[Federal Register Volume 65, Number 138 (Tuesday, July 18, 2000)]
[Rules and Regulations]
[Pages 44408-44414]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-18113]


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DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Part 1140

[Docket No. DA-00-06]


Final Rule for Dairy Forward Pricing Pilot Program

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Final rule.

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SUMMARY: This final rule establishes a pilot program which exempts 
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 nonfluid 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).

EFFECTIVE DATE: July 19, 2000.

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].

SUPPLEMENTARY INFORMATION: This rule implements 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 the 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, provided that such milk does not exceed the 
handler's nonfluid use of milk for the month. 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

[[Page 44409]]

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.
    This pilot program does not invalidate, supersede, or otherwise 
change existing milk contracts between handlers and dairy farmers. 
Contracts eligible for this pilot program shall be those contracts 
beginning no earlier than the effective date of this final rule.
    Pursuant to 5 U.S.C. 553, it is also found and determined that good 
cause exists for not postponing the effective date of this rule until 
30 days after publication in the Federal Register because: (1) The 
pilot program is a voluntary program that does not require extensive 
preparation for those handlers and dairy farmers who choose to 
participate in it; and (2) most handlers and farmers desiring to 
participate in the program are anticipating the publication of this 
rule and would like to have their contractual transactions under the 
program effective as soon as possible.

Executive Order 12988

    This final rule has been reviewed under Executive Order 12988, 
Civil Justice Reform. This rule is not intended to have a retroactive 
effect and will 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 rule in conformance with Executive 
Order 12866. This 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, at times, 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 do 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) considered the economic impact of this rule on 
small entities and has prepared this final regulatory flexibility 
analysis.
    The legal basis for this 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 will 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, a dairy farm 
is a small business if it has annual gross revenues of less than 
$500,000 and a handler is a small business if it has fewer than 500 
employees. For the purposes of determining which dairy farms are 
``small businesses,'' the $500,000 per year criterion was used to 
establish a production guideline of 326,000 pounds per month. Although 
this guideline does not factor in additional monies that may be 
received by dairy producers, it should be an inclusive standard for 
most ``small'' dairy farmers. For purposes of determining a handler's 
size, if the plant is part of a larger company operating multiple 
plants that collectively exceed the 500-employee limit, the plant will 
be considered a large business even if the local plant has fewer than 
500 employees.
    Based upon the most current information available, USDA identified 
as small businesses approximately 66,327 of the 71,716 dairy producers 
(farmers) that had their milk pooled under a Federal order in January 
2000. Thus, small businesses represent approximately 92.5 percent of 
the dairy farmers in the United States. On the processing side, there 
were approximately 1,200 plants associated with Federal orders in 
January 2000, and of these plants, approximately 720 qualify as ``small 
businesses,'' representing about 60 percent of the total. At the 
present time, 142 cooperative associations represent 61,405 dairy 
farmers under the Federal milk order program. In addition, there were 
10,311 dairy farmers who were not affiliated with any cooperative 
association in January 2000. Of these nonmember producers, 9,559 meet 
the SBA's definition of a small business.
    The recordkeeping and reporting requirements for this 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 pilot program, a handler will be required to 
submit a copy of each forward contract with a producer or a cooperative 
association to the market administrator of the order that regulates the 
milk. In addition, the handler will be required to attach a specific 
disclosure statement to each forward contract with each producer under 
the pilot program. The disclosure statement will 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. These requirements 
are discussed further in the Paperwork Reduction Act section of this 
document.
    In drafting the 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.
    Comments were specifically requested on the impact of this rule on 
small businesses. Many comments, particularly from dairy farmers and

[[Page 44410]]

cheese plant operators, stated that the pilot program would assist them 
in running their business. No comments were received from a small 
business stating that the pilot program would be a burden to them.
    The Department does not believe that the forward pricing pilot 
program will unduly burden small entities or impair their ability to 
compete in the marketplace. In fact, by providing another tool to 
reduce price risk, the 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.
    Several provisions that were in the proposed rule have been 
modified or eliminated in response to those commenters who noted that 
these provisions could limit the ability of small businesses to 
participate in the pilot program. A provision that would have provided 
a 3-day period in which a forward contract could be canceled has been 
removed to facilitate hedging of forward contracts, and a provision 
limiting initial forward contracts to 6 months has been changed to 12 
months to better reflect dairy farmers' budgeting practices. In 
addition, another change was made so that proprietary handlers that do 
not operate pool plants can participate in the program. These 
provisions are discussed in more detail in the discussion of the rules 
applicable to the pilot program.
    The Department has not identified any relevant Federal rules that 
duplicate, overlap, or conflict with this rule.

Paperwork Reduction Act of 1995

    The information collection requirements contained in this final 
rule were 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 and such approval was granted. A separate 60-day 
notice seeking public comment on the information collection will be 
published after this final rule is issued. OMB has assigned this 
request No. 0581-0190.
    Under the 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 is attached to a fact sheet 
containing general guidelines to help dairy farmers 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 will be required to submit their forward contracts under 
the pilot program to their respective market administrator's office. 
There are 2 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 provided 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. If all of the 
nearly 1200 plants associated with Federal orders decide to forward 
contract under the pilot program, the total annual burden to submit 
these contracts would be 600 hours.
    In the proposed rule, and as continued in this final rule, the 
disclosure statement described above must be submitted each time that a 
dairy farmer enters into a forward contract under the pilot program. 
Several commenters stated that this requirement was redundant and 
resulted in unnecessary paperwork. They suggested that the disclosure 
statement should only be required to be submitted the first time that a 
dairy farmer enters into a forward contract under the pilot program. 
Except for these comments with respect to the disclosure statement, no 
other comments were received that relate to paperwork reduction or 
information collection.
    While we are concerned about burdening handlers with unnecessary 
paperwork, we do not believe that the very short disclosure statement 
specified in Section 1140.1(e) of this final rule would create such a 
burden. Furthermore, we are not convinced by the argument that 
producers need be told only once that entering into a forward contract 
precludes them from receiving the order minimum prices for their milk. 
Forward contracting by producers is a significant departure from the 
historical regulatory environment. As such, it is essential that 
producers fully understand the consequences of entering into a 
voluntary contract that forfeits their right to receive minimum order 
prices for milk. By signing a disclosure statement for each contract, 
producers will be certifying that they have been given the opportunity 
to review the Forward Pricing Pilot Program Fact Sheet that describes 
the program, provides some advice, and cautions the producer to fully 
understand the terms and conditions of each contract.

Public Comments

    A proposed rule was issued on February 25, 2000 (44 FR 10981). 
Interested parties were given 15 days to file written comments 
concerning the proposed rule. These comments were accepted by regular 
mail, e-mail, and by fax. A total of 97 comments were received. These 
comments came from--in order from most to least--dairy farmers, 
handlers, federal and state legislators, futures industry 
representatives, banking industry representatives, and other interested 
parties. All of the comments are available for viewing on our web site: 
www.ams.usda.gov/dairy/for_contr_pilot.htm.

Discussion of Rules Applicable to Pilot Program

    Under the rules adopted here to administer the pilot program, 
producer milk under forward contract with a handler in compliance with 
the rules will not be subject to a Federal milk order's minimum price 
requirements provided that such milk does not exceed the handler's 
Class II, III, and IV utilization of milk for the month in the market 
that regulates the milk. This rule contains a clarification in 
Sec. 1140.2(a) to make it clear that in order to be eligible for 
exemption from minimum order pricing under this pilot program handlers 
must be in compliance with the program rules.
    For convenience, a handler's combined Class II, III, and IV 
utilization is defined as the handler's eligible milk. In the case of a 
multi-plant handler, the handler's Class II, III, and IV utilization 
will be combined together for all of the handler's milk regulated under 
one order. A handler will only be exempt from paying the order's 
minimum price(s) on its quantity of eligible milk.

[[Page 44411]]

    The determination of which producers' milk is over-contracted is 
left to the handler. If the handler fails to make this determination, 
the market administrator will prorate the over-contract milk to each 
producer and cooperative association having a contract with the 
handler.
    Although handlers participating in the pilot program will not be 
required to pay producers and cooperative associations the order's 
minimum uniform or component prices for contract milk, they will 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 will be exempt from paying the cooperative the minimum 
class prices for contract milk.
    In the proposed rule (See Sec. 1140.2(a)), forward contracting 
under the pilot program was restricted to a handler that operates ``one 
or more pool plants.'' In this final rule, this has been changed to 
read ``any handler defined in Secs. 1000.9 and 1135.9.'' The language 
in the proposed rule would have excluded proprietary handlers that do 
not operate pool plants from participating in the pilot program. As 
noted by Kraft Foods in its comment, ``this limitation is not in the 
statute creating the pilot program, and would unnecessarily exclude a 
number of handlers and producers from enjoying the benefits intended by 
Congress.''
    The language contained in the proposed rule would not have 
permitted forward contracting for many manufacturing plants that use 
pooled milk for their manufactured dairy products. In fact, many 
nonpool plants that receive producer milk by diversion from pool plants 
would have been unable to forward contract under the pilot program.
    In providing for the forward contract pilot program, Congress 
provided handlers who forward contract with an exemption from paying 
the minimum Federal order price to producers with whom they have 
contracted. The November 1999 amendments to the Act did not permit 
handlers who manufacture Class II, III, and IV products to forward 
contract because any handler, even handlers with all Class I milk, 
could have forward contracted prior to the amendments. What the 
amendments did do, however, was excuse handlers from paying producers 
minimum order prices for Class II, III, and IV milk under forward 
contract.
    The language in Sec. 1140.2(a) for the proposed rule stated that 
only pool plant operators could forward contract and be exempt from 
minimum Federal order pricing. This language, however, does not take 
into consideration the complex marketing arrangements that exist 
between pool plants, cooperative association bulk tank handlers, and 
nonpool plants.
    In many markets, milk of nonmember producers that is regularly 
received at a nonpool plant is actually pooled by a pool plant operator 
or by a cooperative association through its deliveries to a pool plant. 
The nonmember milk delivered to the nonpool plant is reported as 
producer milk diverted to a nonpool plant by the cooperative 
association on its monthly report of receipts and utilization to the 
market administrator. Alternatively, if a cooperative association is 
not involved in the transaction, such milk could be reported by a pool 
plant operator on its report.
    Many nonpool plant operators that receive nonmember milk that is 
pooled through another handler issue checks to their nonmember 
producers. They submit their payrolls showing these payments to the 
market administrator. Nevertheless, these nonpool plant operators are 
not responsible under the order for paying their nonmember producers 
the minimum Federal order price; it is the handler--i.e., either the 
cooperative association or pool plant operator--that pools the milk for 
them who would be held responsible for an underpayment.
    In this final rule, only producer milk that is under forward 
contract with a handler in compliance with the rules provided here will 
be exempt from the order's minimum prices. In the case of nonmember 
milk that is reported as producer milk by a cooperative association 
handler or pool plant operator, but payrolled by a nonpool plant 
operator, the cooperative association or pool plant operator, 
respectively, will be held responsible for any underpayment to a 
nonmember producer in the event that milk under contract becomes 
subject to minimum order pricing (for instance, in the case of over-
contracted milk). In this way, cooperative association handlers, pool 
plant operators, and nonpool plant operators may continue the complex 
arrangements that have evolved to pool milk under the Federal milk 
order program and all will be permitted to participate in the pilot 
program.
    The language in Sec. 1140.2(a) of this final rule has been modified 
to reflect the change from ``handler that operates one or more pool 
plants'' to simply ``handler.'' As defined in Sec. 1000.9, handler 
includes not only the operator of a pool plant or a nonpool plant, but 
also a broker serving as a handler as provided in Sec. 1000.9(b) and a 
cooperative association acting as a handler with respect to milk 
delivered to a pool plant or diverted to a nonpool plant. Finally, the 
term ``handler'' includes a proprietary bulk tank handler as defined in 
Sec. 1135.9 of the Western order.
    Any handler participating in the pilot program will 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 information now required under 
the orders.
    Handlers participating in the pilot program will 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 1st day of the 1st month for which the contract 
applies and must be received by the market administrator by the 15th 
day of that month. For the first month that the pilot program is 
effective, contracts must be signed on or after the day on which the 
program becomes effective. For example, if the program becomes 
effective on July 17, contracts for August milk must be signed between 
July 17 and July 31 and must be in the market administrator's office by 
August 15.
    It is 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 must 
be signed on the same date as the contract by the dairy farmer or 
cooperative association representative and will 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 will be considered to be invalid for 
the purpose of being exempt from the order's minimum pricing and will 
be returned to the handler.
    Several commenters objected to having to submit a disclosure 
statement each time they contract with a producer. They argued that 
attaching a disclosure statement to the first forward contract with a 
producer was sufficient and that having to do so with each succeeding 
contract involved unnecessary paperwork.

[[Page 44412]]

    As noted earlier in the section dealing with the Paperwork 
Reduction Act, we do not believe that the very short disclosure 
statement specified in Section 1140.1(e) of this final rule would 
create such a burden. In fact, it is only one paragraph long and can 
easily be incorporated in the body of a forward contract itself or can 
be handled as a one-page supplement that may be attached to the forward 
contract.
    In its proposed rule, the Department proposed 2 provisions to help 
dairy farmers adjust to the new program. One provision would have 
required that each forward contract under the pilot program contain a 
clause that gives a dairy farmer 3 days to change his or her mind about 
forward contracting their milk. The 2nd proposed provision would have 
limited the contract period for first-time contracts under the pilot 
program to 6 months. Both of these proposals were opposed by a majority 
of the commenters who addressed these issues.
    Numerous commenters contended that these 2 provisions would be very 
damaging to the pilot program, even rendering it totally ineffective. 
One commenter who specializes in hedging price risks noted that the 3-
day cancellation provision would severely constrain a handler in 
offsetting its risk if it had to wait for 3 days after signing a 
contract before it could safely hedge a price commitment that it had 
made 3 days earlier. With respect to the proposed rule limiting first-
time contracts to 6 months, many commenters observed that a 6-month 
contract would not match up with a dairy farmer's budgeting process.
    In response to those commenters who argued that having to wait 3 
days would subject handlers to extraordinary, unreasonable price risk, 
we undertook a careful review of the options available to handlers for 
hedging such risk. In particular, we analyzed the costs associated with 
purchasing at-the-money put options in lieu of selling futures to hedge 
forward contracts during the 3 days when a forward contract could be 
canceled. We also looked at the costs incurred in selling futures and 
simultaneously purchasing an equivalent amount of at-the-money call 
options to hedge the price risks associated with entering into forward 
contracts during the 3 days when the contract could be canceled. Our 
analysis indicates that the costs of the 3-day cancellation provision 
could amount to between 10 and 15 cents per hundredweight. These costs 
would likely be passed on to producers in the form of lower contract 
prices which could dampen any interest in the pilot program.
    In proposing the 3-day cancellation clause for producers who enter 
into forward contracts under the pilot program it was our intent to 
help farmers adjust to the new program and to protect them from undue 
pressure in signing forward contracts. However, based on the comments 
and on our analysis it is clear that the 3-day cancellation provision 
would result in some additional costs to handlers who enter into 
forward contracts and hedge such contracts by using the futures market. 
Such costs could be passed on to producers in terms of lower forward 
contract prices. Therefore, while we continue to see merit in this 
provision, we must conclude that, on balance, the 3-day cancellation 
provision could work against the interests of dairy farmers by denying 
them the opportunity to utilize forward contracts under the pilot 
program. Accordingly, this provision has been removed from this final 
rule. Nevertheless, we will carefully monitor whether producers have 
been provided with adequate time and information before entering into 
forward contracts with handlers under the pilot program and will 
revisit this issue if necessary.
    With respect to the 6-month forward contract restriction for 
producers forward contracting for the first time, we still believe that 
a restriction for first-time forward contracts would have merit. 
However, we are convinced by the comments submitted that the maximum 
contract length should be changed from 6 months to 12 months to be more 
consistent with budgeting and banking practices. After a producer has 
entered into his or her first forward contract under the pilot program, 
subsequent contracts could be written for longer periods of time.
    A 3rd proposed provision that was widely opposed by commenters and 
received virtually no support would have required the basis for pricing 
milk under a forward contract to be the same as the basis for pricing 
milk that was not under forward contract. Specifically, in the 4 
Federal orders with butterfat and skim milk pricing, forward contracts 
would have been required to be written in those terms, and in the 7 
orders with component pricing of milk, forward contracts would have 
been required to be written in terms of those same components. This 
provision was proposed for 2 reasons. First, we thought such pricing 
would be more understandable to producers who had part of their milk 
subject to minimum order pricing and part of it subject to forward 
contract pricing. Second, we thought that such pricing would be easier 
for producers to verify using testing data provided by the market 
administrator.
    This proposal was seen by commenters to be unnecessarily limiting 
and an obstacle to effectively hedging contract prices, which may be 
based upon futures market prices that may not price each component of 
milk. Therefore, it has been removed. However, producers who are not 
members of a cooperative association should understand that their milk 
weights and tests will continue to be handled in the same way by the 
market administrator even if they choose to enter into a forward 
contract which prices their milk on a basis that differs from the order 
in which their milk is pooled. For example, if a producer under the 
Appalachian Order, which prices milk to dairy farmers on the basis of 
skim milk and butterfat, enters into a contract that prices milk on the 
basis of protein, butterfat, other solids, and somatic cell count, the 
producer will not receive data from the market administrator to compare 
against the buying handler's test data. If the producer wishes to 
verify these tests, he or she will have to do so at their own expense.
    As proposed, payments specified under a forward contract must be 
made on the same dates as order payments which they replace. No 
comments were received in opposition to this provision and it should be 
carried forward for several reasons. First, 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, it will be much easier to 
administer the pilot program if payments are made on the same day as 
minimum order payments.
    Some commenters argued that the market administrator should enforce 
forward contract prices just as they do minimum order prices. Another 
comment stated that the regulations should enforce payment of all 
contracts.
    The Act requires the Secretary to establish a forward pricing pilot 
program. Milk for nonfluid use which is covered by forward contracts 
under the

[[Page 44413]]

pilot program is exempt from the minimum price provisions of the 
orders. We do not believe it should be the role of the market 
administrator or the Department to determine the terms of forward 
contracts or to enforce negotiated prices. Payment for milk covered 
under forward contract is required to be made by the dates specified in 
Sec. 1140.2(e) of the regulations.
    Some commenters argued that allowing a handler to draw money from 
the producer-settlement fund and not pass it on to its producers could 
create disorderly marketing conditions. One commenter concluded that 
allowing a handler to keep the difference between the order's blend 
price and the contract price was an unjustified windfall to the 
handler.
    This issue merits some discussion. Frankly, we do not know what 
form forward contracts will take under the pilot program. We do know 
the nature of some forward contracts prior to the pilot program. In the 
Upper Midwest, where much of the milk that is pooled is used for Class 
III use, many forward contracts provided for a Class III price plus a 
pool draw. If a handler was a cheese operation, the pool draw would 
equal the difference between the order's blend price and the Class III 
price.
    It may be that this same formula will be the popular way to forward 
contract under the pilot program, but there are several variables that 
make this unclear. First, the pilot program applies to all Federal 
order markets, with Class I utilizations ranging from 90 percent to 10 
percent. There is a significant difference in the pool draw between 
these extremes. Second, forward contracts may only cover milk used for 
Class II, III, or IV use. While a contract providing for a Class III 
price plus the pool draw might make sense for a cheese plant, it may 
not fit well with an ice cream or butter-powder operation.
    Producers who are contemplating forward contracting should keep in 
mind that their benchmark price is the Federal order blend price. That 
is the minimum price that they would receive in the absence of a 
forward contract. Thus, it seems reasonable that when producers 
negotiate a forward contract price, they would hope to approximate, 
ideally, the minimum blend price plus applicable premiums averaged over 
the forward contract period.
    As noted above, we do not know how handlers will arrive at forward 
contract prices. They could look at futures markets for guidance. A 
forward contract price could be a flat blend price approximation; it 
could be an average futures market cheese price plus a pool draw; or, 
for a butter-powder operation, it could be an average future butter and 
powder price on a hundredweight basis plus a pool draw.
    Over time, we would expect to see forward prices to producers below 
the blend price in some months and above the blend price in other 
months. When the contract price is below the blend price, the pool draw 
could accrue to the contracting handler. On the other hand, when the 
contract price is above the blend price, the contracting handler will 
have to supplement the pool draw to pay the producer the contract 
price. On balance, the pluses and minuses should cancel each other out 
since, one could argue, the desired objective of forward contracting is 
to remove the uncertainty and variability in prices, not to reduce a 
handler's cost by cutting its payments to producers. In fact, if 
producers continually find that they are losing money by forward 
contracting, it would seem illogical for them to continue to do so.
    Some commenters also argued that handlers with forward contracts 
under the pilot program should be prohibited from excluding milk from 
regulation or, as it more commonly called, depooling milk.
    This issue would by necessity involve amendments to Federal orders, 
unlike the pilot program, which involves no amendments to Federal 
orders. The depooling issue is really separate from forward contracting 
and is not appropriate for consideration in this informal rulemaking 
process.
    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 will 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 for possible future benefit. 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 appropriate actions to halt 
such activities.
    Many commenters, including several members of Congress, took issue 
with our reference to suspend or terminate the pilot program in the 
discussion part of the proposed rule. Other commenters, however, 
specifically welcomed the discussion of these contingencies.
    It may be true, as one commenter stated, that it is unnecessary to 
state that the Secretary of Agriculture can terminate the pilot program 
if he finds that it is operating in conflict with the Agricultural 
Marketing Agreement Act. However, we see no harm in stating what may 
not be obvious to all pilot program participants: If the program is 
abused, steps will be taken to stop the abuse.
    Therefore, based on the rationale set forth in the proposed rule 
and in this document we are adopting provisions of the proposal as a 
final rule, with the changes discussed in this document, as well as 
several technical changes made for clarity.
    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/fmor/index.htm) and is 
available from local market administrator offices.

    For the reasons set forth in the preamble, Title 7 of Chapter X of 
the CFR is amended by adding a new Part 1140 as follows:

PART 1140--DAIRY FORWARD PRICING PILOT PROGRAM

Subpart A--Definitions
Sec.
1140.1   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  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 the 
contracting handler's Class II, III, and IV utilization of

[[Page 44414]]

producer milk, in product pounds, during the month, combining all 
plants of a single handler regulated under the same Federal order.
    (c) Forward contract means an agreement covering the terms and 
conditions for the sale of milk from a producer defined in 
Secs. 1001.12, 1005.12, 1006.12, 1007.12, 1030.12, 1032.12, 1033.12, 
1124.12, 1126.12, 1131.12, and 1135.12, or a cooperative association 
defined in Sec. 1000.18, and a handler defined in Sec. 1000.9 or 
1135.9.
    (d) Contract milk means the producer milk covered by a forward 
contract.
    (e) Disclosure statement means the following statement which must 
be signed 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 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. The definition of any term in parts 1000-
1135 of this chapter apply to, and are hereby made a part of, this 
part.

Subpart B--Rules Governing Forward Contracts


Sec. 1140.2  Rules governing forward contracts.

    (a) Any handler defined in Secs. 1000.9 and 1135.9 may enter into 
forward contracts with producers or cooperative associations for the 
handler's eligible milk. Milk under forward contract in compliance with 
these rules will be exempt from the minimum payment provisions that 
would apply to such milk pursuant to Secs. 1001.73, 1005.73, 1006.73, 
1007.73, 1030.73, 1032.73, 1033.73, 1124.73, 1126.73, 1131.73 and 
1135.73 for the period of time covered by the contract.
    (b) A forward contract with a producer or cooperative association 
participating for the first time in this pilot program may not exceed 
12 months. In no event shall a forward contract executed pursuant to 
this part extend beyond December 31, 2004.
    (c) Forward contracts must be signed and dated by the contracting 
handler and producer (or cooperative association) prior to the 1st day 
of the 1st 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.\1\ The disclosure statement provided in Sec. 1140.1(e) must be 
signed on the same date as the contract by each producer 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.
---------------------------------------------------------------------------

    \1\ Contracts that have been signed prior to the effective date 
of these rules are invalid under the pilot program.
---------------------------------------------------------------------------

    (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 suppliers 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 
or before the dates applicable to payments for milk that is not under 
forward contract under the respective Federal order.
    (f) 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.
    (g) Nothing in this part shall impede the contractual arrangements 
that exist between a cooperative association and its members.

    Dated: July 13, 2000.
Kathleen A. Merrigan,
Administrator, Agricultural Marketing Service.
[FR Doc. 00-18113 Filed 7-17-00; 8:45 am]
BILLING CODE 3410-02-P