Federal Register, Volume 63 Issue 39 (Friday, February 27, 1998)

[Federal Register Volume 63, Number 39 (Friday, February 27, 1998)]
[Rules and Regulations]
[Pages 10104-10111]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-4140]

[[Page 10103]]

_______________________________________________________________________

Part III

Northeast Dairy Compact Commission

_______________________________________________________________________

7 CFR Part 1301

Compact Over-Order Price Regulation; Final Rule

Results of Producer Referendum on Compact Over-Order Price Regulation;
Final Rule

Federal Register / Vol. 63, No. 39 / Friday, February 27, 1998 /
Rules and Regulations

[[Page 10104]]

NORTHEAST DAIRY COMPACT COMMISSION

7 CFR Part 1301

Compact Over-Order Price Regulation

AGENCY: Northeast Dairy Compact Commission.

ACTION: Final rule.

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SUMMARY: This rule amends the current Compact Over-Order Price
Regulation to exempt from the regulation any fluid milk sold in eight-
ounce containers distributed by handlers under open competitive bid
contracts and sold by School Food Authorities in New England during the
1998-1999 contract year, to the extent an increased cost of such milk
is documented as attributable to operation of the price regulation. The
Compact Commission will reimburse School Food Service Authorities for
such documented increased costs.

EFFECTIVE DATE: April 1, 1998.

ADDRESSES: Northeast Dairy Compact Commission, 43 State Street, P.O.
Box 1058, Montpelier, Vermont 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--Pub. L. 93-320; Maine--Pub. L. 89-437, as
amended, Pub. L. 93-370; Massachusetts--Pub. L. 93-370; New Hampshire--
Pub. L. 93-106; Vermont--Pub. L. 89-95, as amended, 93-57. Consistent
with Article I, Section 10 of the United States Constitution, Congress
consented to the Compact in Pub. L. 104-127 (FAIR ACT), Section 147,
codified at 7 U.S.C. sec. 7256. Subsequently, the United States
Secretary of Agriculture, pursuant to 7 U.S.C. sec. 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.

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. Price regulation also
provides for payment of a uniform ``over-order'' price, out of the
proceeds of the price regulation, to dairy farmers making up the New
England milkshed, regardless of the utilization of their milk. 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.'')
Section 11 of the Compact delineates the administrative procedure
the Compact Commission must follow in deciding whether to adopt or
amend 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.
Sec. 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.

As part of any rulemaking procedure to establish or amend a price
regulation, Section 12(a) of the Compact, directs the Commission to
make four 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.
(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 its first rulemaking procedure in December, 1996.¹
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, 1997-December 31, 1997.² 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 and whether to amend the regulation
generally.³ On November 25, 1997, a final rule was issued
extending the price regulation through to sunset of the Compact
enabling

[[Page 10105]]

legislation, and amending the technical regulation in certain
instances.⁴
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\1\ The Commission issued a notice of Hearing on December 13,
1996, 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 1300, et seq. Minor corrections
to the proposed rule were published 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.
\2\ 62 FR 29627 (May 30, 1997).
\3\ 62 FR 47156 (September 8, 1997)
\4\ 62 FR 62810 (November 25, 1997)
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On December 11, 1997 (62 FR 65226), the Compact Commission issued a
notice of proposed rulemaking ⁵ to exempt from the
regulation fluid milk distributed by handlers under open and
competitive bid contracts for the 1998-1999 contract year with New
England School Food Authorities for child nutrition programs qualified
for reimbursement under the National School Lunch Act and the Child
Nutrition Act.⁶ The Notice set a public hearing for December
29, 1997, as required by Section 11 of the Compact, and, pursuant to
the Commission's bylaws, invited the public to submit written comments
through January 12, 1998.
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\5\ The proposed rulemaking stemmed from the report of a
Commission Ad Hoc Committee established pursuant to the final rule
adopted on November 25, 1997. The rule charged the task force with
assessing the impact of the Compact over-order price regulation on
school food service programs and to ``make recommendations as to
whether the region's school food service 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 authorities.'' 62 FR 62820.
\6\ National School Lunch Act of 1946, Pub. L. 79-396; Child
Nutrition Act of 1966, Pub.L. 89-642.
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Based on the oral testimony and written comment received, and by
reference to the reasoning set forth in its previous and final rules,
the Compact Commission hereby amends the current Compact Over-order
Price Regulation to exempt from the regulation fluid milk distributed
by handlers under open and competitive bid contracts for the 1998-1999
contract year and sold by School Food Authorities, to the extent that
an increased cost for such milk can be documented as attributable to
operation of the price regulation.
The technical provisions of the Compact Over-order Price Regulation
is codified at 7 CFR 1300 through 1308.1. The rule amends the
regulation by adding a new paragraph (e) to 7 CFR 1301.13 Exempt milk.
Immediately following is a summary analysis and response to the
comments 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.

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

The Commission duly considered oral and written comment received at
the December 29, 1997 ⁷ hearing and the considered
additional comments received by the Compact Commission's published
deadline of January 12, 1998. The Compact Commission met on January 26,
1998 to consider and act on the comment received.⁸
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\7\ December 11, 1997, 62 FR 65226.
\8\ Public Notice of the January 26, 1998 meeting was published
originally on January 9, 1998, 63 FR 1396. The meeting was
rescheduled for January 26, 1998 (63 FR 3267, published January 22,
1998).
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Fifty-one separate comments were received during the hearing and
written comment period. Of the total commenters, thirty-one expressed
support for the regulation's amendment and fifteen expressed opposition
to its amendment. The remaining five commenters took no apparent
position on the proposal.
Ten of the fourteen commenters opposing the amendment were farmers.
The remainder included representatives of farmer groups or
organizations representing farmers. Five farmers spoke in support of
the exemption.⁹ Nine of the remainder of the thirty-two
commenters supporting the amendment were directly employed in providing
school lunches to schools, including representatives from Canton,
Walpole, Pittsfield, Wakefield, Essex, and Quincy, Massachusetts. The
remaining commenters in support of the exemption are a diverse group,
including representatives of the region's departments of agriculture,
officials of dairy farmer cooperatives and other farmer organizations,
and a state legislative representative from Massachusetts.
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\9\ One farmer, Bill Peracchio, initially testified against the
exemption at the public hearing, but subsequently submitted written
testimony in support of the exemption.
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Those farmers opposed to the amendment spoke of their strong
support for the Compact and the need to keep the price regulation
intact. Most of these commenters spoke in specific terms of the
importance of the price regulation to the viability of their farming
operations, but only in general terms with regard to its possible
impact on school food service programs. The commenters who testified in
favor of the exemption as food service program administrators provided
specific evidence of the potential cost to their programs caused by the
price regulation, and the importance of exemption from such cost. They
described how food service programs are non-profit and predominantly
self-supporting, and can absorb increased cost inputs only by price
increases for meals or a la carte items. These commenters also
emphasized the nutritional importance of milk. Many referred to the
existing exemption in the price regulation for the Special Supplemental
Nutrition Program for Women, Infants and Children (WIC) as a
justification for treating school food service programs in a similar
manner.
Other commenters who spoke in favor of establishing an exemption
for school food service programs cautioned against making the exemption
broader than necessary. Rather than exempting all milk sold to schools
for the entire amount of the over-order price regulation, as in the WIC
model, these commenters stressed the need for an exemption procedure by
which only the actual, documented, amount of increased cost for milk
sold in eight-ounce containers directly attributable to the price
regulation would be reimbursed.¹⁰
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\10\ These commenters included representatives from the
Connecticut Farm Bureau, Agri-Mark, Inc., Massachusetts Cooperative
Milk Producer's Federation, Independent Dairymen's Association, St.
Albans Cooperative Creamery, Inc. and the Connecticut, Massachusetts
and Vermont Departments of Agriculture.
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The November 25, 1997 final rule establishing the present Compact
over-order price regulation, as well as its predecessor promulgated May
30, 1997, defined as a governing principle the importance of assuring
that the regulation does not adversely affect operation of child
nutrition programs. Stemming in part from this governing principle,
despite the Commission's overall determination that the end-consumer
market would be positively affected by operation of the price
regulation over time, the Commission established an exemption for the
WIC program. This exemption was established in part because of the
determination that the WIC program is unique as a capped entitlement
program, but also out of an abundance of caution to assure that the
program would be ``held harmless'' against any unanticipated short-term
market distortions or other consequences attributable to the price
regulation.
Following from this underlying, governing principle, the Commission
is persuaded by the comment received in the present rulemaking
procedure of the need to establish a limited exemption for school food
service programs.¹¹ The Commission is responding, at bottom,
to the universal understanding of the nutritional importance of milk
for child nutrition, and the central role that school food service
programs play in providing for child nutrition.

[[Page 10106]]

Accordingly, the Commission hereby amends the price regulation to
exempt milk sold in eight-ounce containers by school food service
programs during the 1998-1999 school year, to the extent an increased
cost attributable to operation of the price regulation is documented.
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\11\ As explained below, the comment received makes clear that
the exemption should apply to all milk served by school food service
programs rather than only milk provided through government
supplemental nutrition programs by schools, as set forth in the
proposed rule.
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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 Amendment

As noted above, Section 12(a) of the Compact directs the Commission
to make four findings of fact before an amendment of the over-order
price regulation can become effective.
The first finding considers whether the establishment of an
exemption mechanism for milk sold in eight-ounce containers by school
food service programs serves the public interest. The Compact
Commission finds that the public interest will be served by a
reimbursement process for the school year contract period for 1998-
1999, or September, 1998-June, 1999.¹²
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\12\ As developed further below, the Commission notes that the
Compact sunsets by law no later than April, 1999, so that the actual
term of the exemption is in reality from September, 1998-April,
1999.
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The second finding considers the level of producer price needed to
cover costs of production and to assure an adequate local supply of
milk. The Compact Commission finds that the exemption for milk sold in
eight-ounce containers by school food service programs will reduce the
net producer price established under the regulation by approximately
three percent. Such a reduction will adversely affect to some degree
the regulation's intended function as contemplated under this finding
analysis. Nonetheless, the Commission concludes that this impact must
be balanced within the overall context of the public interest
contemplated under the first finding analysis, in which the paramount
importance of child nutrition programs is overriding.
The fourth finding, requiring the determination of whether the
amendment has been approved by producer referendum pursuant to Article
IV, Section 12 of the Compact, is invoked in this instance given that
the amendment will affect the level of the price regulation on the
producer side. In this final rule, as in the previous final rules, the
Compact Commission makes this finding premised upon certification of
the referendum's results 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.¹³
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\13\ The third finding requires a determination of whether the
provisions of the regulation other than those establishing minimum
milk prices are in the public interest. The amendment serves only to
establish a direct exemption from the price regulation itself. The
matter of the public interest is thereby addressed under the first
required finding and not under this finding. In any event, the
Commission concludes that the price regulation, with operation of
the amendment, remains in the public interest in the manner
contemplated by this finding.
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A. Whether an Amendment to the Price Regulation Establishing A
Reimbursement Provision for Milk Sold in Eight-Ounce Containers by
School Food Service Programs Will Serve the Public Interest

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

(1) Whether the public interest will be served by the
establishment of minimum milk prices to dairy farmers under Article
IV.

Compact, Art. V., Section 12(a)(1).
In its prior rulemakings, as part of a broad ranging consideration
of the public interest in price regulation, the Compact Commission
directly addressed the anticipated impact of the price regulation on
child supplemental nutrition programs. The Commission there determined
that school food services programs operate essentially in accordance
with the broad parameters of the competitive retail marketplace,
whereby the price for school milk sold in eight-ounce containers is set
through an open, competitive, bid process. Based on a direct reference
to a General Accounting Office study's description of the programs, the
Commission determined that:

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.¹⁴
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\14\ GAO Report 13-239877 at p. 2 (October 16, 1992) submitted
by Jim Jeffords as Additional Reply Comment, April 9, 1997; see also
62 FR 23050.

All commenters in the present rulemaking procedure, whether for or
against an exemption, agree on the importance of school food service
programs in ensuring that children have the opportunity to eat a
nutritious and balanced meal at lunchtime during the school day (and at
breakfast, where such meals are available). According to the comment
received, milk provides 23-38 percent of the daily calcium requirement
critical to bone development, depending on age, as well as other
important nutrients and vitamins.¹⁵
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\15\ Nancy E. Sandbach, Director of Nutrition Education, New
England Dairy and Food Council, WC, January 5, 1998.
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One registered dietician explained why milk is such a valued and
critical source of child nutrition:

Now there are other sources of calcium. They include broccoli,
kale, turnip and beet greens, canned fish, tofu, dried peas and
beans. Frankly, none of these are really popular with children. So
you can see that not only the most economical but the most
acceptable source of calcium is milk or milk products.¹⁶
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\16\ Lois Black, Registered Dietician, Hamilton-Wenham Regional
School District, December 29, 1997, Public Hearing at 43.

One farm couple, though opposed to an exemption, summed up the
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universal understanding of milk's importance as a nutritional source:

Nutritionally, young children should consume their minimum daily
requirements of calcium to avoid later skeletal problems. Calcium is
stored as money in the bank for use in later life.¹⁷
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\17\ Jacqueline and Dale Lewis, WC, January 12, 1998.

The Commission received extensive, additional comment from
directors of school food services programs about the operation and
financing of these programs, and about the significance and relative
cost of milk to the success of these programs.¹⁸ The food
service program directors described how their programs are for the most
part self-funding, or without external funding from municipalities or
state government, and receive only partial reimbursement from the
federal government. The non-profit nature of the programs was also
delineated. For example, the profit and loss statement for one program
disclosed a total profit of $707.48 against total expenditures of
$701,218.05, and it was explained that this surplus was intended as a
carry-

[[Page 10107]]

over to cover initial costs for the subsequent school
year.¹⁹
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\18\ Tina Lauersdorf, Food Service Director, Wakefield, MA
Public Schools, December 29, 1997, Public Hearing at p. 25; Lois
Black, Registered Dietician, Hamilton-Wenham, MA Regional School
District, PH at p. 41; and Jaqueline Morgan, Food Services Director,
Walpole, MA Public Schools, PH at p. 80. See also Allen Brown,
Kenneth Leon and Marsha J. Maher, Canton, MA Public Schools, WC,
December 22, 1997.
\19\ Jaqueline Morgan, Food Services Director, Walpole, MA
Public Schools, WC, January 9, 1998.
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Sales of milk by school food service programs, predominantly in
eight-ounce containers, were described as occurring in two forms,
either as part of a breakfast or lunch meal package or a la Carte.
Lunch meal prices, including the milk container, are in the range of
$1.00-$1.75.²⁰ A la Carte milk prices ranged from $0.35-
$0.50 per container.
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\20\ Lois Black, Registered Dietician, Hamilton-Wenham Regional
School District, December 29, 1997, Public Hearing at 77; Jaqueline
Morgan, Food Services Director, Walpole, MA Public Schools, December
29, 1997, Public Hearing at p. 129.
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These commenters, as well as others,²¹ described the
milk procurement process for school food service programs. Supply
contracts for a subsequent school year are put out to bid by individual
districts or consortiums of districts, usually in April or May. After a
review process, the contracts are let in July. By law, Massachusetts'
school districts must accept the lowest bid received.
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\21\ See e.g. William J. Gillmeister, Economist, Massachusetts
Department of Agriculture, WC, January 12, 1998.
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Bids and contracts take two forms, variable or fluctuating, and
fixed. Fluctuating bids and contracts account for the variability in
the vendor/processor's procurement cost, attributable to the monthly
changes in federal milk market order pricing for fluid, or Class I
milk. Fluctuating bids and contracts account for these changes by the
establishment of a benchmark price as of a particular month, with
allowance for subsequent changes in the market order price. Fixed bids
and contracts do not allow for any such variability in the school
program procurement price; the inherent variability in the processor's
cost is built into the price upfront, and applies for the duration of
the contract.²²
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\22\ See Jaqueline Morgan, WC January 9, 1998, ``Cooperative
Purchasing, Specifications for Milk and Milk Products, FY 1997-98'';
see also William J. Gillmeister, WC, January 12, 1998.
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According to statistics provided by the Massachusetts Department of
Agriculture, approximately half each of all contracts are let by the
fixed and variable methods. Also according to the Department's
statistics, school food service program sales of milk amount to
approximately three to four percent of all total fluid milk sales in
the New England region.
All commenters associated with school food service programs were
unanimous in expressing their concern that the programs are extremely
sensitive to cost increases for milk. All expressed the concern that
increases in milk costs could adversely affect their ability to provide
milk to schoolchildren. These commenters all indicated that they
understood the Compact price regulation as causing such a price
increase, with the resulting adverse impact on their programs. For this
reason, all commenters associated with school food service programs
requested an exemption from the price regulation for their milk
purchases.
As noted by many other commenters, however, the commenters
associated with the school food service programs based their
calculations of the potential or actual impact of the price regulation
on a clearly inaccurate and incomplete understanding of the price
regulation's operation.²³ Despite their apparent knowledge
of the monthly variability in milk pricing, the food service program
commenters expressed their opinions of the regulation's potential
annual impact by reference to a letter from one vendor, describing the
regulation's impact for only the one month of September, 1997. Even
accounting for the well-understood arcane nature of milk market
regulation, such incomplete analysis is by definition limited in terms
of its benefit for understanding the dynamics between the price
regulation and the region's school lunch programs.
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\23\ See e.g. Leon Berthiaume, WC, January 12, 1998; Bob
Wellington, WC, January 9, 1998.
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The Commission further notes that the stated concerns expressed
with regard to the potential impact of the price regulation come
predominantly from food service programs in the state of Massachusetts.
While comment in support of the exemption was received from a Food
Service program provider in New Hampshire and in Vermont, all other
commenters associated with food service programs were from
Massachusetts. From the comment received, it is apparent that the
concerns of many of these Massachusetts-based programs stemmed from the
unsuccessful attempt by one vendor, West Lynn Creamery, Inc., to
increase the fixed contract price to a number of school districts the
vendor supplied, after the price regulation went into effect. Though
unsuccessful, the attempt apparently served to bring operation of the
price regulation to the attention of these commenters.²⁴
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\24\ ``When food service directors got this letter [from West
Lynn Creamery announcing the intended price increase] the phone was
ringing * * *'' Jaqueline Morgan, December 29, 1997, Public Hearing,
p. 119.
The comment about this vendor's competitive conduct in the 1997-
1998 bid process, and that of others, also may indicate that the
price regulation could have created a downward pressure on milk
prices in the manner contemplated by the Commission's analysis in
the final rule adopting the price regulation. According to the
testimony, West Lynn's attempt to increase the contract price for
its milk after the price regulation went into effect may have
ultimately been unsuccessful because ``* * * they would no longer be
the lowest bidder so instead of going out to re-bid, West Lynn
absorbed the cost into their price.'' Jaqueline Morgan, PH p. 119.
This commenter subsequently qualified her statement by indicating
that she was describing the experience of a program other than her
own. While somewhat uncertain, the hearing testimony indicated
further that more than the one vendor used this pricing strategy of
not incorporating the price regulation into their bid price. ``We
were informed by Nature's Best that they were not going to pass the
price along to our collaborative.'' Jaqueline Morgan, PH at p. 109;
see also Lois Black, PH at p. 47-48, indicating that Turner's Dairy
did not include the price regulation in its bid. Such a pricing
strategy of not incorporating anticipated price increases into a
bid, whether based on the regulation's establishment of a flat
procurement price or otherwise, could thus in fact have resulted in
the positive, competitive-based, impact on prices anticipated by the
rulemaking process.
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Notwithstanding these vagaries in the testimony, the Compact
Commission is persuaded that the comment received indicates that the
price regulation may serve, at least in the short-term, to increase the
cost of milk provided by school food service programs, and that such
increase would have an adverse impact on the effectiveness of these
vital child nutrition programs. Accordingly, the Commission hereby
determines that the establishment of an exemption from the price
regulation to preclude such an adverse impact best serves the public
interest.
Many commenters other than representatives of school food service
programs support this conclusion. For example, Leon Graves, Vermont
Commissioner of Agriculture, testified that:

The agricultural community understands the need to err on the
side of caution regarding supplemental nutrition programs. As
farmers are benefiting from the Compact Regulation, we recognize
that the nutrition and well-being of children should not be at risk
as a result of our efforts. If there is evidence in the record to
demonstrate that increased milk contract prices are harming schools
involved in child nutrition programs, then as was done with WIC, it
would be prudent for the Commission to grant an exemption for milk
in school meal programs as well.²⁵
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\25\ Leon Graves, PH at p.145.

Frank Mattheson, a dairy farmer from Littleton, MA echoed the
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Commissioner's sentiment:

I am concerned that even one child or school district is hurt by
the Compact.²⁶

\26\ Frank Mattheson, WC, January 9, 1998.
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The Commission accepts the approach of those commenters supporting
an exemption premised on reimbursement of only higher costs that can be
documented as attributable to the

[[Page 10108]]

price regulation.²⁷ Simple reference to the difference
between the federal milk market order price structure and the compact
``over-order'' price regulation would, for most months at least, result
by definition in the determination that the price regulation causes an
increased procurement cost to the school food service programs. It is
apparent from the comment received, however, that the bid process is in
fact competitive and that, while changes in the federal milk market
order price are used as a benchmark, the federal pricing structure is
not the only component of the vendors' respective cost structures.
Diverse costs associated with the particular circumstances of the
multi-varied school food service programs,²⁸ as well as
differing overheads, all can affect a vendor's particular bid. Given
that some vendors apparently chose not to include it in their bids,
incorporation of the price regulation's impact into the cost structure,
itself, may also be a consideration, strategic or otherwise.
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\27\ Dan Stevens, President, Massachusetts Cooperative Milk
Producer's Federation, WC, January 9, 1998; Sally Beach, General
Manager, Independent Dairymen's Cooperative Association, December
29, 1997, Public Hearing at p. 12; Leon Berthiaume, General Manager,
and Diane Bothfeld, St. Albans Cooperative Creamery, Inc., WC,
January 12, 1998 and December 29, 1997, Public Hearing at p. 8; Gabe
Moquin, Connecticut Department of Agriculture, WC, January 9, 1998;
Leon Graves, Commissioner, Vermont Department of Agriculture,
December 29, 1997, Public Hearing at p. 14; Bob Wellington, Senior
Vice President, Agri-Mark, Inc., WC, January 9, 1998.
\28\ Bids and contracts must expressly account for equipment use
and even the provision of straws. (Provided free of charge by
Nature's Best). Other considerations are frequency of delivery and
the number of ``drops'' per territory. Jaqueline Morgan, December
29, 1997, Public Hearing at p. 103-104.
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The Commission concludes that it is appropriate to establish the
exemption in this format based on the further determination that such a
requirement will not work undue hardship on the school food service
programs. The programs currently document and report monthly milk sales
for purposes of receiving federal reimbursement. Under this system of
reimbursement, all food service programs in each state report to the
respective state department of education.²⁹ The data and
procedure for reporting sales currently in use can be relied upon and
tailored for purposes of the compact price regulation exemption.
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\29\ Jaqueline Morgan, WC, January 9, 1998; William J.
Gillmeister, WC, January 12, 1998.
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The procedure utilized will be modified to include a certification
process from each school food service program vendor, establishing that
the compact price regulation has been included in whole or in part in
the contract price, and identifying the precise unit cost amount
attributable to the price regulation. Vendors will be required to
disclose in their bids the underlying cost components resulting in the
identified unit price amount. These should include overhead and other
standard cost components and the manner and degree to which the federal
pricing structure has been incorporated. The Commission again concludes
that such a requirement will not work a hardship, given that the
vendors must currently make certain certifications as part of the
current bid process, as well as account for the interplay between
compact and federal price regulation in their composition of fixed and
variable bids.³⁰
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\30\ Jaqueline Morgan, WC, January 9 and 12, 1998.
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To establish the precise mechanics of the reimbursement procedure,
the Compact Commission will enter into a memorandum of understanding
with the state departments of education, or other agency as
appropriate, not later than May 1, 1998. The memorandum of
understanding shall include provisions for certification by supplying
vendor/processors that their bid and contract cost structures do in
fact incorporate the over-order price obligation, in whole or in part,
and provisions for defining the components of cost structure to be
provided in support of such certification. The memorandum shall also
establish the procedure for providing reimbursement to the school food
service programs. This procedure shall provide for quarterly
reimbursement, unless it is determined that a different reimbursement
time frame would be more efficient and appropriate, and the appropriate
amount to be escrowed by the Commission. The memorandum of
understanding shall in addition contain provisions to ensure the
confidentiality of the bid process.
The exemption is made applicable to all milk sold by school food
service programs, rather than only milk qualified for reimbursement
under federal child nutrition programs. According to the comment, the
reimbursements are imbedded into the revenue structure for the school
food service programs. The degree to which the reimbursements reduce
program costs for milk, as opposed to the total food costs, cannot
thereby be readily identified. As a result, to accomplish its purpose,
all milk must be covered by the exemption.³¹
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\31\ The exemption is limited to the sale of half-pint
containers, the basic sales unit for the school food service
programs. See Gabe Moquin, Connecticut Department of Agriculture,
WC, January 9, 1998.
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The exemption is limited with regard to its application in time and
duration. Based on the comment received describing a competitive
bidding process for the 1997-1998 contract year, it is apparent that
the exemption must be made prospective, only. It would not be
appropriate to interfere with or alter contractual arrangements already
established. It is also apparent that the exemption must be limited to
apply only to the 1998-1999 contract year, given the Compact's
scheduled sunset of no later than April, 1999.
Some of the school food service program directors testifying at the
December 29, 1997 Hearing suggested use of the WIC Program exemption
procedure as the means to establish the exemption for school milk
sales. The WIC Program exemption procedure is not applicable to the
school food service programs. As noted, milk is provided in bulk
deliveries by single vendors directly to the school food service
programs. By contrast, there is no differentiation between or among the
variety of fluid milk brands and products supplied to retailers for
sale to WIC Program participants and that supplied for sale to all
other consumers. On the other end of the transaction, school food
service programs sell only program milk in a narrow readily definable
transaction pattern, in contrast to the diverse pattern of retail sales
to WIC Program participants.
Several commenters opposed establishment of the exemption based on
the concern that petitions for additional exemptions would necessarily
follow.³² The Commission declines to rely on this stated
concern as wholly speculative. A number of farmer commenters also
expressed concern that the Commission was making its decision for
political reasons.³³ The Commission responds by emphasizing
that the decision arises only out of its assessment of the public
interest as expressly required by the Compact, based on the record
before it as developed through the regulatory hearing process, pursuant
to Art. IV, section 12 of the Compact.
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\32\ See e.g. Doug Carlson, December 29, 1997, Public Hearing at
p. 167.
\33\ See e.g. Mathew Freund, PH at p. 154; and Dave Jacquier, PH
at p. 159. In this regard, the Commission is responding particularly
to the testimony of Mr. Jacquier, as well as that of Douglas P.
Gillespie, Director of Governmental Relations, MA Farm Bureau
Federation, Inc., WC, January 12, 1998.
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Some commenters indicated that the marginal cost to the school food
service programs which may be attributed to the price regulation does
not justify the exemption. The Commission responds

[[Page 10109]]

by referring to the substantial and diverse comment highlighting the
specific importance of school food service programs to the promotion of
child nutrition. The Commission's decision to establish this exemption
is in large part based on the determination that any adverse impact on
these particular programs, so targeted for the promotion of child
nutrition, is significant and must be avoided.
On the diametrically opposed end of the spectrum, two commenters
expressing support for the exemption based their position on the view
that the demonstrated need for the exemption should serve in effect as
the basis for extinguishing the entire price regulation.³⁴
The Commission responds to these commenters by reference to the
reasoning of the price regulation describing the expected positive
impact on all segments of the marketplace, from farmgate to retail,
including low-income consumers.
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\34\ Arthur S. Jaeger, Executive Director, Public Voice for Food
& Health Policy, WC, January 12, 1998; Joyce Campbell, Massachusetts
ACORN, WC January 12, 1998.
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Finally, the Compact Commission notes that the public interest
analysis of the rules establishing and extending the price regulation
included a balancing of the interests of all persons affected by the
price regulation. In this instance, the interests of farmers and
processors must be balanced with the interests of the school food
service programs, and their clients-children.
The Compact Commission determines that establishment of the instant
exemption will not adversely affect the interests of processors. As
described above, processor/vendors will retain the discretion to make
strategic bid pricing decisions with regard to incorporation of the
impact of the price regulation on their costing structures, including a
simple pass through, should that be their strategic choice. As also
described above, the Commission concludes that the certification and
documentation procedure to be established by the memorandum of
understanding will not cause undue hardship for processor/vendors.
With regard to the farmer interest, the Commission concludes that
the exemption will have an adverse impact by reducing the net payment
to producers. As explained in detail below, it is expected that the net
payment will be reduced by approximately three percent for the ten-
month period September 1998-June 1999. It is to be noted that the over-
order price regulation will remain in effect for the summer months of
July and August, when federally-established milk prices are
traditionally at their low point, and the over-order price at the
corresponding highest amounts. The Commission nonetheless concludes
that this adverse impact on the farmer pay price must be balanced
against the documented potential for harm to the school food service
programs.
For all the reasons set forth above, the Commission concludes that
the public interest will best be served by the establishment of an
exemption from the price regulation and reimbursement procedure for
fluid milk distributed by handlers under open competitive bid contracts
and sold by School Food Authorities in New England during the 1998-1999
contract year, to the extent an increased cost of such milk is
documented as attributable to operation of the over-order price
regulation.

B. The Exemption's Impact on the Price Level Needed To Assure a
Sufficient Price to Producers and an Adequate Local Supply of Milk

As one of the four underlying findings required for the
establishment of price regulation, the 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.³⁵

\35\ 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. Sec. 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.
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Compact Art. V, Section 12(a).
In the prior rulemakings, the 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 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. This required review prompted the determination
that 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.
To determine the required benchmark cost of production, the
Commission's analysis surveyed the various cost inputs as required
under Section 9(e) of the Compact, including by reference to the
numerous studies on the subject.³⁶ Based on data received
from farmers and a comprehensive assessment of a number of these
studies, the Commission concluded that the range of the costs of
production for New England is somewhere between $14.06 and $16.46. By
reference to prevailing federal milk market order prices, the
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. ³⁷ 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.
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\36\ 62 FR 29632-33.
\37\ See 62 FR 29633 (final rule); 62 FR 23040-41 (proposed
rule)
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In addition to the relatively discrete assessment of the level
needed to cover cost of production, the required finding with regard to
pay price accounts for the broader assessment of the price level needed
to elicit an adequate supply of milk. In the prior rulemaking, the
Compact Commission determined that the Compact, Section 9(e) scrutiny
of the balance of production and consumption of fluid, or beverage,
milk in the region is critical to this additional
assessment.³⁸ The Commission determined that production and
consumption are presently in balance, but in a state of balance of
pronounced and unsustainable stress that must be alleviated.
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\38\ See 62 FR 29634-35.
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Assessment of how to alleviate the stress on the region's supply of
milk through price regulation required the Commission to consider how
best to alleviate the stress under which producers operate. This
inquiry naturally reverted 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 led the 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.

[[Page 10110]]

Based on this combined analysis, the Commission determined that a
compact over-order price of $16.94 would yield sufficient return to
farmers to bring the producer price into the low range of that required
to cover cost of production. The Commission further concluded that
establishment of the over-order Class I obligation as a flat price
would also serve to stabilize the producer price, yielding benefits to
producers in this regard as well.
The following chart indicates that the price regulation is yielding
the anticipated results with regard to producer prices. The current,
average, producer price of $0.93 is at the low end of the range
identified as required to bring producer prices up to a level
sufficient to cover costs of production. Similarly, the current,
average, regulated blend price of $14.07 is just over the low end of
the identified threshold of $14.06 which defines the price needed to
cover costs of production. The chart also indicates that the price
regulation is providing stability to producer pay prices relative to
what they would have been in its absence.

----------------------------------------------------------------------------------------------------------------
Fed order #1 Compact over- Fed order #1 Company Combined
class I price order blend price producer producer
(Zone 1) obligation (Zone 21) price price
----------------------------------------------------------------------------------------------------------------
July............................ $13.94 $3.00 $11.97 $1.28 $13.25
Aug............................. 13.98 2.96 12.26 1.31 13.57
Sept............................ 14.10 2.84 12.54 1.36 14.17
Oct............................. 15.31 1.63 13.60 0.81 14.44
Nov............................. 16.03 0.91 14.10 0.44 14.54
Dec............................. 16.07 0.87 14.06 0.40 14.46
Jan............................. 16.20 0.74 .............. .............. ..............
Feb............................. 16.53 0.41 .............. .............. ..............
Avg............................. 15.27 1.67 13.09 0.93 14.07
----------------------------------------------------------------------------------------------------------------

It is estimated that the exemption and reimbursement for school
food service programs will cause a 3 percent decrease in the producer
pay price.\39\ Based on the current average pay price of $0.93, this
would result in a decrease in the pay price of approximately $0.03.
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\39\ See William J. Gillmeister, WC, January 12, 1998.
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This decrease will bring the producer pay price still nearer to the
bottom range of that identified as necessary to bring prices in
relative alignment with costs. It is of course apparent that any
reduction in the producer pay price will adversely affect the price
regulation's intended function with regard to enhancement of producer
income. Nonetheless, the amount of the decrease must be understood in
view of the fact that the regulation will continue to provide
significant stability to producer prices. Accordingly, the Commission
concludes that the price regulation, as amended to include an exemption
for milk sold by school food service programs will remain at a level
sufficient to assure that producer costs of production are covered and
to elicit an adequate supply of fluid milk for the region.

III. Required Findings of Fact

Pursuant to Compact Art. V, Sec. 12, the Compact Commission hereby
finds:

(1) That the public interest will be served by the establishment
[amendment] of minimum milk price [regulation] to dairy farmers
under Article IV.
(2) That a level price of $16.94, [accounting for a school lunch
exemption], 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 terms of the proposed price regulation were
approved by producers by referendum. \40\
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\40\ 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.
Mae Schmidle, Vice-Chair 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.
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List of Subjects in 7 CFR Part 1301

Milk.

Codification in Code of Federal Regulations

For the reasons set forth in the preamble, the Commission amends 7
CFR part 1301 as follows:

PART 1301--[AMENDED]

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

Authority: 7 U.S.C. 7256.

2. Section 1301.13 is amended by adding paragraph (e) to read as
follows:

Sec. 1301.13 Exempt milk.

* * * * *
(e) Effective April 1, 1998, all fluid milk distributed by handlers
in eight-ounce containers under open and competitive bid contracts for
the 1998-1999 contract year with School Food Authorities in New
England, as defined by 7 CFR 210.2, to the extent that the school
authorities can demonstrate and document that the costs of such milk
have been increased by operation of the Compact Over-order Price
Regulation. In no event shall such increase exceed the amount of the
Compact over-order obligation. Documentation of increased costs shall
be in accordance with a memorandum of understanding entered into
between the Compact Commission and the appropriate state agencies not

[[Page 10111]]

later than May 1, 1998. The memorandum of understanding shall include
provisions for certification by supplying vendor/processors that their
bid and contract cost structures do in fact incorporate the over-order
price obligation, in whole or in part, and provisions for defining the
components of cost structure to be provided in support of such
certification. The memorandum shall also establish the procedure for
providing reimbursement to the school food service programs, including
the scheduling of payments and the amount to be escrowed by the
Commission to account for such payments.
Daniel Smith,
Executive Director.
[FR Doc. 98-4140 Filed 2-26-98; 8:45 am]
BILLING CODE 1650-01-P