[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]]

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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