A Multivariate Generalized ARCH-M Approach'', 
Amer.
---------------------------------------------------------------------------

    The logical implication of this theory is that price stabilization 
reduces or eliminates the retailers' need to act in such a risk-
avoiding manner, because the volatility and uncertainty that drove that 
behavior is reduced or eliminated.
    The analysis of Hahn et al \98\ demonstrates convincingly that 
price volatility within the meaning of the authors above cited defines 
market conduct and performance of the fluid milk industry. The pattern 
of pricing conduct described by these authors is consistent with the 
risk-avoidance strategy described by Brosen et al and Holt.
---------------------------------------------------------------------------

    \98\ See Hansen, Hahn, and Weimar, ``Determinants of the Farm-
to-Retail Milk Price Spread'', Agriculture Information Bulletin 
Number 693 (March 1994). See also Kinnucan and Forker, ``Asymetry in 
Farm-Retail Price Transmission for Major Dairy Products'', Amer. J. 
Ag. Econ., 285-292 (May, 1987).
---------------------------------------------------------------------------

    Based on this analysis, the Commission concludes that New England 
retail prices likely will respond positively to the stabilization of 
the wholesale price input which will result from imposition of Compact 
Over-order Price Regulation. The price established by this rule will be 
a certain one; Berthiaume suggests that the combined, federal Order and 
Compact Over-order price will not vary for the six month term of its 
duration. At least for the short-term duration of this price 
regulation, the uncertainty of price variability in the region's Class 
I market will have been significantly reduced if not eliminated. 
According to the analysis described above, the Compact Commission 
concludes that retail margins and, hence, prices, should positively 
adjust, accordingly.\99\
---------------------------------------------------------------------------

    \99\ The Commission recognizes that at least one comment 
suggested that the ``impact'' of any price regulation would be a 
straight dollar-for-dollar ``pass through'' from processors to 
consumers, resulting higher retail prices. Alan Rosenfeld, December 
19, 1996 at pages 183 et seq. The Commission is not persuaded by 
Rosenfeld's predictions for several reasons. It is, in the 
Commission's view, contrary to the weight of the comments submitted 
and the prevailing economic literature and anecdotal evidence. More 
fundamentally, however, it is not descriptive and provides no 
reasoned explanation for the conclusion expressed therein. Nor does 
it respond in any way to the comprehensive literature suggesting 
precisely the opposite conclusion.
---------------------------------------------------------------------------

3. The Experience of the Southeast Region of the United States
    Received comment and statistics indicate that the adverse 
experience of the southeast states could well serve as a model for the 
future of New England's supply pattern and retail prices, if the 
present stress on the milkshed is not abated. Many of those states have 
lost a significant measure of their local milk supply. For the 
southeast as a whole, between 1980 and 1995, the number of dairy farms 
declined from 33,900 to 7,250.\100\ In Georgia, the percentage of milk 
supplied by Georgia farmers declined from 84% in 1973 to 50% in 
1988.\101\
---------------------------------------------------------------------------

    \100\ National Agricultural Statistics Service, ``Milk 
Production'', 1970-1995.
    \101\ Gilmeister, 3/31/97 at 10.
---------------------------------------------------------------------------

    Two commenters, Ronald Harrell, Ph.D., of the Louisiana Farm Bureau 
Federation, Inc., and G.A. Benson, Ph.D., and Associate Professor and 
Extension Economist in the Department of Agriculture at North Carolina 
State University, voiced graphic concerns over the dwindling local milk 
supply patterns in the Southern states. According to Dr. Benson:

    Because milk production is decreasing, and because of seasonal 
imbalances between production and sales, more milk must be imported 
from out-of-region sources in the fall. The seasonal ``surplus'' in 
the spring months has virtually disappeared. Supplementary or other 
source milk is more expensive than locally produced milk because of 
give-up charges, transportation costs, and differences in 
classification in the originating and receiving orders. These 
statistics are not collected on a regular basis or published, but a 
reliable source in one of the regional cooperatives informed me that 
last year they imported an average of 8.5% of the total milk they 
needed to meet customer needs as supplementary milk at an average 
cost of $1.92 per 100 lb. above the cost of producer milk in the 
federal order. * * * On Average, this supplementary milk [reported 
by another cooperative] cost $2.58 per 100 lb. more than

[[Page 23050]]

local milk. It came from a variety of sources and the added costs 
ranged from a low of $1.52 per 100 lb. to a high of $4.15 per 100 
lb.\102\

    \102\ Dr. G.A. Benson, 327/97 AC at 2.
---------------------------------------------------------------------------

    The comment indicated that dairy cooperatives were currently 
absorbing the cost as a loss rather than passing it on to customers, 
but that this is an unsustainable market pattern.\103\
---------------------------------------------------------------------------

    \103\ Gillmeister's analysis at 6-7 (sic) also indicates that 
southern retail costs are not reflecting these market conditions.
---------------------------------------------------------------------------

    The Commission is concerned that if the continued stress on the 
milkshed for the New England region continues unabated, without 
Commission intervention, then the New England states will begin to 
approach the increased market uncertainty currently facing the Southern 
states. Accordingly, the Commission bases its determination of the 
present need for Compact Over-order Price Regulation on the current 
experience on the southern states. The Commission concludes the Compact 
was designed precisely to avoid such a market pattern as currently 
experience by the southeast, and to permit the New England region to 
test the efficacy of the over-order price mechanism as a device for 
curtailing these very problems.
4. Summary Analysis
    The Commission has analyzed the data and the comments submitted on 
the question of the impact of Compact Over-order Price regulation on 
retail prices and concluded the consumer component of the ``public 
interest'' will be served in the manner contemplated by the finding 
under this section. The Commission concludes that alleviating the 
stress on the milkshed will itself have a stabilizing impact on retail 
prices, if not result in outright reduction.
    The Commission further determines that stabilization of the 
wholesale price will likely result in stabilized, and reduced, consumer 
prices. The Commission here notes, in summary, that an established 
price of $16.94 for July-December of 1997, in combination with the 
federal, Market Order #1 announced prices for January through May, 
1997, would yield an average Class I (Zone 1) price for these 11 months 
of 1997 in the amount of $16.15.\104\ This compares with the 1996 
average price of $16.86.\105\
---------------------------------------------------------------------------

    \104\ Prices announced for Market Order 1, Zone 1 prices: 
January--$14.85; February--$14.58; March--$15.18; April--$15.70; 
May--$15.73.
    \105\ Wellington, Appendix to 12/19/96 HT Testimony, Table 1.
---------------------------------------------------------------------------

    By contrast, as expressed by Gillmeister, there would be ``a 
considerable cost to consumers if nothing is done to assist farmers in 
New England.'' \106\
---------------------------------------------------------------------------

    \106\ Gillmeister comment, 3/31/97 at 8.
---------------------------------------------------------------------------

M. Issue: The Potential Impact of a Flat Combined Regulated Federal 
Order and Compact Over-Order Price on the School Lunch Program

    Consistent with the need to protect the interests of consumers, the 
Commission sought comment on the impact, if any, of a flat, combined, 
federal Market Order price and Compact Over-order Price Regulation on 
the fluid milk procurement process in the context of the school lunch 
(and breakfast) programs. The comment received, while limited, does 
provide the Commission with an adequate basis to make an informed 
decision on this question.
    Senator Jeffords submitted an analysis by the United States 
Department of Agriculture indicating total annual consumption of fluid 
milk by school districts amounted to 12,798,000 gallons.\107\ This 
amounts to 148,456,800 pounds of milk, or approximately 5.9 percent of 
all fluid milk consumed in the region.
---------------------------------------------------------------------------

    \107\ RC 4/9/97.
---------------------------------------------------------------------------

    The comment also contained a discussion of a study by the General 
Accounting Office that described a comprehensive, 1980s Justice 
Department investigation into bid rigging associated with this market. 
The study describes how the school lunch program is designed to operate 
through a competitive bidding process, by which individual districts 
solicit bids for the supply of their milk program demands.
    This description is, in effect, one of a competitive marketplace, 
despite the involvement of the government subsidization. The contracts 
between the districts and the suppliers result from a competitive 
bidding process, with price levels a function of market forces of 
supply and demand. The Compact Commission thereby concludes that the 
impact of Compact Over-order Price Regulation on the school lunch and 
breakfast programs can be understood as consistent with the impact of 
regulation on the larger, overall, retail market.
    As discussed below, such analysis is distinctly different from the 
analysis of the potential impact of regulation on the Women, Infants 
and Children Special Supplemental Nutrition Program of the United 
States Child Nutrition Act of 1966, which is a capped reimbursement 
program.

N. Issue: The Potential Impact of a Flat, Combined, Regulated Federal 
Order and Compact Over-Order Price on the Women, Infants and Children 
Special Supplemental Nutrition Program of the United States Child 
Nutrition Act of 1966

    Section 10 of the Compact sets forth a nonexhaustive list of issues 
that the Commission may, in its discretion, address in a Compact over-
order price regulation. Subsection 10 therein provides that a price 
regulation may contain ``[p]rovisions for reimbursement to participants 
of the Women, Infants and Children Special Supplemental Food Program of 
the United States Child Nutrition Act of 1966.'' (WIC Program).
    The Commission has been most concerned from the outset of its 
regulatory process with ensuring that this program is not adversely 
affected. Accordingly, the Commission sought, and received, testimony 
and both individual and joint written comments from each of the state 
WIC directors addressing the potential consequences of an over-order 
price regulation on the administration of the WIC Program.
    The Commission is particularly impressed with the expertise and 
knowledge of these witnesses regarding the administration of the 
program. In light of the absence of any comments opposing the proposals 
set forth in the joint WIC directors' comments, the Commission hereby 
adopts that written statement, set forth in its entirety below.

About the WIC Program

    The Special Supplemental Nutrition Program for Women, Infants and 
Children (WIC) is a unique health and nutrition program serving women 
and children with--or at risk of developing--nutrition-related health 
problems. WIC provides access to healthcare, free nutritious food, and 
nutrition information to help keep low to moderate income pregnant 
women, infants and children under five healthy and strong.
    WIC provides a monthly `prescription' for nutritious foods tailored 
to supplement the individual dietary needs of each participant. Foods 
include milk, cheese, eggs, cereal, fruit juice and peanut butter. 
Included foods are specifically chosen to provide high levels of 
protein, iron, calcium, and Vitamins A and C--nutrients that have been 
scientifically shown to be lacking or needed in extra amounts in the 
diets of the WIC-eligible population. These five nutrients--plus 
calories and other essential nutrients provided by the WIC food 
prescription--are critical for good health, during periods of growth 
and

[[Page 23051]]

development. Milk and other dairy products play a large and important 
role in every participant's food package. WIC also distributes coupons 
for fresh produce--redeemable at local farmers' markets--in conjunction 
with State Departments of Agriculture.
    WIC is a prevention program designed to influence lifetime 
nutrition and health behaviors. Ongoing nutrition education--the 
centerpeice of WIC--is designed to ensure that program participants 
continue to make healthy choices at the grocery store even when they 
are no longer eligible.

WIC Works

    WIC is widely acknowledged to be effective in the prevention of 
immediate health problems and in the improvement of long-term health 
outcomes. More than 70 evaluation studies have demonstrated the 
effectiveness of WIC and documented medical, health and nutrition 
successes for women, infants, and children:
     Women participating in the WIC Program have improved 
diets, received prenatal care earlier and have improved pregnancy 
outcomes
     Infants born to WIC mothers have better birth weights, 
larger head size, and are less likely to be premature
     WIC infants and children consume more iron, vitamin C and 
other nutrients, resulting in improved growth and nutritional status
     Children enrolled in WIC are more likely to have regular 
medical care and immunizations, and demonstrate better cognitive 
performance
     WIC families buy more nutritious foods than non-WIC 
families.
    And WIC saves money! Studies have also shown that WIC is cost 
effective. Every WIC dollar spent on pregnant women produces $1.92 to 
$4.21 in Medicaid savings for newborns and their mothers.

How WIC Works

    The WIC Program is a Federally funded program carried out according 
to provisions of the Federal Child Nutrition Act. The Program is funded 
through the Food and Consumer Service of the United States Department 
of Agriculture (USDA).
    The Program is administered on the local level by State WIC 
Programs in the Connecticut, Maine, Massachusetts, New Hampshire, Rhode 
Island, the Vermont State Departments of Public Health (the States). 
State funds are also provided in Massachusetts. Participants are issued 
WIC checks or vouchers at local agencies for WIC authorized foods. The 
checks or vouchers--which do not have a predetermined value--are 
redeemed at authorized retail stores at current store prices in 
accordance with posted prices. The checks are processed through the 
banking system for reimbursement, except in New Hampshire where 
vouchers are paid through a state accounting system. Prepayment edits 
are performed on each check to ensure that specific food purchasing, 
pricing and payment requirements are met.
    The average number of women and children provided WIC benefits and 
services in August, 1996 in the New England States was 212,760--
individual State WIC participation was: Connecticut 47,673, 
Massachusetts 99,643; Maine 20,243; New Hampshire 14,700; Rhode Island 
17,360; and Vermont 13,141 (Final August, 1997 FSC 298 Reports). These 
numbers do not include infants also served by the WIC Program.
    WIC is not an entitlement program. As such, the number of 
participants that WIC is able to serve at any time is dependent upon 
availability of funds from Federal and State sources, and the costs of 
WIC food items. The national appropriation for WIC is capped by 
Congress. The amount of USDA funding each State received is determined 
through complex formulae taking into account such factors as the number 
of people served and the funding level of the previous year. The grant 
determines the number of people who can be serviced--not the number of 
people in need.
    Since the amount of funds is fixed, any increase in the price of 
WIC foods has the effect of reducing the number of women and children 
the available grant dollars can serve. USDA estimated that there are 
9.4 million women, infants, and children in the US who meet WIC's 
income eligibility guidelines (185% of the Federal poverty level.) The 
national WIC fiscal year 1997 Federal appropriation is approximately $4 
billion. This sum would serve only about 5.5 million at full retail 
prices, about 60% of the eligible persons.
    All the States have instituted measures to stretch food funds to 
the maximum, including restrictions on container size, brands and 
product price, requiring least expensive brands, competitive store 
selection procedures, and manufacturers' rebates on infant formula and 
infant cereal. Nationally, these measures have brought over $1 billion 
in savings, which are then used to provide services to an additional 
1.9 million needy mothers and children. In New England, over 75,000 
women and children receive WIC services as a direct result of these 
cost savings measures, the most significant of which are the result of 
cooperative projects of State WIC directors working together on an 
interstate basis.
    Still, more than 20% of eligible women and children remain 
unserved. WIC's current funding is estimated to be $100 million short 
for this year, with several States reducing caseloads. Funding 
prospects for next year are not any better, and State WIC programs in 
New England are not eligible to receive funding to offset the impact of 
an Over-Order Price Regulation.
    As such, it is imperative that WIC's funds be held harmless from 
adverse impact due to a Regulation.

The WIC Program and the Milk Over-Order Price Regulation

    The WIC Program recognizes the important role that farms and 
farmers play in New England, including ensuring an ongoing supply of 
fresh milk at competitive prices, keeping important industry--and 
jobs--in our area, and providing open space that increases quality of 
life for all New England residents. The WIC Program also understands 
the need for dairy farmers' relief.
    WIC is a major purchaser of locally produced dairy products in the 
New England region. Because, however, WIC recognizes the importance of 
dairy products at critical times of child development, and therefore, 
must continue its milk purchases, the Program must be concerned with 
the fact that food cost increases have a direct, inverse effect on the 
number of participants WIC is able to serve. An increase in milk prices 
is of particular concern because of the large quantity of milk WIC 
purchases each month.
    Milk purchases are some 35% of WIC food dollars spent by 
participants. The number of quarts of Class 1 fluid milk purchased by 
WIC participants in New England in August 1996 was 3,779,015, which 
represents approximately 3.7% of the total amount sold by New England 
producers in the Region. WIC Class 1 fluid milk purchases in quarts by 
State were: Connecticut 1,100,000; Massachusetts, 1,481,163; Maine 
457,852; New Hampshire 230,000; Rhode Island 300,000; and Vermont 
210,000.
    Given current WIC participation levels, a 1 cents per quart 
wholesale price increase in Class 1 Fluid milk reflected at the retail 
level would translate into an increase in monthly WIC program 
expenditures of $37,790 for New England as a whole. This increase would 
necessitate a decrease in monthly program funded participation of 
1,260. A 5 cents per quart milk retail price increase would result in 
an increase in monthly

[[Page 23052]]

WIC expenditures of $189,950 and a participation decrease of 6,302.
    In order to maintain services to eligible persons, without 
compromising the nutritional health effectiveness of its food benefits 
if food costs rise, WIC managers must achieve offsets to increased food 
benefit expenditures and use those offsets to serve a significant 
portion of the eligible women and children in need. Further, if the 
States in New England must reduce or limit participation levels due to 
higher Class 1 fluid milk costs, there will be negative impact on 
Federal WIC funding to the New England Region--and on the amount of 
milk purchased.
    As important, low income women and children who WIC is not able to 
serve because of increased food costs will not receive the essential 
medical, health and nutritional benefits of WIC participation. It is 
critical, then, that the intended benefits to the regional economy and 
the continuation of dairy farming in New England not accrue at the cost 
of a significant risk to maternal and child health stemming from 
Regulation-related costs to WIC.

Retail Price Impact of An Over-Order

    The Northeast Interstate Dairy Compact enables participating States 
collectively to regulate the New England farm price for Class 1 fluid 
milk, thereby enhancing and stabilizing dairy farmer income. This 
Regulation may have the effect of increasing the price paid for Class 1 
fluid milk by WIC participants at retail stores, if the regulated farm 
price increase translates directly into an increase at the retail 
level. Other goals are to stabilize processor and retailer costs and 
consumer prices.
    Concomitantly, the findings of Hansen et al \108\ with regard to 
the variability of milk farm prices and asymmetric price transmission 
are the basis for the theory that an Over-Order Price Regulation of 
Class 1 fluid milk which brings about stable farm prices for Class 1 
fluid milk will result in price stability--and potential price 
decreased--in Class 1 milk at the retail level for consumers over a 
period of time. Testing this concept, presented by US Senator Patrick 
Leahy of Vermont in public comment before the Northeast Dairy Compact 
Commission, would appear viable with regard to the impact of a 
Regulation on consumer milk prices.
---------------------------------------------------------------------------

    \108\ Hahn et al, ``Determinants of the Farm-to Retail Milk 
Price Spread'', Agriculture Information Bulletin #693, March 1994.
---------------------------------------------------------------------------

Demonstration Period and Continuing Assessment of Impact

    The New England State WIC Programs understand that the Compact is 
considering an Over-Order Price Regulation on Class 1 fluid milk for a 
specific period of time. The State directors believe it appropriate 
that any initial Regulation be in effect for a limited period, such as 
six months. A potential outcome of such a demonstration could provide 
evidence which supports that milk farm price stability due to a 
Regulation will result in price stability, and perhaps decreases and 
related savings, on Class 1 fluid milk purchases by consumers--
including WIC participants--over time.
    To measure and document the impact of a Regulation, the Commission 
will need to develop systems and methodologies to gather, track and 
analyze Class 1 fluid milk retail price data in order to accurately 
assess and evaluate any Regulation-related adverse or beneficial impact 
on costs to consumers and WIC, and to make related adjustments to 
assure that the public interest is served and consumers and the WIC 
Program and its participants are protected. Such an analytical 
framework should include information which is appropriate to milk 
purchasing and pricing at both the New England Regional and individual 
State levels--including each State's WIC programs--comprising 
representative samples of market areas and retail store types, 
proportion of sales by package size (quarts, half falls and gallons), 
and the degrees to which retail price fluctuations differ for package 
sizes in relation to each other, since data reflect WIC operations and 
purchasing patterns in each State. WIC participants often purchase 2 
half gallon containers, and the majority do not have ready access to 
supermarkets, especially for frequent purchase of a perishable product 
such as milk.
    As important, analysis should include development of a baseline by 
which changes over time will be measured, as well as evaluation of the 
relationship between changes in the Regulation and Class 1 fluid milk 
prices at retail levels over time and the cost impact to WIC. WIC does 
not specify the fat content of milk purchased. Tracking and measuring 
product differentials based on fat content; therefore, it is not 
necessary to any WIC cost impact methodology.

Post Demonstration Reimbursement System

    Given such analysis and evaluation and sufficient evidence, 
Commission reimbursement to WIC could be then based upon the Over-Order 
Price Regulation and--specifically, on the amount of any portion of the 
retail cost for Class 1 fluid milk to WIC attributable to the 
Regulation which would encompass and respond to individual state WIC 
programs.

Demonstration Period Reimbursement System

    WIC recognized, however, that the theory and data which may justify 
the adoption of a demonstration period Regulation does not provide 
demonstrated, proven assurance that there would be no cost increase to 
WIC on its Class 1 fluid milk purchases. Notwithstanding any public 
interest or other justification for a Regulation, in the absence of 
such current evidence that a Regulation would be either cost neutral or 
beneficial to WIC's present year funding, the Commission should provide 
a way to protect and hold harmless the WIC Program--and its 
participants--in the New England States from potential increases in the 
Class 1 fluid milk retail price during a period of a demonstration 
Over-Order Price Regulation, for at least the period of any 
demonstration Regulation. It is clearly a part of the public interest 
under any Regulation to protect WIC's limited funds and the full number 
of women and children WIC would otherwise serve. WIC cannot support a 
Regulation which would leave women's and children's health and 
nutritional status at risk because appropriated WIC funds were diverted 
to pay higher milk prices, rather than remaining with the WIC Program 
to provide benefits to participants.
    As such, the State WIC Programs in New England propose a method by 
which the WIC Program will be held harmless from any impact related to 
a demonstration of a Compact Over-Order Price Regulation for Class 1 
fluid milk. The Commission would reimburse each respective State WIC 
Program. The amount of reimbursement would be based on (1) the 
quantities of milk purchased with WIC checks and (2) the amount of any 
Compact Over-Order Price Regulation.
    This would allow the Commission to implement a Compact 
demonstration Regulation, providing essential relief to dairy farmers, 
and WIC could continue to serve the maximum number of participants in 
each State allowed by the grants during an Over-Order demonstration. 
This would also allow the Commission a period of time to develop a more 
finely attuned analysis of the impact of the Regulation, and the 
develop methods to most accurately

[[Page 23053]]

ascertain any cost to WIC and the most appropriate reimbursement 
levels.
    The principles of the interim mechanism proposed by the State 
directors are:
    1. The Commission should establish a Reserve Account, to assure 
that funds are on hand for timely reimbursement by the Commission to 
the States. This account will be funded from the Compact over-order 
price regulation based on the recent percentage of total milk sold in 
New England purchased by WIC participants.
    2. Any Commission Over-Order Price Regulation in a given month will 
result in a cent for cent reimbursement for Class 1 fluid milk paid for 
by each State WIC Program in that month. The amount of reimbursement 
will be based on the quantities of milk actually paid for by each WIC 
state. Funds in the Reserve Account will only be drawn by individual 
States in proportion to the Over-Order Regulation. Unused funds would 
return to the Commission.
    3. Each State WIC Program will invoice the Commission on a monthly 
basis for reimbursement due. When the refund amounts are small, 
individual States may elect to bill up to 3 months in one invoice to 
avoid unnecessary administrative costs for both parties.

Formal Agreement

    Implementation will take place under the terms and conditions of a 
formal agreement between the Commission and the States, entered into by 
the State WIC Programs acting as a single entity. Such an agreement 
must contain the above provisions for interim reimbursement 
determination and procedures, continuing assessment of impact, how the 
parties will change to any post demonstration reimbursement system, 
conditions for mutual agreement for modifications to the agreement, 
term of the agreement and conditions for mutual or either party 
termination prior to expiration of the agreement.
    The above proposal by the State WIC Programs in New England and any 
subsequent agreement are subject to approval by the Food and Consumer 
Service of the USDA. The State WIC Programs will collaborate with the 
Compact Commission and USDA Food and Consumer Service to develop and 
implement agreement provisions and operating procedures for any 
reimbursement system which meet the requirements of Compact legislation 
and Federal WIC guidance, rules and regulations.

Public Interest Finding--Summary Analysis

    In view of this comprehensive marketwide analysis, the Compact 
Commission concludes that Compact Over-order Price Regulation in the 
amount of $16.94, for six months' duration, will ensure the ``public 
interest'' is served in the manner contemplated by the finding analysis 
under this section. The stated amount represents a limited market 
adjustment that accounts for its potential impact on all levels of the 
market, from farm to retail.
    As noted throughout the analysis under this and the previous 
finding section, the Compact Commission has accounted for a number of 
potential market impacts in fashioning this initial, limited 
regulation. Most particularly, the Commission is concerned about the 
potential for market dysfunction in the wholesale market, and with 
regard to unanticipated impacts on consumer prices.
    The Commission has concluded that the regulation should not 
adversely affect the wholesale market and should, indeed, have a 
positive impact on retail prices. Yet the Commission has purposefully 
limited the duration of the initial regulation to ensure against 
unanticipated consequences. As a final safeguard against unanticipated, 
adverse consequences, the Commission has acted to ``hold harmless'' the 
WIC program, despite its conclusion of the remoteness of such 
unanticipated consequences occurring.
    The Compact Commission concludes further that the limited duration 
of this initial regulation ensures that its impact across markets can 
be carefully monitored and evaluated from the outset and then 
reconsidered as soon as a record has been established. Accordingly, the 
Commission will attempt specifically to monitor and assess the pattern 
of raw product supplies from New York and New England farms and the 
movement of packaged milk into the market from plants outside the 
region, as well as the impact of price regulation on retail prices, 
including the school lunch program, and the WIC program.\109\
---------------------------------------------------------------------------

    \109\ In reply comment, John Ghiorzi, Regional Director, 
supplemental Food Programs, Northeast Region, USDA, suggested that 
the demonstrational nature of the initial regulation would be better 
served if the initial period were eight or twelve months instead of 
six months. The Commission acknowledges this point. The Commission 
has determined still that a useful empirical record can be developed 
in six months', and that the relative efficacy of this record must 
be considered along with the other factors at issue in determining 
the proper duration of the initial regulation. The Commission has 
accordingly settled upon six months as the proper length of time.
---------------------------------------------------------------------------

III. Finding

    Whether the major provisions of the order, other than those fixing 
minimum milk prices, are in the public interest and are reasonably 
designed to achieve the purposes of the order.
    The Compact Commission's responsibility to consider the public 
interest with respect to the non-price aspects of regulation are 
evident in two areas: First, as required by Compact Article IV, Section 
9(f), the Commission has acted to insure that its regulation does not 
create an incentive for dairy farmers to produce additional, surplus 
supplies of milk, and second, the Commission's regulation is uniform 
and equitable and does not unduly distort traditional markets and 
marketing channels.

1. Surplus Production

Compact Requirement
    Compact Section 9(f) provides that ``when establishing a Compact 
over-order price, the Commission shall take such action as necessary 
and feasible to ensure that the over-order price does not create an 
incentive for producers to generate additional supplies of milk.''
    Compact, Article IV, Sec. 9(f).
    Accordingly, the Compact Commission sought comment on:

    The appropriate, necessary and feasible, action to take, as 
required by the Compact, to ensure that Compact Over-order Price 
Regulation does not result in additional supplies of milk.\110\

    \110\ 62 CFR 12252.
---------------------------------------------------------------------------

    The Commission concludes that specific action is not necessary at 
the present time in light of the limited duration of the price 
regulation established by this rule. The Commission draws this 
conclusion from actual and projected data of regional and national 
production levels,\111\ which indicate it is most unlikely that 
additional supplies of milk will be produced by New England as a 
region. The Commission also concludes from the testimony of farmers 
about their production planning decisions that it is unlikely 
individual farmers will make decisions to increase production based 
upon imposition of this price regulation.
---------------------------------------------------------------------------

    \111\ See discussion, infra, of CCC purchase requirement.
---------------------------------------------------------------------------

    The record contains abundant evidence demonstrating that farmers 
plan their activities based on the anticipated long-run rather than 
short-range changes in market structure. As cited previously, one dairy 
economist

[[Page 23054]]

testified that price fluctuations and market instability ``makes it 
very difficult for farmers to effectively plan and make the type of 
investment necessary to position themselves for the future.'' \112\ Jim 
Jenks, a dairy farmer from Vermont, echoed these sentiments. He 
testified, in essence, that the instabilities in the prices and in the 
market structure made such an investment too risky of a proposition to 
pursue. ``[I]f we're going to make a good decision with respect to 
putting my family's equity on the line, we need to know something about 
the stability of our markets and our future.'' \113\
---------------------------------------------------------------------------

    \112\ Smith, 12/17/96 HT at 38.
    \113\ Jenks, 12/17/96 HT at 153.
---------------------------------------------------------------------------

    Similar sentiments were expressed by Charlie Telly, a dairy farmer 
from Massachusetts. ``It is difficult for me to plan out--to 
financially plan out my future three, five or ten years in advance 
because of the uncertainty I face each month with the ever changing 
milk price.'' \114\
---------------------------------------------------------------------------

    \114\ Telly, 12/19/96 HT at 123.
---------------------------------------------------------------------------

    Combined with the statistical data of the lack of probability of 
region-wide production increases, this individual testimony leads the 
Commission to conclude that a price regulation of limited duration 
likely would not affect production behavior within the meaning of 
Section 9(f).\115\
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    \115\ The rule's intended benefit regarding the maintenance and 
stabilization of the milkshed relates to promoting the viability of 
farming units rather than the promotion of increased production. It 
is expected that the rule will promote this benefit, despite its 
limited duration, by serving as a basis for existing producers to 
remain in production.
---------------------------------------------------------------------------

Requirement of Enabling Legislation
    Pub. L. 104-127(5) states that:

    [b]fore the end of each fiscal year that a Compact price 
regulation is in effect, the Northeast Interstate Dairy Compact 
Commission shall compensate the Commodity Credit Corporation for the 
cost of any purchases of milk and milk products by the Corporation 
that result from the projected rate of increase in milk production 
for the fiscal year within the Compact region in excess of the 
projected national average rate of the increase in milk production, 
as determined by the Secretary [of Agriculture].

    7 U.S.C. sec. 7256(5). Accordingly, the Compact Commission 
requested comment on:

    The most appropriate means to account for the Compact 
Commission's responsibility to reimburse the Commodity Credit 
Corporation (CCC) for CCC purchases attributable to an increase in 
milk production in the New England region above the national average 
rate of increase.\116\

    \116\ 62 CFR 12252.
---------------------------------------------------------------------------

    Although the comments received were few in number, they were 
sufficient to permit the Commission to address this issue.
    For example, Wellington et al indicated the view that the 
appropriate response for the Commission was simply to monitor 
production levels and take action only if current circumstances changed 
markedly.\117\ The comment is based on the assertion that the rate of 
increase in regional production is unlikely to exceed the rate of 
increase in national production. In the event of an unexpected change 
in circumstances, these commenters suggested a plan for the Commission 
to retain funds sufficient to cover any CCC purchases.
---------------------------------------------------------------------------

    \117\ 3/31/97 WC at 10-11.
---------------------------------------------------------------------------

    Statistical data and projections support the position set forth by 
these commenters. According to statistical data submitted, the national 
production average increased at a rate of 0.8768 percent between 1991 
and 1996.\118\ Production in the region increased 0.7121 percent over 
the same five-year time period.\119\ According to projections, national 
production in1997 is expected to increase at a rate of between 1 and 
2.07 percent. Regional production, however, for 1997 is projected to 
increase at a rate of only 0.6 percent, a rate that is significantly 
lower than the proposed projected national rate of increased 
production.\120\
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    \118\ National Agricultural Statistics Service, Milk Production 
Summary.
    \119\ New England Agricultural Statistics, 1995-1996, ``Milk 
Production'', page 68.
    \120\ Northeast Regional Dairy Outlook Conference, November 6, 
1996; Milk Production Worksheet and Food and Agricultural Policy 
Research Institute Staff Report #1-96, page 86.
---------------------------------------------------------------------------

    The Commission notes that the CCC made no purchases of surplus milk 
in fiscal year 1996 or 1997. Therefore, in light of the comments 
submitted, the Commission agrees that action that is appropriate and 
necessary under these circumstances is presently limited to monitoring. 
The Commission concludes further, however, that it must be prepared in 
case production increases in an unexpected manner, and CCC purchases 
occur.
    Accordingly, for each month price regulation is in place, in 
consultation with the United States Secretary of Agriculture, the 
Compact Commission will monitor the regional and national rates of 
production to determine whether the regional rate of increased 
production is within 0.25 percent of the national rate of increased 
production. If production does increase within this range, then for 
each such month, the Commission will estimate the potential cost of CCC 
surplus purchases of surplus which might occur should the rate of 
regional rate of increased production exceed the national rate. The 
Commission will retain a portion of the proceeds of the price 
regulation sufficient to cover such estimated cost, as necessary.
    After the date of termination of the Compact Over-Order Price 
Regulation, if the Commission has retained any proceeds of the price 
regulation and no compensation has been made to the CCC for surplus 
purchases, the Commission will provide pro rata refunds to all pooled 
producers. The amount of each producer's refund will account for the 
marketing's of milk by each producer and the regulated price for such 
milk in effect for each month in which proceeds were retained.
    If, after the date of termination, compensation has been made to 
the CCC and proceeds of the price regulation still remain, the 
Commission will provide refunds as follow: (1) A pooled producer shall 
become eligible to receive a refund by submitting to the Commission 
documentation that the producer did not increase marketing's of milk 
during the time that the price regulation was in effect as compared to 
the same period during the previous calendar year. Such documentation 
shall be filed with the Commission not later than 45 days after the 
date of termination of the over-order price regulation. (2) The 
Commission shall calculate the amount of refund to be provided to each 
eligible producer by taking into account the total amount of retained 
proceeds, the total marketing's of milk by all producers eligible for 
refunds, and the total amount of marketing's by each eligible producer.
    Finally, the Commission notes, in accordance with 7 U.S.C. 
7256(b)(5), that it is not required to take any action with respect to 
the CCC prior to its promulgation of a price regulation.

2. Technical Regulation

    As described in the discussion on the potential impact of price 
regulation on the wholesale market, the Commission is most concerned 
that the price regulation established under this rule not cause market 
distortion. The Commission concludes that the technical regulation will 
avoid any such distortions.
    The Commission's regulation is uniform and equitable, and will have 
a neutral impact on existing markets and marketing channels, other than 
operation of the regulated price. Assurance of this neutral impact 
promotes the public interest by preventing adverse consequences 
attributable to market distortions. The Commission has taken the 
following steps to insure the protection of the

[[Page 23055]]

public interest in this manner by carefully considering the following 
issues:
    1. Proper construct of the definition of pool plants  and partially 
regulated plants subject to regulation of the Compact. A pool plant is 
defined under Section 2(6) as any milk plant located in a regulated 
area. A partially regulated plant is defined in Section 2(7) as a milk 
plant not located in a regulated area but having Class I distribution 
within such area, or receipts from producers located in such area. 
Section 2(5) defines a regulated area as any area within the region 
governed by and defined in regulations establishing a compact over-
order price or commission market order. Section 9(d) of the Compact 
establishes the Commission's authority to establish the minimum price 
for milk to be paid by pool plants, partially regulated pool plants and 
all other handlers receiving milk from producers located in a regulated 
area.\121\
---------------------------------------------------------------------------

    \121\ One commenter, in effect, challenged the Commission's 
authority to rely upon the provision in Sec. 9(d) of the Compact 
which permits the Commission to regulate such ``partially regulated 
pool plants.'' Vetne, 3/31/97 AC. The Commission disagrees with this 
legal conclusion of the commenter.
---------------------------------------------------------------------------

    2. Assuring that that Class I sales outside the New England region 
made by new England based plants or pool plants, are not subject to the 
regulation, through the use of the so-called ``competitive credits'' 
authorized by Section 10(4) of the Compact.
    3. Providing for equitable distributions to producers shipping to 
pool plants and partially regulated plants. See Compact Section 
9(d).\122\
---------------------------------------------------------------------------

    \122\ One commenter indicated the Commission should include all 
producers supplying partially regulated plants, without regard to 
the relative volume of milk sales by such plants in the Compact 
region. Marcus, 12/19/96 HT at 92. The Commission concludes that 
this approach would cause undue distortion of the outside markets, 
and declines to adopt it.
---------------------------------------------------------------------------

    4. Assuring the regulation does not disrupt the traditional pattern 
of raw product supply from New England and New York, and the existing 
market supply of packaged milk products. These issues are addressed 
comprehensively throughout the technical regulation.
    5. Assuring complimentary operation of the Compact with the Federal 
Milk Market Order Program. The Compact's Statement of Purpose expressly 
declares this purpose. The technical regulation is expressly based on 
this principle. The Commission will also be utilizing the assistance of 
the Milk Market Administrator on an ongoing basis, as authorized by 7 
U.S.C. Sec. 7256(6), to ensure such efficient operation.\123\
---------------------------------------------------------------------------

    \123\ One commenter described the need for a butterfat 
adjustment in the regulation. Vetne, 3/31/97 AC. This necessary 
adjustment is already provided for and established in the structure 
of the underlying federal Order.
---------------------------------------------------------------------------

    Finally, the Compact Commission notes that one commenter argued 
that the Commission should regulate all classes of milk and not just 
Class I fluid milk (HT 177 12/19 Turner). The Commission's authority, 
however, is expressly limited by statute and by the Compact to the 
regulation of Class I fluid milk. See 7 U.S.C. Sec. 7256(2); Compact, 
Art. IV, Sec. 9(b).

IV. Administrative Assessment

    Article VII, Sec. 18(a) of the Compact provides that:

    if regulations establishing an over-order price * * * are 
adopted, they may include an assessment for the specific purpose of 
their administration. These regulations shall provide for 
establishment of a reserve for the Commission's ongoing operating 
expenses.

    In accordance with this section, the Commission determined that 
this regulation will cost $400,000 to administer for its six month 
duration. Based on a projected total utilization of 1.25 billion pounds 
of Class I milk in the Compact region during this period, an assessment 
in the amount of $0.032 per cwt will be imposed. The funds will be held 
in an operating expense reserve account.

V. Required Findings of Fact

    Pursuant to Compact Art. V. Sec. 12, the Compact Commission hereby 
finds:
    (1) That the public interest will be served by the establishment of 
minimum milk prices to dairy farmers under Article IV.
    (2) That, for purposes of this initial regulation, a level of price 
in the amount of $16.94 will assure that producers receive a price 
sufficient to cover their costs of production and will elicit an 
adequate supply of milk for the inhabitants of the regulated area and 
for manufacturing purposes.
    (3) That the major provisions of the order, other than those fixing 
minimum milk prices, are in the public interest and are reasonably 
designed to achieve the purposes of the order.\124\
---------------------------------------------------------------------------

    \124\ Whether the terms of the proposed regional order are 
approved by producers as provided in section thirteen, as required 
by finding 4 of this section, is contingent on final action by the 
Commission and the consequent conduct of a referendum.
---------------------------------------------------------------------------

List of Subjects in 7 CFR Parts 1300, 1301, 1303, 1304, 1305, 1306 
and 1307

    Milk.

    For the reasons set forth in the preamble, the Commission 
establishes in title 7 of the Code of Federal Regulations a new chapter 
XIII to read as follows:

CHAPTER XIII--NORTHEAST DAIRY COMPACT COMMISSION

Part

1300  Over-order price.
1301  Definitions.
1303  Handlers reports.
1304  Classification of milk.
1305  Class price.
1306  Compact over-order producer price.
1307  Payments for milk.
1308  Commission assessment.

PART 1300--OVER-ORDER PRICE REGULATIONS

Sec.
1300.1  Compact Commission.
1300.2  Continuity and separability of provisions.
1300.3  Handler responsibility for records and facilities.
1300.4  Termination of obligation.

    Authority: 7 U.S.C. 7256.


Sec. 1300.1  Compact Commission.

    (a) Designation. The agency for the administration of the Pricing 
Regulation shall be the compact commission.
    (b) Powers. The compact commission shall have the following powers:
    (1) Administer the pricing regulation in accordance with its terms 
and provisions;
    (2) Make rules and regulations to effectuate the terms and 
provisions of the pricing regulation;
    (3) Receive and investigate complaints of violations;
    (4) Recommend amendments.
    (c) Duties: The compact commission shall perform all the duties 
necessary to administer the terms and provisions of the pricing 
regulation, including, but not limited to the following:
    (1) Employ and fix the compensation of persons necessary to enable 
them to exercise their powers and perform their duties:
    (2) Pay out of funds provided by the administrative assessment all 
expenses necessarily incurred in the maintenance and functioning of 
their office and in the performance of their duties;
    (3) Keep records which will clearly reflect the transactions 
provided for in the pricing regulation;
    (4) Announce publicly at their discretion, by such means as they 
deem appropriate, the name of any handler who, after the date upon 
which he is required to perform such act, has not:
    (i) Made reports required by the pricing regulation;
    (ii) Made payments required by the pricing regulation; or

[[Page 23056]]

    (iii) Made available records and facilities as required pursuant to 
Sec. 1300.3;
    (5) Prescribe reports required of each handler under the pricing 
regulation. Verify such reports and the payments required by the 
pricing regulation by examining records (including such papers as 
copies of income tax reports, fiscal and product accounts, 
correspondence, contracts, documents or memoranda, of the handler, and 
the records of any other person that are relevant to the handler's 
obligation under the pricing regulation, by examining such handler's 
milk handling facilities; and by such other investigation as the 
compact commission deems necessary for the purpose of ascertaining the 
correctness of any report or any obligation under the pricing 
regulation. Reclassify fluid milk product received by any handler if 
such examination and investigation discloses that the original 
classification was incorrect;
    (6) Furnish each regulated handler a written statement of such 
handler's accounts with the compact commission promptly each month. 
Furnish a corrected statement to such handler if verification discloses 
that the original statement was incorrect; and
    (7) Prepare and disseminate publicly for the benefit of producers, 
handlers, and consumers such statistics and other information covering 
operation of the pricing regulation and facts relevant to the 
provisions thereof (or proposed provisions) as do not reveal 
confidential information.


Sec. 1300.2  Continuity and separability of provisions.

    (a) Effective time. The provisions of this pricing regulation or 
any amendment to the pricing regulation shall become effective at such 
time as the compact commission may declare and shall continue in force 
until suspended or terminated.
    (b) Suspension or termination. The compact commission shall suspend 
or terminate any or all of the provisions of the pricing regulation 
whenever they find that such provision(s) obstructs or does not tend to 
effectuate the declared policy of the compact. The pricing regulation 
shall terminate whenever the provisions of the compact authorizing it 
cease to be in effect.
    (c) Continuing obligations. If upon the suspension or termination 
of any or all of the provisions of the pricing regulation there are any 
obligations arising under the pricing regulation, the final accrual or 
ascertainment of which requires acts by any handler, by the compact 
commission, or by any other person, the power and duty to perform such 
further acts shall continue notwithstanding such suspensions or 
termination.


Sec. 1300.3  Handler responsibility for records and facilities.

    Each handler shall maintain and retain records of his operations 
and make such records and his facilities available to the compact 
commission. If adequate records of a handler, or of any other person, 
that are relevant to the obligation of such handler are not maintained 
and made available, any fluid milk product required to be reported by 
such handler for which adequate records are not available shall not be 
considered accounted for or established as used in a class other than 
the highest price class.
    (a) Records to be maintained. (1) Each handler shall maintain 
records of his operations (including, but not limited to, records of 
purchases, sales, processing, packaging and disposition) as are 
necessary to verify whether such handler has any obligation under the 
pricing regulation and if so, the amount of such obligation. Such 
records shall be such as to establish for each plant or other receiving 
point for each month:
    (i) The quantities of fluid milk product contained in, or 
represented by, products received in any form, including inventories on 
hand at the beginning of the month, according to form, time and source 
of each receipt;
    (ii) The utilization of all fluid milk product showing the 
respective quantities of such fluid milk product in each form disposed 
of or on hand at the end of the month; and
    (iii) Payments to producers, dairy farmers and cooperative 
associations, including the amount and nature of any deductions and the 
disbursement of money so deducted.
    (2) Each handler shall keep such other specific records as the 
compact commission deems necessary to verify or establish such 
handler's obligation under the pricing regulation.
    (b) Availability of records and facilities. Each handler shall make 
available all records pertaining to such handler's operation and all 
facilities the compact commission finds are necessary to verify the 
information required to be reported by the pricing regulation and/or to 
ascertain such handler's reporting, monetary or other obligation under 
the pricing regulation. Each handler shall permit the compact 
commission to observe plant operations and equipment and make available 
to the compact commission such facilities as are necessary to carry out 
their duties.
    (c) Retention of records. All records required under the pricing 
regulation to be made available to the compact commission shall be 
retained by the handler for a period of three years to begin at the end 
of the month to which such records pertain. If, within such a three 
year period, the compact commission notifies the handler in writing 
that the retention of such records, or of specified records, is 
necessary in connection with a proceeding or court action specified in 
such notice, the handler shall retain such records, or specified 
records, until further written notification from the compact 
commission. The compact commission shall give further written 
notification to the handler promptly upon the termination of the 
litigation or when the records are no longer necessary in connection 
therewith.


Sec. 1300.4  Termination of Obligation.

    The provision of this section shall apply to any obligation under 
the pricing regulation for the payment of money:
    (a) Except as provided in paragraphs (b) and (c) of this section, 
the obligation of any handler to pay money required to be paid under 
the terms of the pricing regulation shall terminate two years after the 
last day of the month during which the compact commission receives the 
handler's report of receipts and utilization on which such obligation 
is based, unless within such a two year period, the compact commission 
notifies the handler in writing that such money is due and payable. 
Service of such written notice shall be complete upon mailing to the 
handler's last known address and it shall contain but need not be 
limited to the following information:
    (1) The amount of the obligation;
    (2) The month(s) on which such obligation is based; and
    (3) If the obligation is payable to one or more producers or to a 
cooperative association, the name of such producer(s) or such 
cooperative association, or if the obligation is payable to the compact 
commission, the account for which it is to be paid;
    (b) If a handler fails or refuses, with respect to any obligation 
under the pricing regulation, to make available to the compact 
commission all records required by the pricing regulation to be made 
available, the compact commission may notify the handler in writing, 
within the two year period provided for in paragraph (a) of this 
section, of such failure or refusal. If the compact commission so 
notifies a handler, the said two year period with respect to such 
obligation shall not

[[Page 23057]]

begin to run until the first day of the month following the month 
during which all such records pertaining to such obligation are made 
available to the compact commission;
    (c) Notwithstanding the provisions of paragraphs (a) and (b) of 
this section, a handler's obligation under the pricing regulation to 
pay money shall not be terminated with respect to any transaction 
involving fraud or willful concealment of a fact, material to the 
obligation, on the part of the handler against whom the obligation is 
sought to be imposed; and
    (d) Unless the handler files a petition to the compact commission 
to commence litigation within the applicable two year period indicated 
below, the obligation of the compact commission:
    (1) To pay a handler any money which such handler claims to be due 
him under the terms of the pricing regulation shall terminate two years 
after the end of the month during which the fluid milk product involved 
in the claim were received; or
    (2) To refund any payment made by a handler (including a deduction 
or offset by the compact commission) shall terminate two years after 
the end of the month during which payment was made by the handler.

PART 1301--DEFINITIONS

Sec.
1301.1  Compact.
1301.2  Commission.
1301.3  Northeast Dairy Compact Regulated Area.
1301.4  Plant.
1301.5  Pool plant.
1301.6  Partially regulated plant.
1301.7  Non pool plant.
1301.8  Milk.
1301.9  Handler.
1301.10  Producer-handler.
1301.11  Producer.
1301.12  Producer milk.
1301.13  Exempt milk.
1301.14  Fluid milk product.
1301.15  Fluid cream product.
1301.16  Filled milk.
1301.17  Cooperative association.
1301.18  Person.
1301.19  Route disposition.
1301.20  Distributing plant.
1301.21  Supply plant.
1301.22  State dairy regulation.
1301.23  Diverted milk.

    Authority: 7 U.S.C. 7256.


Sec. 1301.1 Compact.

    Compact means the Northeast Dairy Compact as approved by section 
147 of the Federal Agriculture Improvement and Reform Act (Fair Act), 
Pub. L. 104-127.


Sec. 1301.2  Commission.

    Commission means the commission established by the Northeast Dairy 
Compact.


Sec. 1301.3  Northeast Dairy Compact Regulated Area.

    Northeast Dairy Compact Regulated Area hereinafter called the 
Regulated Area means all territory within the boundaries of the states 
of Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island and 
Vermont. All waterfront facilities connected therewith and craft moored 
thereat, and all territory therein occupied by any governmental 
installation, institution, or other similar establishment.


Sec. 1301.4  Plant.

    Plant means the land and buildings, together with their 
surroundings, facilities and equipment, whether owned or operated by 
one or more persons, constituting a single operating unit or 
establishment for the receiving, processing or packaging of milk or 
milk products. The term plant shall not include:
    (a) Distribution points (separate premises used primarily for the 
transfer to vehicles of packaged fluid milk products moved there from 
processing and packaging plants); or
    (b) Bulk reload points (separate premises used for the purpose of 
transferring bulk milk from one tank truck to another tank truck while 
en route from dairy farmers' farms to a plant). If stationary storage 
tanks are used for transferring milk at the premises, the operator of 
the facility shall make an advance written request to the compact 
commission that the facility be treated as a reload point; otherwise it 
shall be a plant. The cooling of milk, collection or testing of 
samples, and washing and sanitizing of tank trucks at the premises 
shall not disqualify it as a bulk reload point.


Sec. 1301.5  Pool Plant.

    Pool Plant means any milk plant located in the regulated area.


Sec. 1301.6  Partially Regulated Plant.

    Partially Regulated Plant means a milk plant not located in the 
regulated area but having Class I distribution in the regulated area, 
or receipts from producers located in the regulated area.


Sec. 1301.7  Non Pool Plant.

    Non Pool Plant means any milk plant that is not a pool plant 
pursuant to section 1301.5 and not a partially regulated plant pursuant 
to section 1301.6.


Sec. 1301.8  Milk.

    Milk means the lacteal secretion of cows and includes all skim, 
butterfat, or other constituents obtained from separation of any other 
process and as defined pursuant to prevailing standards of identity.


Sec. 1301.9  Handler.

    Handler means:
    (a) Any person, except a producer-handler, who operates a pool 
plant;
    (b) Any person who operates a partially regulated plant;
    (c) Any person who operates any other plant, or a pool bulk tank 
unit as defined under the Federal order, from which fluid milk products 
are disposed of, directly or indirectly, in the regulated area;
    (d) Any cooperative association with respect to the milk that is 
moved from farms in tank trucks operated by, or under contract to, the 
association to pool plants or as diverted milk to non pool plants for 
the account of, and at the direction of, the association. The 
association shall be considered as the handler who received the milk 
from the dairy farmers. However, the cooperative association shall not 
be the handler with respect to the milk moved from any farm if the 
association and the operator of the pool plant to which milk from such 
farm is moved both submit a request in writing, on or before the due 
date for filing the monthly reports of receipts and utilization, that 
the operator of the pool plant be considered as the handler who 
received the milk from the dairy farmer, and the pool plant operator's 
request states that the pool plant operator is purchasing the milk from 
such farm on the basis of the farm bulk tank measurement readings and 
the butterfat tests of samples of the milk taken from the farm bulk 
tank; or
    (e) Any person who does not operate a plant but who engages in the 
business of receiving fluid milk products for resale and distributes to 
retail or wholesale outlets packaged fluid milk products received from 
any plant described in paragraph (a), (b) or (c) of this section.


Sec. 1301.10  Producer-handler.

    Producer-handler means any person who, during the month is both a 
dairy farmer and a handler and who meets all of the following 
conditions:
    (a) Provides as the person's own enterprise and at the person's own 
risk the maintenance, care, and management of the dairy herd and other 
resources and facilities that are used to produce milk, to process and 
package such milk at the producer-handler's own plant, and to 
distribute it as route disposition.

[[Page 23058]]

    (b) The person's own route disposition constitutes the majority of 
the route disposition from the plant.
    (c) The producer-handler receives no fluid milk products except 
from such handler's own production and from pool handlers, either by 
transfer of diversion.


Sec. 1301.11  Producer.

    Producer means:
    (a) A dairy farmer who produces milk in the regulated area that is 
moved to a pool plant or a partially regulated plant, having Class I 
distribution in the regulated area,
    (b) A dairy farmer who produces milk outside of the regulated area 
that is moved to a pool plant provided that dairy farmer milk was moved 
to a plant located in the regulated area during December 1996. Provided 
further: to be considered a qualified producer, milk from the dairy 
farmer's farm must move to a pool plant during the current month and 
must have been moved to a pool plant for five (5) months subsequent to 
July of the preceding calendar year;
    (c) A dairy farmer who produces milk outside of the regulated area 
that is moved to a partially regulated plant and allocated to Class I 
pursuant to Sec. 1304.5. However, the term shall not include:
    (1) A producer handler;
    (2) A dairy farmer who is a local or state government that has non-
producer status for the month under Sec. 1301.13(c);
    (3) A dairy farmer who is a governmental agency that is operating a 
plant from which there is route disposition in the regulated area;
    (4) Dairy farmer milk received at a pool plant or a partially 
regulated plant which is rejected and segregated in the handler's 
normal operations for receiving milk and which receipts are accepted 
and disposed of by the handler as salvaged product rather than milk.


Sec. 1301.12  Producer milk.

    Producer milk means milk that the handler has received from 
producers. The quantity of milk received by a handler from producers 
shall include any milk of a producer that was not received at any plant 
but which the handler or an agent of the handler has accepted, 
measured, sampled, and transferred from the producer's farm tank into a 
tank truck during the month. Such milk shall be considered as having 
been received at the pool plant at which other milk from the same farm 
of that producer is received by the handler during the month, except 
that in the case of a cooperative association in its capacity as a 
handler under Sec. 1301.9(d), the milk shall be considered as having 
been received at a plant in the zone location of the pool plant, or 
pool plants within the same zone, to which the greatest aggregate 
quantity of the milk of the cooperative association in such capacity 
was moved during the current month or the most recent month.


Sec. 1301.13  Exempt milk.

    Exempt milk means:
    (a) Fluid milk products received at a pool plant in bulk from a non 
pool plant to be processed and packaged, for which an equivalent 
quantity of package fluid milk products is returned to the operator of 
the non pool plant during the same month, if the receipt of bulk fluid 
milk products and return of packaged fluid milk products occur during 
an interval in which the facilities of the non pool plant at which the 
fluid milk products are usually processed and packaged are temporarily 
unusable because of fire, flood, storm or similar extraordinary 
circumstances completely beyond the non pool plant operator's control;
    (b) Packaged fluid milk products received at a pool plant from a 
non pool plant in return for an equivalent quantity of bulk fluid milk 
products moved from a pool plant for processing and packaging during 
the same month, if the movement of bulk fluid milk products and receipt 
of package fluid milk products occur during an interval in which the 
facilities of the pool plant at which the fluid milk products are 
usually processed and packaged are temporarily unusable because of 
fire, flood, storm, or similar extraordinary circumstances completely 
beyond the pool plant operator's control;
    (c) Milk received at a pool plant in bulk from the dairy farmer who 
produced it, to the extent of the quantity of any packaged fluid milk 
products returned to the dairy farmer, if:
    (1) The dairy farmer is a State or local government that is not 
engaged in the route disposition of any of the returned products, and
    (2) The dairy farmer has by written notice to the compact 
commission and the receiving handler, elected non-producer status for a 
period of not less than 12 months beginning with the month in which the 
election was made and continuing for each subsequent month until 
canceled in writing, and the election is in effect for the current 
month.
    (d) All fluid milk product disposed outside of the regulated area.


Sec. 1301.14  Fluid milk product.

    (a) Except as provided in paragraph (b) of this section fluid milk 
product means any milk products in fluid or frozen form containing less 
than nine percent butterfat, that are in bulk or are packaged, 
distributed and intended to be used as beverages. Such products 
include, but are not limited to: Milk, skim milk, low fat milk, milk 
drinks, buttermilk, and filled milk, including any such beverage 
products that are flavored, culture, modified with added nonfat milk 
solids, sterilized, concentrated (to not more than 50 percent total 
milk solids), or reconstituted.
    (b) The term fluid milk product shall not include:
    (1) Plain or sweetened evaporated milk, plain or sweetened 
evaporated skim milk, sweetened condensed milk or skim milk, formulas 
especially prepared for infant feeding or dietary use that are packaged 
in hermetically sealed containers, any product that contains by weight 
less than 6.5 percent nonfat milk solids, and whey; and
    (2) The quantity of skim milk in any modified product specified in 
paragraph (a) of this section that is in excess of the quantity of skim 
milk in an equal volume of an unmodified product of the same nature and 
butterfat content.


Sec. 1301.15  Fluid cream product.

    Fluid cream product means cream (other than plastic cream or frozen 
cream), including sterilized cream, or a mixture of cream and milk or 
skim milk containing nine percent or more butterfat, with or without 
the addition of other ingredients.


Sec. 1301.16  Filled milk.

    Filled milk means any combination of nonmilk fat (or oil) with 
skimmed milk (whether fresh, cultured, reconstituted, or modified by 
the addition of nonfat milk solids), with or without milk fat, so that 
the product (including stabilizers, emulsifiers, or flavoring) 
resembles milk or any other fluid milk product, and contains less than 
six percent nonmilk fat (or oil).


Sec. 1301.17  Cooperative association.

    Cooperative association means any cooperative marketing association 
of producers which the Secretary of Agriculture of the United States 
determines:
    (a) To be qualified under the provisions of the Act of Congress of 
February 18, 1922, known as the ``Capper-Volstead Act'';
    (b) To have full authority in the sale of milk of its members; and
    (c) To be engaged in making collective sales of, or marketing milk 
or its products for its members.

[[Page 23059]]

Sec. 1301.18  Person.

    Person means individual, partnership, corporation, association, or 
other business unit.


Sec. 1301.19  Route disposition.

    Route disposition means distribution of Class I milk by a handler 
to retail or wholesale outlets, which include vending machines but do 
not include plants or distribution points. The route disposition of a 
handler shall be attributed to the processing and packaging plant from 
which the Class I milk is moved to retail or wholesale outlets without 
intermediate movement to another processing and packaging plant.


Sec. 1301.20  Distributing plant.

    Distributing plant means a processing and packaging plant.


Sec. 1301.21  Supply plant.

    Supply plant means a plant at which facilities are maintained and 
used for washing and sanitizing cans and to which milk is moved from 
dairy farmers' farms in cans and is there accepted, weighed or 
measured, sampled, and cooled, or it is a plant to which milk is moved 
from dairy farmers' farms in tank trucks.


Sec. 1301.22  State dairy regulation.

    State dairy regulation means any state regulation of dairy prices, 
and associated assessments, whether by statute, marketing order or 
otherwise.


Sec. 1301.23  Diverted milk.

    Diverted milk means milk, other than that excluded under 
Sec. 1301.11 from being considered as received from a producer, that 
meets the conditions set forth in paragraph (a) or (b) of this section 
and is not excluded from diverted milk under paragraph (c) of this 
section.
    (a) Milk that a handler in its capacity as the operator of a pool 
plant reports as having been moved from a dairy farmer's farm to the 
pool plant, but which the handler caused to be moved from the farm to 
another plant, if the handler specifically reports such movement to the 
other plant as a movement of diverted milk, and the conditions of 
paragraph (a) (1) or (2) of this section have been met. Milk that is 
diverted milk under this paragraph shall be considered to have been 
received at the pool plant from which it was diverted.
    (1) During any two (2) months subsequent to July of the preceding 
calendar year, or during the current month, on more than half of the 
days on which the handler caused milk to be moved from the dairy 
farmer's farm during the month, all of the milk that the handler caused 
to be moved from that farm was physically received as producer milk at 
the handler's pool plant or at another of the handler's pool plants 
that is not longer operated as a plant.
    (2) During the current month and not more than five (5) other 
months subsequent to July of the preceding calendar year, milk from the 
dairy farmer's farm was received at or diverted from the handler's pool 
plant as producer milk, and during the current month all of the milk 
from that farm that the handler reported as diverted milk was moved 
from the farm in a tank truck in which it was intermingled with milk 
from other farms, the milk from a majority of which farms was diverted 
from the same pool plant in accordance with the preceding provisions of 
this paragraph.
    (b) Milk that a cooperative association in its capacity as a 
handler under Sec. 1301.9(d) caused to be moved from a dairy farmer's 
farm to a partially regulated plant if the association specifically 
reports the movement to such plant as a movement of diverted milk, and 
the conditions of paragraph (b) (1) and (2) of this section have been 
met. Milk that is diverted under this paragraph shall be considered to 
have been received by the cooperative association in its capacity as a 
handler under Sec. 1301.9(d).
    (1) During any two (2) months subsequent to July of the preceding 
calendar year, or during the current month, on more than half of the 
days on which the cooperative association in its capacity as a handler 
under Sec. 1301.9(d) caused milk to be moved from the farm as producer 
milk during the month, all of the milk that the association cause to be 
move from the farm was physically received at a pool plant.
    (2) During the current month and not more than five (5) other 
months subsequent to July of the preceding calendar year, the 
cooperative association in its capacity as a handler under 
Sec. 1301.9(d) caused milk to be moved from the dairy farmer's farm as 
producer milk, and during the current month all of the milk from that 
farm that the cooperative association in its capacity as a handler 
under Sec. 1301.9(d) reported as diverted milk was moved from the farm 
in a tank truck in which it was intermingled with milk from other 
farms, the milk from a majority of which farms was diverted by the 
association in accordance with the preceding provisions of this 
paragraph.
    (c) Milk moved, as described in paragraphs (a) and (b) of this 
section, from dairy farmer's farms to partially regulated plants in 
excess of 35 percent in the months of September through November and 45 
percent in other months, of the total quantity of producer milk 
received (including diversions) by the handler during the month shall 
not be diverted milk. Such milk, and any other milk reported as 
diverted milk that fails to meet the requirements set forth in this 
section, shall be considered as having been moved directly from the 
diary farmers' farms to the plant of physical receipt, and if that 
plant is a nonpool plant the milk shall be excluded from producer milk.

PART 1303--HANDLERS REPORTS

Sec.
1303.1  Reports of receipts and utilization.
1303.2  Other reports of receipts and utilization.
1303.3  Reports regarding individual producers and dairy farmers.
1303.4  Notices to producers.

    Authority: 7 U.S.C. 7256.


Sec. 1303.1  Reports of receipts and utilization.

    On or before the eighth day after the end of each month, each 
handler shall report for such month to the compact commission, in the 
detail and on the forms prescribed by the compact commission as 
follows:
    (a) Each handler, with respect to each of the handler's pool plants 
shall report the quantities of fluid milk products contained in or 
represented by:
    (1) Receipts of producer milk (including the specific quantities of 
diverted milk and receipts from the handler's own production);
    (2) Receipts of milk from cooperative association in their capacity 
as handlers under Sec. 1301.9(d);
    (3) Receipts of fluid milk products from other pool plants;
    (4) Receipts of fluid milk products from partially regulated 
plants;
    (5) Inventories at the beginning and end of the month of fluid milk 
products;
    (6) All Class I utilization or disposition of milk, filled milk, 
and milk products required to be reported pursuant to this paragraph.
    (b) Each handler operating a partially regulated plant shall report 
with respect to such plant in the same manner as prescribed for reports 
required by paragraph (a) of this section. Receipts of milk that would 
have been producer milk if the plant had been fully regulated shall be 
reported in lieu of producer milk.
    (c) Each handler described in Sec. 1301.9(d) shall report:
    (1) The quantities of all fluid milk product contained in receipts 
of milk from producers; and

[[Page 23060]]

    (2) The utilization or disposition of all such receipts.
    (d) Each handler shall report bulk milk received at a handler's 
pool plant from a cooperative association in its capacity as the 
operator of a pool plant or as a handler under Sec. 1301.9(d), if such 
milk was rejected by the handler subsequent to such handler's receipt 
of the milk on the basis that it was not of marketable quality at the 
time the milk was delivered to the handler's plant, and such milk was 
removed from the plant in bulk form by the cooperative association and 
was replaced in the other milk from the association. Except for 
purposes of this paragraph and Sec. 1303.2(a), such milk that was so 
removed from the handler's plant shall be treated for all other 
purposes of the pricing regulation as though it had not been delivered 
to and received at the handler's plant.
    (e) Each handler not specified in paragraphs (a) through (c) of 
this section shall report with respect to the handler's receipts and 
utilization of milk, filled milk, and milk products in such manner as 
the compact commission may prescribe.
    (f) Any handler who operates a pool plant which has no Class I 
disposition and receives no milk from producers is exempted from 
reporting to the compact commission under this section.


Sec. 1303.2  Other reports of receipts and utilization.

    (a) Each handler who intends to have a receipt of unmarketable milk 
replaced with the other milk in the manner described under Sec. 1303.1 
shall give the compact commission, at the request and in accordance 
with instructions of the compact commission, advance notice of the 
handler's intention to have such milk replaced.
    (b) In addition to the reports required pursuant to paragraph (a) 
of this section and Sec. 1303.1 and Sec. 1303.3 each handler shall 
report such other information as the compact commission deems necessary 
to verify or establish such handler's oblitation under the order.


Sec. 1303.3  Reports regarding individual producers and dairy farmers.

    (a) Each handler shall report on or before the 15th day after the 
end of each month the information required by the compact commission 
with respect to producer additions, producer withdrawals, changes in 
farm locations, and changes in the name of farm operators.
    (b) Each handler that is not a cooperative association, upon 
request from any such association, shall furnish it with information 
with respect to each of its producer members from whose farm the 
handler begins, resumes, or stops receiving milk at his pool plant. 
Such information shall include the applicable date, the producer-
member's post office address and farm location, and, if known, the 
plant at which his milk was previously received, or the reason for the 
handler's failure to continue receiving milk from his farm. In lieu of 
providing the information directly to the association, the handler may 
authorize the compact commission to furnish the association with such 
information, derived from the handler's reports and records.
    (c) Each handler shall submit to the compact commission within ten 
(10) days after their request made not earlier than twenty (20) days 
after the end of the month, his producer payroll for the month, which 
shall show for each producer:
    (1) The daily and total pounds of milk delivered and its average 
butterfat test; and
    (2) The net amount of the handler's payments to the producer, with 
the prices, deductions, and charges involved.


Sec. 1303.4  Notices to producers.

    Each handler shall furnish each producer from whom he receives milk 
the following information regarding the weight and butterfat test of 
the milk:
    (a) Whenever he receives milk from the producer on the basis of 
farm bulk tank measurements, the handler shall give the producer at the 
time the milk is picked up at the farm a receipt indicating the 
measurement and the equivalent pounds of milk received;
    (b) Whenever he receives milk from the producer on a basis other 
than farm bulk tank measurements, the handler shall give the producer 
within three (3) days after receipt of the milk a written notice of the 
quantity so received;
    (c) If butterfat tests of the producer's milk are determined from 
fresh milk samples, the handler shall give the producer within ten (10) 
days after the end of each month a written notice of the producer's 
average butterfat test for the month. Such notice shall not be required 
if the handler has given the producer a written notice of the butterfat 
test for each of the sampling periods within the month; and
    (d) If butterfat tests of the producer's milk are determined from 
composite milk samples, the handler shall give the producer within 
seven (7) days after the end of each sampling period a written notice 
of the producer's average butterfat test for the period.

PART 1304--CLASSIFICAITON OF MILK

Sec.
1304.1  Classification of milk.
1304.2  Classification of transfers and diversions.
1304.3  General classification rules.
1304.4  Classification of producer milk at a pool plant.
1304.5  Classification of milk at a partially regulated plant.

    Authority: 7 U.S.C. 7256.


Sec. 1304.1  Classification of milk

    All fluid milk products required to be reported by a handler 
pursuant to this section shall be classified as follows:
    (a) Class I milk shall be all fluid milk products disposed of in 
the regulated area, and in packaged inventory of fluid milk products at 
the end of the month, except as otherwise provided in paragraphs (b), 
(c), and (d) of this section;
    (b) Fluid Milk Products:
    (1) Disposed of in the form of a fluid cream product or any product 
containing artificial fat, fat substitutes, or six percent or more 
nonmilk fat (or oil) that resembles a fluid cream product, except as 
otherwise provided in paragraph (c) of this section;
    (2) In packaged inventory at the end of the month of the products 
specified in paragraph (b)(1) of this section and in bulk concentrated 
fluid milk products in inventory at the end of the month;
    (3) In bulk fluid milk products and bulk fluid cream products 
disposed of or diverted to a commercial food processor if the compact 
commission is permitted to audit the records of the commercial food 
processing establishment for the purpose of verification. Otherwise, 
such uses shall be Class I;
    (4) Used to produce:
    (i) Cottage cheese, lowfat cottage cheese, dry curd cottage cheese, 
ricotta cheese, pot cheese, Creole cheese, and any similar soft, high 
moisture cheese resembling cottage cheese in form or use;
    (ii) Milkshake and ice milk mixes (or bases), frozen desserts, and 
frozen dessert mixes distributed in one-quart containers or larger and 
intended to be used in soft or semi-solid form:
    (iii) Aerated cream, frozen cream, sour cream and sour half-and-
half, sour cream mixtures containing nonmilk items, yogurt and any 
other semi-solid product;
    (iv) Eggnog, custards, puddings, pancake mixes, buttermilk biscuit 
mixes, coatings, batter and similar products;
    (v) Formulas especially prepared for infant feeding or dietary use 
(meal

[[Page 23061]]

replacement) that are packaged in hermetically sealed containers;
    (vi) Candy, soup, bakery products and other prepared foods which 
are processed for general distribution to the public, and intermediate 
products, including sweetened condensed milk, to be used in processing 
such prepared food products; and
    (vii) Any product not otherwise specified in this section.
    (c) All fluid milk products:
    (1) Used to produce:
    (i) Cream cheese and other spreadable cheeses, and hard cheeses of 
types that may be shredded, grated, or crumbled, and are not included 
in paragraph (b)(4)(i) of this section;
    (ii) Butter, plastic cream, anhydrous milkfat and butteroil;
    (iii) Any milk product in dry form, except nonfat dry milk;
    (iv) Evaporated or sweetened condensed milk in a consumer-type 
package and evaporated or sweetened condensed skim milk in a consumer-
type package; and
    (2) In inventory at the end of the month of unconcentrated fluid 
milk products in bulk form and products in bulk form and products 
specified in paragraph (b)(1) of this section in bulk form;
    (3) In fluid milk products, products specified in paragraph (b)(1) 
of this section, and products processed by the disposing handler that 
are specified in paragraphs (b)(4) (i)-(iv) of this section, that are 
disposed of by a handler for animal feed;
    (4) In fluid milk products, products specified in paragraph (b)(1) 
of this section, and products processed by the disposing handler that 
are specified in paragraphs (v)(4) (i)-(iv) of this section, that are 
dumped by a handler. The compact commission may require notification by 
the handler of such dumping in advance for the purpose of having the 
opportunity to verify such disposition. In any case, classification 
under this paragraph requires a handler to maintain adequate records of 
such use, if advance notification of such dumping is not possible, or 
if the compact commission so requires, the handler must notify the 
compact commission on the next business day following such use;
    (5) In fluid milk products and products specified in paragraph 
(b)(1) of this section that are destroyed or lost by a handler in a 
vehicular accident, flood, fire, or in a similar occurrence beyond the 
handler's control, to the extent that the quantities destroyed or lost 
can be verified from records satisfactory to the compact commission.
    (6) In skim milk in any modified fluid milk product or in any 
product specified in paragraph (b)(1) of this section that is in excess 
of the quantity of skim milk in such product that was included within 
the fluid milk product definition pursuant to Sec. 1301.14 and the 
fluid cream product definition pursuant to Sec. 1301.15.
    (d) All fluid milk products used to produce nonfat dry milk.


Sec. 1304.2  Classification of transfers and diversions

    (a) Transfers and diversions to pool plants. Fluid milk products 
transferred or diverted from a pool plant to another pool plant or 
partially regulated plant shall be classified as Class I milk unless 
the operators of both plants request not to classify it Class I. In 
either case, the classification of such transfer or diversion shall be 
subject to the following conditions: The fluid milk products classified 
in Class I shall be limited to the amount of fluid milk products, 
respectively, remaining in Class I at the transferee-plant or diverted-
plant.
    (b) Transfers and diversions to producers-handlers. Fluid milk 
products transferred or diverted from a pool plant to a producer-
handler shall be classified as Class I.


Sec. 1304.3  General classification rules.

    In determining the classification of producer milk pursuant to 
Sec. 1304.4, the following rules shall apply:
    (a) Each month the compact commission shall correct for 
mathematical and other obvious errors all reports filed pursuant to 
Sec. 1303.1 and shall compute separately for each pool plant and for 
each cooperative association with respect to milk for which it is the 
handler pursuant to Sec. 1301.9(d) the pounds of skim milk and 
butterfat, respectively, in Class I in accordance with Sec. 1304.1 and 
Sec. 1304.2;
    (b) The classification of producer milk for which a cooperative 
association is the handler pursuant to Sec. 1301.9(d) shall be 
determined separately from the operations of any pool plant operated by 
such cooperative; and
    (c) If receipts from more than one pool plant are to be assigned, 
the receipts shall be assigned in sequence according to the zone 
locations of the plants, beginning with the plant in the lowest-
numbered zone for assignments to Class I milk.


Sec. 1304.4  Classification of producer milk at a pool plant.

    For each month the compact commission shall determine the 
classification of producer milk of each handler described in 
Sec. 1301.9(a) for each of the handler's pool plants separately and of 
each handler described in Sec. 1301.9(d) by allocating the handler's 
receipts of fluid milk products to the handler's utilization pursuant 
to paragraphs (a) and (b) of this section.
    (a) Fluid milk products shall be allocated in the following manner:
    (1) Subtract from the total pounds of fluid milk products in Class 
I the pounds of fluid milk products in:
    (i) Beginning inventory packaged fluid milk products;
    (ii) Receipts of Class I fluid milk products from other pool plants 
and partially regulated plants;
    (iii) Disposition of Class I fluid milk products outside of the 
regulated area;
    (iv) Receipts of exempt fluid milk products pursuant to 
Sec. 1301.13 (a), (b), and (c).
    (b) The quantity of producer milk in Class I shall be the combined 
pounds of fluid milk product remaining in Class I.


Sec. 1304.5  Classification of producer milk at a partially regulated 
plant.

    For each month the compact commission shall determine the 
classification of producer milk of each handler described in 
Sec. 1301.9(b) for each of the handler's partially regulated plants 
separately by allocating the handler's receipts of fluid milk products 
to the handler's utilization pursuant to paragraphs (a) through (c) of 
this section.
    (a) Fluid milk products shall be allocated in the following manner. 
Subtract from the total pounds of fluid milk product in Class I the 
pounds of fluid milk products in:
    (1) Beginning inventory packaged fluid milk products;
    (2) Receipts of Class I fluid milk products from other pool plants 
and partially regulated plants;
    (3) Disposition of Class I fluid milk products outside of the 
regulated area;
    (4) Receipts of exempt fluid milk product pursuant to Sec. 1301.13 
(a), (b), and (c).
    (b) The quantity of producer milk in Class I shall be the combined 
pounds of fluid milk product remaining in Class I, not to exceed the 
total pounds of fluid milk products disposed of in the regulated area.
    (c) Producer milk will be allocated pursuant to paragraph (b) of 
this section in the following manner:
    (1) Receipts from producers located in the regulated area;
    (2) Receipts of diverted pool milk;
    (3) Receipts from producers not located in the regulated area shall 
then be assigned to any remaining Class I in the regulated area.

[[Page 23062]]

PART 1305--CLASS PRICE

Sec.
1305.1  Compact over-order class I price and compact over-order 
obligation.
1305.2  Announcement of compact over-order class I price and compact 
over-order obligation.
1305.3  Equivalent price.

    Authority: 7 U.S.C. 7256.


Sec. 1305.1  Compact over-order class I price and compact over-order 
obligation.

    The compact over-order Class I price per hundredweight of milk 
shall be as follows:
    (a) The Class I price shall be announced pursuant to Sec. 1305.2.
    (b) The compact over-order obligation shall be computed as follows:
    (1) The compact Class I price;
    (2) Deduct Federal Order #1, Zone 1 price;
    (3) The remainder shall be the compact over-order obligation.


Sec. 1305.2  Announcement of compact over-order class I price and 
compact over-order obligation.

    The compact commission shall announce publicly on or before the 5th 
day of each month the Class I over-order price and the compact over-
order obligation for the following month.


Sec. 1305.3  Equivalent price.

    If, for any reason, a price specified in this part for use in 
computing class prices or for other purposes is not reported or 
published in the manner described in this part, the compact commission 
shall use one determined by the commission to be equivalent to the 
price that is specified.

PART 1306--COMPACT OVER-ORDER PRODUCER PRICE

Sec.
1306.1  Handler's value of milk for computing basic over-order 
producer price.
1306.2  Partially regulated plant operator's value of milk for 
computing basic over-order producer price.
1306.3  Computation of basic over-order producer price.
1306.4  Announcement of basic over-order producer price.

    Authority: 7 U.S.C. 7256.


Sec. 1306.1  Handler's value of milk for computing basic over-order 
producer price.

    For the purpose of computing the basic over-order producer price, 
the compact commission shall determine for each month the value of milk 
of each handler with respect to each of the handler's pool plants and 
of each handler described in Sec. 1301.9(d) with respect to milk that 
was not received at a pool plant, as directed in this section: Multiply 
the pounds of Class I fluid milk products as determined pursuant to 
Sec. 1304.1(a) by the compact over-order obligation.


Sec. 1306.2  Partially regulated plant operator's value of milk for 
computing basis over-order producer price.

    For the purpose of computing the basic over-order producer price, 
the compact commission shall determine for each month the value of milk 
disposition in the regulated area by the operator of a partially 
regulated plant, as follows: Multiply the pounds of Class I fluid milk 
products as determined pursuant to Sec. 1304.1(a) by the compact over-
order obligation.


Sec. 1306.3  Computation of basic over-order producer price.

    The compact commission shall compute the basic over-order producer 
price per hundredweight applicable to milk received at plants as 
follows:
    (a) Combine into one total the values computed pursuant to 
Sec. 1306.1 and Sec. 1306.2 for all handlers from whom the compact 
commission has received at the compact commission's office prior to the 
9th day after the end of the month the reports for the month prescribed 
in Sec. 1303.1 and the payments for the preceding month required under 
Sec. 1307.3(a).
    (b) Add an amount equal to not less than one-half of the 
unobligated balance of the producer-settlement fund at the close of 
business on the 8th day after the end of the month;
    (c) Divide the resulting amount by the sum of the following for all 
handlers included in these computations:
    (1) The total hundredweight of producer milk;
    (2) The total hundredweight for which a value is computed pursuant 
to Sec. 1306.2 (a); and (d) Subtract not less than four (4) cents nor 
more than five (5) cents for the purpose of retaining a cash balance in 
the producer-settlement fund. The result shall be the basic over-order 
producer price for the month.


Sec. 1306.4  Announcement of basic over-order producer price.

    The compact commission shall announce publicly on or before: The 
13th day after the end of each month the over-order producer price 
resulting from the adjustment of the basic over-order producer price 
for such month, as computed under Sec. 1306.3.

PART 1307--PAYMENTS FOR MILK

Sec.
1307.1  Producer-settlement fund.
1307.2  Handler's producer-settlement fund debits and credits.
1307.3  Payments to and from the producer-settlement fund.
1307.4  Payments to producers.
1307.5  [Reserved]
1307.6  Statements to producers.
1307.7  Adjustment of accounts.
1307.8  charges on overdue accounts.

    Authority: 7 U.S.C. 7256.


Sec. 1307.1  Producer-settlement fund.

    (a) The compact commission shall establish and maintain a separate 
fund known as the producer-settlement fund. They shall deposit into the 
fund all amounts received from handlers under Sec. 1307.3, Sec. 1307.7, 
and Sec. 1307.8 and the amount subtracted under Sec. 1306.3(d). They 
shall pay from the fund all amounts due handlers under Sec. 1307.3, 
Sec. 1307.7, and Sec. 1307.8 and the amount added under Sec. 1306.3(b) 
subject to their right to offset any amounts due from the handler under 
these sections and under Sec. 1308.1
    (b) All amounts subtracted under Sec. 1306.3(d), including interest 
earned thereon, shall remain in the producer-settlement fund as an 
obligated balance until it is withdrawn for the purpose of effectuating 
Sec. 1306.3(b).
    (c) The compact commission shall place all monies subtracted under 
Sec. 1306.3(d) in an interest-bearing bank account or accounts in a 
bank or banks duly approved as a Federal depository for such monies, or 
invest them in short-term U.S. Government securities.


Sec. 1307.2  Handlers' producer-settlement fund debits and credits.

    On or before the 15th day after the end of the month, the compact 
commission shall render a statement to each handler showing the amount 
of the handler's producer-settlement fund debit or credit, as 
calculated in this section.
    (a) The producer-settlement fund debit for each plant and each 
cooperative association in its capacity as a handler under 
Sec. 1301.9(d) shall be the value computed pursuant to Sec. 1306.1 and 
Sec. 1306.2.
    (b) The producer-settlement fund credit for each plant and each 
cooperative association in its capacity as a handler under 
Sec. 1310.9(d) shall be computed as specified in this paragraph.
    (1) Multiply the quantities of producer milk that were allocated to 
Class I pursuant to Sec. 1304.4 and the quantities of route disposition 
in the marketing area by partially regulated plants for which a value 
was determined pursuant to Sec. 1306.2(a) by the basic over-order 
producer price computed under Sec. 1306.3.
    (2) For any cooperative association in its capacity as a handler 
under Sec. 1301.9(d), multiply the quantities of

[[Page 23063]]

milk moved to each pool plant by the basic over-order blended price 
computed under Sec. 1306.3; and to the result add the value determined 
under Sec. 1306.1.
    (c) The producer-settlement fund debit or credit of any handler 
shall be the net of the producer-settlement fund debits and credits as 
computed for all of its operations under paragraph (a) and (b) of this 
section.


Sec. 1307.3  Payments to and from the producer-settlement fund.

    (a) On or before the 18th day after the end of the month, each 
handler shall pay to the compact commission the handler's producer-
settlement fund debit for the month as determined under Sec. 1307.2(a).
    (b) On or before the 20th day after the end of the month, the 
compact commission shall pay to each handler the handler's producer-
settlement fund credit for the month as determined under 
Sec. 1307.2(b). If the unobligated balance in the producer-settlement 
fund is insufficient to make such payments, the compact commission 
shall reduce uniformly such payments and shall complete them as soon as 
the funds are available.


Sec. 1307.4  Payments to producers.

    (a) On or before the 20th day after the end of the month, each 
handler shall make payment to each producer for the milk received from 
him during the month at not less than the basic over-order producer 
price per hundredweight computer under Sec. 1306.3. If the handler has 
not received full payment for the compact commission under 
Sec. 1307.3(b) by the date payments are due under this paragraph, he 
may reduce pro rata his payments to producers by an amount not to 
exceed such underpayment. Such payments shall be completed after 
receipt of the balance due from the compact commission by the next 
following date for making payments under this paragraph.
    (b) If the handler's net payment to a producer is for an amount 
less than the total amount due the producer under this section, the 
burden shall rest upon the handler to prove to the compact commission 
that each deduction from the total amount due is properly authorized 
and properly chargeable to the producer.
    (c) In making payment to producers under paragraph (b) of this 
section for milk diverted from a pool plant the handler may elect to 
pay such producers at the price of the plant from which the milk was 
diverted, if the resulting net payment to each producer is not less 
than the otherwise required under this section and the rate of payment 
and the deduction shown on the statement required to be furnished under 
Sec. 1307.6 are those used in computing the payment.
    (d) If a handler claims that the required payment cannot be made 
because the producer is deceased or cannot be located, such payment 
shall be made to the producer-settlement fund, and in the event that 
the handler subsequently locates and pays the producer or a lawful 
claimant, or in the event that the handler no longer exists and a 
lawful claim is later established, the compact commission shall make 
such payment from the producer-settlement fund to the handler or to the 
lawful claimant, as the case may be.
    (e) If not later than the date when such payment is required to be 
made, legal proceedings have been instituted by the handler for the 
purpose of administrative or judicial review of the compact commission 
findings upon verification as provided above such payment shall be made 
to the producer-settlement fund and shall be held in reserve until such 
time as the above-mentioned proceedings have been completed or until 
the handler submits proof to the compact commission that the required 
payment has been made to the producer in which latter event the payment 
shall be refunded to the handler.
    (f) At a partially regulated plant each handler shall make 
payments, on a pro rata basis, to all producers and dairy farmers for 
milk received from them during the month, the payment received pursuant 
to Sec. 1307.3(b).


Sec. 1307.5  [Reserved]


Sec. 1307.6  Statements to producers.

    In making the payments to producers required under Sec. 1307.4, 
each handler and each cooperative shall furnish each producer, in 
addition to the information required under Federal and State 
regulations, a supporting statement, in such form acceptable to the 
commission, which shall show: The rate and amount of the compact over-
order producer price.


Sec. 1307.7  Adjustment of accounts.

    (a) Whenever the compact commission verification of a handler's 
reports or payments discloses an error in payments to or from the 
compact commission under Sec. 1307.3 or Sec. 1308.1, the compact 
commission shall promptly issue to the handler a charge bill or a 
credit, as the case may be, for the amount of the error. Adjustment 
charge bills issued during the period beginning with the 10th day of 
the prior month and ending with the 9th day of the current month shall 
be payable by the handler to the market administrator on or before the 
18th day of the current month. Adjustment credits issued during that 
period shall be payable by the compact commission to the handler on or 
before the 20th day of the current month.
    (b) whenever the compact commission's verification of a handler's 
payments discloses payment to a producer or a cooperative association 
of an amount less than is required by Sec. 1307.4, the handler shall 
make payment of the balance due the producer not later than the 20th 
day after the end of the month in which the handler is notified of the 
deficiency.


Sec. 1307.8  Charges on overdue accounts.

    Any producer-settlement fund account balance due from or to a 
handler under Sec. 1307.3, Sec. 1307.7 or Sec. 1307.8 for which 
remittance has not been received in or paid from the compact commission 
office by close of business on the 18th day of any month, shall be 
increased one percent effective the following day.

PART 1308--ADMINISTRATIVE ASSESSMENT

    Authority: 7 U.S.C. 7256


Sec. 1308.1  Assessment for pricing regulations administration.

    On or before the 18th day after the end of the month, each handler 
shall pay to the compact commission his pro rata share of the expense 
of administration of this pricing regulation. The payment shall be at 
the rate of .032 cents per hundredweight. The payment shall apply to:
    (a) The quantity of fluid milk products disposed in the regulated 
area from a pool plant for which a value is determined under 
Sec. 1306.1;
    (b) All receipts and beginning inventory of a cooperative 
association in its capacity as handler under Sec. 1301.9(d) for the 
month less its ending inventory for the month; and
    (c) The quantity distributed as route disposition in the regulated 
area from a partially regulated plant for which a value is determined 
under Sec. 1306.2.
Daniel Smith,
Executive Director.
[FR Doc. 97-10831 Filed 4-25-97; 8:45 am]
BILLING CODE 1650-01-M