[Federal Register Volume 67, Number 31 (Thursday, February 14, 2002)]
[Proposed Rules]
[Pages 7040-7053]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-3634]



[[Page 7039]]

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Part V





Department of Agriculture





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Agricultural Marketing Service



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7 CFR Part 1030



Milk in the Upper Midwest Marketing Area; Tentative Decision on 
Proposed Amendments and Opportunity To File Written Exceptions to 
Tentative Marketing Agreement and To Order; Proposed Rule

  Federal Register / Vol. 67, No. 31 / Thursday, February 14, 2002 / 
Proposed Rules  

[[Page 7040]]


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DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Part 1030

[Docket No. AO-361-A35; DA-01-03]


Milk in the Upper Midwest Marketing Area; Tentative Decision on 
Proposed Amendments and Opportunity To File Written Exceptions to 
Tentative Marketing Agreement and To Order

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Proposed rule.

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SUMMARY: This tentative decision proposes to adopt, on an interim final 
and emergency basis, provisions that would eliminate the ability to 
simultaneously pool milk on the Upper Midwest Federal milk order and a 
State-operated milk order that has marketwide pooling. Additionally, 
the order would be amended by establishing a limit on the amount of 
milk that can be diverted to nonpool plants from pool distributing 
plants regulated under the order. Public comments on these actions and 
the other pooling and payment issues are requested. In addition, this 
decision requires determining if producers approve the issuance of the 
amended order on an interim basis.

DATES: Comments should be submitted on or before April 15, 2002.

ADDRESSES: Comments (6 copies) should be filed with the Hearing Clerk, 
Room 1083, South Building, United States Department of Agriculture, 
Washington, DC 20250.

FOR FURTHER INFORMATION CONTACT: Gino M. Tosi, Marketing Specialist, 
USDA/AMS/Dairy Programs, Order Formulation Branch, Room 2968, South 
Building, PO Box 96456, Washington, DC 20090-6456, (202) 690-1366, e-
mail address: [email protected].

SUPPLEMENTARY INFORMATION: This administrative action is governed by 
the provisions of sections 556 and 557 of Title 5 of the United States 
Code and, therefore, is excluded from the requirements of Executive 
Order 12866.
    The amendments to the rules proposed herein have been reviewed 
under Executive Order 12988, Civil Justice Reform. They are not 
intended to have a retroactive effect. If adopted, the proposed 
amendments would not preempt any state or local laws, regulations, or 
policies, unless they present an irreconcilable conflict with this 
rule.
    The Agricultural Marketing Agreement Act of 1937, as amended (7 
U.S.C. 601-674), provides that administrative proceedings must be 
exhausted before parties may file suit in court. Under section 
608c(15)(A) of the Act, any handler subject to an order may request 
modification or exemption from such order by filing a petition stating 
that the order, any provision of the order, or any obligation imposed 
in connection with the order is not in accordance with the law. A 
handler is afforded the opportunity for a hearing on the petition. 
After a hearing, the Department would rule on the petition. The Act 
provides that the district court of the United States in any district 
in which the handler is an inhabitant, or has its principal place of 
business, has jurisdiction in equity to review the Department's ruling 
on the petition, provided a bill in equity is filed not later than 20 
days after the date of the entry of the ruling.

Regulatory Flexibility Analysis Act and Paperwork Reduction Act

    In accordance with the Regulatory Flexibility Act (5 U.S.C. 601 et 
seq.), the Agricultural Marketing Service has considered the economic 
impact of this action on small entities and has certified that this 
proposed rule will not have a significant economic impact on a 
substantial number of small entities. For the purpose of the Regulatory 
Flexibility Act, a dairy farm is considered a ``small business'' if it 
has an annual gross revenue of less than $750,000, and a dairy products 
manufacturer is a ``small business'' if it has fewer than 500 
employees. For the purposes of determining which dairy farms are 
``small businesses,'' the $750,000 per year criterion was used to 
establish a production guideline of 500,000 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. In June 2001, there were 12,748 producers pooled on, and 
57 handlers regulated by the Upper Midwest order. Based on these 
criteria, the vast majority of the producers and handlers would be 
considered as small businesses. The adoption of the proposed pooling 
standards serve to revise established criteria that determine those 
producers, producer milk, and plants that have a reasonable association 
with, and, are consistently serving the fluid needs of, the Upper 
Midwest milk marketing area, and are not associated with other 
marketwide pools concerning the same milk. Criteria for pooling are 
established on the basis of performance levels that are considered 
adequate to meet the Class I fluid needs and, by doing so, determine 
those that are eligible to share in the revenue that arises from the 
classified pricing of milk. Criteria for pooling are established 
without regard to the size of any dairy industry organization or 
entity. The criteria established are applied in an identical fashion to 
both large and small businesses and do not have any different economic 
impact on a substantial number of small entities. The proposed 
amendments will engender a small change, relative to the total price 
paid to producers, and no substantial number of entities will change 
pool status as a result of the proposed amendments. Therefore, the 
proposed amendments will not have a significant economic impact on a 
substantial number of small entities.
    A review of reporting requirements was completed under the 
Paperwork Reduction Act of 1995 (44 U.S.C. chapter 35). It was 
determined that these proposed amendments would have little or no 
impact on reporting, recordkeeping, or other compliance requirements 
because they would remain identical to the current requirements. No new 
forms are proposed and no additional reporting requirements would be 
necessary.
    This notice does not require additional information collection that 
requires clearance by the Office of Management and Budget (OMB) beyond 
currently approved information collection. The primary sources of data 
used to complete the forms are routinely used in most business 
transactions. Forms require only a minimal amount of information which 
can be supplied without data processing equipment or a trained 
statistical staff. Thus, the information collection and reporting 
burden is relatively small. Requiring the same reports for all handlers 
does not significantly disadvantage any handler that is smaller than 
the industry average.
    No other burdens are expected to fall on the dairy industry as a 
result of overlapping Federal rules. This proposed rulemaking does not 
duplicate, overlap, or conflict with any existing Federal rules.
    Interested parties are invited to submit comments on the probable 
regulatory and informational impact of this proposed rule on small 
entities. Also, parties may suggest modifications of this proposal for 
the purpose of tailoring their applicability to small businesses.

[[Page 7041]]

Prior documents in this proceeding

    Notice of Hearing: Issued June 5, 2001; published June 11, 2001 (66 
FR 31185).

Preliminary Statement

    Notice is hereby given of the filing with the Hearing Clerk of this 
tentative final decision with respect to proposed amendments to the 
tentative marketing agreement and the order regulating the handling of 
milk in the Upper Midwest marketing area. This notice is issued 
pursuant to the provisions of the Agricultural Marketing Agreement Act 
and the applicable rules of practice and procedure governing the 
formulation of marketing agreements and marketing orders (7 CFR part 
900).
    Interested parties may file written exceptions to this decision 
with the Hearing Clerk, U.S. Department of Agriculture, Washington, DC 
20250, by the 60th day after publication of this decision in the 
Federal Register. Six (6) copies of the exceptions should be filed. All 
written submissions made pursuant to this notice will be made available 
for public inspection at the office of the Hearing Clerk during regular 
business hours (7 CFR 1.27(b)).
    The Hearing notice specifically invited interested persons to 
present evidence concerning the probable regulatory and informational 
impact of the proposals on small businesses. While no evidence was 
received that specifically addressed these issues, some of the evidence 
encompassed entities of various sizes. The materials are addressed in 
the discussion below of the particular issues considered.
    The proposed amendments set forth below are based on the record of 
a public hearing held at Bloomington, Minnesota, on June 26-27, 2001, 
pursuant to a notice of hearing issued June 5, 2001 and published June 
11, 2001 (66 FR 31185).
    The material issues on the record of hearing relate to:
    1. Eliminating the simultaneous pooling of milk on the order when 
already pooled on a State-operated milk order that has marketwide 
pooling.
    2. Allowing overbase milk from California to remain as eligible for 
pooling on the Upper Midwest Federal milk order.
    3. Changing certain pooling provisions of the order regarding 
performance standards and diversion limits.
    4. Changing the rate of partial payments to producers.
    5. Determining whether emergency marketing conditions exist that 
would warrant the omission of a recommended decision and the 
opportunity to file written exceptions.

Findings and Conclusions

    Preliminary Statement: Representatives from the California 
Department of Food and Agriculture, Dairy Marketing Branch, appeared at 
the hearing to provide information and to answer factual questions 
about the California State milk order program. Their appearance was at 
the request of the USDA and their participation was provided as a 
courtesy to the public. The participation of the California officials 
was neither in support of nor in opposition to any of the proposals or 
issues that were heard. The California officials provided publications 
that detailed and explained the history and operations of the 
California milk order program which included how milk is pooled and 
priced under that State order.
    The following findings and conclusions on the material issues are 
based on evidence presented at the hearing and the record thereof:

1. Simultaneous Pooling on a Federal and State-Operated Milk Order

    A proposal, published in the hearing notice as Proposal 1, seeking 
to prevent the simultaneous pooling of milk on the Upper Midwest order 
and on a State-operated order with marketwide pooling, should be 
adopted immediately. The practice of pooling milk on a Federal milk 
order and simultaneously pooling the same milk on a State-operated milk 
order has also come to be referred to as ``double dipping.'' Currently, 
the Upper Midwest order (Order 30) only provides prohibitions for the 
simultaneous pooling of the same milk on more than one Federal order. 
The record provides evidence and support for eliminating the ability of 
milk already receiving the benefits of marketwide pooling through a 
State-operated milk order from simultaneously being pooled on Order 30.
    Proposal 1, which sought to end the practice of double dipping, was 
proposed by Associated Milk Producers, Inc. et.al., First District 
Association, and Lakeshore Federated Cooperative. These entities are 
dairy farmer cooperatives who supply a significant portion of the milk 
needs of the Upper Midwest marketing area. Other entities who joined in 
support of this proposal included: Foremost Farms USA; Mid-West 
Dairymen's Company; Bongards' Creameries; Cady Cheese; Cass-Clay 
Creamery; Ellsworth Cooperative Creamery; Family Dairies USA; Hastings 
Cooperative Creamery; Kraft Foods; Lynn Dairy; Manitowoc Milk Producers 
Cooperative; Milwaukee Cooperative Milk Producers; Muller Pinehurst 
Dairy; Mullins Cheese; Plainview Milk Products; Swiss Valley Farms; 
Valley Queen; Weyauwega Milk Products; White Clover Dairy, Inc.; and 
Hilmar Cheese of Hilmar, California.
    A witness appearing on behalf of Associated Milk Producers, 
Inc.(AMPI), a supporter for the direct elimination of double-dipping, 
provided evidence and testimony that showed an increasing amount of 
California milk being pooled on Order 30. For the time period of 
October 2000 through May 2001, said the AMPI witness, there was an 
estimated $11.4 million negative effect on the pool, the equivalent of 
about a ten-cent ($0.10) reduction for each hundredweight of milk 
pooled on the order, as a result of pooling California milk on Order 
30. According to the AMPI witness, this estimate was calculated by 
factoring the amount of milk from California that had been pooled on 
the Upper Midwest pool from the Order's actual Producer Price 
Differential (PPD) and applying the difference to the volume of milk 
pooled on the order.
    The AMPI witness indicated the reform of the Federal milk marketing 
order system, implemented in January 2000, provided economic incentives 
for California milk to pool on Order 30. Specifically, said AMPI, the 
use of the higher of either the Class III or Class IV milk price in 
setting and moving Class I milk prices had yielded generally higher 
PPDs than existed in the Upper Midwest region prior to reform.
    The AMPI witness surmised that Order 30's pooling of California 
milk, already pooled under the State-operated milk order of California, 
resulted in obvious inequities. The witness provided estimates of 
extent and impact on Upper Midwest dairy farmers and was of the opinion 
that this situation is severe enough to conclude that the Department 
should move directly to a final decision and avoid the more lengthy 
procedure of first issuing a recommended decision and then issuing a 
final decision.
    These views and conclusions by the AMPI witness were supported in 
testimony by a witness appearing on behalf of Foremost Farms USA 
(Foremost). The Foremost witness testified that California milk pooled 
on Order 30 grew from about 10 million pounds to an average of 260 
million pounds during the 3-month period of March through May 2001. 
According to calculations by Foremost, an estimated $6 million 
reduction in value for all milk pooled on the order occurred due

[[Page 7042]]

to the pooling of California milk on Order 30. This revenue, said 
Foremost, comes from Upper Midwest dairy farmers who already have the 
lowest PPD in the Federal order system. Acknowledging that tighter 
pooling provisions may serve to eliminate the double dipping issue, 
Foremost was of the opinion that tightening pooling standards would not 
be the best way to accomplish that end.
    A witness representing the Mid-West Dairymen's Company/Lakeshore 
Federated Dairy Cooperative (MDC), a dairy farmer cooperative located 
in northern Illinois and southern Wisconsin, testified in support of 
ending double dipping. This witness also spoke on behalf of Lakeshore 
Federated Dairy Cooperative, which represents over 4,000 dairy farmers 
located in Illinois, Iowa, and Wisconsin, and whose milk is pooled 
mostly on the Upper Midwest order and to a lesser extent on the Central 
and Mideast Federal milk orders. This witness indicated that Mid-West 
Dairymen's Company milk supplies the fluid market.
    The MDC witness expressed concern about equity among producers and 
equity among handlers. In this regard, the witness maintained that this 
issue should be handled on an expedited basis. The MDC witness 
indicated that the Federal order program has a long history of 
promoting equity to both producers and handlers. According to MDC, 
classified pricing contributes to equity among handlers, and the 
marketwide pooling of revenue generated from classified pricing 
provides for equity among producers. Specifically noted by the MDC 
witness was the purposeful elimination of individual handler pooling as 
milk marketing orders have consolidated in larger geographic areas.
    Federal orders prohibit the pooling of the same milk of a producer 
on more than one Federal order, noted the MDC witness. Drawing money 
from one Federal order pool equitably shares revenue with those 
producers who supply the market, but drawing additional revenue from a 
second Federal order pool destroys the goal of equity among producers, 
a reason why the Federal order program prohibits double pooling, 
maintained MDC. As evidence of the impact of double dipping, MDC 
presented analysis showing that from January 2000 through April 2001, 
the Order 30 statistical uniform price per hundredweight averaged 
$10.8850, with a pool draw of 84.5 cents. Over the same 16-month 
period, said MDC, the California overbase price averaged about 21.5 
cents higher than the blend price in Order 30. Not only is the 
California overbase price higher than in Order 30, noted MDC, but a 
California dairyman pooled on Order 30 will also draw the 84.5 cents by 
being able to simultaneously pool the same milk on Order 30.
    The MDC witness testified that the California milk pooling plan 
places high importance on providing equity to producers and to handlers 
regulated by the state. The witness noted that establishing producer 
equity is a basic cornerstone of both the California and Federal milk 
order programs and that both accomplish this through marketwide 
pooling. If the Federal order program does not eliminate double 
dipping, there cannot be equity in prices received by producers in the 
Midwest or California, said the witness. Eliminating double dipping is 
desirable, said MDC, because it would not change the movement or the 
marketing of milk in any significant fashion. Milk would continue to be 
picked up at the farm and taken to the same plants as is currently 
done. According to the MDC witness, the only difference would be that 
no financial benefit would accrue to some producers who currently are 
able to double dip.
    A dairy farmer from Minnesota, who is also the Chairman of the 
First District Association, President of the Nelson Creamery 
Association, and serves on the board of the Minnesota Milk Producer's 
Association (First District), testified in support of amending the 
Upper Midwest order to prohibit double dipping. The First District 
witness testified that it is unfair and wrong for dairy farmers pooled 
on Order 30 to have their milk price intentionally diluted as a result 
of California milk being pooled on the order. This witness estimated 
that the impact on the price received by dairy farmers in the Upper 
Midwest was about 15 to 17 cents per hundredweight. The First District 
witness also thought it important to indicate that California, with its 
State-wide milk regulatory system, had chosen not to be a part of the 
Federal milk order system.
    A consultant witness with extensive experience in milk marketing 
regulations appeared on behalf of the supporters of Proposal 1. The 
witness provided detailed analysis regarding California milk movements 
and offered modified wording from that published in the hearing notice 
to end double dipping. This witness testified that Federal order 
provisions have always been tailored to prevent producers from pooling 
the same milk twice and enjoying the benefits of marketwide pooling 
from more than one order. To this end, according to the witness, a 
handler regulated on the Upper Midwest order should not be permitted to 
pool diverted milk if that milk is pooled and priced under either a 
Federal order or State order that provides for marketwide pooling.
    Important to the new consolidated orders was the rejection of 
``open pooling'' where milk from anywhere can be pooled on any 
marketing order, said the witness. The witness indicated that, in his 
opinion, the Department rejected open pooling because it did not 
provide an assurance of milk being made available for the fluid market. 
The witness also expressed the opinion that in markets with 20 percent 
or less milk used for fluid purposes, the notion of assuring an 
adequate supply of milk for fluid use becomes of questionable 
importance.
    The witness testified that the statutory requirements for milk 
marketing orders require the uniform treatment of producers and that 
uniform treatment is fundamentally the same as the equitable treatment 
of producers. The witness said that equitable treatment includes the 
equal sharing of the proceeds of the pool among all producers pooled on 
the order. However, the witness thought the notion of equitable 
treatment would not include producers who are sharing in the proceeds 
of other marketwide pools on the same milk. To this end, the witness 
maintained that pooling milk on both the California and Order 30 
marketwide pools has resulted in the nonuniform distribution of 
proceeds to those producers who pool the same milk twice.
    The witness also presented an analysis of data from the California 
Department of Food and Agriculture as well as relying on his knowledge 
of milk receipts at plants located in the western States of Oregon, 
Nevada, and Arizona. This analysis shows, said the witness, that almost 
all of the California milk pooled on the Upper Midwest order is not 
physically received within the Order 30 area, but is instead being 
received at California plants. Because the milk is received at a 
California plant, it is pooled under the California marketwide system.
    The Secretary of the Wisconsin Department of Agriculture, Trade, 
and Consumer Protection (WDATCP), accompanied by the Director of Value 
Added Agricultural Development of the WDATCP, testified in support of 
amending the Upper Midwest order to stop and prevent the double dipping 
of milk. The witnesses testified that increasing volumes of California 
milk was diluting the Class I utilization of the market and was also 
lowering the

[[Page 7043]]

benefit to dairy farmers in Minnesota and Wisconsin who are pooled on 
Order 30.
    These Wisconsin officials were of the opinion that artificial 
regulations, not market forces, allow California milk to simultaneously 
pool under California's State order program and Order 30. The witnesses 
found this to be patently unfair and noted that it only serves to lower 
the income to Wisconsin and Minnesota dairy farmers.
    With regard to milk produced far from the order and pooled on Order 
30, these witnesses expressed minimal concern about such milk being 
able to pool on the order provided the same milk could not and would 
not enjoy the benefit of two marketwide pools. While the impact of 
pooling distant milk which cannot double dip was acknowledged to have 
the same impact in lowering returns to Minnesota and Wisconsin dairy 
farmers, these witnesses took no issue with such distant milk being 
able to pool on the Upper Midwest order. They expressed the view that 
adopting more restrictive pooling standards for the purpose of 
preventing double dipping would interfere with and supplant market 
forces, such as the economics of transportation and distribution, with 
artificial regulations.
    The President and Chief Executive Officer of Hilmar Cheese, located 
in Hilmar, California, also testified in favor of preventing California 
milk from being pooled simultaneously on the California State order and 
the Upper Midwest order. Hilmar Cheese (Hilmar) produces a variety of 
cheeses which are marketed throughout the United States. The Hilmar 
witness testified that the California milk order system employs 
marketwide pooling.
    The Hilmar witness stated that dairymen in California participate 
in a marketwide pool through a regulated milk pricing and pooling 
system that includes quota milk and that is operated by the State of 
California. The Hilmar witness confirmed the testimony of the 
California State government witnesses that all Grade A milk sold to a 
pool plant in California is associated with the pool and shares in the 
revenue generated from the use of milk in all classes of use. While all 
plants that manufacture milk into manufactured products such as cheese, 
frozen products, butter, and milk powder need not be pool plants, said 
the witness, most plants opt to participate in the pool so that their 
dairy farmers can reap the benefits of marketwide pooling. 
Manufacturing plants become pool plants, said Hilmar, by making some of 
their milk receipts available for Class I and Class II uses. Producers 
are paid for their milk on the basis of the milk components they ship 
and on the proportion of their milk sales that are covered by their 
quota holdings, said this witness. Fat and solids-not-fat, said Hilmar, 
have their own separate pools, and all producers share equally in the 
revenue generated by sales in the various milk classes. The total 
revenue from solids-not-fat in all classes, including revenue from the 
Class I fluid carrier value, is first adjusted to pay for 
transportation allowances and credits, and the remaining revenue is 
reduced by the total value of milk that is quota milk, said the 
witness. The quota milk pool is determined, said Hilmar, primarily by 
the pounds of solids-not-fat quota shipped multiplied by the quota 
premium of $0.195 per pound of solids-not-fat, which is also equal to 
$1.70 per hundredweight. After deducting the value of quota milk from 
the adjusted solids-not-fat revenue in the pool, the remaining revenue 
is divided by the total pounds of solids-not-fat to obtain the overbase 
(product in excess of quota) and the base solids-not-fat price, said 
the witness. The quota solids-not-fat price, said Hilmar, is equal to 
the overbase price plus $0.195 per pound. Under the California milk 
pooling system, testified Hilmar, all dairy farmers in the pool receive 
a portion of the revenue from milk sales in all milk classes, even 
though some dairy farmers will receive more as quota holders than those 
who hold less quota or no quota.
    Because of this revenue sharing with all producers pooled under the 
California system, testified the Hilmar witness, the same dairy farmers 
should not also have the opportunity to pool the same milk on a Federal 
milk order. The witness found it odd that some producers would seek to 
capture pool revenue from other parts of the country and, at the same 
time, collect pool revenue from the California pool. Engaging in this 
sort of behavior, said the Hilmar witness, results in some undesirable 
consequences. The witness presented an analysis of a 17-month period 
(beginning with the implementation of order reform) that compared 
California milk prices with Federal order milk prices. This analysis 
revealed, according to the witness, that during the 17-month time 
period, the California overbase price averaged $11.21 per hundredweight 
(cwt), or $1.03 per cwt over the California Class 4-B (milk used in 
cheese) milk price. In the Upper Midwest order at Hennepin County 
(Minneapolis), noted the witness, milk value was only 73 cents higher 
than the order's Class III price at the reference test. The witness 
drew attention to the California overbase price averaging nearly 22 
cents above the Upper Midwest statistical blend price despite the use 
of a quota system by California. California overbase dairy farmers, 
said the witness, already benefit significantly from its diverse 
product pool, and quota holders benefit in prices received by an 
additional $1.70 per cwt of milk.
    There is an inequity to Upper Midwest producers, said Hilmar, when 
California overbase milk is pooled in both California and on the Upper 
Midwest order. Hilmar compared the producer price differential (PPD) 
for two different locations in the Upper Midwest marketing area 
(Chicago and Minneapolis) with a plant located in Glenn County, 
California (some 90 minutes north of Sacramento), where milk pooled 
under the Upper Midwest order is received. Hilmar testified that 
comparison of both the California overbase price and the Federal order 
PPD on the California milk that is pooled but not delivered to the 
Upper Midwest, results in a 95-cent net higher price for the ``double-
pooled'' California milk than from California milk not pooled on Order 
30. According to the Hilmar witness, the double pooling only serves to 
augment California prices received by producers by drawing money from 
the Upper Midwest market which already has milk prices lower than 
California's.
    In light of their analysis, said Hilmar, double dipping is not the 
type of innovation that creates real value, and that double dipping 
only moves money and distorts and discourages, and ultimately damages 
the dairy industry. Hilmar chose not to engage in this behavior.
    Additional support for eliminating double dipping was offered by a 
representative of Marigold Foods. Marigold Foods (Marigold) is a 
handler which has five regulated distributing plants located within the 
Upper Midwest order. Marigold is concerned, the witness indicated, 
about California milk being pooled on the order and reducing dollars 
paid to their local dairy farmers. According to the Marigold witness, 
California milk is not leaving the state of California and is not 
available to serve the fluid market in Order 30. Marigold indicated 
that they pay a $1.70 Class I differential on most of their milk 
purchases as well as over-order premiums to assure a supply of milk. 
However competitive the over-order premiums, Marigold indicated, they 
are not enough to assure themselves a supply of milk, noting that 
several of their suppliers have indicated a financial need to reduce 
shipments to

[[Page 7044]]

Marigold's distributing plants. The witness attributed this situation 
to the ability of California milk to be pooled simultaneously on the 
California State order and on Order 30.
    The Marigold witness testified that the Order 30 PPD was being 
reduced by 10 to 15 cents per cwt by the pooling of California milk. 
Marigold indicated that this money was funded by the market's Class I 
fluid milk processors and that these funds should be going to the dairy 
farmers who serve, or are available to serve as needed, the Order 30 
fluid market. Marigold stressed that they already compete for a supply 
of milk with handlers who are regulated by another Federal order and 
with entities who have obtained funds from Order 30 from the pooling of 
California milk. Competing with California only intensifies an 
inequitable situation in Marigold's ability to compete for a supply of 
milk, said the witness.
    Marigold stated that it is through a regulatory loophole that 
producer milk which is not available to serve the fluid market is 
permitted to receive money from the Order 30 pool when the same milk is 
already receiving a benefit from marketwide pooling in a State-operated 
order. The witness said that this situation is unjust and contrary to 
the purposes of the legislation which authorizes Federal milk marketing 
orders for bringing forth an adequate supply of milk to meet fluid 
needs. Accordingly, the Marigold witness urged a prompt end of the 
ability of milk to double dip. By closing this regulatory loophole, 
said the Marigold witness, equity would be restored to Upper Midwest 
dairy farmers because the action would ensure that the money paid for 
milk by a regulated handler is shared among farmers who serve or are 
available to serve the fluid market.
    Land O' Lakes is of the opinion that California does not have 
marketwide pooling. In support of their proposal, LOL pointed to other 
State dairy programs. They noted that the North Dakota State Order and 
the Pennsylvania Milk Marketing Board are currently considering the 
adoption of marketwide pooling. Other pricing programs, said LOL, such 
as the Northeast Compact and various over-order pricing agencies such 
as the Upper Midwest Marketing Agency would appear threatened if 
Proposal 1 were adopted. Other LOL views and proposals are discussed 
later in this decision.
    Other opposition took the form of describing the general inadequacy 
of the Upper Midwest's pooling provisions and not the elimination of 
double dipping per se. While Dairy Farmers of America (DFA) testified 
that it opposes the ability of the same milk to simultaneously pool on 
two Federal milk orders, they did not oppose simultaneous pooling 
occurring on both a Federal and State-operated milk order such as 
California's. DFA indicated their ability to derive monetary benefits 
from both the Federal and California State milk order program has been 
of assistance in meeting their desired business objectives. DFA did 
submit their own proposal, published in the hearing notice as Proposal 
4, which addressed broader pooling standards and concerns. DFA's 
proposal is discussed later in this decision.
    For over 60 years, the Federal government has operated the milk 
marketing order program. The law authorizing the use of milk marketing 
orders, the Agricultural Marketing Agreement Act of 1937 (AMAA), as 
amended, provides authority for milk marketing orders as an instrument 
which dairy farmers may voluntarily opt to use to achieve objectives 
consistent with the AMAA and that are in the public interest. An 
objective of AMAA, as it relates to milk, was the stabilization of 
market conditions in the dairy industry. The declaration of the AMAA is 
specific: ``the disruption of the orderly exchange of commodities in 
interstate commerce impairs the purchasing power of farmers and 
destroys the value of agricultural assets which support the national 
credit structure and that these conditions affect transactions in 
agricultural commodities with a national public interest, and burden 
and obstruct the normal channels of interstate commerce.'' The AMAA 
provides authority for employing several methods to achieve more stable 
marketing conditions. Among these is classified pricing, which entails 
pricing milk according to its use by charging processors differing milk 
prices on the basis of form and use. In addition, the AMAA provides for 
specifying when and how processors are to account for and make payments 
to dairy farmers. Plus, the AMAA requires that milk prices established 
by an order be uniform to all processors and that the price charged can 
be adjusted by, among other things, the location at which milk is 
delivered by producers (Section 608(c)(5)). As these features and 
constraints were employed in establishing prices under Federal milk 
orders, some important market stabilization goals were achieved. The 
most often recognized goal was the near elimination of ruinous pricing 
practices of handlers competing with each other on the basis of the 
price they paid dairy farmers for milk and in price concessions made by 
dairy farmers. The need for processors to compete with each other on 
the price they paid for milk was significantly reduced because all 
processors are charged the same minimum amount for milk, and processors 
had assurance that their competitors were paying the same value 
adjusted minimum price.
    The AMAA also authorizes the establishment of uniform prices to 
producers as a method to achieve stable marketing conditions. Although 
some hearing participants are of the opinion that marketwide pooling 
cannot solve disorderly marketing conditions, marketwide pooling has 
been adopted in all Federal orders because of its superior features of 
providing equity to both processors and producers. A marketwide pool, 
using the mechanism of a producer settlement fund to equalize on the 
use-value of milk pooled on an order, speaks directly to the objective 
of the AMAA of ensuring uniform prices to producers supplying a market. 
The Federal order program purposefully moved away from individual 
handler pooling--a pooling method not uncommon when many milk marketing 
orders represented much smaller and much more local milk marketing 
areas. Through marketwide pooling, the equalization of prices paid to 
dairy farmers did have implications that affected the competitive 
relationship between processors along with uniform prices received by 
dairy farmers. Under individual handler pooling, the use-values of milk 
by a handler are averaged, or blended, and distributed separately to 
only those producers who had supplied the handler. With marketwide 
pooling, a handler regulated by an order with high Class I use was no 
longer able to exercise control over producers through the higher blend 
prices they were able to pay to producers who were, for example, more 
favorably located to the plant. Similarly, handlers with lower Class I 
use, unable to pay as large a blend price, found that marketwide 
pooling greatly improved their position in competing for a supply of 
milk. Prices paid by handlers were equalized across the entire market 
where handlers competed with each other for fluid sales and producers 
received a more uniform price for their milk.
    Under the California State milk order program, similar objectives 
to that of the AMAA are clear. The record evidence indicates the 
California State order program as having a long history in the 
development and evolution of a classified pricing plan and in providing

[[Page 7045]]

equity in pricing to handlers and producers. Important as classified 
pricing has been in setting minimum prices, the issue of equitable 
returns to producers for milk could not be satisfied by only the use of 
a classified pricing plan. Some California plants had higher Class I 
fluid milk use than did others and some plants processed little or no 
fluid milk products. As with the Federal order system, producers who 
were fortunate enough to be located nearer Class I processors received 
a much larger return for their milk than producers shipping to plants 
with lower Class I use or to plants whose main business was the 
manufacturing of dairy products. Over time, disparate price differences 
grew between producers located in the same production area of the state 
which, in turn, led to disorderly marketing conditions and practices. 
These included producers who became increasingly willing to make price 
concessions with handlers by accepting lower prices and in paying 
higher charges for services such as hauling. Contracts between 
producers and handlers were the norm, but the contracts were not long-
term (rarely more than a single month) and could not provide a stable 
marketing relationship from which the dairy farmers could plan their 
operations.
    In 1967, the California State legislature passed and enacted the 
Gonsalves Milk Pooling Act. The law provided the authority for the 
California Agriculture Secretary to develop and implement a pooling 
plan, which was implemented in 1968. The California pooling plan 
provides for the operation of a Statewide pool for all milk that is 
produced in the State and delivered to California pool plants. It uses 
an equalization fund that equalizes prices among all handlers and sets 
minimum prices to be paid to all producers pooled on the State order. 
While the pooling plan details vary somewhat from pooling details under 
the Federal order program, the California pooling objectives are, for 
all intents and purposes, identical to those of the Federal program.
    It is clear from this review of the Federal and the California 
State programs that the orderly marketing of milk is intended. Both 
provide a stable marketing relationship between handlers and dairy 
farmers and both serve the public interest. It would be incorrect to 
conclude that the Federal and California milk order programs have 
differing purposes when the means, mechanisms, and goals are so nearly 
identical. In fact, and as indicated in brief by the supporters for 
Proposal 1, the Federal order program has precedent in recognizing that 
the California State milk order program has marketwide pooling. Under 
milk order provisions in effect prior to milk order reform, and under 
Sec. 1000.76(c), a provision currently applicable to all Federal milk 
marketing orders, the Department has consistently recognized California 
as a State government with marketwide pooling.
    Since the 1960's, the Federal milk order program recognized the 
harm and disorder that resulted to both producers and handlers when the 
same milk of a producer was simultaneously pooled on more than one 
Federal order. As noted above, producers do not receive uniform minimum 
prices, and handlers receive unfair competitive advantages. The need to 
prevent ``double pooling'' became critically important as distribution 
areas expanded and orders merged. The issue of California milk, already 
pooled under its State-operated program and able to simultaneously pool 
under a Federal order, has, for all intents and purposes, the same 
undesirable outcomes that Federal orders once experienced and 
subsequently corrected. It is clear that the Upper Midwest order should 
be amended to prevent the ability to pool on more than one order when 
both orders employ marketwide pooling.
    There are other State-operated milk order programs that provide for 
marketwide pooling. For example, New York, as indicated in record 
testimony, operates a milk order program for the western region of that 
State. A key feature explaining why this State-operated program has 
operated for years alongside the Federal milk order program is the 
exclusion of milk from the State pool when the same milk is already 
pooled under a Federal order. Because of the impossibility of the same 
milk being pooled simultaneously, the Federal order program has had no 
reason to specifically address double dipping or double pooling issues, 
the disorderly marketing conditions that arise from such practice, or 
the primacy of one regulatory program over another. The other states 
with marketwide pooling similarly do not double pool Federal order 
milk.
    The record contains various opinions offered to explain why the 
practice of double dipping has occurred. Some offered that the Class I 
price structure changes implemented with Federal order reform resulted 
in a much higher PPD than existed under the old Upper Midwest and 
Chicago orders, providing a financial incentive. Some cited the change 
in how orders, including Order 30, zoned Class I prices and producer 
blend prices, suggesting if these zoning methods had been retained, the 
incentive for California milk to double dip on Order 30 may never have 
been an issue. Others noted that the Federal order location value of 
fluid milk in much of California is actually higher than in Order 30 
and thus implied that tighter pooling provisions would most likely 
prevent California milk from being pooled on Order 30.
    These are all interesting and valid observations that can lead to 
reasonably concluding that California milk would not seek to be pooled 
on Order 30 if not for the regulatory amendments. However, determining 
that double dipping and its impacts are a result of the reformed Class 
I pricing structure does not lead to the conclusion that the price 
structure needs to be abandoned or severely altered. Rather the issues 
here are whether the double dipping is a pooling problem that needs to 
be solved, and whether the first proposal, with or without various 
modifications, is an effective solution to that problem. As noted 
above, the Department believes the pooling problem needs a pooling 
solution and a modification of the first proposal will effectively 
solve the problem. When equity is not provided for, the disorderly 
marketing conditions that have arisen in Order 30 become the same as 
those existing prior to Federal orders adopting provisions preventing 
the double pooling of milk.
    California milk should only be eligible for pooling on Order 30 
when it is not pooled on the California State order, and meets the 
Upper Midwest's pooling standards. A distinction needs to be made here 
between a producer and the milk of a producer. While much of the record 
testimony speaks of producers in the same vein as the milk of 
producers, it is necessary to clarify the obvious intent of all hearing 
participants that it is the milk of a producer that becomes pooled. It 
is clear from the context of the record testimony that this was 
intended.
    The Federal milk order program, including Order 30, does not 
regulate producers. Rather, the program regulates handlers, those 
entities that are the first buyers of milk from producers and who incur 
the minimum payment obligations to producers. The Federal milk order 
program has no authority to regulate producers in their capacity as 
producers, and cannot, for example, preclude a producer from being 
pooled anywhere, provided the milk of the producer meets the pooling 
standards of an order. For this reason, Federal milk orders, including 
Order 30, provide separate definitions for a producer in the Producer 
definition and for the milk of a producer in the Producer milk 
definition. This distinction is also

[[Page 7046]]

important because the record evidence indicates California milk 
delivered directly from farms to plants located outside the State is 
not pooled on the State order. If a California producer delivers milk 
directly from the farm to pool plants regulated by the Upper Midwest 
order, and if that milk satisfies the pooling standards of the Upper 
Midwest order, that milk will be pooled on the Upper Midwest order.
    The amendatory wording provided below, intended to eliminate double 
dipping, is at some variance from that proposed by the proponents of 
Proposal 1. The wording is different because the proposed modified 
wording of Proposal 1 would prevent double dipping on only diverted 
milk. The wording presented below would apply to any milk that 
participates in a State-operated milk order that provides for the 
marketwide pooling of milk and, would not prohibit the ability of milk 
to participate in the Order 30 pool when not part of a State-operated 
order milk order program providing for marketwide pooling.

2. California Overbase Milk and Pooling

    A proposal, published in the hearing notice as Proposal 3, that 
sought to exclude California quota milk from being pooled on the Upper 
Midwest order should not be adopted. As California has quota and 
overbase prices for milk, this proposal would allow overbase milk from 
California to be eligible for pooling on Order 30.
    Two proposals were offered by Land O'Lakes (LOL) that sought to 
permit the continued pooling of California milk on the Upper Midwest 
Order. Specifically, a proposal published in the hearing notice as 
Proposal 2, would ``grandfather'' or exempt any California milk 
previously qualified for pooling on the Upper Midwest order from any 
amendment to the order which would thereafter exclude the pooling of 
such milk. This proposal was abandoned and is not discussed further in 
this decision. Another proposal, published in the hearing notice as 
Proposal 3, sought to exclude only California quota milk from being 
pooled on the Upper Midwest order. LOL is a cooperative association 
that has member producers whose milk is pooled under both the 
California State and Upper Midwest milk orders.
    The witness testifying on behalf of LOL indicated that his 
organization supports the concept of efficient and orderly marketing 
and, that the pooling of milk under an order should be based on 
performance. However, LOL indicated they were not in favor of 
restricting access to pooling to benefit a select few. LOL was of the 
opinion that fewer restrictions to pooling provides for market 
efficiencies resulting in lower costs in serving the Class I needs of a 
market. The witness testified that LOL engages in double dipping. They 
indicated they engage in this practice to gain additional revenue to 
subsidize the losses incurred in servicing the fluid market in Order 
30. They did not think marketing conditions warrant the Department of 
Agriculture treating the issue as an emergency.
    The real issue facing the industry, said the LOL witness, is not 
California milk. The impact of pooling reserve supplies of milk is the 
same regardless of where the milk is located, said LOL. The witness 
argued that regardless of location, performance criteria must be met to 
provide for pooling eligibility, and therefore, performance 
requirements rather than the artificial restrictions offered by 
Proposal 1 should be addressed. According to the witness, increasing 
shipping requirements would provide all the equity necessary as 
handlers shipping the minimum requirements will be forced to ship more 
milk or reduce the volume of milk pooled. LOL contends that producers 
have the right to pool milk based on performance, stressing that where 
the milk originates is irrelevant.
    The LOL witness testified that the Class I pricing surface adopted 
as a result of Federal milk order reform has allowed for more 
liberalized pooling, thereby allowing access to higher levels of Class 
I revenues. The witness said the net impact of Federal order reform has 
been positive for Upper Midwest dairy farmers. LOL did stress that 
access to additional Class I revenues should only be gained through 
performance, with market participants demonstrating a willingness to 
service the fluid needs of the market. According to the LOL witness, 
the utilization of milk for Class I fluid uses will tend to equilibrate 
as the needs of milk order areas beyond Order 30 are met based on 
performance. The witness said that the milk of producers should be 
allowed to move freely to meet the needs of the markets. In this 
regard, testified LOL, Upper Midwest entities must be willing to share 
the local proceeds from Class I use if they expect to share other 
markets' Class I proceeds or risk the loss of credibility when 
participating in deciding how milk orders should function.
    According to the LOL witness, California does not have a marketwide 
pool. The witness noted that proceeds from fluid and soft dairy product 
use are paid to producers on the basis of quota, while non-quota milk 
is priced based on manufacturing values. The returns on quota equity, 
said LOL, are not distributed marketwide, noting that it has been only 
recently that the State of California instituted a value difference 
between quota and overbase milk. It is LOL's assertion that 
California's lack of marketwide pooling should not prohibit the ability 
of overbase milk to be pooled on Order 30.
    The LOL proposal for allowing the pooling of overbase milk from 
California on Order 30 should not be adopted for the same reasons 
discussed in finding that Proposal 1 should be adopted immediately. 
Regardless of LOL opinions, the only reasonable conclusion that can be 
reached is that the California State order program does have marketwide 
pooling and that overbase milk received at a California plant is pooled 
on the State order and thereby shares in the benefits that accrue to 
producers under the State's marketwide pooling plan. This conclusion is 
substantiated by the testimony and participation by California State 
officials who operate the California State milk order program. 
Additionally, it seems contrary to the argument advanced by LOL that 
milk, regardless of where it is located, should be pooled on the basis 
of performance. California milk, other than a one-time shipment of a 
days' production of a producer, does not actually leave the State to 
consistently service the Order 30's Class I needs.

3. Performance Standards and Diversion Limits

    A proposal offered by the Dairy Farmers of America (DFA) and the 
National Farmers Organization (NFO), published in the hearing notice as 
Proposal 4, addressed two separate issues: establishing performance 
standards for milk not traditionally associated with the Upper Midwest 
marketing area and, the ability of pool distributing plants to divert 
an unlimited volume of milk to nonpool plants. The portion of the 
proposal seeking to establish diversion limits for pool distributing 
plants should be adopted immediately. The record does not support 
adoption of performance standards for milk based on the location of the 
producer or the milk of a producer. DFA is a member-owned cooperative 
of nearly 17,000 farms that produce and market milk across a 
significant portion of the United States. NFO is also a member-owned 
cooperative that produces and markets milk in Order 30, the State of 
California, and in other Federal milk orders.
    Specifically, the Upper Midwest order should be immediately amended 
to provide a diversion limit of 90 percent of producer receipts, 
including

[[Page 7047]]

diversions, for pool distributing plants regulated under the order. In 
addition, the market administrator may adjust the diversion limit for 
pool distributing plants as marketing conditions warrant. Since supply 
plants pooling milk on the Upper Midwest order must ship 10 percent of 
receipts, including milk diverted, to a pool distributing plant and 
certain other types of plants, there is no reason to impose a diversion 
limit on supply plants.
    DFA testified that two primary benefits of the Federal order 
program include allowing producers to benefit from the orderly 
marketing of milk and to share in the marketwide distribution of 
revenue that results mostly from Class I milk sales. Orderly marketing 
influences milk to move to the highest value use when needed and, for 
milk to clear the market when not used in Class I, said DFA. The 
witness insisted that the pooling of distant milk that does not show a 
service to the Class I market is inconsistent with Federal order policy 
and such milk should not be eligible to share in the revenue that 
accrues from Class I use.
    Pooling standards are universal in their intention, said DFA, 
requiring a measure of commitment to a market marked by the ability and 
willingness to supply the Class I needs of that market. The witness 
also noted that pooling standards are individualized in their 
application and each market requires standards that work for the 
conditions that apply in that individual market. The witness quoted the 
Final Decision of milk order reform: ``the pooling provisions for the 
consolidated orders provide a reasonable balance between encouraging 
handlers to supply milk for fluid use and ensuring orderly marketing by 
providing a reasonable means for producers with a common marketing area 
to establish an association with the fluid market.''
    The DFA witness drew from the history of milk marketing and 
commented on the problems of producers in their attempts at improving 
their economic circumstances. The witness identified shortcomings of 
the marketplace resulting in the difficulty of the milk supply being 
able to service the market's fluid needs in a manner that treats all 
producers equitably. The superior negotiating position of milk buyers 
and the variations in supply and demand were examples provided by the 
witness that have always ``tripped up'' dairy farmers in their 
marketing efforts. The witness added that farmers' attempts to improve 
on past efforts always seemed to fail when one or more suppliers would 
find a way to opt out of the added cost of serving the market to obtain 
a higher return for themselves. Marketwide pooling, said the DFA 
witness, eliminated the differences in prices paid to suppliers within 
the same market and, in turn, eliminated the non-productive competitive 
drive for higher returns since everyone faced the same terms of trade. 
The witness also noted the absence of any action recommending any 
change to these fundamental features of milk orders and, that every 
Federal order shares returns to all producers marketwide.
    The DFA witness was of the opinion that the new Class I pricing 
structure, together with the interface of the pricing surface and the 
pooling provisions found in each order, resulted in significant changes 
in the marketplace for milk. The link between performance and pooling, 
said the witness, was altered by these reforms and needs review. DFA 
noted that many entities, including themselves, moved quickly to take 
advantage of these changes in order rules. The witness indicated that 
when in a competitive dairy economy, an entity must make pooling 
decisions that aim to increase returns, competitors must attempt to do 
the same or risk their competitive position.
    Pooling provisions of the Order 30 order work well for milk 
produced in the marketing area, said DFA, but do not work well for milk 
produced out of the area. Producers need only deliver a days' 
production a single time to a pool plant to have their milk eligible 
for pooling. This, combined with no loss of producer eligibility 
provided a producer does not deliver to another Federal order plant, 
makes Order 30 an attractive market in which to pool milk, the witness 
stated.
    The witness also relied on, and drew heavily from, the order reform 
Final Decision (64 FR 16026) which explained the marketing area 
boundaries of the consolidated Upper Midwest marketing area. Although 
the prior marketing order areas of the Chicago Regional and Upper 
Midwest orders did not have a considerable degree of overlapping fluid 
milk disposition, they did have an extensive overlapping procurement 
area, according to the witness. In light of this, the witness noted 
that the reform Final Decision could therefore find no justification on 
the basis of overlapping sales for increasing the consolidated 
marketing area beyond what was adopted. Rather, it is the extensive 
overlapping of a common procurement area, or milkshed, that is the most 
compelling reason for explaining the boundaries of the consolidated 
Upper Midwest marketing area.
    The witness noted, too, that there was extensive discussion early 
in the construct of the 1996 Farm Bill concerning the merits of having 
a single national Federal order. Such an outcome would have resulted in 
a single blend price across the entire country. Noting that Congress 
debated several proposals and several economic studies over this issue, 
Congress rejected the idea of a single marketing order with the premise 
of one blend price. According to the witness, open pooling, which may 
result in blend prices being equalized across a large territory, is 
counter to the intent of Congress and the legislative directive of the 
Farm Bill--to consolidate the orders into no fewer than 10 and not more 
than 14.
    The DFA witness expressed alarm about milk from distant areas 
sharing in the blend price when that milk neither serves the fluid 
market, nor balances the market when extra milk is needed by fluid 
processors. The witness referenced the rejection of the concept of open 
pooling discussed in the reform Final Decision and indicated that the 
decision rejected this because open pooling provides no reasonable 
assurance that milk will be made available to satisfy the fluid needs 
of the market. The witness also noted further that proposals to create 
and fund ``stand-by'' pools were also rejected.
    DFA was of the opinion that open pooling is not appropriate for 
Order 30. Additionally, because of the distance and cost involved in 
moving milk to the market, milk needed in the fall months to 
accommodate increased demand because of increased school milk sales, or 
to provide a manufacturing outlet for milk produced in excess of fluid 
needs would not be provided. It is irrelevant, said the witness, if the 
milk in question originates from California or any other place because 
such milk is no more burdensome than distant milk produced in Idaho or 
any other area. Under the open-pooling concept, said DFA, ``distant'' 
milk able to pool alongside ``local'' deliveries only serves to pyramid 
the volume pooled.
    Prohibiting the simultaneous pooling of milk on a State-operated 
marketwide pool and the Order 30 pool, the focus of Proposal 1, said 
DFA, does not fully address the pooling problems at hand. The witness 
provided evidence and testimony that showed an increasing amount of 
``distant'' milk pooled on the Upper Midwest order which, they 
maintain, is not serving the Class I needs of the market. The witness 
submitted analysis demonstrating that when milk is pooled without being 
available for Class I use, or ``paper pooled'' on Order 30, returns to 
local producers who are consistently serving the fluid market are 
decreased.

[[Page 7048]]

    Analysis was provided by DFA to illustrate how the pooling of milk 
on Order 30 has changed by examining the amount of milk pooled on the 
order and where the milk was produced. Using October 1997 as a 
reference time period prior to the consolidation of the orders, 2.4 
billion pounds of milk were associated with the Chicago Regional and 
Upper Midwest markets, but only 1.6 billion pounds of milk were pooled 
because of class--price relationships, provided the witness. The 2.4 
billion pounds were produced by 27,250 producers located in 13 States 
from Tennessee to Minnesota, and from New Mexico to Michigan. The 
witness noted that over 93 percent of the producer milk was produced 
within the consolidated marketing area, and 91.4 percent of the milk 
pooled was produced within the States of Wisconsin and Minnesota. In 
comparison, the witness provided data subsequent to the implementation 
of order reform; during June 2001, 12,748 producers pooled 1.5 billion 
pounds of milk on consolidated Order 30, with a total of 84 percent of 
the milk pooled produced within the consolidated marketing area, and 79 
percent originating from Minnesota and Wisconsin. The other 16 percent 
of the total milk pooled on Order 30 during June 2001 was from 
California.
    The witness testified that DFA considers it important to end the 
near open pooling of large volumes of milk that never serve the fluid 
market by modifying the order's pooling standards and establishing 
diversion limits for pool plants. To this end, DFA offered a proposal 
requiring milk produced outside the States that comprise the Upper 
Midwest milk marketing area be grouped into, and reported as, 
individual State ``units''. Each unit would be subject to the same 
shipping standards for pool supply plants, said DFA.
    Additionally, DFA was of the opinion that the order lacks the means 
to define the potential size of the pool. In this regard, DFA thought 
it appropriate to establish a limit on the amount of producer milk that 
a pool plant can divert. Because a producer need only deliver one days' 
production to an Order 30 pool plant to qualify and thereafter remain 
qualified to pool their milk on the order, DFA noted, a pool plant may 
subsequently divert all of the producer's milk to any plant without any 
of that milk being required to serve the fluid market. It is this 
shortcoming of the Order 30 producer milk definition which provides the 
means by which milk from distant areas is able to pool on Order 30, 
stated DFA.
    Stressing the costs associated with transporting milk long 
distances, DFA was of the opinion that no economic basis exists for 
such milk to actually make itself available to consistently serve the 
fluid market. Therefore, the witness concluded, milk located far from 
the order should be required to meet performance standards equal to the 
performance standards for milk originating within the order. The ease 
of qualifying for pooling on Order 30, said DFA, has attracted and 
caused to be pooled increasing volumes of milk which have only served 
to lower the order's blend price. The economic burden of the cost of 
delivering milk to a pool plant becomes a one-time event, said DFA. 
Thereafter the milk need never perform in servicing the fluid market 
while reducing returns to producers whose milk is actually serving the 
market's Class I needs, the witness concluded.
    DFA was of the opinion that their proposal provides reasonable 
standards for demonstrating consistent performance in supplying the 
fluid market by milk from outside the States comprising Order 30. This 
would result in milk from distant areas performing on the same basis as 
local milk, said the witness, while not discriminating, penalizing, or 
establishing any barriers to the pooling of milk from any area on Order 
30. The witness also stated this feature of their proposal is an 
adequate and reasonable standard for requiring all market participants 
to share in the responsibility of serving the fluid market.
    DFA presented an analysis of data depicting mileages from 
California and Idaho to locations in Order 30 with the performance 
standards they proposed. This was offered to illustrate DFA's opinion 
that distant milk would not rationally seek to be pooled on Order 30 
when required to perform in the same way as milk from within the States 
that comprise the marketing area. The witness presented a review of the 
relationship between the order's blend price return versus the cost of 
delivering milk to the Order 30 market. The witness claimed that a 
daily delivery of milk from California would yield a net loss of 
$71,647, while a daily delivery from Idaho would yield a net loss of 
$48,576 in the month of January 2000. On the basis of such losses, DFA 
concluded that such distant milk would not seek to be pooled on Order 
30.
    DFA then presented a comparison of blend price return versus 
hauling costs with no performance standards. After absorbing the one-
time hauling cost, both the California and Idaho milk supplies would 
have generated a positive return in the first month, growing to much 
higher returns in the second month, concluded the witness. Stressing 
that once the cost of the initial haul to qualify a producer for 
pooling is incurred, the subsequent pooling of milk would continually 
enjoy monetary benefits of being pooled on Order 30 without servicing 
the fluid market.
    The DFA witness was of the opinion that their proposal has a 
measurable economic consequence that is in line with existing Federal 
milk order principles. If the economic returns are positive, said DFA, 
regulation would not prohibit pooling of distant milk and thus would 
provide a reasonable and defendable standard. The witness also said 
that each State unit must be treated individually and perform as a 
stand-alone entity under the same performance standards as currently 
applicable to supply plants. The witness stressed that this feature of 
their proposal provides a reasonable economic test of whether or not 
the market needs such milk for Class I use, and that economic returns 
must be earned in the market place and not by what is provided in 
pooling reports.
    DFA was of the opinion that Order 30 should not be amended on an 
emergency basis prior to proceedings to consider amending other orders. 
The distant pooling of milk on Order 30 has been occurring for a long 
time--since January 2000, DFA stated. While the volume of distant milk 
pooled has increased, the negative impact on Order 30 blend prices has 
been reduced by the fact that Order 30 handlers have, in a not 
dissimilar fashion, pooled large volumes of milk on the Central and 
Mideast Federal milk orders, stated the witness, adding that California 
milk under their control was also being double pooled on the Central 
Order, Order 32. DFA was also of the opinion that if the Upper Midwest 
order is amended prior to consideration of appropriate amendments to 
the Central and Mideast orders, the pooling problems exhibited in the 
Upper Midwest would only ``migrate'' to these other marketing areas, 
resulting in even more disorderly marketing conditions.
    A witness from the Northwest Milk Marketing Federation testified in 
support of DFA's proposals. The Northwest Milk Marketing Federation 
(NMMF) is a cooperative representing over 97 percent of dairy farmers 
whose milk is pooled on the Pacific Northwest Federal milk order.
    The NMMF witness stated that Federal orders should have performance 
requirements which reasonably require all volumes of milk associated 
with the pool to proportionately service the fluid

[[Page 7049]]

needs of the market. The witness was of the opinion that Idaho milk 
could pose a threat to producers in the Pacific Northwest if that milk 
can be pooled without meeting performance standards. The proposals 
offered by DFA adequately address such pooling issues and should be 
adopted in Order 30, said the witness. This would not only alleviate 
the issue of pooling distant milk, but would serve as a model for other 
Federal order hearings, namely the Pacific Northwest, where similar 
pooling problems exist, said the witness.
    Opponents of DFA's proposals stressed that marketing conditions 
prevailing in the Upper Midwest require only the elimination of double 
dipping. Associated Milk Producers, Inc., First District Association, 
and Lakeshore Federated Dairy Cooperative, expressed concern that DFA's 
proposal does not thoroughly address the need to end double dipping. 
They claimed that DFA's analysis of hauling costs only serves to 
exclude and target Idaho and California milk, and the value of such 
analysis of the Order 30 marketing conditions is misplaced. Similarly, 
they noted that back-hauling, where a lower shipping rate can be 
obtained from a hauler who has the ability to back-haul or return with 
other freight instead of returning empty, leaves open the possibility 
that double pooled California milk could, in fact, have positive 
returns even if required to perform.
    The opponents also claimed that other loopholes in DFA's proposal 
might allow California milk to continue double pooling on Order 30. 
Class I fluid milk products, including concentrated milk which 
California plants routinely process in meeting the fluid milk standards 
of California, could be pooled on Order 30, noted the witness. For 
example, concentrated milk could be delivered to Order 30 and 
subsequently returned to California for use in that State's Class 4a or 
4b uses of milk, the witness added.
    Opponents were also of the opinion that illegal trade barriers to 
the movement of milk in Federal orders would be erected if DFA's 
proposal were adopted. Idaho milk that performs in the same manner as 
Minnesota milk should be eligible for pooling in the same way the order 
now provides for Minnesota milk, provided the same milk is not pooled 
more than once, stated opponents. Similarly, said the opponents, 
eligibility requirements in other Federal milk orders should not 
exclude milk based on its point of origin. They also stressed that 
trying to differentiate ``historical'' milk supplies with other 
``distant'' milk for pooling purposes would be difficult and an 
unreliable test for determining pooling eligibility. In this regard, 
they noted the pooling of milk received from Montana dairy farmers on 
the old Upper Midwest order, Order 68. Also, their review of historical 
data revealed that Missouri milk, for example, was long associated with 
the Texas order, but is now associated with the Southeast order. 
Changes in milk association can and do occur, opponents noted, and USDA 
should not create rigid rules as to when, where, and how such 
association may be permitted.
    A witness representing Kraft Foods (Kraft) also testified in 
opposition to DFA's proposal, depicting it as being designed to create 
a severe, detrimental, and economic disincentive to pool milk on the 
Upper Midwest market because the performance standards called for would 
increase the transportation burden borne by distant producers. They 
were of the opinion that if this proposal were adopted, it would be 
nothing more than Government imposing a discriminatory transportation 
burden on distant producers and hindering a producer's free marketing 
choices.
    Along the theme of transportation burdens, the Kraft witness also 
expressed the opinion that when producers incur disproportionately 
large transportation costs in supplying the fluid needs of the market, 
those producers would not be receiving uniform prices as required by 
law. Kraft was of the opinion that DFA's proposal is inconsistent with 
what the witness described as the AMAA's prohibition against 
consideration of a handler's use of milk as a condition of blend price 
receipt, adding also that it would create an unlawful and unauthorized 
exception in providing for uniform prices to producers. In effect, 
detailed Kraft, the DFA proposal would require selected groups of 
distant producers to incur transportation costs and other regulatory 
burdens not required of nearby producers under the order, said the 
witness. Participation in the Upper Midwest market would only guarantee 
that distant farms would incur monetary losses, Kraft asserts. 
Additionally, said Kraft, DFA's proposal is unlawful because it 
conditions the pooling of distant producers upon utilization of their 
milk by a Class I distributing plant. In this regard, Kraft questioned 
the legality of requiring designated groups of dairy farmers to incur 
extraordinary expenses of shipping milk to Class I plants while other 
pooled farmers would be able to share in the Class I revenue without 
the same burden.
    Finally, Kraft expressed the opinion that DFA's proposal would, if 
adopted, violate the law because it would be erecting illegal trade 
barriers by limiting the marketing of milk products in Order 30 
depending on where the milk is located. The performance requirements 
placed on producers within Order 30, said Kraft, would be different 
than requirements for producers outside the order.
    The proposal by DFA should be adopted in part but limited to the 
establishment of diversion limits for pool distributing plants. The 
record does not support the adoption of performance standards for 
pooling milk on the order on the basis of its location. Establishing a 
limit on the amount of milk that a pool distributing plant may divert 
provides for a complete set of provisions for identifying which 
producers, which producer milk, and which handlers should share in the 
benefits that accrue from the marketwide pooling of milk on the Upper 
Midwest order. By setting a limit, the integrity of the performance 
standards of the order will be improved. If Order 30 does not limit the 
amount of milk that may be diverted by pool distributing plants, the 
pool is effectively undefined.
    Diversions are needed to accommodate the movement of milk properly 
associated with the market when not needed for Class I use. A diversion 
limit will also establish the amount of producer milk that may be 
associated with the integral milk supply of a pool plant. As discussed 
earlier, the diversions being considered are shipments of milk directly 
from the farm to a nonpool plant pursuant to the Producer milk 
definition provided for in Sec. 1030.13(d). The Upper Midwest order 
also allows for supply plants to deliver producer milk directly from 
the farm to another pool plant. However, since the intent of allowing a 
supply plant to ship producer milk directly from the farm to pool 
plants is to provide for maximizing the efficient movement of milk to 
pool distributing plants, milk shipments such as these are not included 
in the context of diversions as it relates to pool distributing plants 
and are, therefore, not limited in the quantity of milk a supply plant 
can direct ship to another pool plant.
    The marketing conditions of the Upper Midwest order are unique, and 
this uniqueness should be reflected in the pooling standards of this 
order. As indicated in testimony and in briefs, the Upper Midwest 
market area has about a 20 percent use of milk for fluid use, with the 
remainder of the milk used in lower-valued classes. In light of this

[[Page 7050]]

relatively low share of milk volume that is needed to supply the Class 
I needs of the market, this decision finds basic agreement with those 
who expressed opposition to DFA's proposal. Specifically, the marketing 
conditions of Order 30 do not exhibit the need to require additional 
performance standards for milk located outside of the marketing area 
or, as DFA describes, milk located outside of the States that currently 
comprise the consolidated Upper Midwest Milk Marketing Area. 
Accordingly, all pool plants, regardless of location, may become 
eligible to have the milk of producers pooled on Order 30 by meeting 
the performance standards specified for the various types of pool 
plants.
    In several instances in testimony and in their post-hearing brief, 
DFA was of the opinion that ``distant'' milk does not have, and is not 
required to meet, the same performance standards as ``local'' milk. Any 
supply plant or a cooperative acting as a handler (as provided for and 
described in Sec. 1000.9(c)) would need to ship ten (10) percent of 
their reported producer receipts to pool distributing plants and 
certain other plants each month in order to qualify for being pooled. 
Therefore, producer milk included in reports by handlers described in 
Sec. 1000.9(c) is included in determining whether or not the handler 
has qualified for being pooled on the order. No distinction is made by 
the order whether the milk pooled is ``local'' or ``distant.'' Thus all 
of the producer milk of the handler meets the same qualification 
standards regardless of the physical location of the producer or the 
milk of a producer.
    DFA maintains that the proposal (Proposal 1) seeking only to 
eliminate double dipping does not go far enough in addressing their 
general concerns about performance standards for the system of orders, 
including the Upper Midwest order. The argument is troublesome. On one 
hand, DFA fundamentally asserts that performance standards are critical 
to the orderly marketing of milk and for determining those participants 
who are actually serving the fluid market, including the Order 30 
market, stressing that only these participants should share in the 
benefits of the pool. At the same time, by their own testimony, DFA 
engages in the practice of double dipping, yet does not find double 
dipping disruptive to the orderly marketing of milk, even when such 
``distant'' milk from California will rarely, if ever, again be shipped 
to pool plants, including distributing plants regulated by the order. 
This decision finds little logic in asking for a finding that no 
disorder results from allowing the simultaneous pooling of distant milk 
under California's State operated system and on Order 30, while at the 
same time asking for a finding that alternative performance standards 
are needed because of the disruptive effects to orderly marketing by 
pooling ``distant'' milk which does not consistently service the fluid 
market.
    Pooling standards of milk orders, including Order 30, are intended 
to ensure that an adequate supply of milk is supplied to meet the Class 
I needs of the market and to provide the criteria for identifying those 
who are reasonably associated with the market for sharing in the Class 
I proceeds. Pooling standards of the order are represented in the Pool 
plant, Producer, and the Producer milk definitions of the order. Taken 
as a whole, these definitions set forth the criteria for pooling. 
Pooling standards should continue to be performance based in Order 30. 
This is the only basis viable for determining those eligible to share 
in the pool. It is primarily the additional revenue from the Class I 
use of milk that adds additional revenue, and it is reasonable to 
expect that only those producers who consistently supply the market's 
fluid needs should be the ones to share in the distribution of pool 
proceeds.
    With regard to the Final Decision for the reform of the Federal 
milk order program, it is true that the common procurement area was the 
most compelling basis in forming the consolidated Upper Midwest 
marketing area. However, it is not the procurement area that provides 
the additional revenue to the pool. Rather, the revenue is derived 
largely from the Class I use of milk by regulated handlers that have 
Class I sales in the marketing area. In this regard, it is not 
important who provides the milk for Class I use or from where this milk 
originates. The order boundaries of the Upper Midwest order were not 
intended to limit or define which producers, which milk of those 
producers, or which handlers could enjoy in the benefits of being 
pooled on Order 30. What is important and fundamental to all Federal 
orders, including Order 30, is the proper identification of producers, 
the milk of those producers, and handlers that should share in the 
market's pool proceeds.
    Pooling of ``distant'' milk on the Upper Midwest order is neither 
new nor without precedent. The record testimony and evidence show milk 
pooled on Order 30 from nearly all corners of the country. However, 
this decision acknowledges that with the advent of the economic 
incentives for California milk to pool on Order 30 and, at the same 
time, enjoy the benefits of being pooled under California's State-
operated milk order program, significantly more milk has come to be 
pooled on the order that has no legitimate association with the 
integral milk supplies of Order 30 pool plants. The association at 
present has been made possible only through what some market 
participants describe as a regulatory loophole. The Upper Midwest order 
also provides a significant degree of pooling flexibility in the form 
of provisions allowing system and unit pooling. These provisions 
promote the orderly marketing of milk by minimizing the inefficient 
movement of milk for the sole purpose of meeting pooling standards.
    This decision finds basic agreement with some of the reasons 
offered in testimony and reiterated in briefs by opponents to DFA's 
proposal for organizing ``distant'' milk into State units. Requiring 
each State unit to ship at least 10 percent of the quantity of milk to 
a distributing plant regulated under the order effectively sets a 
performance standard different from the States that comprise Order 30. 
For example, of the milk received from Idaho, the DFA proposal would 
establish a standard for at least 10 percent of such milk to be shipped 
to a distributing plant in order for this milk to be producer milk 
pooled on the order. However, the same would not be required, for 
example, that 10 percent of all Wisconsin milk be shipped to 
distributing plants regulated under the order. It is the ability of 
milk from California to double dip that is the primary source of 
disorderly marketing conditions and for much more milk being pooled on 
Order 30. By eliminating the ability to double dip, it is reasonable to 
conclude that California milk is unlikely to be pooled on Order 30 for 
economic reasons illustrated in DFA's testimony and analysis contained 
in the record of this proceeding. The remaining issue is establishing 
appropriate diversion limits for all pool plants, including limits for 
distributing plants which currently do not exist in the Upper Midwest 
milk order provisions.
    In addition to describing what a dairy farmer must do to become a 
producer under the order, the producer definition of the order provides 
that a full days' production of the milk of a dairy farmer be 
physically received at a pool plant anytime during the first month a 
producer is associated with the market before the milk of a producer 
can be diverted. Provisions for diverting milk

[[Page 7051]]

are a desirable and needed feature of an order because they facilitate 
the orderly and efficient disposition of the market's milk not used in 
Class I uses. When producer milk is not needed in the market for Class 
I use, its movement to nonpool plants for manufacturing without loss of 
producer milk status should be provided for. Provision should also be 
provided to minimize the inefficient movement of milk solely for 
pooling purposes. However, it is just as necessary to safeguard against 
excessive milk supplies becoming associated with the market through the 
diversion process.
    Diverted milk is milk not physically received at a pool plant. 
However, it is included as a part of the total producer milk receipts 
of the pool plant causing the milk to be diverted. While diverted milk 
is not physically received at the pool plant that causes the milk to be 
diverted, such milk is nevertheless an integral part of the milk supply 
of the diverting pool plant. If such milk is not part of the integral 
supply of the diverting plant, then that milk should not, and is not, 
properly associated with the diverting plant. Therefore, such milk 
should not be pooled.
    Associating more milk than is actually part of the diverting 
plant's milk supply only serves to reduce the potential blend price 
paid to dairy farmers. Allowing the pooling of milk far in excess of 
reasonable needs by the absence of diversion limits only provides for 
association with the market through ``paper-reporting'' and not by 
service to the Class I needs of the market. Without a diversion limit, 
the order's ability to provide for effective performance standards and 
orderly marketing is weakened.
    On the basis of the record, the lack of a diversion limit for 
producer milk by distributing plants has opened the door for pooling 
much more milk, and, in theory, an infinite amount of milk on the 
market. In the specific marketing conditions of Order 30 evidenced by 
the record of this proceeding, the lack of a diversion limit for 
producer milk at distributing plants has caused more milk to be pooled 
on the order than can be considered reasonably associated with the 
market.
    The diversion limits for pool distributing plants offered by DFA 
are reasonable, and, in fact, are needed for upholding the purpose of 
providing for performance requirements in serving the Class I needs of 
the market. The order already effectively sets a diversion limit on 
pool supply plants by requiring these plants to ship 10 percent of 
their receipts, including diversions, to distributing plants regulated 
under the order. Therefore, an effective 90 percent limit on the amount 
of milk that could be diverted has already been established. 
Accordingly, the specific amendatory wording offered by DFA with 
respect to pool supply plants is not necessary. However, in the case of 
pool distributing plants, the order does need specific amendatory 
language to carry out this intent.
    The amendatory language provided by DFA would add other order 
distributing plants that cooperative handlers (as described in 
Sec. 1000.9(c)) may divert milk to. DFA claims that this matches the 
pool supply plant provisions for shipments to a distributing plant. It 
does do this. However, the amount of milk for which a pool supply plant 
is able to qualify for pooling is limited to the amount of shipments 
that are not made on the basis of agreed-upon Class II, Class III and, 
Class IV utilization. Milk that moves directly from the farm to another 
order pool distributing plant that is allocated to Class I becomes 
producer milk in the receiving order. This milk cannot be used for 
qualification, and the cooperative handler (as described in 
Sec. 1000.9(c)) does not receive a qualification credit on direct 
shipped milk for Class I. A cooperative handler should not receive 
qualification for milk it ships to distributing plants if such milk is 
only to be used for pool qualification purposes and is delivered on an 
agreed upon Class II, Class III, or Class IV use of milk.

4. Changing the Rate of Partial Payment

    A proposal that would change the rate of the partial payment to 
producers and cooperatives for milk delivered during the first 15 days 
of the month to the lowest class price for the prior month times 103 
percent, published in the hearing notice as Proposal 5, is not 
recommended for adoption. Therefore, the partial payment rate should 
remain as currently provided for by the order--at the lowest class 
price for the prior month.
    Both DFA and NFO were among those who supported increasing the 
minimum partial or advance payment due producers and cooperatives from 
the prior month's lowest class price to 103 percent of the prior 
month's lowest class price. A representative of DFA testified that 
since the inception of Federal order reform, the percentage of a 
producer's pay price, as measured by dividing the statistical uniform 
price by the prior month's Class III price, has declined from 95 
percent to 91 percent in comparison to this relationship prior to 
reform. The witness presented detailed analysis supporting their 
position that the relative reduction in the partial payment is a trend 
that is having a significant negative impact on dairy farmers' cash 
flow. According to analysis presented, DFA concluded that using 103 
percent of the lowest class price of the previous month would return 
the balance between the partial payment and final payment to the same 
relative level as prior to Federal order reform. The change should not 
have significant impact on handlers required to make minimum payments, 
said the witness.
    A witness for the Wisconsin Cheese Makers Association (WCMA) 
testified in opposition to changing the rate of the minimum partial 
payment provision. The witness testified that the WCMA represents 25 
supply plants supplying milk to the Upper Midwest order and that 
increasing the required minimum payment would be a burden to their 
member plants because they would need to borrow money to meet the 
partial payment. Requiring a larger partial payment, testified the WCMA 
witness, would require increased borrowing and thus increased costs for 
the plants. The witness explained that since the partial payment is 
only a minimum payment, plants may pay more if they desire to, but not 
all plants pay more than the minimum partial payment. According to the 
witness, the reduction in the percent of the prior month's Class III 
price as a percent of the statistical uniform price is a short-term 
phenomena and, that over time, the relationship would move back to the 
higher percentage that occurred prior to Federal order reform.
    There is no compelling reason for changing the payment rate of the 
partial payment to producers. In the data presented by proponents at 
the hearing, the partial payment required by the order exceeded the 
final payment during numerous months. In most cases, the months in 
which the partial payment exceeded the final payment occurred prior to 
the implementation of Federal order reform.
    It is difficult to determine whether or not there is a trend 
occurring, as DFA maintains, that would be corrected or mitigated by 
changing the rate of the partial payment. Milk prices are an outcome of 
supply and demand conditions for milk. Prices tend to increase during 
tighter supplies and fall when milk is plentiful relative to demand. 
The up and down fluctuations of milk prices does not in itself indicate 
a trend, nor does it suggest a structural flaw in how the order prices 
milk since price fluctuations are a response to changes in the quantity 
of milk supplied and in the quantity of milk demanded.

[[Page 7052]]

    Since Federal order reform, a 17-month period at the time of the 
hearing, the data shows two months in which the partial payment and the 
final payment were equal. However, if the partial payment rate were 
increased to 103 percent of the lowest class price, as proposed, four 
months (about 24 percent of the 17-month period) would have had a 
partial payment greater than or equal to the final payment.
    The opponents of this proposal noted that Federal order reform and 
its newer pricing system have only been in place for a short time--17 
months--suggesting that there has not been adequate time to observe 
various pricing scenarios that might occur over a more lengthy 
evaluation period. For example, there has been no significant price 
decline since the implementation of Federal order reform that would 
serve to aid in evaluating the effect of declining prices on the 
difference between the partial and final payment obligations. Class III 
and Class IV prices have been relatively stable during the beginning 
two thirds of the 17-month period, with prices beginning to show 
consistent increases during the last third of the period (December 2000 
through May 2001).
    The record testimony and post-hearing briefs supporting a change in 
the rate of partial payment asserts that payments to producers and 
cooperatives, particularly by a cheese plant, is a ``pass through'' 
from the Federal order pool. A cheese plant/Class III handler receives 
the PPD from the pool (a ``pool draw''), in order to pay the order's 
minimum prices to producers. However, the majority of the payment to 
producers and cooperatives in the Upper Midwest is derived from cheese 
sales. The statistical uniform or blend price is received by producers 
in the form of a PPD calculated from the marketwide pooling of all milk 
on the order at classified prices. In a market like the Upper Midwest, 
which has a relatively low Class I differential ($1.80) and low Class I 
utilization (15-20 percent), the resulting PPD is less than in markets 
with higher Class I use and higher Class I differential values. Over 
the 17-month period of January 2000 through May 2001, the Upper Midwest 
PPD ranged from 43 cents to $1.43, and averaged $0.83 per cwt. Handlers 
did not know what the PPD would be until several days before payment 
was due to its dairy farmers. In light of this, it is not reasonable to 
establish a partial payment rate at a level that may increase the 
likelihood of requiring handlers to pay out part or all of the PPD 
prior to receiving payments from the producer settlement fund. This 
caution seems especially important in the Upper Midwest market where 
the PPD is relatively low and can be completely offset by the price 
difference between the prior month's lowest class price and the current 
month's Class III price.

5. Emergency Marketing Conditions

    Evidence presented at the hearing establishes that California milk 
pooled simultaneously on the California State-operated order and the 
Upper Midwest Federal order is resulting in a lowering of milk prices 
to Upper Midwest producers. The lack of diversion limits on the order's 
pool distributing plants could allow excessive milk supplies from 
California or elsewhere to be pooled on the order. Additionally, the 
practice of double dipping renders the Upper Midwest Federal milk order 
unable to establish prices that are uniform to producers and to 
handlers. Finally, the amount of milk pooled on the order as a result 
of double dipping has greatly increased over the past year. 
Consequently, the issuance of a recommended decision is being omitted.
    The opportunity to file written exceptions to the interim rule 
amending the order remains.
    In view of this situation, the interim final rule amending the 
order will be issued as soon as the approval of producers is 
determined.

Rulings on Proposed Findings and Conclusions

    Briefs and proposed findings and conclusions were filed on behalf 
of certain interested parties. These briefs, proposed findings and 
conclusions, and the evidence in the record were considered in making 
the findings and conclusions set forth above. To the extent that the 
suggested findings and conclusions filed by interested parties are 
inconsistent with the findings and conclusions set forth herein, the 
requests to make such findings or reach such conclusions are denied for 
the reasons previously stated in this decision.

General Findings

    The findings and determinations hereinafter set forth supplement 
those that were made when the Upper Midwest order was first issued and 
when it was amended. The previous findings and determinations are 
hereby ratified and confirmed, except where they may conflict with 
those set forth herein.
    The following findings are hereby made with respect to the 
aforesaid marketing agreement and order:
    (a) The interim marketing agreement and the order, as hereby 
proposed to be amended, and all of the terms and conditions thereof, 
will tend to effectuate the declared policy of the Act;
    (b) The parity prices of milk as determined pursuant to section 2 
of the Act are not reasonable in view of the price of feeds, available 
supplies of feeds, and other economic conditions which affect market 
supply and demand for milk in the marketing area, and the minimum 
prices specified in the tentative marketing agreement and the order, as 
hereby proposed to be amended, are such prices as will reflect the 
aforesaid factors, insure a sufficient quantity of pure and wholesome 
milk, and be in the public interest; and
    (c) The interim marketing agreement and the order, as hereby 
proposed to be amended, will regulate the handling of milk in the same 
manner as, and will be applicable only to persons in the respective 
classes of industrial and commercial activity specified in, a marketing 
agreement upon which a hearing has been held.

Interim Marketing Agreement and Interim Order Amending the Order

    Annexed hereto and made a part hereof are two documents; an Interim 
Marketing Agreement regulating the handling of milk, and an Interim 
Order amending the order regulating the handling of milk in the Upper 
Midwest Marketing Area, which has been decided upon as the detailed and 
appropriate means of effectuating the foregoing conclusions.
    It is hereby ordered, that this entire tentative decision and the 
interim order and the interim marketing agreement annexed hereto be 
published in the Federal Register.

Determination of Producer Approval and Representative Period

    June 2001 is hereby determined to be the representative period for 
the purpose of ascertaining whether the issuance of the order, as 
amended and as hereby proposed to be amended, regulating the handling 
of milk in the Upper Midwest marketing area is approved or favored by 
producers, as defined under the terms of the order as hereby proposed 
to be amended, who during such representative period were engaged in 
the production of milk for sale within the aforesaid marketing area.

List of Subjects in 7 CFR Part 1030

    Milk marketing orders.


[[Page 7053]]


    Dated: February 8, 2002.
A.J. Yates,
Administrator, Agricultural Marketing Service.

Interim Order Amending the Order Regulating the Handling of Milk in 
the Upper Midwest Marketing Area

    This interim order shall not become effective unless and until the 
requirements of Sec. 900.14 of the rules of practice and procedure 
governing proceedings to formulate marketing agreements and marketing 
orders have been met.

Findings and Determinations

    The findings and determinations hereinafter set forth supplement 
those that were made when the order was first issued and when it was 
amended. The previous findings and determinations are hereby ratified 
and confirmed, except where they may conflict with those set forth 
herein.
    (a) Findings. A public hearing was held upon certain proposed 
amendments to the tentative marketing agreement and to the order 
regulating the handling of milk in the Upper Midwest marketing area. 
The hearing was held pursuant to the provisions of the Agricultural 
Marketing Agreement Act of 1937, as amended (7 U.S.C. 601-674), and the 
applicable rules of practice and procedure (7 CFR part 900).
    Upon the basis of the evidence introduced at such hearing and the 
record thereof, it is found that:
    (1) The said order as hereby amended, and all of the terms and 
conditions thereof, will tend to effectuate the declared policy of the 
Act;
    (2) The parity prices of milk, as determined pursuant to section 2 
of the Act, are not reasonable in view of the price of feeds, available 
supplies of feeds, and other economic conditions which affect market 
supply and demand for milk in the aforesaid marketing area. The minimum 
prices specified in the order as hereby amended are such prices as will 
reflect the aforesaid factors, insure a sufficient quantity of pure and 
wholesome milk, and be in the public interest; and
    (3) The said order as hereby amended regulates the handling of milk 
in the same manner as, and is applicable only to persons in the 
respective classes of industrial or commercial activity specified in, a 
marketing agreement upon which a hearing has been held.

Order Relative to Handling

    It is therefore ordered, that on and after the effective date 
hereof, the handling of milk in the Upper Midwest marketing area shall 
be in conformity to and in compliance with the terms and conditions of 
the order, as amended, and as hereby amended, as follows:
    The authority citation for 7 CFR Part 1030 continues to read as 
follows:

    Authority: 7 U.S.C. 601-674

PART 1030--MILK IN THE UPPER MIDWEST MARKETING AREA

    1. Section 1030.7 paragraph (g) is amended by revising the first 
sentence to read as follows:


Sec. 1030.7  Pool plant.

* * * * *
    (g) The applicable shipping percentages of paragraphs (c) and (f) 
of this section and Sec. 1030.13(d)(2), and (d)(3) may be increased or 
decreased, for all or part of the marketing area, by the market 
administrator if the market administrator finds that such adjustment is 
necessary to encourage needed shipments or to prevent uneconomic 
shipments. * * *
    2. Section 1030.13 is amended by revising the introductory text, 
redesignating paragraph (d)(3) as paragraph (d)(4), and adding new 
paragraphs (d)(3), and (e) to read as follows:


Sec. 1030.13  Producer milk.

    Except as provided for in paragraph (e) of this section, Producer 
milk means the skim milk (or the skim equivalent of components of skim 
milk), including nonfat components, and butterfat in milk of a producer 
that is:
* * * * *
    (d) * * *
    (3) The quantity of milk diverted to nonpool plants by the operator 
of a pool plant described in Sec. 1030.7(a) or (b) may not exceed 90 
percent of the Grade A milk received from dairy farmers (except dairy 
farmers described in Sec. 1030.12(b)) including milk diverted pursuant 
to Sec. 1030.13; and
* * * * *
    (e) Producer milk shall not include milk of a producer that is 
subject to inclusion and participation in a marketwide equalization 
pool under a milk classification and pricing program imposed under the 
authority of a State government maintaining marketwide pooling of 
returns.

Marketing Agreement Regulating the Handling of Milk in Certain 
Marketing Areas

    The parties hereto, in order to effectuate the declared policy of 
the Act, and in accordance with the rules of practice and procedure 
effective thereunder (7 CFR Part 900), desire to enter into this 
marketing agreement and do hereby agree that the provisions referred to 
in paragraph I hereof as augmented by the provisions specified in 
paragraph II hereof, shall be and are the provisions of this marketing 
agreement as if set out in full herein.
    I. The findings and determinations, order relative to handling, and 
the provisions of Secs. 1030.1 to 1030.86 all inclusive, of the order 
regulating the handling of milk in the Upper Midwest marketing area (7 
CFR Part 1030) which is annexed hereto; and
    II. The following provisions: Record of milk handled and 
authorization to correct typographical errors.
    (a) Record of milk handled. The undersigned certifies that he/she 
handled during the month of June 2001, ______ hundredweight of milk 
covered by this marketing agreement.
    (b) Authorization to correct typographical errors. The undersigned 
hereby authorizes the Deputy Administrator, or Acting Deputy 
Administrator, Dairy Programs, Agricultural Marketing Service, to 
correct any typographical errors which may have been made in this 
marketing agreement.
    Effective date. This marketing agreement shall become effective 
upon the execution of a counterpart hereof by the Department in 
accordance with Section 900.14(a) of the aforesaid rules of practice 
and procedure.
    In Witness Whereof, The contracting handlers, acting under the 
provisions of the Act, for the purposes and subject to the limitations 
herein contained and not otherwise, have hereunto set their respective 
hands and seals.


Signature By (Name)
(Title)---------------------------------------------------------------
(Address)-------------------------------------------------------------

(Seal)
Attest

[FR Doc. 02-3634 Filed 2-13-02; 8:45 am]
BILLING CODE 3410-22-P