Federal Register, Volume 62 Issue 227 (Tuesday, November 25, 1997)

[Federal Register Volume 62, Number 227 (Tuesday, November 25, 1997)]
[Rules and Regulations]
[Pages 62810-62827]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-30602]

[[Page 62809]]

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Part III

Northeast Dairy Compact Commission

_______________________________________________________________________

7 CFR Ch. XIII

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Compact Over-Order Price Regulation and Results of Producer Referendum;
Final Rules

Federal Register / Vol. 62, No. 227 / Tuesday, November 25, 1997 /
Rules and Regulations

[[Page 62810]]

NORTHEAST DAIRY COMPACT COMMISSION

7 CFR Parts 1301, 1304, 1305, 1306 and 1307

Compact Over-Order Price Regulation

AGENCY: Northeast Dairy Compact Commission.

ACTION: Final rule.

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SUMMARY: This rule extends the present compact over-order price
regulation (``price regulation'') for all Class I, fluid milk route
distributions in the territorial region of the six New England states
beyond its present expiration date of December 31, 1997. The rule
extends the price regulation for the period January 1, 1998 through
termination of the Compact enabling legislation.¹ The
regulation is established in the combined, Federal Milk Market Order #1
and compact over-order, amount of $16.94 (Zone 1).
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\1\ 7 U.S.C. 7256(3) ``Consent for the Northeast Interstate
Dairy Compact shall terminate concurrent with the Secretary's
implementation of the dairy pricing and Federal milk marketing order
consolidation and reforms under section 7203 of this title.''
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In so extending the price regulation, the Northeast Dairy Compact
Commission (``Compact Commission'') reaffirms and again bases the
decision on its findings that such price regulation is necessary to
assure the viability of dairy farming in New England, that it is
necessary to assure the region's consumers of a continued, adequate,
local supply of fresh and wholesome milk, reasonably priced, and that
it is otherwise in the public interest. The Compact Commission also
establishes the price regulation based on the finding that the
regulation has been approved by producer referendum pursuant to Article
V, section 13 of the Northeast Interstate Dairy Compact. Notice of
approval by referendum is published separately in this Federal
Register.
This rule also establishes a Task Force under Article VII. D. of
the Compact Commission's Bylaws to determine whether it is appropriate
to provide similar reimbursement to the region's School Lunch Programs,
established under the National School Lunch Act of 1946 and the Child
Nutrition Act of 1966 for any adverse financial impact. The Task Force
is to report back on its assessment of whether it is appropriate to
reimburse the programs and, if so, to recommend a procedure for
reimbursement to the Compact Commission at its regularly scheduled
meeting for February, 1998.
Finally, the price regulation extends the administrative assessment
of 3.2 cents per hundredweight of milk on all route dispositions of
Class I, fluid milk in the territorial region of the six New England
states. It is noted that the additional, start-up assessment of
approximately 1.3 cents per hundredweight presently imposed will expire
with final payment in December, 1997.

EFFECTIVE DATE: January 1, 1998.

ADDRESSES: Northeast Dairy Compact Commission, 43 State Street, P.O.
Box 1058, Montpelier, VT 05601.

FOR FURTHER INFORMATION CONTACT: Daniel Smith, Executive Director,
Northeast Dairy Compact Commission at the above address or by telephone
at (802) 229-1941 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--Public Law 93-320; Maine--Public Law 89-437, as
amended, Public Law 93-274; Massachusetts--Public Law 93-370; New
Hampshire--Public Law 93-336; Rhode Island--Public Law 93-106;
Vermont--Public Law 89-95, as amended, 93-57. Consistent with Article
I, Section 10 of the United States Constitution, Congress consented to
the Compact in Public Law 104-127 (FAIR ACT), Section 147, codified at
7 U.S.C. 7256. Subsequently, the United States Secretary of
Agriculture, pursuant to 7 U.S.C. 7256(1), authorized implementation of
the Compact.
Section 8 of the Compact empowers the Compact Commission to engage
in a broad range of activities designed to ``promote regulatory
uniformity, simplicity and interstate cooperation.'' For example, the
Compact authorizes the Compact Commission to engage in a range of
inquiries into the existing milk programs of both the participating
states and the federal milk marketing system, to make recommendations
to participating states, and to work to improve industry relations as a
whole. See Compact, Art. IV, section 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, section 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, section 2(8).
The regulated price authorized by the Compact is actually an
incremental amount above, or ``over-order'' the minimum price for the
same milk established by Federal Milk Market Order #1. The price
regulation establishes the minimum procurement price to be paid by
fluid milk processors for milk that is ultimately utilized for fluid
milk consumption in the New England region.² Price
regulation also provides for payment of a uniform ``over-order'' price,
out of the proceeds of the price regulation, to all dairy farmers
making up the New England milkshed regardless of the utilization of
their milk.³ See Compact, Art. IV, section 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.''.)
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\2\ 7 CFR 1305.2.
\3\ 7 CFR 1307.4.
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Section 11 of the Compact delineates the administrative procedure
the Compact Commission must follow in deciding whether to adopt a 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. 553). In
addition, the commission shall, to the extent 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 hearing. 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.

Section 12(a) of the Compact directs the Commission to make four
findings of fact before an over-order price

[[Page 62811]]

regulation can become effective. Specifically, 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 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.⁴
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\4\ The Commission limited its assessment to issues relating to
the fluid milk market, given the limitations on its authority to
regulate the price of milk used for manufacturing purposes. See
Compact, Section 9(a); see also 7 U.S.C. 7256(2).
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(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. Section 12.
Pursuant to Section 11 of the Compact, the Compact Commission
initiated a rulemaking procedure in December, 1996.⁵ The
rulemaking culminated on May 30, 1997 with the issuance of a final rule
establishing a compact over-order price regulation for the period July
1-December 31, 1997.⁶
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\5\ The Commission issued a notice of Hearing on December 13,
1996 at 61 FR 65604 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. 62
FR 12252. This comment period closed on March 31, 1997; the reply
comment period closed April 9, 1997. Based on the testimony and
comment received, the Compact Commission issued a proposed rule on
April 28, 1997 to adopt price regulation. 62 FR 23032. As part of
the proposed rule, the Commission published for comment technical
regulations to be codified at 7 CFR Section 1300, et seq. Minor
corrections to the proposed rule were published on May 8, 1997, 62
FR 25140, to provide clarification and to correct errors. The
Compact Commission received additional comment in response to the
proposed rule issued April 28, 1997.
\6\ 62 FR 29626 (May 30, 1997).
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On September 8, 1997, the Compact Commission issued notice of
proposed rulemaking to consider whether to extend the price regulation
beyond the present December 31, 1997 expiration date.⁷ The
technical provisions of the price regulation established by final rule
of May 30, 1997 and as codified at 7 CFR Chapter 1300, and the summary
and analysis of the rule, were issued as a proposed rule in the
September 8, 1997 notice of rulemaking, with the further proposals that
the regulation be extended for one year and that it be amended
generally. Pursuant to Compact, Art. IV, Section 11, the Compact
Commission held a public hearing on September 24, 1997 on the proposed
rule, and accepted written comment pursuant to its bylaws until October
8, 1997.
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\7\ 62 FR 47156 (September 8, 1997).
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Based on the oral and written comment received, and upon the
reasoning set forth in its previous proposed and final rules, the
Compact Commission hereby extends the present price regulation for the
period January 1, 1998 through termination of the Compact enabling
legislation. As explained below, the amount of the price regulation
remains unchanged at $16.94. As also explained below, the technical
regulation, as codified at 7 CFR Chapter 13 [Secs. 1301.11(b),
1304.5(a), 1305.1, 1306.1, 1306.2, 1306.3(b) through (f), 1307.1,
1307.2, and 1307.4(f)], is amended in certain instances.
Immediately following is a summary analysis and response to the
comment received during the present rulemaking procedure. A more
detailed review and response follows, organized around the finding
analysis required by Section 12 of the Compact. This analysis also
summarizes and incorporates the relevant reasoning developed in the
previous rulemaking. The analysis also identifies and describes any
amendments to the price regulation made as part of this final rule.

I. Summary Analysis of Comments Received in Response to the Proposed
Rule and Compact Commission's Response

Oral and written comment received in the September 24, 1997 hearing
and additional written comments received by the Compact Commission's
published deadline of October 8, 1997 were duly considered by the
Compact Commission. The Compact Commission met on October 23, 1997 to
consider and act on the comment received. Public notice of this meeting
was published on October 16, 1997 in the Federal Register. 62 FR 53769.
Eighty-nine separate comments were received during the hearing and
written comment period. Of the total commenters, five expressed
opposition to the regulation's extension and eighty-four expressed
support for its extension.
The five commenters expressing opposition to the regulation's
extension include an economist for Public Voice for Food and Health
Policy, a public interest group based in Washington, DC, and four
representatives of Massachusetts ACORN, a low income community advocacy
group in Dorchester, MA. These commenters expressed concern primarily
with the regulation's impact on low income consumers in the New England
region.
The Compact Commission recognizes and acknowledges the concerns
raised by these opposing commenters. As explained in greater detail in
the subsequent analysis, one of the central reasons the Compact
Commission adopted its initial regulation for the limited period of six
months on May 30, 1997 was to ensure close monitoring of the
regulation's impact on consumers, including low income consumers. See
62 FR 29638. This careful scrutiny is derived from the finding analysis
and inquiry into the public interest in milk price regulation which the
Compact Commission must make under the Compact, and which is concerned
with, among other issues, the impact of price regulation upon
consumers, including low income consumers.
While accentuating the need for continued, careful scrutiny, the
commenters have not established that the price regulation is causing
such anomalous market distortions of the retail market as to justify
elimination of price regulation. When viewed in the context of, and
balanced with, the comments presented in support of continuing the
regulation, along with the reasoning derived from the prior rulemaking,
the Compact Commission concludes the interests of consumers in a stable
milk supply and, ultimately, stabilized prices, will continue to be
served by extending the price regulation.
Fifty-four of the eighty-four commenters expressing support for
extension of the regulation were dairy farmers. Other commenters
expressing support for extension include representatives of dairy
farmer cooperatives, farm credit agencies, banks, dairy processors,
dairy feed and fertilizer suppliers, Farm Bureaus, farm machinery
dealers, New England state WIC Programs, New England state Departments
of Agriculture, a state legislator, a large animal veterinarian, and a
consumer.
These commenters, farmers and others alike, expressed support for
extending the regulation for periods of varying duration. The broad
majority supported extension through the termination of the Compact
Commission's authority to establish an over-order price regulation
under the Congressional Consent to the Compact.⁸ The
supporting comment also was mixed with regard to whether the amount of
the over-order price should be kept at the same rate or increased, and,
if increased, at what rate. Most of

[[Page 62812]]

the comment supported an increase reflecting the increase in the
Consumer Price Index. Finally, a number of the commenters recommended
certain amendments to the technical codified price regulation.
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\8\ 7 U.S.C. 7256(3).
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In view of these amendments suggested by the commenters, the
Compact Commission notes that, in addition to allowing for close review
of the regulation's impact on the retail market, the limited, six month
duration of the initial price regulation was also established to ensure
close scrutiny of the regulation's impact on the overall fluid milk
marketplace. As with review of the impact on the retail market, this
overall assessment is necessary to determine whether the price
regulation has caused such market distortions as to require its
discontinuation, or whether its extension will continue to serve the
public interest.
As explained in detail below, the Compact Commission concludes from
this rulemaking process that the public interest is best served by the
regulation's extension from January 1, 1998 through termination of the
Compact enabling legislation. Accounting for the concerns of the
commenters, the Compact Commission concludes the public interest,
including those of low income consumers, will be better served by
extending the price regulation so as to establish stable prices across
the wholesale and retail markets in New England for the continuous
period July 1, 1997 through termination of the Compact enabling
legislation. The Commission concludes that close scrutiny of the
regulation's impact must continue and, accordingly, schedules
subsequent rulemaking with review of all relevant issues to be
commenced, pursuant to Section 11 of the Compact, no later than July 1,
1998.
The comments received, with regard to the significant concerns and
relative positions on the critical issues invoked by the finding
analysis mandated by Section 12(a) of the Compact, are now addressed in
detail.

II. Summary and Further Explanation of Findings Regarding Adoption of
Over-order Price

As noted above, Section 12(a) of the Compact directs the Commission
to make four findings of fact before an over-order price regulation can
become effective. The issues relating to the first three topics
(excluding the referendum procedure) were exhaustively reviewed in the
Compact Commission's initial proposed rule. The Compact Commission's
findings on these topics, based on that analysis, were reaffirmed with
further discussion in the subsequently adopted final rule on May 30,
1997, which rule served as the proposed rule in the present rulemaking
process. The analysis of these issues contained in the previous
proposed and final rules is again reaffirmed, subject to the further
discussion contained here.
As in the previous rulemaking, the second finding required by the
Compact (the level of prices needed to assure a sufficient price to
producers and an adequate supply of milk) is discussed initially. The
Compact Commission finds that a price of $16.94 per hundredweight
continues to be needed to achieve these dual goals. The first finding
required by the Compact (whether the public interest will be served by
the establishment of minimum milk prices) is then discussed. The
Compact Commission further finds that the public interest will be
served by an over-order price regulation in the amount of $16.94 to
extend from January 1, 1998 through termination of the Compact enabling
legislation.
With respect to both of these findings, the Compact Commission's
inquiry has been guided by Section 9(e) of the Compact, which sets
forth several factors which the Compact Commission must consider during
the hearing process to determine whether to adopt and if so, the amount
of, an over-order price:

In determining the price, the 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 for
milk outside the regulated area, the purchasing power of the public
and the price necessary to yield a reasonable return to the producer
and the distributor.

The third finding required by the Compact is then discussed; the
Compact Commission concludes that the major provisions of this order,
other than those establishing minimum milk prices, are in the public
interest and reasonably designed to achieve the purposes of the order.
The fourth required finding is whether the terms of the proposed
order have been approved by producer referendum, pursuant to Article
IV, section 12 of the Compact. In this final rule, the Compact
Commission makes this finding premised upon certification of such
approval, published separately in this Federal Register. The procedure
for such certification is set forth infra in the section of this rule
addressing the fourth finding.

A. What Level of Prices Will Assure That Producers Receive a Price
Sufficient To Cover Their Costs of Production and Elicit an Adequate
Local Supply of Milk

As one of the four underlying findings required for the
establishment of price regulation, the Compact Commission must
determine:

(2) 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.⁹
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\9\ The Commission limited its assessment to issues relating to
the fluid milk market, given the limitations on its authority to
regulate the price of milk used for manufacturing purposes. See
Compact, Sec. 9(a); see also 7 U.S.C. section 7256(2). At the same
time, for purposes of this analysis, it must be recognized that the
present supply needs for manufacturing purposes are not available
for fluid usage.

Compact Art. V, section 12(a)(2).
As in the prior rulemaking, the Compact Commission's deliberations
regarding the level of price required to cover costs of production
focused again on the variety of cost inputs identified in Section 9(e)
of the Compact. With regard to the price needed to elicit an adequate
local supply of milk, the Compact Commission reviewed the nature of the
balance of production and consumption in the region, as also called for
by Section 9(e) of the Compact.¹⁰ This required review again
prompts assessment of the degree to which farm prices have been
insufficient to cover costs of production over time (``price
insufficiency''), and the degree to which such insufficiency has
affected the balance of production and consumption in the region.
Assessment of this issue also required consideration of the wide swings
over time in farmer pay prices under federal regulation, which have
caused farm financial stress and made it difficult for farmers to plan
financially (``price instability''), and the failure of farmer pay
prices to keep up with inflation.
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\10\ This assessment was presented under the second, broader
public interest analysis in the first rulemaking procedure.
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Farmer Costs of Production
The Compact Commission's inquiry with regard to whether prices are
sufficient to cover the cost of production was guided by Section 9(e)
of the Compact, which directs the Commission to consider cash costs of
production, including feed, machinery expense, labor, and interest, as
well as the non-cash costs of value for the farmer's own labor and a
reasonable return on the farmer's investment.
With regard to the various specific components of cash and non-cash
costs

[[Page 62813]]

reviewed under Section 9(e) of the Compact, the Compact Commission
determined in the previous rulemaking that feed costs are a significant
production cost component. The Commission found that feed costs can
account for as much as 50 percent of a farmer's cost of production. 62
FR 23034. Farmers indicated that feed costs had risen beyond their
means. In 1996, in particular, feed costs increased by some 29 percent.
62 FR 29633.¹¹
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\11\ In addition, a cost-of-production study conducted by
Wackernagel and relied upon by the Commission (62 FR 23034)
indicated that feed and crop expenses together can account for some
39% of a farmer's cash operating expenses.
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According to the comment received in the present rulemaking, feed
costs continue to account for a significant portion of cost of
production. A Vermont dairy farmer indicated that the ratio of
purchased grain cost to the value of milk produced for his farm has
normally been 20% but that, since January of 1997, it has averaged 32%.
De Geus and Gillmeister, in their joint submission,¹² report
that the Economic Research Service (ERS) of the USDA indicate that
feeds account for as much as 50% of the cash expenses for milk
production in 1996. They also report that feed prices are down this
year relative to 1996 but remain historically high. They rely on the
ERS September 1997 Livestock, Dairy, and Poultry Monthly
Report,¹³ as well as the recent farm experience in New
England, to conclude that high grain and high hay prices will raise
this year's production costs higher, but not as high as last year's
level.
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\12\ Reenie De Geus and William Gillmeister, Dairy Economists
for the Vermont and Massachusetts Departments of Agriculture,
Written comment, (``WC''), October 8, 1997.
\13\ The Report describes the current national situation to be:
``Forage supplies will be of mediocre quality and high priced, even
though the silage crop looks promising in most areas. Milk-feed
price ratios will be at levels normally associated with conservative
concentrate feeding and below-trend growth in milk per cow.''
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De Geus, in a separate submission,¹⁴ indicates that
Vermont feed costs are expected to remain high because of flooding in
northern Vermont and drought conditions in southern Vermont, parts of
New York, and much of the rest of New England.¹⁵ A dairy
farmer from Connecticut reported that, since last September, his grain
costs had increased approximately 8%.¹⁶ Other commenters
noted that the increase in grain prices they are experiencing is
creating an imbalance between their production costs and farm price for
milk.¹⁷
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\14\ Reenie De Geus, WC, October 8, 1997.
\15\ Vermont dairy farmers reiterated this point in their
submissions. Paul Doten, Harvey T. Smith, WC, October 8, 1997.
\16\ David Jaquier, Dairy Farmer, East Canaan, CT, Public
Hearing (``PH'') at p.134, September 14, 1997.
\17\ Walter Fletcher, Donna Caverly, Richard Woodger, Maine
Dairy Farmers, WC, October 8, 1997.
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Machinery expense as a factor in the cost of production arises
primarily in the context of depreciation; that is, depreciation must be
covered by replacing old and worn out equipment. See 62 FR 29633. As in
the prior rulemaking, farmers again indicated that pay prices are too
low to permit them to make these investments.¹⁸ Claude and
Jeanne Bourbeau indicated that that ``[their] debt load has increased
in the past year due to depreciation of farm equipment. Money is needed
to replace equipment and the milk check does not provide adequate funds
to replace this equipment.'' ¹⁹ Another farmer indicated
that it doesn't make sense to invest in new equipment because it would
just add to his debt load and increase his monthly
payments.²⁰ Both Wesley Snow of Brookfield, Vermont and
Robert Dow of Dover, Maine indicated that the increase in equipment
costs since they purchased their current equipment makes replacement
impossible, given their current milk price.²¹
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\18\ See 62 FR 29633. Economist Reenie De Geus noted in record
testimony that expenditures on machinery and other depreciation
expenses tend to rise in the good years and are delayed in the bad
years. Reenie De Geus, WC 75.
\19\ Claude and Jeanne Bourbeau, Dairy Farmers, Swanton,
Vermont, WC, October 8, 1997.
\20\ David Hinsworth, Dairy Farmer, Royalton, Vermont, WC,
October 8, 1997.
\21\ WC, October 8, 1997.
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Section 9(e) also directs the Compact Commission to consider
interest and labor costs in assessing the sufficiency of farmer pay
prices. (Measurement of these components of costs of production, in
particular, provide for much of the variability in the range of cost of
production noted below.) In the previous rulemaking, the Compact
Commission determined that both interest and non-family labor expenses
constitute a significant proportion of costs of production: from $0.50
to $1.18 per hundredweight for interest expenses, and $1.08 to $1.92
per hundredweight for labor expenses. 62 FR 29633.²²
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\22\ See: Wackernagel, which analyzed Agrifax and ELFAC farms
over a 3-year period; Maine cost-of-production studies; and Pelsue
and ERS-USDA studies submitted by Smith.
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Section 9(e) also directs the Compact Commission to consider
certain non-cash costs, including a reasonable value for the farmer's
own labor and a reasonable return on the farmer's investment. In
considering whether pay prices provide a reasonable value for the
farmer's labor, the Compact Commission previously determined that dairy
farms in New England are still predominately family operated, and, that
in light of farmer pay prices, much of this family labor is completely
uncompensated, or significantly undercompensated. Id. The Commission
concluded that this failure to compensate for family labor discourages
entry into the dairy industry. See 62 FR at 23035.
Comment received in this rulemaking again supports this
determination. A number of commenters indicated that they were
experiencing difficulty in hiring labor at rates they were able to
pay.²³ One dairy farmer indicated that he must pay his hired
help more than he pays himself.²⁴
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\23\ Lester Bailey, Robert L. Foster, and Claude and Jeanne
Bourbeau, Dairy Farmers, WC, October 8, 1997.
\24\ Onan Whitcomb, Williston, Vt., WC, October 8, 1997.
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Allaire Palmer reports that his ``family employees have not had a
raise in four years and work for six dollars per hour. Rent is
furnished because employees are required to be available twenty-four
hours per day.'' ²⁵ Two dairy farmers testified that their
children and grandchildren were not interested in continuing the family
tradition of farming because of the long hours and short
profit.²⁶ On the basis of the record, the Compact Commission
finds that current pay prices continue to discourage family entry into
dairy farming because they fail to offer reasonable value for the
farmer's labor.
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\25\ Allaire P. Palmer, Dairy Farmer, Cornish, Maine, WC,
October 8, 1997.
\26\ Douglas Carlson, Dairy Farmer, Canaan, CT, and Dale Lewis,
Dairy Farmer, Haverill, NH, PH at p. 99 and p. 140, respectively,
September 24, 1997.
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With regard to whether pay prices provide a reasonable return on
the farmer's investment, the Compact Commission noted several comments
received in the previous rulemaking indicating that a reasonable return
ranges between 4% and 5%.²⁷ The Commission determined that,
for an extended period of time, pay prices have been insufficient to
provide a rate of return on equity that reaches these levels. 62 FR
29633.
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\27\ Robert A. Smith of the Yankee Farm Credit System suggested
a 4% rate of return was reasonable in his testimony at the September
24, 1997 PH and in his comments submitted in the previous rulemaking
in April, 1997. 62 FR 23033. The Maine cost-of-production studies,
which analyze southern New England, used a 5% return on equity. Id.
at 23034. In addition, Michael Sciabarrasi of University of New
Hampshire Cooperative Extension Service, suggested that 5% was a
minimal rate of return. Id.
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Comment received from farmers in the present rulemaking again
highlighted the impact of these

[[Page 62814]]

expenses upon their costs of production and the failure of pay prices
to cover them completely. A number of commenters pointed out that
failure of pay prices to cover their costs of production left them with
no return on their investment.²⁸ Douglas Carlson pointed out
in his testimony that because of the large number of recent farm
foreclosures, auctions are not bringing a reasonable return on the
original investment, reflecting a lower general value of farm capital
investments.²⁹ The Compact Commission, therefore, reaffirms
the determination that pay prices are insufficient to provide a rate of
return on equity that reaches a reasonable range between 4% and 5%.
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\28\ Allaine Palmer, David Bradshaw, Rosemarie Jeleniewski,
Harold Larrabee, and Roger Scott, Dairy Farmers, WC, October 8,
1997.
\29\ Douglas Carlson, PH at p. 102.
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This survey of various cost inputs of under Section 9(e) of the
Compact underscores the pressure farmers operate under with regard to
the inability of pay prices to cover costs of production. With regard
to identifying overall costs of production, as determined by the
previous rulemaking, numerous studies provide a variety of
estimates.³⁰ While based on different methods for
determining costs of production, particularly with respect to non-cash
costs, these studies provide the basis for making the overall
assessment of price needed to cover cost of production, as required by
the Compact. In the previous rulemaking, based on a comprehensive
assessment of a number of studies, the Compact Commission concluded
that the range of the costs of production for New England is somewhere
between $14.06 and $16.46. Id.
---------------------------------------------------------------------------

\30\ 62 FR 29632-33.
---------------------------------------------------------------------------

The Compact Commission received additional comment on the measure
of overall cost of production in the present rulemaking from a number
of commenters. Robert A. Smith of Northeast Farm Credit Associations
again reported that, on the basis of a report prepared by Farm Credit
Partners surveying farms in New England, New York and Pennsylvania, the
costs of production for the region were $14.25/cwt. for 1995 and
$15.00/cwt. for 1996. When adjusted for a 4% return on equity, these
costs become $15.37/cwt. for 1995 and $16.02/cwt. for
1996.³¹ The cost figures for New England were the same as
for the larger region as a whole.³²
---------------------------------------------------------------------------

\31\ Robert A. Smith, Manager of Public Affairs and Regional
Council Relations, CoBank and Northeast Farm Credit Associations, PH
at p. 75, September 24, 1997.
\32\ Id.
---------------------------------------------------------------------------

Reenie De Geus, Vermont's Department of Agriculture, Food and
Market dairy economist, reported that the average costs of production
for Vermont farms in the Farm Credit Partners survey was $14.06/cwt.
for 1995 and $15.32/cwt. for 1996, up 9%.³³ For that six
year period, 1991 to 1996, the average cost of production for these
Vermont farms is $14.65/cwt. with only a 3% return on
equity.³⁴ A representative of a dairy processor testified
that the cost of production is in the range of $13.50/cwt. to $14.00/
cwt.³⁵ Comment from individual farmers indicated a range for
their costs of production from $12.66/cwt. to $17.95/cwt.³⁶
for an average among them of $14.65/cwt.
---------------------------------------------------------------------------

\33\ De Geus, WC.
\34\ Id.
\35\ Gary Warren, Vice-President, Fairdale Farms, Bennington,
VT, PH at p. 124, September, 24, 1997.
\36\ Ivar Green, Allaire Palmer, David Bradshaw, Claude and
Jeanne Bourbeau, and Neal Rea, WC, October 8, 1997; Ed Platt, PH,
September 24, 1997. It is to be noted that some of their estimates
include a return on equity and while others do not.
---------------------------------------------------------------------------

Combined with the analysis conducted during the prior rulemaking,
the Compact Commission determines in this rule that the cost of
production remains in the range of $14.06/cwt. to $16.46/
cwt.³⁷ Acccordingly, the Commission concludes that an
overall combined pay price ³⁸ in this range is necessary
``to assure that producers receive a price sufficient to cover their
costs of production'' within the meaning of the finding analysis
required by Section 12(a) of the Compact.
---------------------------------------------------------------------------

\37\ The Commission notes that it is in process of conducting
the comprehensive cost of production study authorized by its
previous final rule. See 62 FR29632. One commenter (Gillmeister)
argues for a division of the proceeds of price regulation based upon
a presentation of varying costs of production among the New England
states and New York. The Commission declines to adopt the approach
of this commenter as premature, given that the Commission has just
undertaken its study process to determine costs of production in the
states and the region.
\38\ This combined price reflects the federal Market Order #1
blend price plus the Compact over-order producer price. For a more
complete discussion of the components of the actual pay or ``mail
box'' price paid to farmers see 62 FR 23037.
---------------------------------------------------------------------------

In the prior rulemaking, the Compact Commission concluded that an
over-order pay price in the range of $0.46-$1.90 was necessary to bring
farmer pay prices up to the level necessary to cover cost of
production. See 62 FR 29633 (Final Rule); 62 FR 23040-41 (Proposed
Rule). Assuming Class I utilization of 50 percent, this means that
price regulation in the amounts of $0.92-$3.80 would be necessary to
achieve the necessary range of over-order payment.
Elicitation of an Adequate Local Supply of Milk
The required finding with regard to pay price accounts for the
broader assessment of the level needed to elicit an adequate supply of
milk, in addition to the relatively discrete assessment of the level
needed to cover cost of production. In the prior rulemaking, the
Compact Commission determined that the Compact Sec. 9(e) scrutiny of
the balance of production and consumption of fluid, or beverage milk,
in the region is critical to this additional assessment. See 62 FR
29634-35.
The Compact Commission determined that production and consumption
is presently in balance, but in a balance of pronounced and
unsustainable stress that must be alleviated. 62 FR 23040. The Compact
Commission concluded that overall milk production was in decline in the
New England region and in the portion of New York State which has
traditionally been a supplemental part of the New England milkshed. 62
FR 23039-40. The Compact Commission also found that supplies of milk
are being transported increasing distances from the region's population
centers and associated processing plants. 62 FR 23040. While over fifty
percent of the milk produced in the New England milkshed is presently
utilized in a variety of manufactured dairy products, the Compact
Commission concluded that substitution of such milk cannot be relied
upon to provide an alternative supply for fluid utilization purposes.
62 FR 23039. In sum, the Compact Commission concluded that the balance
of production and consumption in the region depended on at least
stabilizing, if not increasing, the present, local supply through price
regulation. 62 FR 23040.
Assessment of how to alleviate the stress on the region's supply of
milk through price regulation requires consideration of how best to
alleviate the stress under which producers operate. This inquiry
naturally reverts back to the issue of the degree to which farmer pay
prices are not sufficient to cover costs of production. In addition, as
previously determined, the review leads the Compact Commission to
conclude that the nature of the persistently unstable farmer pay prices
and the degree to which farmer prices have failed to keep pace with
inflation are also structural factors of stress.
Price Insufficiency
As noted above, the Compact Commission's comprehensive review in
the prior rulemaking of the various cost inputs and the variety of
studies of

[[Page 62815]]

overall cost of production provided the basis for the Compact
Commission to determine the amount and degree to which farmer pay
prices were not sufficient to cover costs of production. 62 FR 29633.
Based on its review of the studies, overall, the Compact Commission
concluded that costs of production have exceeded the farm pay price by
an amount in the range of $0.46-$1.90. Id.
As also noted above, the newly received data, in combination with
the previous analysis, leads the Compact Commission again to conclude
that farmer pay prices are failing to cover costs of production and
that there is a continuing need for an over-order price that results in
farmer pay prices in the range of $0.46 to $1.90.
Failure of Farmer Pay Prices To Keep Up With Inflation
The Compact Commission determined in the prior rulemaking that the
failure of farmer pay prices to keep up with inflation was a
significant factor contributing to chronic price insufficiency and farm
financial stress. 62 FR 29633-64. For this reason, the Compact
Commission adopted the joint proposal of Reenie De Geus and William
Gillmeister, dairy economists for the Vermont and Massachusetts
Departments of Agriculture, respectively, to establish an over-order
price regulation based, in part, on an inflation
adjustment.³⁹
---------------------------------------------------------------------------

\39\ Their joint submission in this rulemaking, however, argues
against using the Consumer Price Index (CPI) as a structural
adjustment to the Compact over-order price because the dairy
farmer's costs of production are driven by factors other than those
measured by the CPI, such as the cost of grain. The Commission
concludes that the CPI is not a perfect fit for systemic cost
increases on the farm.
---------------------------------------------------------------------------

Comment received in the present rulemaking did not focus on the
issue of the chronic, structural failure of prices to keep up with
inflation to the same degree as in the prior rulemaking. This is
perhaps a result of the fact that the price regulation adopted as part
of the prior rulemaking was premised, in part, on a structural
adjustment for inflation. In any event, the Commission remains mindful
that the relationship between farmer pay prices and inflation remains a
critical concern. Certainly, the comment received supports this
determination.⁴⁰
---------------------------------------------------------------------------

\40\ Robert Wellington, Sr. Vice-President, AgriMark
Cooperative, WC, October 8, 1997; Lee and Charlotte Bosworth,
Auburn, ME; Mary Connolly, Pittsfield, ME; Alaine Palmer, Cornish,
ME; Pery and Carol Hogden, Randolph, VT; David Hansen, North
Brookfield, MA; Edward A. Ellis, Hebron, CT; Wesley and Brenda Snow,
Brookfield, VT; Robert Dow, Dover, ME; Lowell J. Davenport Jr.,
Ancramdale, NY; Dairy Farmers, WC, October 8, 1997.
---------------------------------------------------------------------------

The Compact Commission also remains mindful, however, of the
concern expressed by several commenters in the prior rulemaking (62 FR
29634) and a comment submitted in this rulemaking ⁴¹ that an
inflation adjustment not be built in as a permanent, automatic
adjustment.⁴² The Compact Commission's determination of the
proper balance between adjustment for inflation and accounting for
broader market conditions, in establishing the appropriate level of
price regulation, is presented in the summary analysis of this section,
below.
---------------------------------------------------------------------------

\41\ See De Geus and Gillmeister, Id. In large part based on
their comment, CPI is rejected for automatic adjustment to the
Compact over-order price. See below.
\42\ Based in part on this concern, the Commission concluded on
May 30, 1997 that adoption of a price regulation for the limited
duration of six months would allow for continuing evaluation of
broader market conditions. Id.
---------------------------------------------------------------------------

Price Instability
The Compact Commission received a wealth of testimony and comment
in the prior rulemaking indicating that wide fluctuations in the price
of milk are also a primary cause of farm financial stress and, in
particular, made it difficult for farmers to plan financially. 62 FR
29633.
The comment received in the present rulemaking accentuates the fact
of persistent fluctuations in the pricing structure under federal
regulation. The price drop from the Autumn of last year to the present
was both precipitous and dramatic. Between October, 1996 and July,
1997, the New England Market Order #1 Blend price fell from $16.84 to
$11.97.⁴³ For October, 1997, the blend price is estimated to
be $13.50 ⁴⁴
---------------------------------------------------------------------------

\43\ Market Order #1 Administrator Statistics.
\44\ Wellington, PH at p. 8.
---------------------------------------------------------------------------

Not surprisingly, farmers again expressed their reluctance to make
long-term investments in their farming operations, and their concern
that when prices dropped precipitously they were unable to meet their
most basic obligations. For example, the ability of farmers to pay
machinery expenses is further diminished by price instability because
farmers are unable to invest (e.g., in new machinery or in upgrading
their facilities), given the wide fluctuations in the price of milk.
Of most concern, Leon Berthiaume, General Manager of St. Albans
Cooperative Creamery, testified that--

In May through July, 66 to 100 of our members received a check
of less than $1,000.00 for 15 days worth of milk production. We also
during [sic] this period of time there was 20 to 50 members that
received no check at all for those 15 days of production. We are
continuing to experience farm auctions. In the last 2\1/2\ weeks, we
have lost 12 members from our Cooperative, and in the next week we
have three more members that are scheduled to be auctioned
off.⁴⁵
---------------------------------------------------------------------------

\45\ Leon Berthiaume, PH at pp. 57-58. Robert Wellington also
testified at the PH at p. 8 that Agri-Mark, the region's largest
cooperative, accounting for 1630 of the approximately 3840 pool
producers in Federal Market Order #1, indicates a loss of 73 member
producers in July, 1997 from the previous July. It also was down 61
members in August compared to the previous August. Agri-Mark also
added 10 new New York members in July, 1997 as compared with the
previous July, and 17 such new members in August, as compared with
the previous year. According to the testimony, ``New York has been
the only area available to obtain the additional milk needed for New
England consumers.''

Gary Warren, in his testimony at the public hearing, underscored
the benefits of price stability across the market, from farmer to
consumer.⁴⁶ Robert A. Smith pointed out that volatility in
milk prices makes it very difficult for farmers to effectively plan and
make the type of investments necessary to position themselves for the
future.⁴⁷
---------------------------------------------------------------------------

\46\ Warren, PH at p. 128.
\47\ Smith, PH at p. 76.
---------------------------------------------------------------------------

In addition to testimony of the apparent, continuing, stress on
supply, however, the Compact Commission received testimony that
production had nonetheless increased by 2.2 percent in
1997.⁴⁸ This indicates that, in the short term, despite the
persistent failure over time of prices to cover cost of production and
the structural conditions of market stress, farmers are still able to
produce milk to cover demand. The Compact Commission concludes this is
in part because of the presence of a range of cost of
production,⁴⁹ and in part because of the working dynamic
between the fluid and manufactured milk markets under federal
regulation. One commenter indicated such increased production may also
in part be a function of the cool 1997 summer.⁵⁰ In
addition, testimony in the record indicates that increased production
may be a factor of persistently low farm prices.⁵¹ (The
Compact Commission also notes that, in addition to price enhancement
under the Compact price regulation for August and September, 1997,
according to De Geus, ``last year was an abnormally high year both for
price and costs with the result that farmers had a positive return

[[Page 62816]]

of one cent for the first time in six years.'') ⁵²
---------------------------------------------------------------------------

\48\ Leon Graves, Commissioner, Vt. Dept. of Agriculture, Food
and Markets, WC, October 8, 1997.
\49\ John Schnittker, Public Voice for Food and Health Policy,
PH at p. 13, September 24, 1997; Gillmeister, WC, October 8, 1997;
De Geus and Gillmeister, WC, October 8, 1997.
\50\ Wellington, PH at p. 114.
\51\ Wellington, PH at p. 110; Carl Peterson, Dairy Farmer and
President, AgriMark, PH at p. 70.
\52\ See footnote 27; 62 FR 29633.
---------------------------------------------------------------------------

The Compact Commission concludes, accordingly, that the required
determination of the amount needed both to cover cost of production and
to assure an adequate supply must account simultaneously for both the
persistent gap between cost of production and pay prices and the level
of supply in the market in spite of that gap. The finding analysis
reflects an intended balancing of the basic economic requirement that
pay prices cover cost of production to ensure sustainability with a
recognition that supply may still be provided despite some gap between
cost of production and pay prices.
John Schnittker argues, without supporting evidence, that the price
regulation would primarily help the larger and generally more
financially healthy dairy producers and would help the smaller and
financially stressed producers the least.⁵³ The commenter
made the same argument in the previous rulemaking process, also without
supporting evidence. The Compact Commission there concluded that the
criticism of the Compact over-order price regulation by Schnittker was
incorrect. 62 FR 29634. The assertion assumes that the smaller producer
is less efficient than the larger producer. On the basis of the
detailed analysis of Professor Wackernagel,⁵⁴ the Commission
again concludes, however, that the financial viabililty of both 80 cow
farms and 350 cow farms will be improved substantially by the Compact
over-order price regulation.
---------------------------------------------------------------------------

\53\ Schnittker, PH at p. 11.
\54\ 62 FR 29634 (May 30, 1997).
---------------------------------------------------------------------------

Summary Analysis--Level of Prices Needed to Assure That Producers
Receive a Price Sufficient To Cover Their Costs of Production and
Elicit an Adequate Local Supply of Milk
As noted above, the Compact Commission has determined that an over-
order price in the range of $0.46-$1.90 continues to be needed to
assure that farmer costs of production are covered, requiring an over-
order price regulation in the range of $0.92-$3.80.⁵⁵ With
regard to the price needed to elicit an adequate supply of milk for the
region, the Compact Commission again notes that such an amount is not
necessarily identical with that required to cover costs of production.
The Compact Commission further concludes that the analysis of the
appropriate level of price regulation must also account for price
instability and the failure of producer prices to account for
inflation,⁵⁶ as well as the regulation's duration.
---------------------------------------------------------------------------

\55\ Assuming Class I utilization of 50 percent, the amount of
the over-order regulation price must be twice the over-order
producer price to account for the entire, identified, amounts.
\56\ The Commission here reaffirms its reliance upon the study
by Professor Wackerngel, cited at length in both the previous
proposed and final rules, which analyzed in detail the impact of
Compact price enhancement and price stabilization upon two different
farm sizes--an 80 cow herd and a 350 cow herd. 62 FR 29634 (May 30,
1997).
---------------------------------------------------------------------------

As noted at the outset, the prior rulemaking resulted in
establishment of an over-order price regulation of $16.94 for six
months duration. 62 FR 29632. The Compact Commission received numerous
comments from farmers on the appropriate level of price and duration
for an extension of the price regulation. The majority of these
commenters recommended that the price be adjusted by the CPI at 2.2%,
with such adjustment to last through the termination of the
Compact.⁵⁷ Wellington and Berthiaume made a similar
recommendation; Beach recommended an adjustment by the CPI at 2.2% for
a period of six months.⁵⁸ De Geus and Gillmeister
recommended that it be raised by 2%.⁵⁹ (In his separate
comment, Gillmeister proposed a six months' duration; De Geus proposed
extension through sunset.) Warren suggested that the price be raised by
$1.00.⁶⁰
---------------------------------------------------------------------------

\57\ 7 U.S.C. 7256(3).
\58\ Wellington, PH at p. 107; Berthiaume, PH at p. 58; Sally
Beach, Independent Dairymen's Coop., PH at p. 82.
\59\ De Geus and Gillmeister, WC.
\60\ Warren, PH at p. 126.
---------------------------------------------------------------------------

Viewing the comment in light of all the relevant factors, the
Compact Commission finds the argument of De Geus and Gillmeister
⁶¹ persuasive for not further adjusting the amount of the
Compact over-order price regulation in direct proportion to the
Consumer Price Index. The function of the initial regulation was a one-
time regulatory adjustment in response to the strikingly apparent,
chronic, structural failure of the marketplace to account for
inflation. Price regulation forward must be responsive to the variety
of market forces at work, including but not limited to inflation, as
argued by these commenters.
---------------------------------------------------------------------------

\61\ See: note 34 supra.
---------------------------------------------------------------------------

The Compact Commission further concludes that the present amount of
the price regulation at $16.94 is sufficiently responsive to the
variety of market forces referred to above. The resulting degree of
price enhancement provided by the price regulation still ensures that
the net pay price remains within the range, albeit at the low end, of
that identified as necessary to provide for covering the costs of
production.
The Compact Commission also determines that extension of the $16.94
price regulation for the period January 1, 1998 through termination of
the Compact enabling legislation, so as to establish uniform regulation
and price for a total period of at least 21 months, will provide
critical assurance of continued price stability for producers. Finally,
the presence of a regulation of stable, continuous, duration will still
allow the Commission to hear and consider the need to make further
adjustment to account for increased costs of production and inflation
at any time, before farmer pay prices again begin to lag far behind
inflation. The Commission will commence rulemaking, pursuant to Section
11 of the Compact, no later than July 1, 1998 to consider whether any
further adjustment in the Compact over-order regulation price is
necessary and appropriate.
In this regard, the Commission takes official notice of the fact
that the first three months of the regulation increased farmer pay
prices, on average, by approximately $1.30 per hundredweight, raising
the combined, regulated minimum pay price from approximately $12.00 to
approximately $13.30 per hundredweight. For the next two months of the
regulation, it is projected that the regulation will increase the pay
price by approximately $.75 and $.40, respectively, yielding combined
pay prices of approximately $13.90--$14.10 per hundredweight. The
regulation, accordingly, is providing both price enhancement and
stability.
With this background, the response of the Compact Commission to the
comments received from farmers and cooperative representatives
indicating the need for further price enhancement is to extend the
current regulation at the same price. The extension of the regulation
serves the essential function of establishing combined price
enhancement and price stability in the market for a period of at least
21 consecutive months. At the same time, the extension in no way
precludes the Commission from finding that a further adjustment in
price is warranted after making an assessment of the costs of
production, market prices and production levels during the rulemaking
process the Commission will commence no later than July 1, 1998.
In sum, extension of the price regulation in the amount of $16.94
through termination of the Compact enabling legislation is the
appropriate ``level of price needed to assure that producers receive a
price sufficient to

[[Page 62817]]

cover their costs of production and elicit an adequate local supply of
milk.''

B. Whether the Public Interest Will Be Served by the Establishment of
Minimum Milk Prices to Dairy Farmers

In the prior rulemaking, the Compact Commission first focused
specifically on the producer related-inquiry of Section 9(e) in making
the finding concerning the appropriate level of price required by the
Compact, and then referred to the conclusions there determined in
making the broader ``public interest finding'' required by the Compact.
62 FR 29632. This analytical approach is adopted for purposes of
extending the rule. This analytical approach is also adopted with
regard to the dual findings required for establishment of the proper
level of price under the rule.
The Compact Commission also adopts the two-part assessment of the
broader ``public interest'' utilized in the prior rulemaking. This
assessment is premised first on a review of those components of the
public interest specifically identified by section 9(e), followed by
consideration of a broader range of subjects and issues drawn from
these specific components.
As set forth in section A, above, focusing on the producer/milk
supply-related finding inquiry, the Compact Commission found the amount
of $16.94 per hundredweight to be the appropriate level of price
regulation, extended for the period January 1, 1998 through termination
of the Compact enabling legislation. This level of price was determined
to be necessary to ``cover * * * costs of production and elicit * * *
an adequate supply of milk'' within the meaning of the required finding
analysis. The price assures in addition, thereby, that the ``balance
between production and consumption of milk productions in the regulated
area'' will be maintained within the meaning of Compact, section 9(e).
With regard to the review of ``the purchasing power of the public''
contemplated by Compact, section 9(e), the Compact Commission has again
determined that this inquiry is relevant to assessing the impact of
price regulation on the consumer market, the ``critical part of the
Compact Commission's assessment of the public interest under this
finding section.'' 62 FR 23045. This inquiry focuses ``primary concern
on the consumer interest because milk is a staple product.''
Id.⁶²
---------------------------------------------------------------------------

\62\ With regard to the Compact's emphasis on the ``prevailing
price for milk outside the regulated area'' and the first ``public
interest'' finding, the Compact Commission again determines this
data to be relevant with regard to the retail price of milk outside
the region. (It is also relevant to the farm price of milk outside
the region.) Based on the comments received in the prior rulemaking,
the Commission identified the retail prices in two separate markets
outside the Compact region as a benchmark for tracking the impact of
price regulation on retail prices in the region, 62 FR 23046-47
(April 28, 1997), and to compare ``the current, relative alignment
in prices between the New England and New York regions against the
relative alignments once price regulation is in place.'' 62 FR 23048
(April 28, 1997). The comprehensive study to conduct this tracking
analysis is currently being developed by the Commission.
---------------------------------------------------------------------------

The Compact Commission determined in the prior rulemaking that the
continuing erosion of the region's milkshed has had a direct--and
adverse--impact on retail prices, and hence on the purchasing power of
the public, in part because of the increased transportation costs
associated with an expanding milkshed. 62 FR 29635. The Compact
Commission similarly determined that ``farm/wholesale price volatility
had also likely had an adverse impact on retail prices over time, and
that stabilization of the farm/wholesale price through a compact over-
order price regulation, traced through to the endpoint retail market,
likely will manifest as a corresponding positive impact on retail
prices.'' ⁶³ Id. Finally, the Compact Commission determined
that ``the foregoing analysis supports the conclusion that the
purchasing power of the public likely will be enhanced, rather than
diminished, as a result of the stabilizing effects of the over-order
price regulation.'' Id.
---------------------------------------------------------------------------

\63\ As a general manager of a processing facility testified,
stable wholesale prices should lead to stable retail prices. Warren,
PH at p. 130.
---------------------------------------------------------------------------

Based on the reasoning presented in the proposed and final rules,
the Compact Commission reaffirms these determinations.⁶⁴
---------------------------------------------------------------------------

\64\ The Commission also concluded that the actual impact on
retail prices could only be determined by careful monitoring and
tracking over time. 62 FR 23048 (April 28, 1997). The Commission is
in process of establishing and implementing the study procedure
necessary to accomplish this assessment.
---------------------------------------------------------------------------

The detailed data and comment received with regard to the consumer
interest focused on prevailing retail prices for Class I fluid milk in
the region and the potential and actual impact of the price regulation
on the retail market. Adverse comment was also received with regard to
retail prices and concerns about the regulation's impact on low income
consumers. Comment was also submitted with regard to extension of the
State WIC program reimbursement provisions.
Impact on Retail Prices--Data and Analysis
De Geus and Gillmeister submitted joint testimony with regard to
the impact of the price regulation on the overall retail market. Data
was submitted placing the price regulation's impact within a context of
price movements between 1995 and the present. The relationship between
the procurement cost for raw milk and the retail price was assessed.
According to their testimony,

The important point to note in the relationship between tables 1
and 2 is that farm prices for Class I milk fell dramatically in
January of 1997, while retail price [sic] remained elevated. Then,
when the Compact [sic] implemented the Final Rule in July of 1997,
the prevailing price jumped 30 cents from their already elevated
level. In Figure 1, Vermont shows a 20 cent increase in the price of
a gallon of milk. Then in August the prevailing price in Boston fell
10 cents and remained unchanged in September. Expectations are that
the prevailing price will fall more over time.

The commenters further indicated that--

The baseline projections for dairy product prices for 1998 shows
a decrease in prices of 0.4%. That is to say, dairy product prices
are expected to decline * * *. Overall, we feel that the consumer is
doing quite well. While fluid milk prices increased in July, they
should decrease some over the next several months as competition for
the growing sea of consumer dollars begins to over-ride any over-
order price.

Table 1: Federal Market Order #1 (Zone 1) Class I Prices 1995-1997
[Per cwt] \65\
----------------------------------------------------------------------------------------------------------------
Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. Average
----------------------------------------------------------------------------------------------------------------
15.10.. 14.62 14.59 15.03 15.13 14.47 14.36 14.66 14.47 14.79 15.32 15.85 14.85
16.11.. 16.15 15.97 15.83 15.94 16.33 17.01 17.16 17.73 18.18 18.61 17.37 16.82
14.85.. 14.58 15.18 15.69 15.73 14.69 16.94 16.94 16.94 16.94 16.94 16.94 15.54
----------------------------------------------------------------------------------------------------------------
\65\ Source: Gillmeister and DeGeus, infra, (Market Order #1 Administrator Statistics).

[[Page 62818]]

Table 2: Boston Retail Prices 1995-1997
[Per gallon] \66\
----------------------------------------------------------------------------------------------------------------
Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. Average
----------------------------------------------------------------------------------------------------------------
2.59... 2.49 2.49 2.59 2.49 2.49 2.49 2.49 2.49 2.49 2.49 2.59 2.52
2.59... 2.59 2.69 2.59 2.69 2.59 2.59 2.79 2.59 2.59 2.59 2.59 2.62
2.59... 2.59 2.69 2.59 2.59 2.59 2.89 2.79 2.79 ...... ...... ...... 2.67
----------------------------------------------------------------------------------------------------------------
\66\ Source: Gillmeister and De Geus, infra, (International Association of Milk Control Agencies).

De Geus submitted additional individual testimony, indicating
similar retail price experience in Vermont and Connecticut:

Retail Price
------------------------------------------------------------------------
Vermont: Connecticut:
$/gallon $/gallon
------------------------------------------------------------------------
November 1996................................ $2.49 $2.67
December..................................... 2.53 2.68
January 1997................................. 2.54 2.65
February..................................... 2.51 2.62
March........................................ 2.48 2.61
April........................................ 2.49 2.60
May.......................................... 2.48 2.65
June......................................... 2.49 2.61
July......................................... 2.64 2.81
August....................................... 2.62 2.83
September.................................... 2.62 2.78
------------------------------------------------------------------------

As can be seen, prices in Vermont increased by 15 cents after
initiation of the price regulation in July, then declined the following
month, and held constant in September. In Connecticut, prices were
observed to have increased by 20 cents after initiation of the price
regulation in July, another 2 cents in August, and then decreased by 5
cents for September.
Despite the apparent initial spike in retail prices,\67\ the
Compact Commission concludes that the regulation has not affected the
retail market so anomalously as to require its elimination. Rather, it
is concluded from the data and analysis presented that the retail
market can best be understood as in the process of adjustment to the
current price regulation. The Commission particularly notes that the
average Class I price for 1997 will be 11 cents less than last year,
while the retail price for the Boston market is expected to be 5 cents
greater. Recognizing that last year's prices were unusually high, and
that the retail market usually takes time to adjust to price
changes,\68\ it is noted that the retail price has increased 15 cents
since 1995, while the farm price, including that imposed by the price
regulation has increased by only six cents.
---------------------------------------------------------------------------

\67\ De Geus indicated that the data gathered for the
Connecticut market, identifying a price increase of 20 cents,
includes ``Mom and Pop'' stores while the Vermont data, identifying
a price increase of 15 cents, does not. According to De Geus, this
difference is attributable to the difference in data collection. WC.
\68\ Cf. 62 FR 29629 citing 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, ``Asymmetry in Farm-Retail Price Transmission
for Major Dairy Products'', Amer. J. Ag. Econ., 285-292 (May, 1987).
---------------------------------------------------------------------------

The Compact Commission also takes note that the over-order price
obligation for July, 1997 was $3.00, while for November it will be
substantially less, in the amount of $0.91. The impact of having a flat
price in the market, resulting from the interplay between the
underlying federal, Class I price and the Compact ``over-order'' price,
accordingly, thus has yet to be fully assimilated into the pricing
dynamic of the market.
The data and analysis presented are not inconsistent with the
Compact Commission's prior determination that stabilization of the
farm/wholesale price through a compact over-order price regulation,
traced through to the endpoint retail market, likely will manifest as a
corresponding positive impact on retail prices.'' 62 FR 29635.\69\
Indeed, if the commenters cited above are correct in their assessment
of the likely trend of retail prices in 1998, it will only require a
slight such ``drift downward'' for retail prices to reach their 1995
level.
---------------------------------------------------------------------------

\69\ One commenter who is the general manager of a processing
facility supported the Commission's analysis with his assessment
that stable wholesale prices should lead to stable retail prices. PH
at p 130.
---------------------------------------------------------------------------

Comment on the Impact of the Compact Over-order Price Regulation on Low
Income Consumers
The Compact Commission received four comments from an organization
representing low income consumers \70\ who expressed opposition to the
extension of the price regulation. Their comments centered on a concern
with increased retail prices for fluid milk faced by low income parents
and grandparents. Because they attributed recent price increases in
their neighborhoods to the Compact Commission's decision to establish
the price regulation, they are opposed to its extension.
---------------------------------------------------------------------------

\70\ Joyce Campbell, Patricia Maben, and Florence Knedsen of
Massachusetts ACORN, a low income community advocacy group, PH at
pp. 14-25; Felicia Fields, President, Boston ACORN, WC.
---------------------------------------------------------------------------

Another commenter expressed opposition based on his analysis that
the regulation was benefiting farmers at the expense of consumers,
particularly low income consumers. According to this commenter, the
over-order price now in effect could increase consumer cost for milk in
the Compact region by as much as $70 million over the next year.\71\
---------------------------------------------------------------------------

\71\ John Schnittker, Public Voice for Food and Health, PH at p
9. The Commission notes in response to this comment that, despite
the apparent initial spike in prices, the Commission does not
determine that the apparent impact of the price regulation is some
form of a price increase attributable to a direct ``pass-through'',
as apparently inferred by the commenter. As in the previous
rulemaking the Commission declines to adopt this approach in view of
the lack of explanation, and given that it is directly contrary to
the developed literature on this issue which suggests a contrary
conclusion. As the Commission determined in its proposed rule, price
stabilization eliminates the need for retailers to retain
significant margins in order to protect against the uncertainty in
wholesale costs that exists when prices are volatile. See 62 FR
23049 (citing Hahn, et al.). Because retailers will not have to
engage in this ``risk response'' pricing strategy to ensure cost
recovery, the Commission again disagrees with the commenter's
conclusory remarks regarding the impact of price regulation on
retail prices.
---------------------------------------------------------------------------

The Compact Commission's response to these commenters flows from
its assessment of the actual and potential impact on the retail market
described above. As indicated, the Commission determined price
regulation would likely have a ``positive impact'' on retail prices
over time, though cognizant of the possibility of short-term increases
in milk prices at the retail level, when it adopted the regulation.
Establishment of a six month regulation ensured either expiration of
the regulation in short order or review of the regulation soon after
its adoption to determine whether unexpected anomalies were occurring
so as to preclude its extension.⁷²
---------------------------------------------------------------------------

\72\ The WIC reimbursement provisions were established in part
to cover such a contingency.
---------------------------------------------------------------------------

Even accounting for these adverse comments, the Compact Commission
determines that no such anomalies are occurring in the marketplace.
Rather, the market is in process of responding to the imposition of a
flat, combined

[[Page 62819]]

Class I price, and the actual impact of the regulation is yet to be
determined. The interplay of the underlying federal Class I pricing
regulation and the ``over-order'' mechanism, combining to establish the
flat, combined price, have yet to work through the asymmetric pricing
regimen of retail milk prices. Moreover, while prices may have spiked
up in response to initial imposition of the price regulation, according
to the received data and analysis, they declined the next month and
``are expected to fall more over time.'' ⁷³
---------------------------------------------------------------------------

\73\ De Geus and Gillmeister, infra.
---------------------------------------------------------------------------

The Compact Commission notes further that the WIC
program,⁷⁴ along with the School Lunch Program,⁷⁵
provides a buffer to assist low income consumers with increases in the
retail cost of milk that might occur.⁷⁶ In view of the
existence of these programs, and given the current market picture
presented by the data and analysis as a whole, the Commission
determines that the adverse comment does not establish the need for
elimination of the price regulation.
---------------------------------------------------------------------------

\74\ The WIC reimbursement provisions remain in effect as part
of this extended price regulation.
\75\ Pub.L. 79-346 and Pub.L. 89-642; see also: 62 FR 29637 (May
30, 1997).
\76\ The Commission takes official notice that the Massachusetts
WIC Program guidelines show program eligibility at 185% of the
federal poverty level. Under the guidelines, a family of four is
eligible at an income of $29,639 per annum or $572 monthly.
---------------------------------------------------------------------------

Reasonable Rate of Return to the Distributor
With regard to the ``price necessary to yield a reasonable rate of
return to the distributor,'' Compact, Section 9(e), the Compact
Commission has previously determined that ``[t]he focus of this inquiry
is the determination of a price that ensures a reasonable rate of
return,'' and, more specifically, ``whether processing plants are
currently covering costs of production,'' including the distributors'
rate of return on capital. 62 FR 23045.
Working from this framework, the Compact Commission sought and
received comment on wholesale costs and prices. The data received
persuaded the Compact Commission to conclude that processors are in
fact covering their margins, including a return on capital of $0.06 per
gallon.⁷⁷ The Compact Commission further determined that
``minimization of such persistent fluctuations in price can only serve
as a benefit to stability of firm participants in the wholesale
market.'' 62 FR 29635.
---------------------------------------------------------------------------

\77\ The comment received and used for this analysis included a
study by 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, and an
extract by the same authors, entitled ``Presentation at IDFA Annual
Meeting in Dallas, Texas (October 1996). (This extract provides
``estimated costs of marketing 2% lowfat milk through supermarkets,
New York Metro Area, $ per gallon, 1995). In comment received on the
proposed rule, Professor Aplin indicates that the extract was based
on identified costs of the northeast plants that were part of the
broader, overall study group. The Commission also relied upon a
study by the Economic Research Service (ERS) of the United States
Department of Agriculture, Food Cost Review/AER-729. The Commission
found the Aplin et al. study more representative, given its
identified inclusion of a significant percentage of northeast
plants. Moreover, the ERS study incorporated data drawn from
vertically integrated, or combined, processing/retailing facilities.
The Compact region only includes one such operation.
---------------------------------------------------------------------------

The Compact Commission hereby reaffirms the resulting determination
that the benefits of price stabilization ⁷⁸ in the wholesale
market parallel the benefits of price stabilization at the farm level,
namely, allowing processors to engage in long-term economic planning
and investment, and thereby improve their economic efficiency and
performance. Id.
---------------------------------------------------------------------------

\78\ See: footnote 64, supra.
---------------------------------------------------------------------------

Broadened Inquiry Under Compact Section 9(e)
As indicated in the introduction to this finding section, the
Compact Commission determined under the prior rulemaking that the
ultimate finding required by Section 12 of the Compact--whether ``the
public interest will be served by the establishment of minimum milk
prices to dairy farmers''--necessitated consideration of a broader
range of subjects and issues than those specifically delineated by
Section 9(e) of the Compact. Accordingly, the Compact Commission sought
comment regarding the potential impact of price regulation on each of
the farm, wholesale and retail sub-markets which comprise the overall
market for fluid milk. 62 FR 23042. These inquiries were broken down
further into the individual components of these respective sub-markets,
including some of the components specifically listed in Section 9(e) of
the Compact, as discussed above. This broad-ranging inquiry, focusing
on all phases of the fluid milk market, allowed the Compact Commission
to gather substantial data and make an informed determination that an
over-order price regulation would be in the public interest, overall,
and with regard to its specific impact on each of the three discrete
sub-markets--farm, wholesale and retail. 62 FR 23048-50. For purposes
of completeness, the Compact Commission's conclusions with regard to
the wholesale and retail submarkets are again expressly presented,
along with analysis of relevant comment received as part of this
rulemaking process.⁷⁹
---------------------------------------------------------------------------

\79\ As in the prior rulemaking, the impact on the farm
submarket is presented under the inquiry mandated by the farmer/
supply finding.
---------------------------------------------------------------------------

Wholesale Sub-Market--The Compact Commission assessed the impact of
price regulation on the wholesale market by considering the issue of
rate of return to processors, as discussed above, (62 FR 23045), and by
assessing whether price regulation would result in market distortion
with regard to wholesale price and thereby contravene the public
interest. 62 FR 23048. In assessing the concern with market distortion,
the Compact Commission carefully reviewed present patterns of supply
for the region's wholesale needs. The Compact Commission determined
that the wholesale market presently is supplied almost totally in the
form of raw, bulk product transported from areas of concentration of
dairy farms in the rural part of the region to the fluid processing
plants located in close proximity to the region's cities. 62 FR 23045.
The Compact Commission also determined that the marginal, remainder of
the wholesale market is supplied by finished, packaged milk transported
from processing plants located some distance away from the region's
cities. Id.
With regard to the primary bulk supply component of the wholesale
market, the Compact Commission determined that there was unlikely to be
market distortion caused by price regulation that could adversely
affect the wholesale price. According to the comment received in the
previous rulemaking, present patterns of raw product supply between
processors and independent farmers or cooperative organizations of
farmers are relatively stable and are unlikely to be affected by a
regulated price increase in the amount and for the duration established
by the price regulation. 62 FR 23048.
The Compact Commission also concluded that price regulation was
unlikely to cause market distortion with regard to the secondary
packaged product component of the market. The concern here is whether
price regulation can be administered uniformly with regard to raw
product and, as identified and addressed in the current rule, packaged
milk supplies. If a significant portion of the packaged milk supplies
is left unregulated, this might distort the market by creating a
competitive advantage for such packaged products, encouraging their
substitution as a source of wholesale supply. 62 FR 23048. Given that
packaged milk as

[[Page 62820]]

wholesale supply is more expensive than raw product supply, such
substitution resulting from market distortion would increase retail
prices and be contrary to the public interest.
The Compact Commission concluded that raw product and packaged
product supplies could be regulated uniformly and that such uniform
regulation will prevent market distortion, including indirect impact on
price. (The basis for this conclusion was presented under the third
finding analysis of the prior rulemaking. 62 FR 29637)
The comment received in the present rulemaking initially confirms
the Compact Commission's assessment that the price regulation would not
adversely affect the relatively stable market patterns of the wholesale
sub-market. As presented in the next finding analysis, the Commission
received and has responded in detail to comment received indicating the
need for marginal adjustment in the operation of the price regulation
in the wholesale market. Such comment indicating the need only for
marginal adjustment confirms that the regulation has not had such an
anomalous impact on the marketplace so as to require its elimination.
At the same time, the Compact Commission reaffirms the need to continue
to monitor comprehensively the regulation's impact on this sub-market,
as detailed in the prior rulemaking. The Commission is in process of
implementing the tracking mechanism necessary to conduct the required
monitoring established by the prior rulemaking.
Retail Sub-Market--With regard to the retail market, the Compact
Commission concluded in the prior rulemaking that price regulation was
likely overall to have a positive impact on ``the purchasing power of
the public'' within the meaning of Compact Section 9(e), and thereby to
be distinctly in the public interest. See 62 FR 23048. (The
Commission's underlying conclusion, that stabilizing the milk supply
and removing variability in the federally regulated, farm/wholesale,
pricing structure would likely combine to have a positive, downward
impact on retail prices is explained in further detail at 62 FR 23048-
50.) As noted above, the Commission has reaffirmed this conclusion in
view of the comment received with regard to retail prices.
In the prior rulemaking, the Compact Commission also made a further
determination of the potential, positive impact of price regulation
with regard to the broader, consumer-based market. More specifically,
the Commission concluded that price regulation will not have a negative
impact on government supplemental nutrition programs such as the
National School Lunch Program. The Commission made this further
determination based on its assessment that the pricing patterns of such
programs were premised on essentially the same competitive patterns of
the broader, consumer-based market. See 62 FR 23050. Citing a General
Accounting Office description of the program, the Commission noted in
its proposed rule:

The National School Lunch Act of 1946 (Pub L. 79-396) and the
Child Nutrition Act of 1966 (Pub L. 89-642) authorize USDA to
reimburse state and local school authorities--under grant
agreements--for some or all of the costs of these programs.
Reimbursements are based on either the number of meals served or the
number of half pints served. The schools use these funds, as well as
state and local funds and moneys collected from students, to
purchase food, including milk, for these programs. These purchases
are made through either sealed bid or negotiated procurements.
USDA's regulations require that these procurements be conducted in a
manner that provides for the maximum amount of open and free
competition.⁸⁰

\80\ GAO Report 13-239877 at 2 (October 16, 1992), submitted by
Jeffords as Additional Reply Comment, April 9, 1997; See also 62 FR
23050.
The Commission further notes that the purchasing patterns of
other institutional buyers such as the military and hospitals, as
described in the GAO study similarly mirror the broader, competitive
market. The Commission concludes that these institutional buyers
will also benefit from the impact of price regulation on the
competitive market.
---------------------------------------------------------------------------

The Compact Commission reaffirms this understanding of the expected
interplay between the price regulation and the School Lunch Program.
Given the critical concern with the potential impact on such
supplemental food nutrition programs, and in view of the comment
received on this issue, the Commission determines it appropriate to
establish a Task Force pursuant to Article VII. D. of the Compact
Commission's Bylaws to assess more closely the regulation's actual and
potential impact on the School Lunch programs. The Task Force shall
report back to the Commission at its regularly scheduled meeting for
February, 1998. Based on the Committee's assessment of the impact of
the Compact over-order price regulation, it shall make recommendations
as to whether the region's School Lunch Programs should receive
reimbursement for some or all of any increased costs attributable to
the price regulation and, if so, the method for reimbursing the
appropriate local authorities.
Price Regulation and the WIC Program
The Compact Commission did determine in the prior rulemaking that
pricing and reimbursement patterns for one government supplemental
nutrition program, the WIC Program, are not configured according to the
same pattern as the broader consumer-based retail market. 62 FR 23050;
29637. Accordingly, the Commission exempted the WIC program from
operation of the price regulation. Id. at 23050-53; 29637.
Two of the State WIC Program Directors submitted comment in support
of extending the provisions in the current rule for reimbursing State
WIC Programs for their costs incurred as a result of the Compact over-
order price regulation.⁸¹ The current rule includes a formal
agreement between the Compact Commission and the six State WIC Programs
that governs the terms of the reimbursement program. The Compact
Commission herein extends that agreement for the effective period of
the rule.
---------------------------------------------------------------------------

\81\ Mary Kelligrew Kassler, Director of the Massachusetts WIC
Program, WC; Jadwiga Goclowski, Division Director/State WIC
Director, Department of Health, State of Connecticut, WC.
---------------------------------------------------------------------------

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. The Program
provides a monthly ``prescription'' for nutritious foods tailored to
supplement the individual dietary needs of each participant. Milk and
other dairy products play a large and important role in every
participant's food package.
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) and administered on the local level by State WIC
Programs in the Connecticut, Maine, Massachusetts, New Hampshire, Rhode
Island, Vermont State Departments of Public Health (the States).
Additional 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. Prepayment edits are performed on
each check to ensure that specific food

[[Page 62821]]

purchasing, pricing and payment requirements are met.
Because WIC is not an entitlement program and has a capped program
appropriation, any increase in food costs results in fewer women and
children being served. It is imperative, therefore, that WIC's funds be
held harmless from any adverse impact due to a Regulation. While the
Compact Commission has again concluded that price regulation should
have a ``positive impact'' on retail markets, it has also found that
the market is presently adjusting to the price regulation with an as-
yet indeterminable, overall, actual outcome. In order to ensure that
WIC funds are held harmless, it is necessary to extend the
reimbursement procedure during the effective period of the Compact
over-order price regulation.
Continuing Assessment of Impact
The Compact Commission, in its current rule, provides for
continuous monitoring and analysis of Class I 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. The
Compact Commission, under this rule, will continue to monitor and
analyze information 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, and degree to which retail price
fluctuations differ for package sizes in relation to each other.
WIC Reimbursement System
Given that State WIC Programs have a September 30th fiscal year
end, the Compact Commission can not make the Program whole after the
fact. WIC must operate in a funding ``limbo'' between October and
January when its State Program grants are announced. Uncertainty
regarding the potential effect of price regulation, or reimbursements
to States made by the Compact Commission at a later date, would force
State WIC managers to lower first quarter participation levels. The
State WIC Programs have proposed and the Commission has agreed to 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 will reimburse each respective State
WIC Program. The amount of reimbursement will be based on a formal
agreement to be entered into by the Compact Commission and the six New
England State WIC Program Directors, as approved by the Food and
Consumer Service of the USDA. Under the agreement, the reimbursement
amounts will be based on: (1) The quantities of milk purchased with WIC
checks and (2) the amount of any Compact Over-Order Price Regulation.
The Compact Commission has also made provision for continuing
monitoring and analysis of retail and wholesale prices for fluid milk.
Should there be continuing adverse impacts on consumers, in general,
and low income consumers, in particular, the Commission will be able to
react.
Impact on Retailers
Finally, the Compact Commission reaffirms its prior determination
that price regulation does not and will not likely have an adverse
impact on the retailers, themselves. In summary: in similar manner as
with its assessment of the wholesale market in the prior rulemaking,
the Commission reviewed retail costs and prices to determine if
retailers are covering costs, including return on capital, under
present market conditions. 62 FR 23045, 23046-48. The Compact
Commission concluded that such margins are presently being covered, and
that price regulation will not adversely affect the ability of retail
outlets to continue to cover their margins. Id. at 23048.⁸²
---------------------------------------------------------------------------

\82\ The comment received and used for the cost analysis relied
upon the study by Aplin et al, ``An Analysis of Processing and
Distribution Productivity and Costs in 35 Fluid Milk Plants'',
February 1997, R.B. 97-03, Cornell University and the extract by the
same authors, entitled ``Presentation at IDFA Annual Meeting in
Dallas, Texas (October 1996). (This extract provides ``estimated
costs of marketing 2% lowfat milk through supermarkets, New York
Metro Area, $ per gallon, 1995). In comment received on the proposed
rule, Professor Aplin indicates that the represented supermarket
costs were representative of New England supermarkets, as well. The
Commission notes that these studies focus on supermarket costs.
Supermarkets represent the primary retail outlet for fluid milk in
the marketplace. According to the Aplin study, retail cost, with
return is $2.12 per gallon.
---------------------------------------------------------------------------

Public Interest Finding--Summary Analysis
Based on this analysis under Compact section 9(e) and the broader
market-wide analysis, the Compact Commission concludes that continuing
the price regulation in the amount of $16.94 for the period January 1,
1998 through termination of the Compact enabling legislation will
ensure the ``public interest'' is served in the manner contemplated by
the finding analysis under Compact section 12(a)(2). The Compact
Commission concludes the current price regulation has begun to achieve
its intended purposes of price stabilization and limited price
enhancement for producers without distortion of downstream wholesale
and retail markets. While the actual impact on the downstream markets
cannot yet be determined comprehensively, the data and comment
presented indicate that at worst only marginal adjustments are
necessary and that at best the regulation may be serving its intended
purpose of having a positive, downward pressure on retail prices.
Extension of the regulation in substantially similar form will continue
its function as a limited market adjustment which again accounts for
its potential impact on all levels of the market, from farm to retail,
including the benefits of market stability.
As noted throughout the analysis under this and the previous
finding section, the Compact Commission has again considered and
accounted for the variety of potential market impacts in fashioning
this extension of the price regulation. The Commission remains
concerned with its potential, adverse impact on the wholesale market,
as well as with regard to unanticipated impacts on consumer prices.
While the Compact Commission has concluded that the regulation has
not and is not likely to adversely affect the wholesale market and may
well, indeed, have a positive impact on retail prices, the Commission
will ensure comprehensive monitoring of these market functions. The
Commission has also determined that it will commence a rulemaking
proceeding, pursuant to section 11 of the Compact, no later than July
1, 1998 during which it will make an assessment of, among other issues,
the data and analysis received as a result of its tracking analysis.
As a final safeguard against unanticipated, adverse consequences,
the Commission has again acted to ``hold harmless'' the WIC Program by
reestablishing the reimbursement provisions for all New England State
WIC Programs, despite the Commission's conclusion of the remoteness of
there occurring unanticipated, adverse consequences in the retail
market. Finally, as a new element of this monitoring procedure adopted
under the previous rulemaking, the Commission will establish a Task
Force to assess the specific impact of the regulation on the region's
School Lunch Programs and to determine whether it is appropriate to
establish some form of reimbursement for these programs.

[[Page 62822]]

C. Whether the Major Provisions of the Order, Other Than Those Fixing
Minimum Prices, Are Reasonably Designed To Achieve the Purposes of the
Order

The third provision of section 12(a) of the Compact requires that
the Compact Commission determine whether the non-price provisions of
the proposed rule would also be in the public interest, and, based on
the record before it, the Commission so finds. The Commission's
assessment focuses on two conditions: assurance that the 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. The Compact Commission finds that both
conditions are met by the final rule, as amended from the proposed
rule.
Based on their individual farm or cooperative experience with
production over the period January through August, 1997, several
commenters ⁸³ indicated that the price regulation had not
created an incentive for dairy farmers to produce additional, surplus
supplies of milk. They indicated that production for either their farm
or their cooperative was roughly the same in 1997 for the 8 month
period as for the same period in 1996.⁸⁴ One dairy farmer
indicated that in his experience, it is low prices that cause the
farmer to produce more milk in order to meet the monthly fixed
commitments for farm expenses.⁸⁵ Similarly, another
commenter indicated that the over-order producer price would likely not
be an incentive for increased production because the farmer will have a
better cash flow under the regulation and can avoid the extra costs of
increasing production with additional cows or other
strategies.⁸⁶
---------------------------------------------------------------------------

\83\ Leon Berthiaume, St. Albans Coop., PH at p. 63 and WC;
Sally Beach, IDA, PH at p. 85; Douglas Carlson, dairy farmer, PH at
p. 102; David Jaquier, dairy farmer, PH at p. 137; Norma O'Leary,
Ct. Farm Bureau, WC; Carl Peterson, dairy farmer, PH at p. 70;
Robert Wellington, AgriMark Coop., PH at p. 111 and WC.
\84\ Berthiaume indicated in his testimony, PH at p. 59-64 that
production for St. Albans Cooperative was the same for January
through June, 1997 as it was for the same period in 1996. It
increased 1% in July, 1997 and 2.3% in August, 1997, well below the
average increase in the 20 largest dairy states which was 5% and
4.4%, respectively.
\85\ Peterson. PH, p. 70.
\86\ Wellington, WC. In his written comment, he also made the
point that farm prices regularly below the costs of production will
not themselves generate any long-term additional supplies of milk.
---------------------------------------------------------------------------

Two commenters ⁸⁷ based their opinion that the
regulation will not elicit increased production on an analysis of the
interactive effect of the compact over-order price when applied in
complement to the Basic Formula Price (BFP) of the federal Milk Market
Order #1. Because the current compact over-order price of $16.94
establishes a partial floor price to the producer, the supply and
demand in the New England milkshed, the farmer receives appropriate
economic signals about the amount of production called for by the
market. They independently conclude that this mechanism provides a more
stable price for the producer while allowing the natural mechanisms of
the marketplace to influence supply and demand.
---------------------------------------------------------------------------

\87\ Smith and Wellington. op. cit.
---------------------------------------------------------------------------

The joint submission of Renee De Gues and William Gillmeister, both
dairy economists for the Vermont and Massachusetts Departments of
Agriculture, respectively, indicates that, based on reported data,
production levels in the region have not changed dramatically since the
Final Rule was implemented on July 1, 1997. Based on the data they
submitted, they conclude that ``the Compact is not stimulating
production in New York and Pennsylvania because from July through
September, milk production in those states seems to have matched milk
production patterns for the U.S.'', as a whole. Receipts for New York
and New England, while up over the same period in 1996, were normal
when compared to 1994 and 1995. In their joint submission, they report
that receipts from New York, Vermont and Connecticut increased by 0.6%,
0.17%, and 3.5%, respectively, from July to August, 1997. Receipts from
Maine, Massachusetts, New Hampshire, and Rhode Island fell by 1.6%,
2.1%, 1.4%, and 2.4%, respectively, from July to August, 1997.
Moreover, production levels were considerably below the average
increase in the national production.⁸⁸
---------------------------------------------------------------------------

\88\ Leon Graves, Commissioner, Vt. Dept. of Agriculture, Food
and Markets, WC.
---------------------------------------------------------------------------

The Compact Commission notes that the Commodity Credit Corporation
(CCC) made no purchases of surplus milk in the region during fiscal
year 1996 or 1997.⁸⁹ The Commission established a monitoring
plan in the May 30, 1997 Final Rule that will track regional and
national rates of production to determine whether the regional rate of
increased production is within 0.25% of the national rate of increased
production. If New England production levels do 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 increased production exceed the national
rate. The Commission will retain a portion of the proceeds of the price
regulation sufficient to cover such estimated costs, as necessary. See
62 FR 23054. In this rulemaking, the Commission determines that the
tracking procedure and the plan for paying CCC for any surplus
purchases are still the most viable and reasonable method for dealing
with any increased production in the region.
---------------------------------------------------------------------------

\89\ Wellington, WC.
---------------------------------------------------------------------------

On the basis of this record, the Compact Commission concludes that
neither additional supplies nor surplus production has occurred to date
nor does it expect any to occur under an extension of the Compact over-
order price regulation. The Commission will continue the tracking
procedures established under the current regulation to monitor
production, so as to allow appropriate action should an unanticipated
change in production patterns occur. 62 FR 23054. Pursuant to section
9(f) ⁹⁰ of the Compact, the Commission finds that it is not
now necessary to take any action to ensure that the over-order price
does not create an incentive for producers to generate additional
supplies of milk. If the monitoring procedures indicate the need for
such action, the Commission will take the necessary and feasible
action, as appropriate, to reimburse the Commodity Credit Corporation
for any purchases of resulting surplus supplies.⁹¹
---------------------------------------------------------------------------

\90\ When establishing a compact over-order price, the
commission shall take such action as necessary and feasible to
ensure that the price does not create an incentive for producers to
generate additional supplies of milk.'' Compact. section 9(f).
\91\ ``Before 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. 7256(6).
---------------------------------------------------------------------------

One commenter ⁹² suggested an amendment to the codified
regulations that would establish a method for assessing pro rata all
pooled producers for a three month period for the purpose of any
retroactive payment to the Commodity Credit Corporation for surplus
purchases. The Commission's response is that, should payments at the
end of the fiscal year to the commodity Credit Corporation be necessary
and appropriate, the entire producer pool ought to bear those costs,
when incurred. This mechanism provides an added disincentive for over-
production

[[Page 62823]]

by the pool producers appropriate under Section 9(e) of the Compact.
---------------------------------------------------------------------------

\92\ Leon Berthiaume, WC.
---------------------------------------------------------------------------

The inquiry on the second condition centers on the technical
provisions, currently codified in 7 CFR parts 1300, 1301, and 1303-
1307. These provisions establish the definitions and procedures for the
assessment of price regulation collection from processors and
disbursements to producers. The Commission finds, generally, that these
provisions continue to ensure uniform and equitable administration of
the price regulation. The provisions continue to be patterned closely
upon the underlying federal Milk Market Order #1, as they were when
adopted on May 30, 1997. 62 FR 29637. They are designed to and have, in
fact, worked since July 1, 1997 in complement to the Market Order with
the direct, technical assistance of the Market Order #1 Administrator's
office.
In response to the Compact Commission's proposal to extend and
amend generally the current provisions of the regulation, a number of
comments were received at both the public hearing and in later written
submissions. To allow later written comment on a number of technical
administrative issues, the Compact Regulation Administrator
⁹³ suggested in his testimony at the September 24, 1997
public hearing, that an additional criteria be added to 7 CFR
1301.11(b), relating to qualifying as a producer under the regulation,
to include having moved milk into the regulated area for more than half
the days during December of 1997. The current rule provides that any
dairy farmer who moved milk into New England in December of 1996 for
over half of the days on which he or she shipped milk qualified for the
over-order producer price. This reflects the traditional parallel
provision of the federal Milk Market Order for qualifying for pooling
during a specific time period of each year.⁹⁴ Those who
qualify during this specific period have demonstrated that they are
traditionally associated the regional milkshed. The Commission finds it
reasonable and consistent to provide a parallel one month qualifying
period for December of 1997 added to December of 1996. It, therefore,
amends 7 CFR 1301.11(b) to insert ``and December 1997'' after December,
1996 in the current regulation.
---------------------------------------------------------------------------

\93\ Carmen L. Ross, Compact Regulation Administrator, PH at pp.
44-55.
\94\ Under the federal Milk Market Order #1 regulatory
provisions, producers qualify who ship milk for over half of the
days in July through August each year.
---------------------------------------------------------------------------

The same commenter also suggested that 7 CFR 1301.11(b) be further
amended by adding a provision that would limit the total amount of milk
at a pool plant eligible to qualify out of region producers to the
total bulk receipts of fluid milk products less the total bulk
transfers of fluid milk products (not including bulk transfers of
skimmed milk and condensed milk).
The principal criterion for qualifying a producer for the over-
order producer price is whether the farmer has committed to supply the
Compact area milkshed. Out of area producer milk being shipped into a
Compact area pool plant and then transferred out of the plant for
distribution outside of the regulated area does not meet that criteria.
The commenter noted that, under the current version of this section,
milk could be shipped into a pool plant only to qualify the producer
for the Compact over-order producer price. The Commission finds that
the suggestion deals adequately with this problem and is consistent
with the principal criteria for producer qualification of a
demonstrated commitment to supply the New England milkshed. There are,
however, additional problems associated with this suggested provision.
Another commenter ⁹⁵ advocated that the current rule not
be amended and that the current treatment of plant diversions be left
in place, to parallel the treatment under the federal Milk Market
Order. He pointed out that plant diversions are part of everyday life
in all regions of the country and that these diversions are required by
a variety of circumstances. A third commenter ⁹⁶ pointed out
that it would be unfair to penalize the out of area producers and
prevent their qualification because business necessity at the plant
required that producer's milk be transferred on any particular day. He
suggested that ``reloading'' occurs for a variety of reasons, among
which are varying seasonal demand and supply in the milkshed, and that
a percentage limit on bulk milk transfers for purposes of qualifying
out of region producers could solve the problem while not distorting
normal business practice.
---------------------------------------------------------------------------

\95\ Eugene Madill, CEO, Dairylea Coop., PH at p. 37.
\96\ Wellington, PH at p. 109 and WC.
---------------------------------------------------------------------------

A dairy processor from New York ⁹⁷ identified a somewhat
related concern with regard to the current rules for qualified out of
region producers whose milk is shipped to a pool plant in the regulated
area with sales outside the regulated area in competition with the New
York processor. According to the commenter, the New York processing
facility must match the over-order producer price paid by the New
England-based pool plant to qualified New York producers in order to
assure maintenance of raw product supply. According to the commenter,
this payment raises the New York processor's costs compared with the
New England processing facility's costs.
---------------------------------------------------------------------------

\97\ Gary Dake, Vice-President, Stewart's Processing Corp.,
Saratoga Springs, NY, WC.
---------------------------------------------------------------------------

This comment raises a similar concern to that presented with regard
to bulk transfers, in that new milk is being pooled which is not
traditionally associated with the pool for the regulated New England
area. The Commission responds to this comment by amending the
regulation to limit producer qualification in some instances with
regard to milk utilized for sales outside the region. All out of region
producers historically associated with the milkshed for the region, or
those providing supply in December 1996 and 1997, will qualify on that
basis. Newly supplying producers, however, will qualify only to the
extent that their receiving plant has sales in the regulated region
attributable to such new, additional, supply.
In recognition of the problem to which Ross's suggested amendment
is addressed, to reflect the need to accommodate reloading as a current
business practice for balancing milk supplies to fit consumer needs and
available plant capacity, and to correct the problem pointed out by the
New York processor, the Compact Commission adopts two new provisions in
Sec. 1301.11(b) which will:
(a) restrict a handler's ability to increase its out of region
producer supply not traditionally associated with regulated area, by
limiting the out of region producer qualification to only 10% of the
milk received from those producers but subsequently reloaded and
transferred in bulk for disposition out of the region; and will:
(b) provide for minimization or elimination of qualification of out
of region producers whose milk is shipped to a pool plant that packages
the milk for sale outside of the regulated area, solely for such sales.
To reflect the decisions of the Compact Commission to include these
new provisions, 7 CFR 1301.11 (b) is amended as indicated infra in
``Codification in Code of Federal Regulations''.
One commenter ⁹⁸ suggested that the five month
qualifying period be reduced to 3 months to allow more out of region
producers to take advantage of the over-order producer price. Another

[[Page 62824]]

commenter,⁹⁹ however, advocated that the qualifying period
remain at the five months required by the current provision. The
Compact Commission's response to these comments is that the five month
period is a reasonable measure of a producer's initial commitment to
supply the New England milk pool. The Commission concludes that the
current provision with the suggested amendments adopted above ensures
equitable and uniform treatment of out of region producers. The
Commission, therefore, will continue the current five month requirement
in 7 CFR 1301.11(b).
---------------------------------------------------------------------------

\98\ Garry Warren, PH at p.126.
\99\ Wellington, WC.
---------------------------------------------------------------------------

A previous commenter ¹⁰⁰ suggested another amendment to
clarify the current regulation in 7 CFR 1304.5 dealing with the
classification of milk. He suggested deleting the current provision at
Sec. 1304.5(a) and adding a new subsection (a) to clarify that fluid
milk products which had been pooled at a New England pool plant and
shipped to a partially regulated plant will be attributed only to the
pool plant. This suggestion ensures that milk already subject to the
Compact over-order obligation at the pool plant will not again be
subject to the obligation at a partially regulated plant to which it is
later shipped.
---------------------------------------------------------------------------

\100\ Carmen L. Ross, Id.
---------------------------------------------------------------------------

Although no double billing has occurred under the current
provision, this clarification will ensure that it cannot happen. There
was no comment opposing this suggestion.
The Compact Commission agrees that the current provision should be
clarified to ensure uniform and equitable administration of the
regulation. The Commission, therefore, adopts the amendment to delete
the current language at 7 CFR 1304.5(a) and to replace it with a new
subsection (a) as is indicated infra in ``Codification in Code of
Federal Regulations.''
The Commission notes that the current codified provision at
Sec. 1305.1 establishing the Compact over-order Class I price does not
include the dollar amount adopted by the Commission on May 30, 1997.
Because of the need for clarity in the codified regulations, the
Compact Commission amends that section to include reference to the new
Compact over-order price of $16.94, as indicated infra in
``Codification in Code of Federal Regulations.''
The same commenter suggested that 7 CFR 1306.1 and 1306.2 be
amended to establish a parallel exemption from regulation with that of
the federal Milk Market Order #1 for any dairy processor who handles
less than an average of 300 quarts per day. He points out that these
limited amounts of milk should be excluded from the Compact pool as a
de minimus exemption because of the relatively small amounts of the
Compact over-order obligation and consequent producer price
distribution. There was no further comment received on this suggestion.
The Compact Commission finds merit in the suggestion as a way to
simplify administration of the regulation and to reflect the practice
under the federal Milk Market Order system. The Commission, therefore,
amends 7 CFR 1306.1 and 1306.2 as is indicated infra. ``Codification in
Code of Federal Regulations.''
The same commenter pointed out that, in the notice of final
rule,¹⁰¹ the Compact Commission adopted the requirement of a
formal agreement for a reimbursement system between the Commission and
the State WIC Program directors, to be approved by the Food and
Consumer Service of the USDA, that will ensure reimbursement of any
additional costs incurred by those programs because of the over-order
price regulation, the requirement was inadvertently omitted from the
codification. In the same final rule notice, the Commission had also
approved the establishment of a Commission reserve account for
reimbursement of anticipated WIC Program costs.
---------------------------------------------------------------------------

\101\ 62 FR 29630.
---------------------------------------------------------------------------

As explained in the prior finding analysis, the Commission has
reestablished and extended the WIC reimbursement system.¹⁰²
The Commission, therefore, amends 7 CFR 1306.3 to add a new subsection
(b).
---------------------------------------------------------------------------

\102\ See: Discussion of the WIC Programs, supra.
---------------------------------------------------------------------------

In addition, the Compact Commission notes that, although it adopted
a mechanism for reserving funds to cover any costs to be reimbursed to
the Commodity Credit Corporation for surplus purchases in its Proposed
and Final Rule,¹⁰³ it did not include any provision in the
codified regulations. To address that omission, the Commission amends 7
CFR 1306.3 further to add a new subsection (c) and to redesignate the
remaining subsections to be (d) through (f), as indicated infra in
``Codification in Code of Federal Regulations.''
---------------------------------------------------------------------------

\103\ 62 FR 23054 and 29638.
---------------------------------------------------------------------------

The same commenter also suggested changes needed to 7 CFR 1307.1
both to accommodate new references required by the above amendments and
to correct the language. There was no additional comment on these
suggestions. The Commission adopts these suggestions and amends 7 CFR
1307.1, as indicated infra in ``Codification in Code of Federal
Regulations.''
The same commenter suggested changes to 7 CFR 1307.2 to clarify the
intent and to delete subsection (c) which is not needed. There were no
additional comments on this suggestion. The Compact Commission agrees
with the comments and amends 7 CFR 1307.2 by deleting (c) in its
entirety and amending (b) (1) and (2), as indicated infra in
``Codification in Code of Federal Regulations.''
This same commenter's last suggestion for changes to the codified
provisions of the regulation was to amend 7 CFR 1307.4 to exclude milk
at a partially regulated plant that was diverted from a pool plant,
where it was already pooled for purposes of the Compact over-order
price obligation. There was no additional comment on this suggestion.
Because this amendment will ensure that the price obligation not be
assessed twice on the same milk, the Commission adopts the suggestion
and amends 7 CFR 1307.4(f), as indicated infra in ``Codification in
Code of Federal Regulations.''
Another commenter ¹⁰⁴ suggested an amendment to 7 CFR
1304.4(a)(ii) to avoid the assessment of the over-order obligation on a
cooperative for bulk milk which the cooperative ships to other pool or
partially regulated plants. He points out that under the current
regulation the cooperative and its membership are financially
responsible for the assessment for which the receiving plant is billed
by the cooperative and which will ultimately be paid by the receiving
plant. He suggests that it is more appropriate that the second
processing plant be financially responsible than the farmer
cooperative.
---------------------------------------------------------------------------

\104\ Leon J. Berthiaume, WC.
---------------------------------------------------------------------------

The Compact Commission's response is that the over-order price
obligation is imposed on this particular cooperative as a processor
operating a compact pool plant. It is a traditional technique of milk
market regulation to impose the obligation on the pool plant that
receives the milk from the producer. It is, therefore, appropriate that
the cooperative continue to be responsible for the obligation as the
operator of the receiving pool plant.
With these amendments to the current codified provisions of the
price regulation, the Commission finds that the major provisions of the
order, other than those fixing minimum prices, are reasonably designed
to achieve the purposes of the order.

[[Page 62825]]

Finally, the Compact Commission concludes that the administrative
assessment of $0.032 per hundredweight of milk on all route
dispositions of class I fluid milk in the territorial region of the six
New England states should be extended in order to finance the budgeted
costs for administration of the Compact Commission's regulations
through the effective period of the rule. The Commission notes that the
additional, start-up assessment of approximately $0.013 per
hundredweight presently imposed will expire with final payment in
December of 1997.

III. Required Findings of Fact

Pursuant to Compact Article V, Section 12, the Compact Commission
hereby finds:
(1) That the public interest will be served by the continuation of
minimum prices in the amount of $16.94 (Zone 1) to dairy farmers under
Article IV for the period January 1, 1998 through termination of the
Compact enabling legislation.
(2) That a level price of $16.94 (Zone 1) 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.
(4) That the terms of the proposed price regulation were approved
by producers by referendum.¹⁰⁵
---------------------------------------------------------------------------

\105\ Section 13 of the Compact requires that the Commission
conduct a referendum among producers and that, at least, two-thirds
of the voting producers approved the regulation. A separate notice
in the Federal Register certifies the results of the referendum
pursuant to the following Referendum Approval Certification
Procedure:
The Compact Commission resolves and adopts this procedure for
certifying whether the price regulation adopted by this final rule
has been duly approved by producer referendum in accordance with
Compact Article V, section 12.
________ is hereby designated as ``Referendum Agent'' and
authorized to administer this procedure.
The designated Referendum Agent shall:
1. Verify all ballots with respect to timeliness, producer
eligibility, cooperative identification, authenticity and other
steps taken to avoid duplication of ballots. Verification of ballots
shall include those cast individually by block vote. Ballots
determined by the Referendum Agent to be invalid shall be marked
``disqualified'' with a notation of the reason for disqualification.
Disqualified ballots shall not be considered in determining approval
or disapproval of the regulation.
2. Compute and certify the following:
A. The total number of ballots cast.
B. The total number of ballots disqualified.
C. The total number of verified ballots cast in favor of the
price.
D. The total number of verified ballots cast in opposition to
the price regulation.
E. Whether two-thirds of all verified ballots were cast in the
affirmative.
3. Report to the Executive Director of the Compact Commission
the certified computations and results of the referendum under
Section 2.
4. At the completion of his or her work, seal all ballots,
including the disqualified ballots, and shall submit a final report
to the Executive Director stating all actions taken in connection
with the referendum. The final report shall include all ballots cast
and all other information furnished to or compiled by the Referendum
Agent.
The ballots cast, the identity of any person or cooperative, or
the manner in which any person or cooperative voted, and all
information furnished to or compiled by the Referendum Agent shall
be regarded as confidential.
The Executive Director shall publish the certified results of
the referendum in the Federal Register.
---------------------------------------------------------------------------

List of Subjects in 7 CFR Parts 1300, 1301, 1303-1307

Milk.

Codification in Code of Federal Regulations

For reasons set forth in the preamble, the Compact Commission
amends title 7, chapter XIII, as follows:

PART 1301--DEFINITIONS

1. The authority citation for part 1301 continues to read as
follows:

Authority: 7 U.S.C. 7256

2. In Sec. 1301.11, paragraph (b) is revised to read as follows:

Sec. 1301.11 Producer.

* * * * *
(b) A dairy farmer who produces milk outside of the regulated area
that is moved to a pool plant, provided that on more than half of the
days on which the handler caused milk to be moved from the dairy
farmer's farm during December 1996 and December 1997, all of that milk
was physically moved to a pool plant in the regulated area. Or: to be
considered a qualified producer, on more than half of the days on which
the handler caused milk to be moved from the dairy farmer's farm during
the current month and for five (5) months subsequent to July of the
preceding calendar year, all of that milk must have moved to a pool
plant, provided that the total amount of milk at a pool plant eligible
to qualify producers who did not qualify in December 1996 and December
1997 shall not exceed the total bulk receipts of fluid milk products
less:
(1) Producer receipts as described in paragraph (a) of this section
and producer receipts as described in paragraph (b) of this section who
are qualified based on December 1996 and December 1997;
(2) 90% of the total bulk transfers of fluid milk products (not
including bulk transfers of skimmed milk and condensed milk) disposed
outside of the regulated area; and
(3) 100% of packaged fluid milk products disposed outside of the
regulated area.
* * * * *

PART 1304--CLASSIFICATION OF MILK

1. The authority for part 1304 continues to read as follows:

Authority: 7 U.S.C. 7256.

2. In Sec. 1304.5, paragraph (a) is revised to read as follows:

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

* * * * *
(a) Subtract from the total pounds of fluid milk products in Class
I the pounds of fluid milk products in:
(1) Receipts of Class I fluid milk products from pool plants if
reported and classified Class I by the pool plant;
(2) Disposition of Class I fluid milk products outside of the
regulated area;
(3) Receipts of exempt fluid milk products pursuant to Section
1301.13 (a), (b), and (c) of this Chapter.
* * * * *

PART 1305--CLASS PRICE

1. The authority citation for part 1305 continues to read as
follows:

Authority: 7 U.S.C. 7256.

2. Section 1305.1 is revised to read as follows:

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 $16.94 per hundredweight.
(b) The compact over-order obligation shall be computed as follows:
(1) The compact Class I price ($16.94);
(2) Deduct Federal Order #1 Zone 1, Class I price;
(3) The remainder shall be the compact over-order obligation.

PART 1306--COMPACT OVER-ORDER PRODUCER PRICE

1. The authority for part 1306 continues to read as follows:

Authority: 7 U.S.C. 7256.

2. Sections 1306.1, 1306.2, and 1306.3 are revised to read as
follows:

[[Page 62826]]

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) of the chapter with
respect to milk that was not received at a pool plant, as directed in
this section. Any pool plant that does not exceed a daily average of
300 quarts of disposition in the compact regulated area in the month
shall not be subject to the compact over-order obligation. The total
assessment for each handler is to be calculated by multiplying 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 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
disposition in the regulated area by the operator of a partially
regulated plant as directed in this section. Any partially regulated
plant that does not exceed a daily average of 300 quarts of disposition
in the compact regulated area in the month shall not be subject to the
compact over-order obligation. The total assessment for each handler is
to be calculated by multiplying the pounds of Class I fluid milk
products as determined pursuant to Sec. 1304.1 (a) of this chapter 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 of this chapter 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) of this chapter.
(b) Subtract 3% of the total value computed pursuant to paragraph
(a) above for the purpose of retaining a reserve for WIC pursuant to
the Formal Agreement for reimbursement of WIC Program costs entered
into between the Commission and the six New England State WIC Program
Directors, as approved by the Food and Consumer Service of the United
States Department of Agriculture (USDA);
(c) In any month when the average percentage increase in production
in the regulated area comes within 0.25 of the average percentage
increase in production for the nation, subtract from the total value
computed pursuant to paragraph (a) above, for the purpose of retaining
a reserve, an amount estimated by the Commission in consultation with
the USDA for anticipated costs to reimburse the Commodity Credit
Corporation (CCC) at the end of its fiscal year for any surplus milk
purchases. Should those funds not be needed because no surplus
purchases were made by the CCC at the end of its fiscal year, it is to
be disbursed as follows:
(1) Any producer who has received payment from a handler pursuant
to Sec. 1307.4 shall become eligible to receive a pro rata disbursement
by submitting to the Commission documentation that the producer did not
increase production of milk during and after the month on which the
regional rate of production increase met or exceeded the national rate
of production increase, as compared to the same period in the
preceeding year. Such documentation shall be filed with the Commission
not later than 45 days after the end of the fiscal year.
(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 production of milk by all
producers eligible for refunds, and the total amount of production by
each eligible producer.
(d) 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;
(e) 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
(f) 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.

PART 1307--PAYMENTS FOR MILK

1. The authority citation for part 1307 continues to read as
follows:

Authority: 7 U.S.C. 7256.

2. Sections 1307.1 and 1307.2 are revised to read as follows:

Sec. 1307.1 Producer-settlement fund.

(a) The compact commission shall establish and maintain a separate
fund known as the producer-settlement fund. It shall deposit into the
fund all amounts received from handlers under Sec. 1307.3, Sec. 1307.7,
and Sec. 1307.8 of this Chapter and the amount subtracted under
Sec. 1306.3(f). It 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(d) subject to their right to offset any amounts due
from the handler under these sections and under Sec. 1308.1 of this
chapter.
(b) All amounts subtracted under Sec. 1306.3(f), 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(d).
(c) The compact commission shall place all monies subtracted under
Sec. 1306.3(b), 1306.3(c), and 1306.3(f) 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) of this chapter shall be the value computed pursuant to
Secs. 1306.1 and 1306.2.
(b) The producer-settlement fund credit for each plant and each
cooperative association in its capacity as a handler under Sec. 1301.9
(d) shall be computed as specified in this paragraph.
(1) Multiply the quantities of producer milk that were reported by
pool plants pursuant to Sec. 1303.1 and the quantities or 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 all producer milk
reported pursuant to Sec. 1303.1(c) by the basic over-order producer
price computed under Sec. 1306.3.
3. In Sec. 1307.4, paragraph (f) is revised to read as follows:

[[Page 62827]]

Sec. 1307.4 Payments to producers.

* * * * *
(f) At a partially regulated plant each handler shall make
payments, on a pro rata basis, to all producers and dairy farmers for
milk (excluding diverted pool producer milk) received from them during
the month, the payment received pursuant to Sec. 1307.3 (b).
Daniel Smith,
Executive Director.
[FR Doc. 97-30602 Filed 11-24-97; 8:45 am]
BILLING CODE 1650-01-P