[Federal Register Volume 65, Number 41 (Wednesday, March 1, 2000)]
[Proposed Rules]
[Pages 10981-10984]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-4920]



[[Page 10981]]

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DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Part 1140

[Docket No. DA-00-06]


Proposed Rule for Forward Pricing Pilot Program and Opportunity 
to File Comments

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Proposed rule.

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SUMMARY: This proposed rule establishes a pilot program which would 
exempt handlers regulated under the Federal milk order program from 
paying producers and cooperative associations the minimum Federal order 
price(s) for that portion of their milk for non-fluid use that is under 
forward contract. Establishment of the pilot program is required by a 
November 1999 amendment to the Agricultural Marketing Agreement Act of 
1937 (AMAA).

DATES: Comments must by submitted on or before March 16, 2000.

ADDRESSES: Comments should be submitted to Nicholas Memoli, Order 
Formulation Branch, Dairy Programs, USDA/AMS, Room 2971, South 
Building, P.O. Box 96456, Washington, DC 20090-6456. Comments also may 
be sent by fax to (202) 690-0552 or by e-mail to 
[email protected].
    All comments submitted in response to this proposal will be 
available for public inspection at the USDA/AMS/Dairy Programs, Order 
Formulation Branch, Room 2968, South Building, 14th and Independence 
Avenue, S.W., Washington, D.C. during normal business hours (7 CFR 
1.27(b)). Anyone wishing to view the comments is requested to make an 
appointment in advance by calling Richard M. McKee at (202) 720-4392.

FOR FURTHER INFORMATION CONTACT: Nicholas Memoli, Marketing Specialist, 
Order Formulation Branch, USDA/AMS/Dairy Programs, Room 2971, South 
Building, P.O. Box 96456, Washington, DC 20090-6456, (202) 690-1932, e-
mail address [email protected].
    The USDA Fact Sheet and other information on the proposed pilot 
program is available from market administrators' offices or can be 
downloaded from our web site (www.ams.usda.gov/dairy).

SUPPLEMENTARY INFORMATION: This proposed rule would implement an 
amendment to the AMAA which directs the Secretary of Agriculture to 
establish a temporary pilot program for forward contracting of milk 
under Federal milk marketing orders. The effect of this amendment is to 
permit a handler to pay producers or cooperative associations a 
negotiated price, rather than the minimum Federal order price, for milk 
that is under forward contract. The amendment appears in Section 3 of 
H.R. 3428 of the 106th Congress, as enacted by Section 1001(a)(8) of 
Public Law 106-113 (113 Stat. 1536). It was signed into law on November 
29, 1999. The amendment specifies that the pilot program shall only 
apply to federally regulated milk that is not classified as Class I 
milk or otherwise intended for fluid use and that is in the current of 
interstate or foreign commerce or directly burdens, obstructs, or 
affects interstate or foreign commerce in federally regulated milk. The 
pilot program expires December 31, 2004.

Executive Order 12988

    This proposed rule has been reviewed under Executive Order 12988, 
Civil Justice Reform. This rule is not intended to have a retroactive 
effect. If adopted, the proposed rule would not preempt any state or 
local laws, regulations, or policies, unless they present an 
irreconcilable conflict with this rule. There are no administrative 
procedures which must be exhausted prior to judicial challenge to the 
provisions of this rule.

Executive Order 12866

    The Department is issuing this proposed rule in conformance with 
Executive Order 12866. This proposed rule is not economically 
significant for the purposes of Executive Order 12866.
    The forward pricing pilot program is a voluntary program that will 
permit a handler and a producer to negotiate prices that may be below 
the minimum order prices that would otherwise apply to such milk. Some 
producers, proprietary handlers, and cooperative associations now 
negotiate forward contracts on part or all of their milk. The pilot 
program will expand the opportunities to engage in forward contracting 
by exempting participating proprietary handlers from the minimum prices 
to producers and cooperative associations required under Federal milk 
marketing orders. These regulations would not affect the ability of 
cooperative associations to forward contract with their members.

The Regulatory Flexibility Act and the Effects on Small Businesses

    Pursuant to the requirements set forth in the Regulatory 
Flexibility Act (RFA) (5 U.S.C. 601 et seq.), the Agricultural 
Marketing Service (AMS) has considered the economic impact of the 
proposed rule on small entities and has prepared this initial 
regulatory flexibility analysis.
    The legal basis for the proposed rule is set forth in an amendment 
to the AMAA signed into law on November 29, 1999, that directs the 
Secretary of Agriculture to establish the dairy forward pricing pilot 
program. The Secretary was directed ``to establish a temporary pilot 
program under which milk producers and cooperatives are authorized to 
voluntarily enter into forward price contracts with milk handlers.''
    The pilot program would provide the dairy industry, which has 
experienced substantial price volatility in recent years, with another 
tool to deal with such volatility. With the phase-down of the dairy 
price support program to a safety-net program, the prices of dairy 
products have fluctuated to a much greater extent than they did during 
the prior 20 years. This price fluctuation has created problems for 
processors of manufactured dairy products (e.g., butter, nonfat dry 
milk, and cheese), the dairy farmers who supply these processors, and 
the retailers, school systems, and other public institutions who 
provide these products to consumers.
    Under the Small Business Administration's definition of a ``small 
business,'' a dairy farm is a small business if it has less than 
$500,000 in gross annual sales and a handler is a small business if it 
has fewer than 500 employees. As of February 2000 under the Federal 
milk order program, there are 142 cooperative associations representing 
approximately 63,000 dairy farmers. In addition, there are 11,600 dairy 
farmers who are not affiliated with any cooperative association. Of 
these nonmember producers, 10,900 meet the SBA's definition of a small 
business.
    There are nearly 1,000 milk plants that are regulated under the 
Federal milk order program. Based on the best data available, 
approximately one-third of these plants would be classified as small 
businesses. These requirements are further discussed in the Paperwork 
Reduction Act section.
    The recordkeeping and reporting requirements for this proposed rule 
are minimal. At the present time, any handler that enters into a 
forward contract with a producer presumably has written proof for such 
an arrangement. Under the proposed pilot program, a handler would be 
required to submit a copy of each forward contract with a producer to 
the market administrator of the order in which the

[[Page 10982]]

handler's plant is regulated. In addition, the handler would be 
required to attach a disclosure statement to each forward contract. The 
disclosure statement, which would be attached to general guidelines 
concerning the contracting process, would have to be signed by each 
dairy farmer entering into a forward contract. The disclosure statement 
explains that a dairy farmer entering into a forward contract under the 
pilot program forfeits his or her right to receive the minimum order 
price(s) for that portion of their milk that is under contract for the 
duration of the contract period.
    In drafting the proposed rule, the Department considered whether 
any limit should be established for the amount of milk that a dairy 
farmer could forward contract. We decided not to impose such a limit 
because we did not wish to interfere with a dairy farmer's desire to 
forward contract all of his or her milk. Also, in order to gain as much 
knowledge as possible about the types of forward contracts that might 
be offered by handlers, we believe it is beneficial to allow handlers 
and dairy farmers to decide between themselves how much milk to put 
under forward contract and how much milk to keep under minimum Federal 
order pricing.
    Since the forward contracting of milk may be new to many dairy 
farmers, the Department decided to incorporate two provisions, in 
addition to the disclosure statement, to help dairy farmers adjust to 
the new program. First, the proposed rule requires that each forward 
contract under the pilot program must contain a clause that gives a 
dairy farmer 3 days to change his or her mind about forward contracting 
their milk. If a dairy farmer does change his or her mind after signing 
a forward contract, the farmer would be required to contact the handler 
with whom he or she had contracted by the 3rd business day following 
the date that the contract was signed.
    The proposed rule would also limit the contract period for first-
time contracts under the pilot program to 6 months. The reason for 
limiting the initial contract period is to give producers a chance to 
familiarize themselves with this new way of pricing their milk.
    The Department does not believe that the forward pricing pilot 
program would unduly burden small entities or impair their ability to 
compete in the marketplace. In fact, by providing another tool to 
reduce price risk, the proposed pilot program may aid small businesses 
in competing with larger entities that have the ability to use existing 
futures and options markets, and other means, to reduce their price 
risks. The Department has not identified any relevant Federal rules 
that duplicate, overlap, or conflict with the proposed rule.
    Comments are specifically requested on the impact of this proposed 
rule on small businesses in addition to other aspects of the rule 
discussed above and throughout this document.

Paperwork Reduction Act of 1995

    The information collection requirements contained in this proposed 
rule have been submitted to the Office of Management and Budget (OMB) 
pursuant to the Paperwork Reduction Act of 1995 (44 U.S.C. chapter 35) 
for emergency approval. Due to a 15-day comment period for the proposed 
rule, a separate 60-day notice seeking public comment on the 
information collection will be published with regard to permanent 
approval.
    Under the proposed pilot program for the forward contracting of 
milk under Federal milk orders, a one-page disclosure statement was 
designed so that the Secretary's representatives administering the 
pilot program can be certain that dairy farmers have entered into the 
pilot program voluntarily. The disclosure statement would be attached 
to a fact sheet containing general guidelines to help the dairy farmer 
understand the forward contracting process. It also explains to the 
dairy farmer that the program is voluntary and that by entering into 
the program with a handler, the dairy farmer will be forfeiting his or 
her right to the minimum prices provided under the order. The form 
should take no more than 15 minutes to be read, understood, and signed 
by a dairy farmer. We estimate that the number of dairy farmers 
involved would be approximately 8,000, and the total annual time burden 
would not exceed 2,000 hours.
    Handlers would be required to submit their forward contracts under 
the pilot program to their respective market administrator's office. 
There are two reasons for this. First, the market administrator must be 
able to review the contract to ensure it is signed and to verify that 
it complies with the regulations proposed here. Second, the Department 
is required to conduct a study of forward contracting under the pilot 
program to determine the impact on milk prices paid to producers in the 
United States. This study must be submitted to Congress no later than 
April 30, 2002. In order to do such a study, the Secretary will have to 
review, summarize, and evaluate the different types of contracts that 
were written under the pilot program. The time required for handlers to 
prepare and submit copies of contracts would approximate 30 minutes per 
contract. Of the less than 700 manufacturing plants associated with 
Federal orders, fewer than 300 would be anticipated to participate with 
a total annual burden of 500 hours.

Discussion of Proposed Rules Applicable to Pilot Program

    Under the rules proposed here to administer the pilot program, a 
proprietary handler will not be subject to the order minimum prices 
with respect to payments to dairy farmers and cooperative associations 
for milk under forward contract that does not exceed the handler's 
Class II, III, and IV utilization for the month in the market where the 
handler's plant or plants are regulated. (In the rule proposed here, 
this amount of milk is defined as ``eligible milk.'' For convenience in 
the discussion that follows, a handler's combined Class II, III, and IV 
utilization will be referred to as the handler's eligible milk.) In the 
case of a multi-plant handler, the handler's Class II, III, and IV 
utilization would be combined together for all of the handler's plants 
regulated under one order. On a monthly basis if a handler's forward 
contracts exceed that amount, the handler would only be exempt from 
paying the order's minimum price(s) on its quantity of eligible milk.
    The proposed rule leaves the determination of which producers' milk 
is over-contracted to the handler. If the handler fails to make this 
determination, the market administrator would prorate the over-contract 
milk to each producer and cooperative association having a contract 
with the handler.
    Although handlers participating in the pilot program would not be 
required to pay producers and cooperative associations the order's 
minimum uniform or component prices for contract milk, they would still 
be required to account to the pool for all milk they receive at the 
respective order's minimum class prices. In the case of milk received 
by transfer from a cooperative association's pool plant, a handler may 
forward contract for all such transferred milk that is not used in 
Class I and would be exempt from paying the cooperative the minimum 
class prices for contract milk.
    Any handler participating in the pilot program would still be 
required to file all of the reports that are now required under an 
order. This includes reports of receipts and utilization of milk and 
monthly payroll reports that show all

[[Page 10983]]

information now required under the orders.
    Handlers participating in the pilot program would have to submit to 
the market administrator a copy of each contract for which it is 
claiming exemption from the order's minimum pricing. This contract must 
be signed prior to the first day of the first month for which the 
contract applies and would have to be received by the market 
administrator by the 15th day of that month. It would be the 
responsibility of each handler to give to each contracting dairy farmer 
or cooperative association a disclosure statement informing them of the 
nature of the pilot program and providing them with certain information 
that they should consider before entering into a forward contract. The 
disclosure statement would have to be signed on the same date as the 
contract by the dairy farmer or cooperative association representative 
and would have to be returned to the market administrator together with 
the contract by the 15th day of the month. Any contract that is 
submitted to the market administrator without the disclosure statement 
would be considered to be invalid for the purpose of being exempt from 
the order's minimum pricing and would be returned to the handler.
    Each forward contract submitted to the market administrator must 
contain a provision that gives the dairy farmer signing the contract 3 
business days in which to change his or her mind about forward 
contracting their milk. At midnight on the 3rd business day following 
the contract date, the contract would become irrevocable.
    If a producer wishes to cancel a forward contract within the 3-day 
period, he or she would have to notify the handler in writing. Such 
notification could be faxed, e-mailed, or mailed, but it would have to 
be in the possession of the handler by midnight of the 3rd business day 
following the contract date. A copy of the notification should be 
retained by the producer together with evidence verifying its date and 
time of receipt.
    The first time that a producer or cooperative association forward 
contracts under this pilot program the contract would be limited to 6 
months. Thereafter, the producer or cooperative association could enter 
into forward contracts with proprietary handlers for whatever period 
they wish so long as the contract does not extend beyond December 31, 
2004. If a handler violates this rule by submitting to the market 
administrator a contract that is longer than 6 months, the market 
administrator would return the contract to the handler and the handler 
would not be exempt from minimum order pricing with respect to that 
contract. The reason for proposing to limit the initial contract period 
is to give producers a chance to familiarize themselves with this new 
way of pricing their milk.
    Payments specified under a forward contract would have to be made 
on the same dates as order payments which they replace. In addition, 
the basis for pricing milk under a forward contract would be the same 
basis that is used to price milk under the respective order regulating 
the pooling of such milk. For example, under the 4 orders that provide 
for skim milk and butterfat pricing (i.e., Parts 1005, 1006, 1007, and 
1131), forward contracts would have to be written in terms of skim milk 
and butterfat pricing. On the other hand, in the 7 markets providing 
for component pricing of milk (i.e., Parts 1001, 1030, 1032, 1033, 
1124, 1126, and 1135), forward contracts under the pilot program would 
have to be written in terms of the component pricing provided under 
those orders.
    Consideration was given to leaving the pricing and payment for milk 
under forward contracts open. However, this approach was considered to 
be undesirable for several reasons. First, with respect to the timing 
of payments, nearly every handler entering into forward contracts would 
have some milk that is subject to minimum order pricing. It is highly 
unlikely that these handlers would establish a dual accounting and 
payment system even if they thought that different payment dates would 
be preferable to those specified under the order. Second, if handlers 
paid producers under contract at different times than producers not 
under contract, this disparate treatment could cause problems which 
might influence the success of the pilot program for reasons entirely 
apart from more predictable pricing. Third, from an administrative 
standpoint, we believe that it would be much easier to administer the 
pilot program if payments are made on the same day as minimum order 
payments. Also, we believe that the program would be easier for 
producers to understand if payments continue to be made on the dates 
with which they have grown accustomed.
    With respect to the form of pricing--i.e., skim milk/butterfat 
versus component--we believe that it would be unduly confusing and 
administratively burdensome to allow contract milk to be priced on a 
different basis than milk subject to minimum order pricing. Market 
administrator offices are set up to test milk according to the way it 
is priced under the order. While they may be able to test milk on some 
other basis, such testing could result in additional labor, possibly 
the purchase of additional equipment, and perhaps additional training 
of market administrator personnel. Finally, disparate pricing of milk 
to a producer could be confusing, especially if over-contracted milk 
has to be repriced using minimum order pricing.
    Since this pilot program is authorized through an amendment to the 
AMAA, it is reasonable to conclude that if the pilot program results in 
disorderly marketing conditions, the program would be in conflict with 
the objectives of the Act and would have to be modified to remedy such 
conflict.
    Participation in the pilot program must be entirely voluntary on 
the part of dairy farmers and handlers. If the Department believes that 
the program is being used to coerce dairy farmers into signing 
contracts providing for prices that, on average, are consistently below 
minimum order prices, steps would be taken to halt such practices. One 
indication that such practices could be occurring would be complaints 
from dairy farmers that they were dropped because they refused to sign 
a forward contract with a handler. Another indication might be 
manifested by the replacement of one group of dairy farmers with 
another group of dairy farmers who have entered into forward contracts 
with the handler. It is conceivable that some farmers might 
intentionally enter into a forward contract that would consistently 
provide a price below the minimum order price simply to get their milk 
pooled on a particular market. This type of activity would undermine 
the concept of minimum prices to dairy farmers and lead to the type of 
conditions that the AMAA was enacted to remedy. Should these types of 
activities occur after the pilot program becomes effective, the 
Secretary would consider amending, suspending, or terminating the pilot 
program.
    Additional information about the pilot program is included in the 
Department's program announcement. The information is also available on 
the Dairy Programs' web site (www:ams.usda.gov/dairy) and is available 
from local market administrator offices.
    A 15-day comment period is provided in this proposed rule. This 
comment period is deemed appropriate because: (1) In enacting the 
legislation authorizing the pilot program, Congress intended that it be 
established early this year; (2) the dairy industry is anticipating, 
and has already been preparing to take part in, the pilot program; and 
(3) the program represents

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another means which the industry may need to deal with price 
volatility.
    For the reasons set forth in the preamble, it is proposed that 
Title 7 of Chapter X of the CFR be amended by adding a new Part 1140 as 
follows:

PART 1140--DAIRY FORWARD PRICING PILOT PROGRAM

Subpart A--Definitions
Sec.
1140.1   General definitions.
Subpart B--Rules Governing Forward Contracts
1140.2   Rules governing forward contracts.

    Authority: 7 U.S.C. 601, et seq.

Subpart A--Definitions


Sec. 1140.1  General definitions.

    (a) Pilot program means the dairy forward pricing pilot program 
provided by an amendment to the Agricultural Marketing Agreement Act of 
1937 (7 U.S.C. 601, et seq.) signed into law on November 29, 1999 
(Section 3 of H.R. 3428 of the 106th Congress, as enacted by section 
1001(a)(8) of Public Law 106-113 (113 Stat. 1536)).
    (b) Eligible milk means the quantity of milk equal to a handler's 
Class II, III, and IV utilization during the month, combining all pool 
plants of a single handler that are regulated under a single Federal 
order.
    (c) Forward contract means an agreement covering the terms and 
conditions for the sale of milk from a producer defined in section 12 
of Parts 1001 through 1135 to a handler defined in Sec. 1000.9.
    (d) Contract milk means the producer milk covered by a forward 
contract.
    (e) Disclosure statement means the following statement which must 
be signed and returned to the market administrator by each producer 
entering into a forward contract with a handler before the market 
administrator will recognize the terms and conditions provided in such 
contract.

Disclosure Statement

    I am voluntarily entering into a forward contract with 
__________ (handler's name). I have been given a copy of the 
contract and I have received the USDA's Pilot Program Fact Sheet to 
which this disclosure statement was attached. By signing this form, 
I understand that I am forfeiting my right to receive the order's 
minimum uniform or component prices for that portion of my milk that 
is under forward contract for the duration of the contract. I also 
understand that my milk will be priced in accordance with the terms 
and conditions of the contract.
Printed Name:
Signature:  -----------------------------------------------------------
Date:  ----------------------------------------------------------------
Address:  -------------------------------------------------------------
Producer No:  ---------------------------------------------------------
    (f) Other definitions. Any term used in this part that is defined 
in Parts 1000-1135 is incorporated in this part.

Subpart B--Rules Governing Forward Contracts


Sec. 1140.2  Rules governing forward contracts.

    (a) A handler that operates one or more pool plants may enter into 
forward contracts with producers or cooperative associations for the 
handler's eligible milk received at such plants and be exempt from the 
minimum payment provisions that would apply to such milk in section 73 
of Parts 1001 through 1135 for the period of time covered by the 
contract, except that a contract with a producer or cooperative 
association participating for the first time in this pilot program may 
not exceed 6 months. In no event shall a forward contract executed 
pursuant to this part extend beyond December 31, 2004.
    (b) Forward contracts must be signed and dated by the contracting 
handler and producer (or cooperative association) prior to the first 
day of the first month for which they are to be effective and must be 
in the possession of the market administrator by the 15th day of that 
month. The disclosure statement provided in Sec. 1140.2(e) must be 
signed on the same date as the contract by each producer or cooperative 
association entering into a forward contract under the pilot program 
and this signed disclosure statement must be attached to each contract 
submitted to the market administrator.
    (c) Each forward contract submitted for approval must contain a 
clause that allows the dairy farmer signing the contract to revoke the 
contract by notifying the handler in writing within 3 business days. 
This written notification, which may be faxed, mailed, or E-mailed, 
must be in the possession of the handler by midnight of the 3rd 
business day following the signing of the contract. The producer is 
responsible for verifying the time and date of receipt of this 
notification.
    (d) In the event that a handler's contract milk exceeds the 
handler's eligible milk for any month in which the specified contract 
price(s) are below the order's minimum prices, the handler must 
designate which producer milk shall not be contract milk. If the 
handler does not designate the owners of the over-contracted milk, the 
market administrator shall prorate the over-contracted milk to each 
producer and cooperative association having a forward contract with the 
handler.
    (e) Payments for milk covered by a forward contract must be made on 
the same dates as payments for milk that is not under forward contract 
under the respective Federal order.
    (f) The basis for pricing milk under forward contract must be the 
same basis--but not at the same rate or level--as is used to price milk 
that is not under forward contract under the respective order. Under 
orders providing for skim milk and butterfat pricing, forward contracts 
must price milk on the basis of skim milk and butterfat, and under 
orders with component pricing of milk, forward contracts must price 
milk according to the components priced under the respective order.
    (g) Handlers participating in the pilot program will continue to be 
required to file all reports that are currently required under the 
respective marketing orders and will continue to be required to account 
to the pool for all milk they receive at their respective order's 
minimum class prices.
    (h) Nothing in this part shall impede the contractual arrangements 
that exist between a cooperative association and its members.

    Dated: February 25, 2000.
Richard M. McKee,
Deputy Administrator, Dairy Programs.
[FR Doc. 00-4920 Filed 2-29-00; 8:45 am]
BILLING CODE 3410-02-P