[Federal Register Volume 63, Number 228 (Friday, November 27, 1998)]
[Rules and Regulations]
[Pages 65517-65524]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-31587]



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  Federal Register / Vol. 63, No. 228 / Friday, November 27, 1998 / 
Rules and Regulations  

[[Page 65517]]


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NORTHEAST DAIRY COMPACT COMMISSION

7 CFR Parts 1301 and 1304


Over-Order Price Regulation

AGENCY: Northeast Dairy Compact Commission.

ACTION: Final rule.

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SUMMARY: This rule amends the Compact Over-order Price Regulation to 
limit the payment of the Compact Over-order producer price to milk 
disposed of within the Compact regulated area, with a seasonally 
adjusted allowance for diverted or transferred milk, but does not 
restrict Compact payment on bulk transfers of processed fluid milk 
products. This rule also amends the definitions of producer and 
producer milk to be consistent with the amended rules regarding 
diverted and transferred milk, and further amends the definition of 
producer to include December 1998 as an additional requirement for 
qualification.

EFFECTIVE DATE: January 1, 1999.

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

FOR FURTHER INFORMATION CONTACT: Kenneth M. Becker, 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:

I. Background

    On June 11, 1998 the Northeast Dairy Compact Commission issued a 
notice of proposed rulemaking 1 to consider amendments to 
the Compact Over-order Price Regulation that would exclude milk from 
the pool which is either diverted or transferred, in bulk, out of the 
Compact regulated area. The Commission held a public hearing to receive 
testimony on the proposed rules on July 1, 1998 and additional comments 
and exhibits were received until 5:00 PM on July 15, 1998. The 
Commission held a deliberative meeting on August 5, 1998 2 
to consider the testimony and comments received and to discuss 
modifications to the proposed rules based on that information. The 
Commission determined that it required additional information on the 
issues and published notice 3 (1) that an additional public 
hearing would be held on September 2, 1998; (2) that the comment period 
would be extended to September 16, 1998 to receive further testimony 
and comment on the proposed rules regarding diverted and transferred 
milk; and (3) that the Commission was considering updating the 
definition of producer to include December 1998 as an additional 
requirement for qualification.
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    \1\ 63 FR 31943 (June 11, 1998). In this same notice of proposed 
rulemaking, the Commission also proposed to establish a reserve fund 
for reimbursement to school food authorities. The final rule 
establishing the reserve fund was published at 63 FR 46385 
(September 1, 1998).
    \2\ Public notice of this meeting was published at 63 FR 40069 
(July 27, 1998).
    \3\ 63 FR 43891 (August 17, 1998).
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    The Commission held a second deliberative meeting on October 7, 
1998 4 to consider all oral and written comments received at 
the public hearings held on July 1, 1998 and September 2, 1998 and the 
additional comments received by the Commission's published comment 
deadlines, and to deliberate and act on the proposed amendments to the 
Over-order Price Regulation.
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    \4\ Public notice of this meeting was published at 63 FR 51864 
(September 29, 1998).
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    Based on the oral testimony and written comments and exhibits 
received, the Commission concludes that appropriate limits must be 
established to prevent increases in milk supply that are not needed for 
the New England market and hereby amends the following sections of the 
Over-order Price Regulation:
    (1) 7 C.F.R. 1301.12--to clarify that producer milk must be 
physically moved to a pool plant, or be diverted as permitted by the 
regulation, to qualify for the Compact payment;
    (2) 7 C.F.R. 1301.23 and 1304.2--to exclude milk from the pool 
which is either diverted or transferred, in bulk, out of the Compact 
regulated area, in excess of 8% in the fall months of August, 
September, October and November, 10% in the transition months of 
January, February, July and December and 13% in the spring months of 
March, April, May and June. The percentage is calculated on the milk 
handler's total producer receipts. The amended rule does not restrict 
Compact payments on bulk transfers of skim milk and condensed milk, 
bulk milk transferred and classified Class I by a federal market order 
and fluid milk processed (i.e., pasturized, homogenized, or blended) or 
fluid milk diverted or transferred due to certain catastrophic 
circumstances; and
    (3) 7 C.F.R. 1301.11--to be consistent with the amended rules 
regarding diverted and transferred milk and to add December 1998 as an 
additional requirement in the definition of producer.

II. Summary and Analysis of Issues and Comments

    At the July 1, 1998 public hearing, the Commission's Regulations 
Administrator, Carmen Ross, testified and explained the issues 
presented under the current Over-order Price Regulation and why the 
proposed rules were needed.5 Mr. Ross provided data 
regarding the volume of milk transferred or diverted out of the Compact 
regulated area from July 1997 through May 1998.6 This data 
showed a clear pattern of an increasing volume of milk being diverted 
and transferred out of the Compact regulated area since the inception 
of the Over-order Price Regulation. For example, in July 1997, the 
first month of the Compact pool, diverted and transferred milk 
constituted 34.4 million pounds, or 6.5 percent of the July pool. 
However, in February 1998, the diverted and transferred milk volume had 
risen to 49.8 million pounds, or 9.8 percent of the February pool. This 
trend continued and in May 1998, 53.2 million pounds of milk was 
diverted or transferred out of the Compact regulated area, amounting to 
9.2% of the May pool.7 Mr. Ross provided the most current 
data at the September 2, 1998 hearing which demonstrated that the 
volume of milk diverted and transferred out of the

[[Page 65518]]

Compact regulated area continued to rise to 64.3 million pounds, 
representing 11.3% of the July 1998 pool, or nearly double the volume 
of milk diverted and transferred in July 1997.
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    \5\ Carmen Ross, First Public Hearing Transcript (``Tr.'') 9-28.
    \6\ Ross, Tr. 17-18.
    \7\ Ross Tr. 17-21.
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    To address the concern of a steadily increasing volume of milk that 
qualifies for the Compact Over-order producer price and is then 
diverted and transferred out of the Compact regulated area, the 
Commission proposed to amend the Over-order Price Regulation, section 
1301.12, which defines producer milk,8 and section 1301.23, 
which defines diverted milk, and section 1304.2 relating to 
classification of transfers of milk. The effect of these proposed 
amendments would be to depool the volume of producer milk that a 
handler diverts or transfers, in bulk, outside of the regulated area, 
thereby excluding it from the Compact Over-order producer 
price.9
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    \8\ 63 FR 31945 (June 11, 1998).
    \9\ Ross Tr. 14-15.
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    The Commission held two public hearings and received testimony and 
comments from a total of fifteen individuals, including six 
representatives of dairy cooperatives,10 two representatives 
from a milk processor,11 two state Commissioners of 
Agriculture and one state dairy economist,12 a dairy 
farmer,13 and two representatives of the Community 
Development and Applied Economics Department of the University of 
Vermont.14 In addition, at the request of the Commission, 
the Federal Order 1 Market Administrator submitted additional data and 
testified at the September 2, 1998 hearing to answer the Commission's 
technical questions relating to that data.15
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    \10\ Robert Wellington and Carl Peterson representing Agri-Mark; 
Dean Ellinwood representing Dairy Farmers of America; Edward 
Gallagher representing Dairylea Cooperative, Inc.; Leon Berthiaume 
representing St. Albans Cooperative Creamery, Inc.; and Sally Beach 
representing Independent Dairyman's Cooperative Association, Inc.
    \11\ Neil Marcus and Bill Fitchett from Marcus Dairy.
    \12\ Jonathan Healy, Commissioner and William Gillmeister, Dairy 
Economist, Massachusetts Department of Food and Agriculture and Leon 
Graves, Vermont Commissioner of Agriculture, Food and Markets.
    \13\ Kenneth Dibbell.
    \14\ Assistant Professors Rick Wackernagel and Charles Nichols.
    \15\ Erik Rasmussen, Market Administrator, Federal Milk Order 
No. 1.
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    Of the total comments received after the first public hearing on 
July 1, 1998, two commenters 16 supported the proposed rules 
relating to diverted or transferred milk, while eight commenters 
17 opposed the total exclusion of diverted and transferred 
milk from the Compact pool. Those commenters opposed to the proposed 
amendments were most concerned with the seasonal fluctuations of supply 
and demand in the New England milk market,18 the vital role 
diversions and transfers of milk play in balancing the market to 
accommodate those fluctuations,19 and the impact, on both 
producers and the market, of totally depooling diverted and transferred 
milk.20 However, most of these commenters also recognized 
the concerns identified by the Commission regarding the increase in 
diversions and transfers of milk out of the Compact regulated area, and 
offered some other solutions, including extending the qualification 
period for producers 21 and implementing a cap on the volume 
of diverted and transferred milk that could qualify for the Compact 
payment.22
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    \16\ Dibbell Tr. 31; Healy, First Written Comment Period 
(``WC'') 3.
    \17\ Marcus, Fitchett, Wellington, Ellinwood, Gallagher, 
Berthiaume, Graves, and Beach.
    \18\ See, e.g., Marcus Tr. 43; Wellington Tr. 63-64, 68, 72; 
Ellinwood Tr. 99-100; Gallagher Tr. 119-120; Berthiaume WC 5; Graves 
WC 14; and Beach WC 15.
    \19\ See, e.g. Marcus Tr. 44, 59; Wellington Tr. 64, 68, 72; 
Ellinwood Tr. 100-101 and WC 1; Gallagher Tr. 120-121; Berthiaume WC 
5-6; Graves WC 13-14; and Beach WC 15.
    \20\ See, e.g. Marcus Tr. 54; Wellington Tr. 65, 67, 69 and WC 
11; Ellinwood Tr. 102, 111; Gallagher Tr. 121-123; Berthiaume WC 5, 
8; Graves WC 13; and Beach WC 15.
    \21\ Wellington, on behalf of Agri-Mark and Dairylea, WC 12; 
Berthiaume WC 7; and Graves WC 14.
    \22\ Wellington, on behalf of Agri-mark and Dairylea, WC 11; 
Ellinwood WC 2; Berthiaume WC 7; and Beach WC 16.
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    Nine commenters 23 provided new or supplemental 
testimony during the extended public comment period. Of those nine 
commenters, four commenters 24 expressed support for a 
seasonally adjusted cap on the volume of diverted and transferred milk, 
calculated as a percentage of total handler producer receipts. No 
commenters opposed a seasonally adjusted cap. One commenter reiterated 
his prior suggestion that the qualification period for producers be 
extended. 25
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    \23\ Rasmussen, Wellington, Marcus, Dibbell, Berthiaume, 
Peterson, Gillmeister, Wackernagel and Nichols.
    \24\ Wellington Extended Public Hearing Transcript (``ETr.'') 55 
, Marcus ETr. 112, Berthiaume ETr. 141 and Gillmeister Extended 
Written Comment Period (``EWC'') 2.
    \25\ Wellington ETr. 56, 96-97 and EWC 2.
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    In the initial public comment period, one commenter supported the 
proposed amendments and their intended effect of ``limiting payments of 
the compact's over-order producer price to milk that is necessary to 
meet the demand of the New England market.'' 26
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    \26\ Healy WC 3.
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    The concerns expressed by this commenter reflect the concerns 
initially identified by the Commission. However, after careful review 
of all the testimony and comments received during this rulemaking 
proceeding, and as discussed in detail below, the Commission concludes, 
as does the commenter,27 that a seasonally adjusted cap on 
the total volume of milk diverted and transferred out of the Compact 
regulated area appropriately addresses these concerns. The Commission 
further concludes that the Over-order Price Regulation appears to be 
having its intended result of stabilizing the New England milkshed, 
and, therefore, also concludes that a seasonally adjusted cap meets the 
dual goals of the Compact of assuring the continued viability of dairy 
farming in the Northeast and of assuring consumers of an adequate, 
local supply of pure and wholesome milk. Compact Article I, Section 1.
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    \27\ Gillmeister EWC 1-3, on behalf of the Massachusetts 
Department of Food and Agriculture.
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A. The New England Milkshed

    One of the commenters who supported the proposed amendments at the 
first hearing stated that the proposals did not go far 
enough.28 This commenter further suggested that the 
Commission should consider not paying the Compact price for any milk 
produced outside of the Compact area.29 Another commenter 
was concerned that the Compact payment should only be made on milk 
needed to supply the New England market.30
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    \28\ Dibbell Tr. 30.
    \29\ Dibbell Tr. 30-31.
    \30\ Healy WC 3.
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    In response to questions from the Commission, one commenter 
31 stated that there is never enough milk produced in New 
England to meet the New England milk plant demands.32 The 
Commission emphasizes that milk produced outside of the Compact 
regulated area has traditionally been needed to meet the demand for 
milk and milk products in New England. As the Commission previously 
concluded:
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    \31\ Gallagher Tr.135.
    \32\ Gallagher Tr. 136-7.
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    According to data, the six state, New England, region draws 
approximately seventy percent of the raw product supply needed for 
the consumption of all milk products, fluid and manufactured, from 
New England farmers. The total volume of milk supplied for the 
region is approximately five billion pounds. The predominant 
remainder is supplied by New York farmers, who have traditionally 
made up a substantial portion of

[[Page 65519]]

the New England milkshed. Less than three percent of the raw milk 
supply for the New England market is produced outside of the six 
state/New York milkshed.33
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    \33\ 62 FR 23039 (April 28, 1997).
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    The data submitted in this rulemaking proceeding confirms that the 
New England market, Federal Order 1, continues to rely on New York 
producers to meet the consumer demand for milk and milk 
products.34 Since July 1997, New York producers have 
accounted for between 25% and 28% of the total producers supplying the 
New England market.35 The data also shows that the total 
number of producers supplying the New England market since July 1997 is 
still less than the total number of producers in 1995 and 
1996.36
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    \34\ Rasmussen, New England Milk Market Statistics 1994-1998.
    \35\ Rasmussen EWC Tables 2 and 3.
    \36\ Rasmussen EWC Table 3.
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    Mr. Rasmussen explained that the data reflects that over time, 
dairy farms get larger and, with New England urbanizing, there is less 
milk and fewer farmers in New England. As the number of dairy farms in 
New England continues to decline, milk handlers must look to New York 
to replenish their supply, because New England is surrounded on all 
other sides by ocean and Canada. Therefore, there is less of a decline 
in the number of producers in New York supplying the New England 
market.37
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    \37\ Rasmussen ETr. 14, 24.
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    Additional data compiled by the University of Vermont demonstrates 
that Vermont and New York have provided the largest volume of the milk 
supply to the New England market for the period of the study 1977-
1997.38 While the volume of milk produced in Vermont has 
increased substantially over this time period, the supply from New York 
state appears to be more volatile, with a small net increase over the 
twenty year period.
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    \38\ Wackernagel EWC 3, Figure 1.
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    The Commission emphasizes that payment of the Compact Over-order 
premium to all producers supplying the New England market, regardless 
of location of production, is needed to stabilize the milkshed and 
assure a local supply of milk. In implementing the Over-order Price 
Regulation, the Commission found that, although milk production and 
consumption are in balance in New England, the situation is under 
considerable distress, and that it is necessary to at least stabilize, 
if not increase, the present, local supply of milk through the price 
regulation.39 The Commission also found that ``the present, 
distant supply itself must be stabilized as well, to ensure that the 
milkshed does not reach further west.'' 40
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    \39\ 62 FR 23039-40 (April 28, 1997); 62 FR 29635 (May 30, 
1997); 62 FR 62814 (November 25, 1997).
    \40\ 62 FR 23040 (April 28, 1997).
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    Since the inception of the Over-order Price Regulation, the supply 
of milk to the New England market and the Compact pool has steadily 
risen.41 The commenters offered several explanations for 
this increase in supply, and a simultaneous increase in diversions and 
transfers, such as the closing of a manufacturing plant in Hinesburg, 
Vermont and a slight increase in production in the region due to 
favorable weather conditions, lower grain prices, and good quality 
forage.42 A few commenters also observed that the Compact 
price regulation has attracted some milk to the New England 
market.43 Therefore, the Commission concludes that the price 
regulation appears to be having the intended effect of stabilizing the 
milkshed and increasing the supply of milk available to the New England 
market, thus assuring consumers of a local supply of pure and wholesome 
milk.
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    \41\ Ross, Second Addendum, EC 1.
    \42\ Rasmussen ETr. 22; Wellington ETr. 48, 95; and Berthiaume 
ETr. 136.
    \43\ Wellington ETr. 91, EWC 10-11; Berthiaume EWC 4; 
Gillmeister EWC 2; Wackernagel EWC 4-5; and Nichols EWC 2.
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B. Seasonal/Balancing

    Eight commenters 44 who opposed the total exclusion of 
diverted and transferred milk in the proposed amendments commented that 
diversions and transfers are necessary due to seasonal or other normal 
and predictable fluctuations of supply and demand in the milk market, 
and are a routine method of balancing the market 45; that 
the normal production swing from spring to fall in the supply of milk 
is in direct opposition to the normal fluctuation in the demand for 
milk 46; that in order to meet the consumer demand for milk 
in the low production months, typically in the fall, cooperative 
associations and milk handlers must accept and market milk from their 
supplying producers in the high production months, typically in the 
spring 47; and that handlers must also establish a reserve 
pool of milk to meet the New England fluid processing 
needs.48
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    \44\ Marcus; Pritchett; Wellington; Ellinwood; Gallagher; 
Berthiaume; Graves; and Gillmeister.
    \45\ Marcus Tr. 43; Ellinwood Tr. 99-100; Wellington Tr. 63-64; 
Gallagher Tr. 116; Berthiaume WC 5; Graves WC 13; Beach WC 15; and 
Gillmeister EWC 2.
    \46\ Marcus Tr. 44; Wellington Tr. 63-64, 68; Ellinwood Tr. 99-
100; Gallagher Tr. 119-120, 131, 133; Berthiaume WC 5-6; Graves WC 
14; and Beach WC 15.
    \47\ Marcus Tr. 59; Wellington Tr. 63-64, 68; and Berthiaume WC 
5.
    \48\ Ellinwood Tr. 100.
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    As these same commenters explained, cooperative associations and 
milk handlers must have a method of balancing the supply of milk at 
times when supply exceeds demand.49 Balancing often is 
accomplished at a balancing plant, where milk that is not needed to 
meet the demand is processed into other marketable products such as 
butter and powder.50 Reloading milk and shipping it to 
another plant outside of the Compact regulated area (transferring), or 
diverting milk to such a plant directly from a farm, also are common 
methods of balancing the supply of milk in the New England 
market.51 Five commenters 52 noted that the 
federal order regulations allow transfers and diversions to meet the 
processors' balancing needs.
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    \49\ Wellington Tr. 72, WC 11; Gallagher Tr. 131, 133; 
Berthiaume WC 5-6; Graves WC 14; and Beach WC 15.
    \50\ Beach WC 16; Wellington EWC 1-4.
    \51\ Ellinwood WC 1; Wellington Tr. 72, ETr. 34-40, EWC 1-4; 
Gallagher Tr. 120
    \52\ Ellinwood Tr. 100-101, WC 1; Wellington Tr. 64, WC 10; 
Gallagher Tr. 121 and Rasmussen ETr. 17-18.
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    One commenter 53 observed that every Class 1 market has 
a large butter/powder plant for balancing. However, as this commenter 
also explained, when the New England market lost the Hinesburg, Vermont 
manufacturing plant, the West Springfield, Massachusetts butter/powder 
plant suddenly became a manufacturing plant, thus limiting the capacity 
of that plant to balancing the market.
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    \53\ Wellington ETr. 40-41.
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    The Commission recognizes the normal fluctuations of supply and 
demand of milk in the New England market and, as noted above, the 
traditional supply of milk to New England from outside the Compact 
area. The Commission appreciates the concerns expressed by the 
commenters and recognizes the seasonal fluctuations in milk supply and 
demand, and also recognizes the importance of balancing plants and 
methods in the New England milk market. In recognition of this integral 
part of the milk market, the Commission includes in the amended rules a 
seasonally adjusted allowance for the total of volume of diverted and 
transferred milk as a percentage of a milk handler's total producer 
receipts.
    While the Commission concludes that the price regulation appears to 
be having the desired impact of increasing the supply of milk to the 
New England market and thereby stabilizing the

[[Page 65520]]

milkshed, it also concludes that appropriate limits must be established 
to prevent increases in milk supply that are not needed for the New 
England market.

C. Technical Amendments to the Price Regulation

    Five commenters 54 observed that milk coming into the 
compact regulated area and being transferred or diverted back out of 
the compact regulated area is a problem. Three of these commenters 
55 stated that such milk should not receive the compact 
payment. Two of these commenters 56 stated that this was a 
problem that would be difficult to solve.
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    \54\ Dibbell Tr. 30-31; Jonathan Healy WC 3; Leon J. Berthiaume 
WC 5-6; Leon Graves WC 13; and Sally Beach WC 15.
    \55\ Dibbell Tr. 30; Healy WC 3; and Berthiaume WC 5, 6.
    \56\ Graves WC 13; and Beach WC 15-16.
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    Eight commenters opposed the proposed amendment of the current 
Over-order Price Regulation. However, some of these commenters did 
suggest alternative regulatory changes as discussed below.
1. Definition of Producer
    Five commenters 57 proposed that the Commission amend 
the regulation at 1301.11 which defines ``producer.'' One of these 
commenters 58 suggested that the existing rule, at 7 CFR 
1301.11(b)(2) limits the handler's ability to replace producers. The 
Commission amends this section to delete the current language and to 
substitute ``the volume of milk excluded from producer milk pursuant to 
section 1304.2.'' This amended language both addresses the concerns 
raised by the commenter and also makes this provision consistent with 
the amended diversion and transfer provisions adopted by the 
Commission.
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    \57\ Marcus Tr. at 47; Wellington, on behalf of Agri-Mark and 
Dairylea at WC 11; Berthiaume at WC 7; and Graves at WC 14.
    \58\ Marcus Tr. at 47.
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    The Commission also adds the language ``and December 1998'' to the 
provisions of sections 1301.11(b) and (b)(1) to update the current 
requirement that a producer must move milk to a pool plant in December 
1996 and December 1997 and December 1998. The remaining four commenters 
all suggested that the five-month qualification period contained in the 
regulation at 1301.11(b) be extended to eight months . One commenter 
59 further suggested that the Commission eliminate the 
December 1996 and 1997 provisions from this regulation. The Commission 
responds that increasing the qualification period cannot be expected to 
have a significant impact on the issue of how much milk should be moved 
in and moved out of the market.60
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    \59\ Berthiaume at WC 7.
    \60\ Ross ETr. 149-150.
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    In response to a question from the Commission, one commenter 
61 observed that extending the qualification requirement 
that requires producers to move their milk into the Compact regulated 
area on more than one-half of the days on which they move milk would 
create higher transportation costs and decrease the balancing options 
for that milk. Similarly, Mr. Ross explained that increasing the number 
of days per month for qualifying purposes would not address the problem 
identified by the Commission and could actually make the situation 
worse by causing handlers to then move other milk, which would in turn 
create a financial burden on the handlers.62 As a result, 
the Commission concludes that no amendment to the qualifying period 
provisions of the existing regulation is justified at the present time.
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    \61\ Wellington ETr. 96-97.
    \62\ Ross ETr. 150-152.
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2. Definition of Producer Milk
    The Commission's initial rulemaking notice proposed to amend the 
definition of producer milk to clarify that the milk must be physically 
moved to a pool plant in the regulated area or be diverted pursuant to 
the Commission's regulation.63 Mr. Ross explained that this 
amendment will depool producer milk that is moved to plants outside of 
the Compact regulated area and will treat all qualified producers the 
same.64
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    \63\ 63 FR 31943 (June 11, 1998).
    \64\ Ross Tr. 13.
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    The Commission received no comments on this provision and thus 
adopts the amendment as proposed.
3. Diverted and Transferred Milk Provisions
    The Commission initially proposed to amend sections 1301.23 and 
1304.2 to exclude all milk from the pool which was diverted or 
transferred out of the Compact region. During the first public hearing 
and comment period, five commenters 65 suggested that the 
Commission impose a five percent cap on transferred milk and one of 
these commenters 66 suggested the Commission impose a cap on 
both diverted and transferred milk. Four of these commenters 
67 also stated that if the Commission imposed a cap, then 
certain processed milk products, such as skim and skim condense, should 
be excluded from the cap, and also, that provision be made to suspend 
the cap for an individual cooperative or handler in appropriate 
circumstances, such as equipment failure.
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    \65\ Ellinwood at WC 2; Wellington on behalf of Agri-Mark and 
Dairylea at WC 11; Berthiaume at WC 7; and Beach at WC 16.
    \66\ Beach at WC 16.
    \67\ Ellinwood at WC 2; Wellington on behalf of Agri-Mark and 
Dairylea at WC 11; and Berthiaume at WC 7.
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    Three commenters 68 recommended that a five percent cap 
on transferred milk be applied to the total volume of milk pooled by 
the cooperative or handler, with an exclusion for skim, and skim 
condense or other processed fluid milk products. Two commenters also 
recommended excluding milk sold for Class I purposes outside of the 
compact area.69 The Commission discussed the recommendation 
for a five percent cap at its deliberative meeting on August 5, 1998.
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    \68\ Wellington WC at 11; Ellinwood WC at 2; and Berthiaume WC 
at 7.
    \69\ Wellington WC at 11; Berthiaume WC at 7.
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    During the second public hearing and comment period, some of those 
commenters and an additional commenter 70 refined their 
positions and instead proposed that the Commission adopt a seasonally 
adjusted allowance for a combined volume of diverted and transferred 
milk. These commenters explained in detail, and provided substantial 
data to support their arguments, that a seasonally adjusted allowance 
would best address the Commission's concerns and accommodate the 
realities of the New England milk market, including the possible 
negative impact that a five percent cap would have on the primary 
balancing plant in the Compact regulated area.71
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    \70\ Wellington ETr. 53-4, EWC 12; Marcus ETr. 112; Berthiaume 
ETr. 137, 145-6; and Gillmeister EWC 2.
    \71\ Rasmussen ETr. 16, 21, 31; Wellington ETr. 41-2, 45, 47, 
93, EWC 1-7, 12-13, and Table 9 (supplemental); Marcus ETr. 99, 112; 
Dibbell ETr. 129; Berthiaume ETr. 133, 135, 137, EWC 3-4; and 
Gillmeister EWC 2-3.
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    After careful consideration of the entire record, the Commission 
agrees that a seasonally adjusted allowance for diversions and 
transfers of milk more appropriately addresses the Commission's 
concerns. The Commission also agrees that the seasons should be defined 
as follows: Transition months--January, February, July, December; 
Spring months--March, April, May, June; Fall months--August, September, 
October, November.72
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    \72\ Wellington EWC 12; Berthiaume ETr. 141; Gillmeister EWC 2.

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[[Page 65521]]

    In setting the allowance for each season, the Commission has 
carefully reviewed the data and arguments of the commenters. The 
Commission is mindful of the importance of maintaining an allowance 
high enough to accommodate the reasonable balancing needs of the market 
while at the same time establishing reasonable limits on the amount of 
milk supplying the New England market relative to the demand for milk 
products within the Compact regulated area. Therefore, the Commission 
establishes the following seasonally adjusted allowance: Transition 
months--10%; Spring months--13%; Fall months--8%.
    The Commission notes that these allowances were recommended by one 
commenter,73 although the method adopted by the Commission 
is somewhat different than that used by the commenter. The Commission 
also notes that these percentages are slightly lower than those 
recommended by a commenter,74 and supported by two 
commenters.75 The Commission carefully considered the data 
provided by Mr. Wellington in Table 9 in his supplemental written 
comments. This commenter explained that the data provided in that table 
supported a seasonally adjusted allowance of 12% in the Transition 
months, 15% in the Spring months and 10% in the Fall 
months.76 However, this commenter also acknowledged that the 
diversion and transfer volume numbers included in the table reflected 
milk transferred on behalf of other handlers, and that the handler 
volume used in the chart did not similarly reflect the total volume of 
milk handled.77
---------------------------------------------------------------------------

    \73\ Gillmeister EWC 2-3.
    \74\ Wellington ETr. 55, EWC 12.
    \75\ Marcus ETr. 112; Berthiaume ETr. 141.
    \76\ Wellington ETr. 55, EWC 12.
    \77\ Wellington ETr. 55, EWC 11, Table 8.
---------------------------------------------------------------------------

    The Commission concludes that adjusting the figures in Table 9 to 
reflect the percentage of the handler's milk diverted and transferred 
relative to the handler's volume for each month and excluding volumes 
attributable to other handlers results in appropriate percentage limits 
of 10% in the Transition months, 13% in the Spring months and 8% in the 
Fall months. The Commission also notes that the data provided in Table 
9 include Class 1 transfers 78 which, as discussed below, 
are excluded from the allowance calculation.
---------------------------------------------------------------------------

    \78\ Wellington EWC 11.
---------------------------------------------------------------------------

    The Commission emphasizes that the amendments regarding diverted 
and transferred milk specifically apply to milk received at a pool 
plant in the regulated area. These amendments do not affect milk 
diverted or transferred to a partially regulated plant having Class 1 
disposition in the regulated area. The Commission also emphasizes that 
the amendments apply only to bulk diversions and transfers of fluid 
milk, and do not apply to packaged milk products.
    In addition, the Commission recognizes the importance of 
accommodating milk temporarily displaced due to catastrophic 
circumstances and adopts a provision for suspending the seasonally 
adjusted allowance in circumstances such as fire, flood, storm and 
equipment failure which are completely beyond the pool plant operator's 
control. The suspension provision requires the operator of the pool 
plant (and the handler, in the case of diverted milk) to notify the 
Commission of the catastrophic circumstance within two (2) days of the 
occurrence.
    The Commission also recognizes the commenters' concerns regarding 
the treatment of processed milk under the diversion and transfer 
provisions. The commenters noted (1) that milk transferred or diverted 
for Class I utilization should be excluded from any cap because all 
producers benefit from the Class I utilization,79 (2) that 
reloads for Class I utilization are for proper long distance 
hauling,80 and (3) that processed products such as skim and 
condensed milk have separate markets. The Commission recognizes that 
these milk products do not present the problem identified by the 
Commission, which was acknowledged by several commenters,81 
of ``reloaded'' milk, which is brought into a pool plant simply to 
qualify for the compact payment. Therefore, the Commission excludes 
bulk transfers of skim milk, condensed milk, bulk milk transferred and 
classified Class I by a federal market order and milk processed (i.e. 
pasturized, homogenized, or blended). All other fluid milk products 
transferred in bulk from a pool plant to a plant located outside of the 
regulated area, except a partially regulated plant having Class I 
disposition in the regulated area, will be subject to the seasonally 
adjusted allowance.
---------------------------------------------------------------------------

    \79\ Marcus Tr. 45, 53, 55, ETr. 111; Ellinwood WC 2; Wellington 
WC 11, ETr. 72, EWC 10; Berthiaume WC 5-8, ETr. 138; and Rasmussen 
ETr. 21.
    \80\ Berthiaume WC 7.
    \81\ Ross Tr. 13; Dibbell Tr. 30-31; Healy WC 3; Berthiaume WC 
5-6; Graves WC 13; and Beach WC 15.
---------------------------------------------------------------------------

    If the handler exceeds the diversion and transfer allowance, the 
plant operator may select the sources to be excluded. If the plant 
operator fails to select the sources to be excluded, then the 
transferred milk that is excluded under this rule shall be prorated to 
all sources of milk received at that plant. The Commission notes that 
this provision is analogous to the federal order system regarding 
selection, by the handler, of classification of milk.
    In sum, the Commission adopts a seasonally adjusted allowance that 
is calculated on the total of all diverted milk, which by definition is 
not processed milk, and non-excluded transferred milk, in determining 
the volume of milk on which the Compact payment will be made. This 
seasonally adjusted allowance is calculated on the total producer 
receipts reported by the handler.82 The Commission concludes 
that the seasonally adjusted allowance appropriately accommodates the 
competing interests and needs of the producers, consumers, cooperative 
associations and handlers, in order to assure New England consumers of 
an adequate, local supply of pure and wholesome milk throughout the 
year.83 The Commission acknowledges the many and varied 
concerns raised by the commenters, and will continue to monitor closely 
the Over-order Price Regulation, as amended, to assure that the 
mission, purposes and objectives of the Compact and the price 
regulation are met.
---------------------------------------------------------------------------

    \82\ Concurring with this method: Wellington ETr. 53-4, EWC 12.
    \83\ See, discussion infra at III. a.
---------------------------------------------------------------------------

III. Summary of Required Findings

    Article V, Section 12 of the Compact directs the Commission to make 
four findings of fact before an amendment of the Over-order Price 
Regulation can become effective. Each required finding is discussed 
below.

a. Whether the Public Interest Will Be Served by the Amendments

    The first finding considers whether the amendment of the Over-order 
Price Regulation serves the public interest. The Commission previously 
has determined that an Over-order Price Regulation serves the public 
interest,84 and the Commission reaffirms that determination. 
The Commission also finds that the public interest will be served by 
amendment of the Over-order Price Regulation to exclude milk from the 
pool that is either diverted or transferred in bulk out of the Compact 
regulated area in excess of a seasonally adjusted allowance of total 
producer receipts, set at 10% in the Transition months of January, 
February, July and

[[Page 65522]]

December, 13% of the Spring months of March, April, May and June, and 
8% in the Fall months of August, September, October and November. The 
Commission further finds that the public interest will be served by 
amending the definitions of producer and producer milk to be consistent 
with the amended rules regarding diverted and transferred milk and to 
further amend the definition of producer to include December 1998 as an 
additional requirement.
---------------------------------------------------------------------------

    \84\ 62 FR 29638 (May 30, 1997); 62 FR 62825 (November 25, 
1997); 63 FR 10110 (February 27, 1998).
---------------------------------------------------------------------------

    The Commission emphasizes that the amendments regarding diverted 
and transferred milk do not impact on the New England consumers. The 
Over-order Price Regulation is structured so that assessments and 
obligations are based on Class I milk distributed in the New England 
market. Data submitted by the New England Market Administrator 
demonstrates that Class I utilization has been relatively constant over 
the last several years, although there has been a slight 
decline.85 Therefore, the amount of milk subject to the 
Over-order Price Regulation is relatively stable and the cost to the 
consumer is defined by only this volume of Class I milk consumed in New 
England. The amended rules restricting the volume of diverted and 
transferred milk that is eligible for the Compact Over-order payment to 
a seasonally adjusted allowance is, therefore, cost-neutral to New 
England consumers.
---------------------------------------------------------------------------

    \85\ Rasmussen, New England Market Statistics 1994-1998.
---------------------------------------------------------------------------

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

    The second finding considers impact of the amendments on the level 
of producer price needed to cover costs of production and to assure an 
adequate local supply of milk for the inhabitants of the regulated 
area.86
---------------------------------------------------------------------------

    \86\ As noted in prior rulemaking proceedings, the Commission 
limits its assessment to issues relating to the fluid milk market. 
62 FR 29632 (May 30, 1997); 62 FR 62812 (November 25, 1997); and 63 
FR 10109 (February 27, 1998).
---------------------------------------------------------------------------

    The Commission reaffirms its prior findings regarding the 
sufficiency of pay prices for milk needed to meet the New England 
market demand.87 In adopting these amendments, the 
Commission notes that the primary impact of the increase in the pool 
beyond the capacity of the New England market, as reflected in the 
volume of milk that is diverted and transferred out of the Compact 
regulated area, is revealed in a slight depression of the producer pay 
price per hundred weight of milk. The Commission concludes that the 
diverted and transferred milk amendments will not negatively impact on 
the price level paid to producers that is needed to assure an adequate 
local supply of milk. The Commission reaffirms its prior finding that 
the over-order price level will assure a sufficient price to producers 
and an adequate local supply of milk.88
---------------------------------------------------------------------------

    \87\ 62 FR 29632-29637 (May 30, 1997); 62 FR 62812-62817 
(November 25, 1997); and 63 FR 10109-10110 (February 27, 1998).
    \88\ 62 FR 29638 (May 30, 1997); 62 FR 62825 (November 25, 
1997).
---------------------------------------------------------------------------

    In reaching this conclusion, the Commission recognizes the seasonal 
variation in supply and demand for milk and milk products and the vital 
role diversions and transfers play in balancing the New England milk 
market. The Commission recognizes that the historical movement of milk 
in the New England milkshed involves both movement of milk into the 
Compact area from outside of the Compact area, and the 
reverse.89 The Commission, in adopting these amendments, is 
focusing on the Compact payment to producers who supply milk to the New 
England market. The Commission recognizes the many challenges involved 
in balancing the supply and demand for milk in the New England market 
and therefore builds in a seasonally adjusted allowance on diverted or 
transferred milk.
---------------------------------------------------------------------------

    \89\ See, 62 FR 23039 (April 28, 1997).
---------------------------------------------------------------------------

    The Commission further notes that the Compact payments to producers 
are intended to assure the continued viability of dairy farming in the 
northeast. Compact Art. 1, Section 1. The Over-order Price Regulation, 
as amended, balances this purpose with the equally important purpose of 
assuring an adequate, local supply of pure and wholesome milk for the 
Compact area consumers. Compact Art. 1, Section 1. The Compact 
specifically charges the Commission to also ``take such action as 
necessary and feasible to ensure that the over-order price does not 
create an incentive for producers to generate additional supplies of 
milk.'' Compact Art. IV, Section 9(f). The Commission concludes that 
the amended regulation meets all three of these objectives and best 
preserves the integrity of the Compact by appropriately balancing these 
objectives.

c. Whether the Major Provisions of the Order, Other Than Those Fixing 
Minimum Milk Prices, Are in the Public Interest and Are Reasonably 
Designed To Achieve the Purposes of the Order

    The 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 amendments establish a 
seasonally adjusted allowance on milk diverted or transferred out of 
the Compact region. Therefore, the matter of the public interest is 
addressed under the first required finding and not under this finding. 
In any event, the Commission finds that the price regulation, as hereby 
amended, is in the public interest in the manner contemplated by this 
finding.

d. Whether the Terms of the Proposed Amendment Are Approved by 
Producers

    The fourth finding, requiring a determination of whether the 
amendment has been approved by producer referendum pursuant to Article 
V, section 13 of the Compact is invoked in this instance given that the 
amendments will affect the level of the price regulation on the 
producer side. In this final rule, as in the previous final rules, the 
Commission makes this finding premised upon certification of the 
results of the producer referendum. The procedure for the producer 
referendum and certification of the results is set forth in 7 CFR Part 
1371.
    Pursuant to 7 CFR Part 1371.3, and the referendum procedure 
certified by the Commission, a referendum was held during the period of 
October 26, 1998 through November 6, 1998. All producers who were 
producing milk pooled in the Federal Order #1, or for consumption in 
New England during June, 1998, the representative period determined by 
the Commission, were deemed eligible to vote. Ballots were mailed to 
these producers on or before October 26, 1998 by the Federal Order #1 
Market Administrator. The ballots included an official summary of the 
Commission's action. Producers were notified that, to be counted, their 
ballots had to be returned to the Commission offices by 5:00 p.m. on 
November 6, 1998. The ballots were opened and counted in the Commission 
offices on November 9, 1998 under the direction and supervision of Mae 
S. Schmidle, Vice-Chair of the Commission and designated ``Referendum 
Agent.''
    Twelve Cooperative Associations were notified of the procedures 
necessary to block vote. Cooperatives were required to provide prior 
written notice of their intention to block vote to all members on a 
form provided by the Commission, and to certify to the Commission that 
(1) timely notice was provided, and (2) that they were qualified under 
the Capper-Volstead Act. Cooperative Associations were further notified 
that the Cooperative

[[Page 65523]]

Association block vote had to be received in the Commission office by 
5:00 p.m. on November 6, 1998. Certified and notarized notification to 
its members of the Cooperative's intent to block vote or not to block 
vote had to be mailed by October 28, 1998 with notice mailed to the 
Commission offices no later than October 30, 1998.

Notice of Referendum Results

    On November 9, 1998 the duly authorized referendum agent verified 
all ballots according to procedures and criteria established by the 
Commission. A total of 4,080 ballots were mailed to eligible producers. 
All producer ballots and cooperative block vote ballots received by the 
Commission were opened and counted. Producer ballots and cooperative 
block vote ballots were verified or disqualified based on criteria 
established by the Commission, including timeliness, completeness, 
appearance of authenticity, appropriate certifications by cooperative 
associations and other steps taken to avoid duplication of ballots. 
Ballots determined by the referendum agent to be invalid were marked 
``disqualified'' with a notation as to the reason.
    Block votes cast by Cooperative Associations were then counted. 
Producer votes against their cooperative associations block vote were 
then counted for each cooperative association. These votes were 
deducted from the cooperative association's total and were counted 
appropriately. Ballots returned by cooperative members who cast votes 
in agreement with their cooperative block vote were disqualified as 
duplicative of the cooperative block vote.
    Votes of independent producers not members of any cooperative 
association were then counted.
    The referendum agent then certified the following:
    A total of 4,080 ballots were mailed to eligible producers.
    A total of 3,006 ballots were returned to the Commission.
    A total of 15 ballots were disqualified--late, incomplete or 
duplicate.
    A total of 2,989 ballots were verified.
    A total of 2,966 verified ballots were cast in favor of the price 
regulation.
    A total of 23 verified ballots were cast in opposition to the price 
regulation.
    Accordingly, notice is hereby provided that of the verified ballots 
cast, 2,989, 99.2%, or 2,966, a minimum of two-thirds were in the 
affirmative.
    Therefore, the Commission concludes that the terms of the proposed 
amendment is approved by producers.

IV. Required Findings of Fact

    Pursuant to Compact Article V. Section 12, the Compact Commission 
hereby finds:
    (1) That the public interest will be served by the amendment of 
minimum milk price regulation to dairy farmers under Article IV to: (1) 
exclude milk from the pool which is either diverted or transferred, in 
bulk, out of the compact regulated area, in excess of a seasonally 
adjusted allowance of total producer receipts, set at 10% for the 
Transition months of January, February, July and December, 13% for the 
Spring months of March, April, May and June and 8% for the Fall months 
of August, September, October and November, with specified exclusions; 
(2) to amend the definitions of producer and producer milk to be 
consistent with the amended provisions regarding diverted and 
transferred milk; and (3) to amend the definition of producer to 
include December 1998 as a requirement.
    (2) That a level price of $16.94 (Zone 1) to dairy farmers under 
Article IV will assure that producers supplying the New England market 
receive a price sufficient to cover their costs of production and will 
elicit an adequate supply of milk for the inhabitants of the regulated 
area and for manufacturing purposes.
    (3) That the major provisions of the order, other than those fixing 
minimum milk prices, are in the public interest and are reasonably 
designed to achieve the purposes of the order.
    (4) That the terms of the proposed amendments are approved by 
producers pursuant to a producer referendum required by Article V. 
section 13.

List of Subjects in 7 CFR Parts 1301 and 1304

    Milk.

Codification in Code of Federal Regulations

    For reasons set forth in the preamble, the Northeast Dairy Compact 
Commission amends 7 CFR Chapter XIII as follows:

PART 1301--DEFINITIONS

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

    Authority: 7 U.S.C. 7256.

    2. Section 1301.11(b) is revised to read as follows:


Sec. 1301.11  Producer.

* * * * *
    (b) A dairy farmer who produces milk outside of the regulated area 
that is moved to a pool plant, provided that on more than half of the 
days on which the handler caused milk to be moved from the dairy 
farmer's farm during December 1996, December 1997, and December 1998, 
all of that milk was physically moved to a pool plant in the regulated 
area. Or: to be considered a qualified producer, on more than half of 
the days on which the handler caused milk to be moved from the dairy 
farmer's farm during the current month and for five (5) months 
subsequent to July of the preceding calendar year, all of that milk 
must have moved to a pool plant, provided that the total amount of milk 
at a pool plant eligible to qualify producers who did not qualify in 
December 1996, December 1997, and December 1998 shall not exceed the 
total bulk receipts of fluid milk products less:
    (1) Producers receipts as described in paragraph (a) of this 
section and producer receipts as described in paragraph (b) of this 
section who are qualified based on December 1996, December 1997, and 
December 1998; and
    (2) The volume of milk excluded from producer milk pursuant to 
Secs. 1301.23 (d) and (e), and 1304.2 (c) and (d).
* * * * *
    3. Section 1301.12 is revised to read as follows:


Sec. 1301.12  Producer milk.

    Producer milk means milk that the handler has received from 
producers and is physically moved to a pool plant in the regulated area 
or is diverted pursuant to Sec. 1301.23(d). The quantity of milk 
received by a handler from producers shall include any milk of a 
producer that was not received at any plant but which the handler or an 
agent of the handler has accepted, measured, sampled, and transferred 
from the producer's farm tank into a tank truck during the month. Such 
milk shall be considered as having been received at the pool plant at 
which other milk from the same farm of that producer is received by the 
handler during the month, except that in the case of a cooperative 
association in its capacity as a handler under Sec. 1301.9(d), the milk 
shall be considered as having been received at a plant in the zone 
location of the pool plant, or pool plants within the same zone, to 
which the greatest aggregate quantity of the milk of the cooperative 
association in such capacity was moved during the current month or the 
most recent month.
    4. Section 1301.23 is amended by adding paragraphs (d) and (e) to 
read as follows:


Sec. 1301.23  Diverted milk.

* * * * *

[[Page 65524]]

    (d) Milk moved, as described in paragraphs (a) and (b) of this 
section, from a dairy farmer's farm to a plant located outside of the 
regulated area, except a partially regulated plant having Class I 
disposition in the regulated area, the volume of milk (including milk 
transferred pursuant to Sec. 1304.2(c)) in excess of the percentage of 
total producer receipts, pursuant to paragraph (e) of this section, 
shall be excluded from producer milk. This paragraph will not apply to 
milk normally associated with a pool plant which was caused to be 
diverted because the facilities of the pool plant are temporarily 
unusable because of fire, flood, storm, equipment failure or similar 
extraordinary circumstances completely beyond the pool plant operator 
control, provided both the handler and the operator of the pool plant 
notify the Commission within two (2) days following such occurrence;
    (e) Milk diverted in excess of the following percentage of total 
producer receipts shall be excluded from producer milk:

------------------------------------------------------------------------
                                                                Percent
------------------------------------------------------------------------
January, February, July, December............................         10
March, April, May, June......................................         13
August, September, October, November.........................          8
------------------------------------------------------------------------

PART 1304--CLASSIFICATION OF MILK

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

    Authority: 7 U.S.C. 7256.

    2. Section 1304.2 is amended by adding paragraphs (c) and (d) to 
read as follows:


Sec. 1304.2  Classification of transfers and diversions

* * * * *
    (c) Transfers to plants located outside of the regulated area. 
Fluid milk products (not including bulk transfers of skim milk, 
condensed milk, bulk milk transferred and classified Class I by a 
federal market order and milk processed (i.e., pasturized, homogenized, 
or blended) transferred in bulk from a pool plant to a plant located 
outside of the regulated area, except a partially regulated plant 
having Class I disposition in the regulated area, the volume of milk 
(including milk diverted pursuant to Sec. 1301.23(d)) in excess of the 
percentage of total producer receipts, pursuant to paragraph (d) of 
this section, shall be excluded from producer milk. The transferred 
milk excluded pursuant to this paragraph shall be prorated to all 
sources of milk received at this plant unless the operator of the plant 
selects the sources to be excluded. This paragraph will not apply to 
any pool plant in which the facilities are temporarily unusable because 
of fire, flood, storm, equipment failure or similar extraordinary 
circumstances completely beyond the pool plant operator's control; 
provided, the operator of the pool plant notifies the Commission within 
two (2) days following such occurrence;
    (d) Milk transferred in excess of the following percentages of 
total producer receipts shall be excluded from producer milk:

------------------------------------------------------------------------
                                                                Percent
------------------------------------------------------------------------
January, February, July, December............................         10
March, April, May, June......................................         13
August, September, October, November.........................          8
------------------------------------------------------------------------

    Dated: November 17, 1998.
Kenneth M. Becker,
Executive Director.
[FR Doc. 98-31587 Filed 11-25-98; 8:45 am]
BILLING CODE 1650-01-P