[Federal Register Volume 67, Number 112 (Tuesday, June 11, 2002)]
[Proposed Rules]
[Pages 39871-39886]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-14455]


 ========================================================================
 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
 
 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
 ========================================================================
 

  Federal Register / Vol. 67, No. 112 / Tuesday, June 11, 2002 / 
Proposed Rules  

[[Page 39871]]



DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Part 1033

[Docket No. AO-361-A35; DA-01-04]


Milk in the Mideast 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.

-----------------------------------------------------------------------

SUMMARY: This tentative decision adopts, on an interim final and 
emergency basis, provisions that amend certain features of the pooling 
standards of the Mideast Federal milk order. Specifically, this 
tentative decision adopts amendments to the Pool plant provisions by 
eliminating automatic pool plant status for the 6-month period of March 
through August, eliminating milk shipments to a distributing plant 
regulated by another Federal milk order as pool-qualifying shipments 
under the Mideast order, eliminating the ``split plant'' feature, 
eliminate including diversions made by a pool supply plant located 
outside the marketing area to a second pool plant, and establishing a 
``net shipments'' provision. For the Producer milk provisions, this 
tentative decision adopts, on an interim basis, amendments that would 
seasonally adjust and increase the number of days that the milk of a 
producer needs to be delivered to a pool plant and establishes year-
round diversion limits, adjusted seasonally, for producer milk for 
distributing plants pooled under the Mideast order. Public comments on 
these actions and the other pooling and payment issues not adopted by 
this tentative decision are requested. Additionally, this decision 
requires determining if producers approve the issuance of the amended 
order on an interim basis.

DATES: Comments are due on or before August 9, 2002.

ADDRESSES: Comments (6 copies) should be filed with the Hearing Clerk, 
Room 1081, South Building, U.S. Department of Agriculture, 14th & 
Independence Avenue, SW., Washington DC 20250.

FOR FURTHER INFORMATION CONTACT: Gino M. Tosi, Marketing Specialist, 
USDA/AMS/Dairy Programs, Order Formulation Branch, Room 2968, 1400 
Independence Avenue, SW STOP 0231, 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.
    These proposed amendments have been reviewed under Executive Order 
12988, Civil Justice Reform. This rule is not intended to have a 
retroactive effect. If adopted, this proposed rule will 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 with the Department 
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

    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 October 2001, there 
were 11,120 producers pooled on and 40 handlers regulated by the 
Mideast order. Based on these criteria, the vast majority of the 
producers and handlers would be considered small businesses. The 
adoption of the amended pooling standards serve to revise and establish 
criteria that ensure the pooling of producers, producer milk, and 
plants that have a reasonable association with, and are consistently 
serving, the fluid milk needs of the Mideast milk marketing area. 
Criteria for pooling milk are established on the basis of performance 
standards that are considered adequate to meet the Class I fluid needs 
of the market, and 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 equal fashion to both large and small businesses. Therefore, the 
Department has determined that 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

[[Page 39872]]

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 tentative decision 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 rulemaking proceeding does 
not duplicate, overlap, or conflict with any existing Federal rules.

Prior Documents in This Proceeding

    Notice of Hearing: Issued September 21, 2001; published September 
28, 2001 (66 FR 49571).

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 Mideast 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, Room 1081, South Building, U.S. Department of 
Agriculture, 14th & Independence Avenue, SW., Washington DC 20250, by 
the 60th day after publication of this decision in the Federal 
Register. Four (4) 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 amendments set forth below are based on the record of a public 
hearing held at Wadsworth, Ohio, on October 23-24, 2001, pursuant to a 
notice of hearing issued September 21, 2001, and published September 
28, 2001 (66 FR 49571).
    The material issues on the record of the hearing relate to:
    1. Pooling standards of the marketing order.
    a. Standards for pool plants.
    b. Standards applicable for producer milk.
    2. Rate of partial payments to producers by handlers.
    3. Conforming changes to the order.
    4. 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

    The following findings and conclusions on the material issues are 
based on evidence presented at the hearing and the record thereof:
1. Pooling Standards of the Order
a. Standards for Pool Plants

Distributing Plants

    A proposal seeking to increase one of the distributing plant 
pooling standards and providing for the seasonal adjustment of the 
standard should not be adopted. Published in the hearing notice as 
Proposal 1, this proposal specifically sought to raise the minimum 
amount of the total quantity of fluid milk products physically received 
by a distributing plant and disposed of as route disposition, or 
transferred in the form of packaged fluid milk products, by 5 
percentage points (from 30 to 35 percent) for the months of May through 
July, and by 10 percentage points (from 30 to 40 percent) for the 
months of August through April.

Supply Plants

    Several amendments to the supply plant pooling provisions of the 
Mideast order should be adopted immediately. Certain inadequacies of 
the supply plant pooling provisions, together with unneeded features 
contained in the current provision, are resulting in disorderly 
marketing conditions and unwarranted erosion of the blend price 
received by those producers who are providing milk to satisfy the fluid 
milk demands of the Mideast marketing area. Specifically, the following 
amendments to the supply plant pooling standards should be adopted 
immediately: (1) Eliminate automatic pool plant status during the 6-
month period of March through August for certain supply plants; (2) 
eliminate the volume of milk shipments made by supply plants to 
distributing plants regulated by another Federal milk marketing order 
as a qualifying shipment for the purpose of meeting the Mideast supply 
plant shipping standard; (3) eliminate the feature of providing for a 
``split plant''; (4) exclude from receipts diversions made by a pool 
plant to a second pool plant from the calculation of the diversion 
limitation established for pool plants; and (5) provide a ``net 
shipment'' standard for supply plant (and supply plants operated by a 
cooperative association) deliveries to the order's distributing plants 
for the purpose of meeting the Mideast supply plant shipping standard. 
These amendments to the pool plant pooling standards were largely 
represented by, and in testimony related to, Proposal 2 and Proposal 5.
    A proposal that would, in part, establish a 6-month re-pooling 
delay, Proposal 8, whenever a pool supply plant elects not to meet the 
supply plant pooling standards for the month should not be adopted. 
However, this decision adopts that portion of the proposal that would 
have August as the beginning month for meeting the pool supply plant 
shipping standard. The adoption of this feature of Proposal 8 makes it 
identical to the adoption of the same feature in Proposal 2.
    Four proposals seeking to modify the pooling standards for pool 
plants of the Mideast order were considered in this proceeding. The 
record evidence makes clear that the proponents of these four 
proposals, described and discussed further below, are of the opinion 
that the current pooling provisions of the order are not accurately 
identifying those producers and the milk of those producers 
consistently serving the fluid needs of the marketing area. Part of the 
pooling standards of the Mideast order are contained in the Pool plant 
provision of the order. Published in the hearing notice as Proposals 1, 
2, 5, and 8, these proposals offered various changes to specific 
components of the current pooling standards for supply plants and 
distributing plants.
    Proposals 1, 2, and 5 were proposed by Dairy Farmers of America 
(DFA), Continental Farms Cooperative, Inc., Michigan Milk Producers, 
Inc., and Prairie Farms Cooperative, Inc.

[[Page 39873]]

Hereinafter, this decision will refer collectively to these proponents 
as the ``Cooperatives.'' These organizations are cooperatives owned by 
dairy-farmer members that supply a significant portion of the milk 
needs of the Mideast marketing area and whose milk is pooled on the 
Mideast order.
    Proposal 8 was proposed by Dean Dairy Products Company, Schneider's 
Dairy Inc., Turner Dairy Farms, Inc., Marburger Farm Dairy, Inc., 
Fike's Dairy, Inc., United Dairy, Inc., Carl Colteryahn Dairy, Inc., 
Smith Dairy Products Company, Superior Dairy, Goshen Dairy, and Reiter 
Dairy. Hereinafter, this decision will refer collectively to these 
organizations as the ``Handlers.'' These organizations receive milk 
from dairy farmers and cooperatives and distribute fluid milk and other 
dairy products within the marketing area. They are regulated under the 
terms of the order.
    Proposal 1, offered by the Cooperatives, seeks to amend the pool 
plant definition by increasing the minimum amount of milk that would, 
in part, cause a distributing plant to become pooled on the Mideast 
order. Proposal 1 would provide that 35 percent or more of the total 
quantity of fluid milk products physically received at a distributing 
plant be disposed of as route disposition or transferred in the form of 
packaged fluid milk products to other distributing plants for the 
months of May through July. Proposal 1 would also increase this same 
minimum standard to 40 percent for the months of August through April. 
The order currently provides a minimum standard of 30 percent and, 
unlike the proposal, makes no seasonal adjustments. Proposal 1 does not 
seek to change this provision's current exclusion of concentrated milk 
received from another plant for other than Class I use.
    Proposal 2, offered by the Cooperatives, seeks to amend three 
features of the supply plant provision of the order as follows: change 
certain details that currently provide for the automatic pooling of 
supply plants; not consider milk shipments from a Mideast supply plant 
to a distributing plant regulated by another Federal milk order as a 
qualifying shipment in meeting the performance standards for becoming a 
pool plant on the Mideast order; and count on a ``net receipts'' basis 
all supply plant shipments, including milk that is transferred or 
diverted and physically received by distributing plants regulated by 
the order. The ``net receipts'' criteria would exclude from a supply 
plant's qualifying shipment any transfer or diversions of bulk fluid 
milk products made by a distributing plant receiving a qualifying 
shipment. In this regard, the concept of a ``net receipt'' is similar 
to what is also commonly referred to as a ``net shipment.'' The 
difference between the two terms is that a ``net receipt,'' as 
presented in this proceeding, applies to distributing plants receiving 
milk. The term ``net shipment,'' as referred to in the record of this 
proceeding, applies to supply plants shipping milk to distributing 
plants. The intended use of these terms is clear, and herein after, 
this tentative final decision will refer to this feature of Proposal 2 
as ``net shipments'' because the proposed change would amend how the 
order applies pooling performance standards to supply plants shipping 
milk to distributing plants. The Mideast order currently has no ``net 
shipment'' provision.
    The order currently provides automatic pool plant status during the 
months of March through August, provided the supply plant met the 
applicable performance standards for pool supply plants during each of 
the immediately preceding months of September through February. 
Additionally, the order currently considers shipments of milk to a 
distributing plant regulated by another Federal order as qualifying 
shipments in meeting the performance standards of the Mideast order.
    Proposal 8, offered by the Handlers, seeks to change the months in 
which the pool plant standard is applicable for supply plant shipments 
to distributing plants from September through February to August 
through February. In this regard, Proposal 8 is similar to Proposal 2. 
However, Proposal 8 also seeks to provide that in the event a supply 
plant opts not to be a pool plant during the month, the plant will not 
be eligible to regain pool plant status for a period of six months.
    Proposal 5, offered by the Cooperatives, seeks to eliminate what is 
often referred to as the ``split plant'' provision. This provision 
provides for designating a portion of a pool plant as a nonpool plant, 
provided that the nonpool portion of the plant is physically separate 
and operated separately from the regulated or pool side of the plant.
    A DFA witness, representing the Cooperatives, testified that two 
primary benefits of the Federal order program are allowing producers to 
benefit from the orderly marketing of milk and 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 
the Cooperatives. The witness noted that marketwide pooling allows 
qualified producers to equitably share in the returns from the market 
and in a manner that provides incentives for supplying the market in 
the most efficient manner. The witness insisted that the pooling of 
milk which does not service the Class I market is inconsistent with 
Federal order policy.
    The Cooperatives' witness was of the opinion that the new Class I 
pricing structure, implemented under Federal order reform, together 
with the pooling provisions found in each order, resulted in changes in 
the marketplace for milk pooled on Federal milk orders, including the 
Mideast order. The link between performance and pooling, said the 
witness, was altered by these reforms and needs review. The 
Cooperatives noted that many entities, including DFA, moved quickly to 
take advantage of these changes in order rules. The witness indicated 
that as a participant in a competitive dairy economy, one must make 
pooling decisions that aim to increase returns or risk their 
competitive position.
    The Cooperatives' witness was of the opinion that the principles 
underlying the economic models that formulated the Class I price 
surface established during Federal order reform assumed that supplies 
of milk associated with a demand point were aggregated into a single 
market and were actually shipped from the counties that were located in 
the population centers where demand points were fixed. There were no 
provisions in the mathematical equations for those models allowing for 
milk to be associated with a market if it did not actually ship to or 
supply the market, said the witness. The current pooling practices, say 
the Cooperatives, clearly exploit the price surface, and if we are to 
retain it, pooling standards need to be restructured to parallel the 
model.
    Pooling standards are universal in their intention, stressed the 
Cooperatives, requiring a measure of commitment to a market marked by 
the ability and willingness to supply the Class I fluid needs of that 
market. The witness 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

[[Page 39874]]

area to establish an association within the fluid market.''
    The Cooperatives' witness also relied on, and drew heavily from, 
the order reform Final Decision detailing the primary criteria used to 
form the boundaries of the consolidated orders, including the 
consolidated Mideast order. The Cooperatives' witness emphasized the 
first and most important criteria of Federal order consolidation as the 
area of overlapping route distribution of Class I milk. Also taken from 
the Final Decision, the Cooperatives' witness noted that, ``The pooling 
of milk produced within the same procurement area under the same order 
facilitates the uniform pricing of producer milk,'' concluding that 
milk procurement areas were also considered as a criteria in 
establishing the consolidated marketing area boundaries. The witness 
also noted other criteria used, including the number of handlers within 
a market, naturally occurring boundaries, cooperative association 
service areas, features or regulatory provisions common to existing 
orders, and milk utilization in common dairy products.
    The Cooperatives' witness continued to rely on, and drew heavily 
from, the Final Decision of milk order reform by relating the 
decision's geographical description of the Mideast order and how the 
aforementioned criteria were applied to form the boundaries of the 
Mideast marketing area. In this regard, the witness indicated that the 
consolidated Mideast marketing area was the result of combining the 
pre-reform orders of the Ohio Valley, Eastern Ohio-Western 
Pennsylvania, Southern Michigan, and Indiana Federal milk orders, plus 
Zone 2 of the Michigan Upper Peninsula Federal milk order, and most of 
the then unregulated counties in Michigan, Indiana, and Ohio. The 
witness stressed that the order reform Final Decision concluded that 
nearly all milk produced within the area would be pooled on the 
consolidated Mideast order.
    The Cooperatives' witness was of the opinion that ``open pooling'' 
is not appropriate for the Mideast order. When milk shares in a pool's 
proceeds but does not service the Class I needs of the market or help 
to balance the market, the witness indicated, there is cause for 
concern. The witness emphasized that the cost of providing service to 
the Class I market always falls back on the local milk supply. To allow 
the pooling of milk which does not provide such services to the Class I 
needs of the market only lowers returns of those dairy farmers whose 
milk is actually supplying the local Class I market, concluded the 
witness.
    The Cooperatives' witness presented evidence which reviewed the 
various Federal order performance standards, concluding that while all 
the standards differ, they nevertheless address the importance of 
performance to the market by serving the Class I needs of the market as 
a condition for milk to be pooled and receive the order's blend price.
    According to the Cooperatives' witness, a new phenomenon is 
occurring in the area of performance standards. Several entities have 
solicited milk located in the marketing area in order to pool milk 
located outside of the marketing area, said the witness. Their 
deliveries of this local supply to distributing plants, said the 
Cooperatives' witness, provide the opportunity to pool much more milk 
located outside the marketing area. This practice, the Cooperatives' 
witness said, does not bring any new milk to be actually received at 
pool plants, and the milk located outside of the marketing area is not 
available and does not demonstrate any consistent or actual service to 
meeting the fluid milk needs of the market.
    This practice of pooling milk located far outside the Mideast 
marketing area, said the Cooperatives' witness, is accomplished through 
a feature of current pool plant performance standards which allows a 
supply plant to use direct deliveries from farms to satisfy up to 90 
percent of its performance standard by diversions. This standard, said 
the witness, is a good standard for milk located inside the marketing 
area, but is not an appropriate standard for milk supplies located 
outside of the area.
    The use of direct deliveries from inside the marketing area to 
qualify supply plants and milk supplies located far outside the 
marketing area should be greatly limited if allowed at all, said the 
Cooperatives' witness. The witness stated that allowing direct shipped 
milk from the farm to qualify a supply plant was intended to provide 
economic efficiency in moving milk, for example, thereby saving the 
reload in and pump-over costs for the sole purpose of meeting a pooling 
standard. However, this feature is now being used to qualify milk 
supplies physically located far outside of the Mideast. This, 
emphasized the witness, runs counter to the initial intent of the 
provision and has resulted in disorderly marketing conditions.
    The Cooperatives' witness provided evidence indicating that the 
Mideast order has the second largest volume of Class I use in the 
Federal Order system. According to the witness, the performance 
standards for the Mideast order should assure meeting this demand by 
specifying a performance standard that results in actual serving of the 
market's Class I needs as a condition to receive the order's blend 
price.
    Along this theme, the Cooperatives' witness relied on data showing 
that the volume of Class I and II milk used in the Mideast changed 
little in the (then) 21 months since implementation of Federal order 
reform. However, noted the witness, the amount of reserve milk, 
represented by Class III and IV use, had grown dramatically. The 
witness concluded from the data that it is difficult to justify the 
need to have pooling standards which have allowed pooling some 250 
percent of additional milk on the Mideast order when that milk does not 
service the Class I needs of the market. The witness indicated that 
additional milk pooled on the order was produced in states far from the 
marketing area, including the States of Illinois, Iowa, Kansas, 
Minnesota, New York, North Dakota, South Dakota, and Wisconsin.
    The witness also faulted the Mideast order's lack of having a 
performance standard for pool supply plants during the months of March 
through August as another way to pool milk on the Mideast order from 
other marketing areas that have lower blend prices. The evidence for 
this observation, said the Cooperatives' witness, is exhibited by data 
indicating that producers located in Wisconsin and South Dakota began 
pooling large volumes of their milk beginning in March 2000. The 
Cooperatives' witness, relying on the same statistics, observed that 
the volume of milk pooled on the order during this 21-month time 
period, but produced on farms located far outside the marketing area, 
increased by 395.66 percent, or by 430,222,762 pounds.
    A witness appearing on behalf of Land O'Lakes (LOL) expressed 
support for Proposal 1 because it seeks to promote pooling standards 
that are based on performance. The LOL witness was of the strong 
opinion that pooling standards should not be based on the physical 
location of milk alone, stressing that standards should be 
``performance oriented'' rather than ``location oriented.''
    Additional support for Proposals 1 and 2 was offered by Prairie 
Farms Dairy, Inc. (Prairie Farms). Prairie Farms operates three pool 
distributing plants regulated by the Mideast order. Their milk is 
supplied by their 176 producer members located in Indiana, Michigan, 
and Ohio.

[[Page 39875]]

    The Prairie Farms witness stated that certain provisions of the 
Mideast order have made it too easy to pool milk without the milk 
actually servicing the Class I needs of the market. Federal orders 
should not be written so restrictive that pooling any milk supplies 
beyond normal basic Class I needs is impossible, said the Prairie Farms 
witness. However, continued the witness, orders should not be written 
so liberally that pooling milk becomes an end unto itself rather than a 
standard that assures milk is actually serving the fluid needs of the 
market. As the Mideast milk order regulations are currently written, 
added the witness, the pooling of milk far beyond the day-to-day needs 
of the market can and does occur.
    According to the Prairie Farms witness, Class I use by Mideast 
order distributing plants has been relatively stable since 
implementation of order reform, but the amount of Class III and Class 
IV milk pooled on the order has increased markedly. The witness 
indicated the additional quantities of milk pooled on the order only 
lower the returns to its members and others who actually do serve the 
Class I needs of the market every day.
    A witness from Foremost Farms who appeared on behalf of the Mideast 
Milk Marketing Agency (MEMA), testified in support of Proposals 1 and 
2. The MEMA is an new organization resulting from the union of three 
previous milk marketing agencies that served milk processors by 
arranging for milk supplies in the pre-reform milk orders consolidated 
to form the current Mideast milk marketing area. The MEMA witness 
indicated that the needs of their customers and variations in 
production cause them to have an occasional need to secure additional 
volumes of milk, citing the opening of schools as an example of when 
additional milk supplies are needed. The witness also indicated that 
the supply and demand situation in spring months shows increased 
production and decreased Class I demands that generally begin in late 
April and continue through mid-July. During this time of the year, the 
MEMA witness indicated, they assume responsibility to sell milk not 
required by their customers. Most often these sales are to 
manufacturing plants located in the marketing area and to plants 
located as far away as Wisconsin and Minnesota, the witness said. 
Often, noted the witness, such sales are below the minimum class prices 
of the order and the costs of disposing of surplus milk are borne by 
MEMA members.
    The MEMA witness noted that sufficient raw milk is secured through 
its member cooperatives and other suppliers within the marketing area 
to service its customers on a year-round basis, with the fall months 
being the only exception. In light of this supply and demand situation, 
the witness could find no reason why the Mideast marketing order should 
provide for the pooling of two to three times the milk supply actually 
needed to serve the Class I needs of the market.
    A witness appearing on behalf of the Michigan Milk Producers 
Association (MMPA) also testified in support of Proposals 1 and 2. MMPA 
is a dairy farmer owned-and-operated cooperative engaged exclusively in 
the marketing of milk and dairy products on behalf of 2,600 of their 
member dairy farmers in Michigan, Ohio, northern Indiana, and northeast 
Wisconsin.
    The MMPA witness testified that each of the five predecessor orders 
merged into the consolidated Mideast order had more demanding pool 
plant qualification standards. The witness stressed that pooling 
provisions are not intended to create barriers to pooling. However, the 
witness indicated, it is reasonable to expect that a market with a 
fluid demand as large as the Mideast warrants a higher level of 
performance than in markets with lower Class I use.
    The MMPA witness stated that adequate supplies of milk exist within 
the order to satisfy the requirements of at least the Michigan portion 
of the marketing area. The witness noted that during the past 24 
months, Class I sales in Michigan had declined 7 percent. Also, the 
witness noted that milk production in Michigan has been increasing and 
indicated that local supplies have increased 7 percent since 1998. The 
MMPA witness was of the opinion that with declining fluid sales and 
increasing milk production, pooling standards that result in pooling 
additional quantities of milk supplies cannot be justified.
    The MMPA witness noted that nearly all of the increased volume of 
milk pooled on the Mideast order since order reform was used at Class 
III or IV manufacturing plants, which the witness concluded has only 
served to lower producer pay prices. In their opinion, this occurred 
because the current performance standards required for pool 
qualification are too lenient. These performance standards have 
resulted in an inequitable distribution of proceeds from this market's 
pool, stressed MMPA, while the proceeds from the fluid market were 
improperly shared with producers who did not service the Class I needs 
of the market. The MMPA witness was of the strong opinion that this 
situation should be treated as an emergency by the Department and a 
Recommended Decision should therefore be omitted.
    In addition to supporting the testimony given by the DFA witness on 
behalf of the Cooperatives regarding Proposal 2, the MMPA witness 
offered a modification to Proposal 2. The MMPA modification would 
specifically limit the practice of using pooled milk located inside of 
the marketing area to qualify milk of a plant located outside of the 
marketing area for pooling its milk receipts on the order. According to 
the witness, a one-time delivery of the milk of a producer located 
outside the marketing area qualifies a ``distant'' producer as a 
producer under the Mideast order and, in turn, qualifies the milk of a 
``distant'' producer to thereafter be diverted to nonpool plants. Most 
often, stressed the witness, these plants are also located at a great 
distance from the marketing area and this milk need never meet the 
order's performance standards. The MMPA witness concluded that the 
pooling standards should not allow such milk to be part of the Mideast 
pool. The witness stressed that eliminating the ability to pool milk in 
this manner would not affect the efficiencies afforded by direct-
shipped milk from farms located within the marketing area. The MMPA 
witness added it would also prohibit an abuse of pooling principles 
that never intended to qualify milk for pooling under the order without 
an actual relationship to the order's supply plants in supplying the 
Class I needs of the market.
    A witness from Dean Foods (Dean) testified in support of a portion 
of Proposal 2. They supported eliminating the feature of the current 
pool supply provision which does not establish a performance standard 
during the months of March through August. They were also in agreement 
with other witnesses that the Department should treat this proceeding 
on an emergency basis. The Dean witness reasoned that the economic 
damage to the producers whose milk actually serves the Class I needs of 
the market should be resolved as soon as possible.
    A witness appeared on behalf of Suiza Foods (Suiza) in general 
support of Proposals 1 and 2. The witness reasoned that once 
performance becomes a monthly requirement to pool milk, both processors 
and producers will be better able to plan deliveries based upon the 
need for milk during the fall months when milk supplies are generally 
less plentiful. The witness also stated that August should be the 
initial month

[[Page 39876]]

when higher performance standards should apply because of increased 
demand caused by the opening of schools occurring at the same time as 
generally declining overall milk supplies.
    The Suiza witness also was of the opinion that the adoption of a 
net shipment provision for supply plants should also be applicable for 
plants operated by a cooperative association--another type of pool 
plant provided for in the Mideast order. In their post-hearing brief, 
Suiza emphasized that in the interest of fairness and equitable 
regulatory treatment, providing a net shipment provision applicable to 
this type of pool plant would be appropriate. According to Suiza, not 
providing for a net shipment feature for supply plants operated by a 
cooperative association would merely change the incentives for 
cooperatives that operate supply plants to become a pool plant under 
this provision applicable for cooperative associations. Although not a 
part of the direct testimony by the proponents of Proposal 2, or its 
supporters, all parties agreed that a net shipment provision should 
also be provided for plants operated by cooperative associations.
    A witness representing Scioto County Cooperative Milk Producers 
Association (Scioto) testified in support of Proposals 1 and 2. Scioto 
has dairy farmer members in southern Ohio and northern Kentucky whose 
milk is pooled on the Mideast order.
    The Scioto witness noted that during the period of 2000-2001, the 
amount of producer milk pooled on the Mideast market increased by 
nearly 42 percent. Virtually all of this increase can be attributed to 
producers in States not included as part of the Mideast marketing area, 
while the amount of the Class I use in the Mideast order remained 
relatively constant, maintained the witness. In light of the increased 
amount of milk pooled on the Mideast order, Scioto indicated their 
support for proposals which would establish higher pooling standards. 
Scioto indicated this would also ensure that the revenue generated by 
Class I sales are properly shared with those producers and pool plants 
which actually perform service to the Class I market.
    The Scioto witness also indicated support for the addition of 
August as a month when additional shipments should be made to 
distributing plants. However, Scioto opposed establishing performance 
standards for the remaining months which currently have none. The 
witness concurred that the hot days of August have a significant impact 
on milk production and noted more schools are starting as early as 
middle August. Scioto said that this combined effect makes it more 
difficult to meet the fluid needs of the market and concluded that 
supply plant standards should be established to assure those needs.
    Opposition to a part of Proposal 2 was offered by Scioto. The 
feature of specifying ``net shipments'' for supply plant deliveries to 
pool distributing plants should be not adopted, testified Scioto. The 
witness was of the opinion that performance standards should only 
require supply plants to ship milk when needed by the market and that 
performance standards should provide the flexibility to retain milk at 
local supply plants during the flush season when milk supplies are more 
plentiful.
    Opposition to a portion of Proposal 2 by LOL was provided in their 
post-hearing brief. LOL indicated they do not support establishing a 
``net shipments'' provision because it would effectively raise the 
supply plant shipping standards above the indicated pool supply plant 
performance standard. The LOL brief indicated that virtually all 
distributing plants have some transfers or diversions resulting from 
decreased demand on weekends and holidays for Class I milk. According 
to LOL, this should be considered so that supply plants are not 
penalized by being viewed as not performing in supplying the fluid 
market during such situations.
    Proposal 8, offered by the Handlers, seeks, in part, to change the 
months during which pool supply plant shipping standards would be 
applicable--to begin in August and continue through to February. 
Proposal 8 also seeks to establish a 6-month re-pooling delay whenever 
a pool supply plant elects to not meet the pool plant standards for the 
month. According to the Handlers, a 6-month delay in being able to 
return to the order as a pool plant would eliminate the ability of 
handlers to participate in the pool only when it was advantageous and 
to not participate in the pool when it was not.
    A witness from Dean Foods, appearing on behalf of the Handlers, 
testified that the current pool supply plant provisions permitting 
handlers to pool and de-pool milk causes market instability. The 
witness noted the occurrence of a class-price inversion (when the blend 
price is lower than the Class III price) as an example of when supply 
plants have the economic incentive to opt out of pooling their milk 
supplies. Nevertheless, the Dean witness was of the opinion that a 6-
month re-pooling delay would serve to assure consistent and reliable 
association of milk with the marketing area and in meeting the market's 
Class I demands.
    Opposition to Proposal 8 was raised by DFA. DFA was of the opinion 
that class-price inversions are a function of the order providing 
advanced pricing to handlers for Class I and II milk. The witness 
indicated advanced pricing is a needed and good provision of Federal 
milk marketing orders. However, if the Class I sector of the market 
were not provided advanced pricing, reasoned the DFA witness, depooling 
might never occur. Nevertheless, noted the DFA witness, there should be 
no reason why Class III and IV handlers should ever have to equalize 
class-use values with the blend price by paying this difference into 
the pool for the benefit of Class I handlers simply because of price 
inversion. Imposing a 6-month re-pooling delay may cause Class III and 
IV handlers to pay into the pool only to retain pool status, but doing 
so can result in causing financial damage to the reserve and balancing 
sectors of the market, maintained the DFA witness.
    Proposal 5, offered by the Cooperatives, seeks to eliminate what is 
commonly referred to as the ``split plant'' provision from the Mideast 
order. A split plant designates a portion of the plant as the ``pool'' 
side and another portion of the plant as the ``nonpool'' side.
    According to the Cooperatives, this provision was initially used to 
accommodate a plant's use of both Grade A and Grade B milk while 
providing for diversion from the pool plant side of the plant to the 
nonpool side for use in manufactured products. This designation was 
provided, said the witness, for orders with lower Class I differentials 
and low Class I use. However, the witness noted that its purpose seems 
to have been broadened to also afford a supply plant to gain economic 
efficiencies by avoiding incurring costs for transporting milk solely 
to meet pool standards.
    The Cooperatives' witness argued that the split plant provision 
continues to have validity in low Class I use and low Class I 
differential orders, but does not have a legitimate role to play in a 
higher differential, higher utilization order like the Mideast. This 
provision, said the witness, serves no purpose for the Mideast order, 
stressing that none of the Mideast's predecessor orders provided for it 
and that no plant located within the Mideast marketing area makes use 
of the provision. Rather, it has only become a tool to pool distant 
milk on the market which is not serving the Class I milk needs of the 
market, maintained the witness.

[[Page 39877]]

    Citing data provided by the Mideast Market Administrator, the 
Cooperatives observed that increasing volumes of milk pooled from 
distant areas began in June 2000. The amount of distant milk pooled 
then was about 16 million pounds and grew dramatically to some 480.5 
million pounds by June 2001. The total pounds of milk pooled through 
split plants ranged from 69 to 179 million pounds for the months of 
January through August 2001, noted the witness. The witness indicated 
that this statistic represents a significant percentage of the total 
milk pooled on the order. Diversions of distant milk by pool 
distributing plants, added the witness, were similarly significant. 
However, the witness stressed that actual physical deliveries used to 
qualify the additional volumes of milk pooled through split plants were 
as little as 50,000 pounds. These statistics, said the Cooperatives' 
witness, clearly prove that the current pooling standards are allowing 
milk to be pooled without demonstrating reasonable relationship, or 
providing actual service, to the market's fluid needs. According to the 
witness, using split plants to pool milk in this way can only be viewed 
as an abuse of an accommodation not intended when originally adopted 
for the Mideast order.
    Scenarios were presented by the Cooperatives' witness as examples 
for illustrating the harm being caused by the split plant provision. 
One example depicted how milk currently being pooled on the order, but 
located far from the marketing area, would not likely seek to be on the 
Mideast order without a split plant provision. According to the 
Cooperatives' witness, this is because the cost of transportation would 
exceed the gain of receiving the Mideast's blend price. Another example 
demonstrated the negative impacts of split plants to the Mideast market 
because of the lack of diversion limits.
    According to the Cooperatives' witness, the pool side of the split 
plant is being used to establish an ``outpost'' that serves no other 
purpose than to qualify milk for pooling from other marketing areas 
where blend prices are lower. By meeting the minimal one-day delivery 
standard for becoming a producer on the order, the milk of producers 
located far from the marketing area, but whose milk is actually 
delivered to an ``outpost'' pool plant nearer their farms, may qualify 
milk for pooling on the Mideast order. Further, stressed the witness, 
the milk of these producers can thereafter be diverted to manufacturing 
plants nearer their farms without ever again being delivered to pool 
plants located in marketing area. This milk can hardly be viewed as 
servicing the market, the Cooperatives' witness asserted. Additionally, 
concluded the witness, the daily, weekly, and seasonal supplying of 
fluid milk, and meeting the balancing needs of the market are 
consistently being borne by the local producers who are only having 
their blend price diluted from the pooling of milk that does not 
consistently provide these services.
    A witness representing Suiza testified in support of Proposal 5. 
This witness stressed that the split plant provision did not exist in 
all marketing orders prior to order reform and is not used today for 
the purpose for which it was originally intended. The Suiza witness 
concluded that the split plant provision is clearly not needed nor 
justifiable under the Mideast order.
    MMPA also testified in support of Proposal 5. The witness similarly 
observed that pooling milk through the split plant provision only 
serves to depress prices for producers who actually supply the market. 
The witness maintained that a principle responsibility of the Federal 
milk order program is to preserve the proceeds from the fluid market 
for those producers who demonstrate an ability and willingness to serve 
that market. Since the split plant provision does not serve this end, 
concluded the witness, it should be eliminated from the order.
    The witness representing Scioto expressed doubt that adopting 
Proposal 5 would solve the pooling problem presented by split plants. 
In this regard, the witness proposed a limit on the maximum amount of 
producer milk that could be associated with a pool supply plant during 
the months when no performance standard is applicable. The witness 
offered that 110 percent of the daily average producer receipts, pooled 
during the months specifying a performance standard, is a reasonable 
alternative performance standard for such months. According to the 
Scioto witness, amending the split plant feature in this way would 
recognize normally higher production levels during the spring and 
summer months as compared to generally lower production levels during 
the fall and winter months. It would still allow supply plants from 
outside the marketing area to participate in the Class I returns of the 
market for the entire year, noted the witness, but would prevent plants 
from abusing the market by only pooling milk during the spring and 
summer months with milk that does not service the market.
    Post-hearing briefs submitted by LOL expressed opposition to the 
adoption of Proposal 5. The split plant provision, indicated LOL, has 
historically recognized commingled Grade A and Grade B milk in 
procurement areas and has provided a way for Grade A milk to be 
diverted to the non-pool plant for manufacturing uses. Removing this 
pooling feature, concluded LOL in their brief, would result in the need 
for full plant accountability, including determining milk shrinkage and 
overage, in the manufacturing (nonpool) portion of a plant. LOL is of 
the opinion that this would be very burdensome and would result in the 
need for costly record keeping by both handlers and the Market 
Administrator's office, while providing no benefit to producers or 
handlers.
    The record contains testimony clearly indicating general support 
for increasing and seasonally adjusting the distributing plant pooling 
standard offered by Proposal 1. The proposal would increase minimum 
standards for triggering pool plant status for a distributing plant and 
therefore become regulated under the terms of the Mideast milk 
marketing order. Beyond statements indicating general support for the 
adoption of Proposal 1, the record contains little, if any, evidence 
that indicates why this pooling standard should be increased. To the 
extent that excess milk is being pooled on the order through 
distributing plants, this decision attributes the pooling of excess 
milk to inadequacies in other pooling standards of the order. 
Specifically, the record reveals that the lack of diversion limits 
during certain times of the year provides the ability for distributing 
plants to pool milk on the Mideast order (the issue of diversions and 
diversion limits are discussed later in this decision) far beyond the 
legitimate reserve supply of milk for the plant. Therefore, in the 
absence of other evidence, the record does not support a finding that 
distributing plants should meet a higher standard by increasing the 
amount of milk receipts disposed of as route disposition, or 
transferred in the form of packaged fluid milk products, as a condition 
for designation as a pool plant.
    The record of this proceeding strongly supports concluding that the 
various features of the Mideast order's supply plant pooling standards 
are either inadequate or unnecessary. Because the order currently 
contains inadequate pooling standards for supply plants, much more milk 
is able to be pooled on the order than can be considered properly 
associated with the Mideast market. This milk does not demonstrate a 
reasonable level of performance necessary to conclude that it provides 
a

[[Page 39878]]

regular and reliable service in satisfying the Class I milk demands of 
the Mideast marketing area. Therefore such milk should not be pooled on 
the order.
    The pooling standards of all milk marketing orders, including the 
Mideast order, 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 
Mideast 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. The pooling standards 
for the Mideast order are based on performance, specifying standards 
that, if met, qualify a producer, the milk of a producer, or a plant to 
enjoy the benefits arising from the classified pricing of milk.
    Pooling standards that are performance based provide the only 
viable method for determining those eligible to share in the marketwide 
pool. It is primarily 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. Pool plant standards, 
specifically standards that provide for the pooling of milk through 
supply plants, also need to be reflective of the supply and demand 
conditions of the marketing area. This is important because pooling 
this milk ensures the receipt of the market's blend price.
    Similarly, supply plant pooling standards should provide for those 
features and accommodations that are reflective of the needs of 
proprietary handlers and cooperatives in providing the market with milk 
and dairy products. When a pooling feature's use deviates from its 
intended purpose, and its use results in pooling milk that is not 
serving the fluid needs of the market, it is appropriate to re-examine 
the need for continuing to provide for that feature as a necessary 
component of the pooling standards of the order. One of the objectives 
of pooling standards is to ensure an adequate supply of fluid milk for 
the marketing area. A feature which results in pooling milk on the 
order that does not provide such service should be considered as 
unnecessary for that marketing area. Similarly, another objective of 
pooling standards is for the proper identification of the milk of those 
producers who are providing service in meeting the Class I needs of the 
market. If a pooling provision does not reasonably accomplish this end, 
the proceeds that accrue to the marketwide pool from fluid milk sales 
are not properly shared with the appropriate producers. The result is 
the lowering of returns to those producers whose milk is serving the 
fluid market.
    The record provides sufficient evidence to conclude that several 
features of the supply plant definition are not being used for the 
reasons they were originally intended. Other shortcomings of the 
Mideast order's pooling standards, specifically as they relate to 
producer milk, also contribute to inappropriately pooling the milk of 
producers who are not a legitimate part of the Mideast marketing area. 
Here too, the impact is an unwarranted association of milk on the 
order. Milk is classed at lower prices--a decrease in the relative 
Class I utilization of the market--which results in a lower blend price 
to those producers who do supply the Class I needs of the market.
    This decision finds that the milk of some producers is benefitting 
from the blend price of the Mideast order while not reasonably 
demonstrating a service to the Class I needs of the Mideast marketing 
area. This finding is attributable to faulty pooling standards. The 
pooling provisions provided in the Final Decision of milk order reform, 
implemented on January 1, 2000, established pooling standards and 
pooling features that envisioned the needs of the market participants 
resulting from the consolidation of those pre-reform orders. The reform 
Final Decision, as it related to the Mideast marketing area, did not 
intend or envision that the pooling standards adopted would result in 
the sharing of Class I revenues with those persons, or the milk of 
those persons, who do not provide a reasonable measure of service in 
providing the Class I needs of the market. The reform Final Decision 
examined and discussed the various pooling standards and features of 
the pre-reform orders for their applicability in a new, larger, 
consolidated milk order. The pooling standards and features adopted for 
the Mideast order were designed to reflect and retain those standards 
and features of the pre-reform orders so as to not cause a significant 
change, and indeed to provide for, the continued pooling of milk that 
had been pooled by those market participants. The record of this 
proceeding reveals that the combination of the standards and features 
adopted for pool plants, especially those that apply to pool supply 
plants, are not the appropriate or reasonable standards for a much 
larger milk marketing area.
    Accordingly, this decision finds basic agreement in the evidence 
presented by the proponents of Proposal 2 and Proposal 5, and those 
entities who expressed their support for adopting these proposals, that 
certain pool plant provisions should be eliminated from the Mideast 
order. These include: (1) The provision of the order that currently 
provides for automatic pool plant status during the 6-month period of 
March through August for certain pool supply plants; (2) the provision 
that currently counts supply plant shipments to distributing plants 
regulated by another Federal milk marketing order as a qualifying 
shipment for meeting supply plant performance standards of the Mideast 
order; and (3) the provision of the order that provides for ``split 
plant'' recognition.
    Supply plant deliveries of milk to a distributing plant regulated 
by another Federal milk marketing order should no longer be considered 
as a qualifying shipment for meeting the supply plant performance 
standards of the Mideast order. While such milk is providing some 
servicing of the fluid needs of another marketing area, such milk 
provides no service to the Class I needs of the Mideast order. Pooling 
standards for the Mideast marketing area, in part, provide for 
determining those producers and the milk of those producers who are 
serving the Class I needs of the Mideast marketing area and thereby 
receive the blend price of the Mideast order. It is reasonable, in 
light of this objective, to conclude that serving the fluid needs of 
another market provides no service to the Mideast market. Accordingly, 
such milk should not be considered as a qualifying shipment for meeting 
the supply plant performance standard of the Mideast order.
    The modification of Proposal 2, offered by MMPA, intended to 
provide a pooling standard that assists in the proper identification of 
the milk of those producers who actually provide a service to the 
order's Class I market, should also be adopted immediately. However, 
the proposed amendatory language has been modified by the Department 
and is presented below. Safeguards are added to the supply plant 
provision allowing that up to 90 percent of a supply plant's qualifying 
shipments to distributing plants be directly from farms of producers by 
diversion. The intent of this pooling feature for supply plants was to 
provide flexibility and offer efficiency in transporting milk, and 
thereby be less burdensome, for those market participants of the pre-
reform orders who would continue to be pooled on the larger 
consolidated Mideast order. This feature was not intended to be used as 
a mechanism to pool milk on the order

[[Page 39879]]

that was not providing a reasonable measure of service in supplying the 
Class I needs of the Mideast marketing area.
    The intent of the modification of Proposal 2 by MMPA sought 
reasonable safeguards so that milk pooled by handlers from sources 
distant from the marketing area, resulting from the pooling of milk 
from within the marketing area, would end. The reasons for modifying 
Proposal 2 are well supported by evidence contained in the record of 
this proceeding. Currently, plants located far from the marketing area 
can use diversion of near-in milk for up to 90 percent of the distant 
plant's qualifying deliveries. Supply plants qualified in this manner 
do not provide milk to the marketing area that can be shown to be a 
service in meeting the Class I needs of the Mideast marketing area. 
Therefore, there is no reasonable basis to conclude that such milk 
should be pooled on the order and thereby receive the order's blend 
price. This modification would establish that supplemental milk 
supplies actually perform a reasonable measure of service in supplying 
the fluid needs of the Mideast marketing area.
    Finally, the evidence of this proceeding supports adopting a ``net 
shipment'' provision, a feature of Proposal 2. As intended by the 
proponents, a net shipment feature would not include transfers or 
diversions of bulk fluid milk products of a supply plant's qualifying 
shipments to a distributing plant by any amount of bulk milk transfers 
or diversions made from the distributing plant. Providing such a 
feature for the pooling standards for the Mideast order supply plants 
is reasonable, notwithstanding the objections to its adoption by Scioto 
and LOL. It is true that distributing plants have some transfers and 
diversions resulting from variations in demand stemming from weekend 
days and holidays. However, the current supply plant performance 
standard is below the Mideast market's Class I use of milk, even with 
the pooling of milk inappropriately associated with the market due to 
faulty pooling standards. This decision finds it unlikely that 
transfers and diversions by distributing plants on such occasions would 
involve a sufficient volume of milk to cause a supply plant to lose 
pool status. Additionally, given other changes to the order's pooling 
standards adopted in this decision (discussed below), placing a limit 
on diversions that can be made by any pool plant to a nonpool plant 
should provide the necessary safeguards that would make it even more 
unlikely that a supply plant would lose its pool status. This decision 
finds that adoption of a net shipment feature in the pooling standards 
for Mideast supply plants will aid in properly identifying the milk of 
those producers who actually supply milk to meet the fluid needs of the 
market.
    A brief submitted by Suiza emphasized the need for providing a net 
shipment provision for a supply plant operated by a cooperative 
association. The brief indicated that it would provide for fair and 
equitable regulatory treatment of two similar types of supply plants. 
This decision agrees with the need to apply the same net shipment 
provision to supply plants operated by a cooperative association. Both 
supply plant and cooperative supply plant performance standards are, 
for all intents and purposes, identical. Therefore it is reasonable to 
adopt the same standard in considering the actual, or net, shipments 
made to distributing plants by a plant operated by a cooperative 
association.
    Providing a 6-month re-pooling delay whenever a supply plant opts 
not to meet the pooling standards for the month would not tend to 
provide for orderly marketing conditions in the Mideast marketing area. 
The record indicates that handler interests seek every assurance for a 
steady and reliable milk supply as the order can reasonably provide. 
Providing pooling standards that may cause a supply plant to consider 
the longer-term implications of dropping off the pool may also tend to 
ensure the desired outcome of assuring reliable deliveries of milk to 
fluid handlers. However, the need for a provision which denies a supply 
plant the ability to rejoin the pool through proper performance after a 
6-month delay is not supported by the record.
    Milk marketing orders are instruments for promoting stability in 
the marketing relationship between producers and handlers. In this 
regard, and considering the marketing conditions of the Mideast 
marketing area, promoting stability in this manner is not appropriate 
or needed. The record indicates that fluid milk handlers have not had 
significant difficulties in securing milk supplies since the 
implementation of milk order reform. To the extent that handlers fear 
the potential disruption to the market that may arise from depooling, 
that fear to date is only speculative.
    The most important evidence provided on the record that provides 
any justification for adopting a 6-month re-pooling delay rests on the 
possible occurrence of a class-price inversion. Handlers see the issue 
of opting off-and-on the pool as rushing to join the pool to secure the 
advantages of price protection and dropping from the pool when prices 
for Class III and IV milk are higher than the order's blend price. 
Further, handlers worry that during such times, their ability to obtain 
needed milk supplies is diminished. The DFA witness is of the opinion 
that penalizing supply plants, often cooperative owned, may cause 
financial damage to be borne by the manufacturing sectors of the 
market. Additionally, DFA does not endorse the notion that producers 
should incur any penalty because of price outcomes which, they 
conclude, are the result of the order program providing for the advance 
pricing of Class I and II milk that serves the interest of handlers.
    This decision makes no finding on whether advance pricing is a 
cause or contributor to class-price inversions. Neither does this 
decision make any findings regarding the damage that may result to 
cooperatively owned manufacturers by being prevented from rejoining the 
pool. These are both far beyond the scope of this proceeding. However, 
this decision does find that the amendments to the pooling standards 
adopted by this decision, taken as a whole, strengthen the 
effectiveness of the order for the benefit of both producers and 
handlers and will restore orderly marketing conditions and a consistent 
supply of milk to Class I handlers.
b. Standards for Producer Milk

Minimum Deliveries to Pool Plants--The Touch Base Standard

    The proposal seeking to change certain standards and features of 
the Producer milk provision of the order should be adopted immediately. 
The following amendments include:
    (1) Increasing the number of days of milk production of a producer 
to be delivered to a pool plant before the milk of the producer is 
eligible for diversion during each of the months of August through 
November, or ``touch base'' is increased to 2-days' milk production. In 
this regard, August is an addition to the touch base period. 
Additionally, the amended touch base provision establishes a 2-day 
touch base standard for new producers coming on the Mideast market 
during each of the months of December through July. The 2-days' milk 
production touch base standard will be applicable only if the producer 
has not been part of the Mideast market during each of the previous 
months of August through November. Adoption of a 2-day touch base 
standard therefore concludes that the higher standards of either 3 or 4

[[Page 39880]]

days, supported by handlers and Scioto, is not adopted.
    (2) Establishing diversion limits for all pool handlers in each 
month of the year. Additionally, diversion limits will be seasonally 
adjusted. For each of the months of August through February, the 
diversion limit shall be 60 percent. For each of the months of March 
through July, the diversion limit shall be 70 percent.
    (3) Eliminating the ability of a pool plant to increase diversions 
to nonpool plants by diverting milk to a second pool plant.
    Proposal 7, which sought to add the months of August and March to 
the current diversion limit standard of 60 percent for each of the 
months of September through February, should not be adopted.
    Proposals 3, 7, and 9 seek to modify the order's standards for 
determining the eligibility to pool the milk of a producer on the 
order. The standards for determining this are described in the Producer 
milk provision of the order. These three proposals are similar in the 
changes proposed and the specific details of each proposal are 
discussed in greater detail below. As explained earlier in this 
decision, the collective references of the proponents as the 
``Cooperatives'' and ``Handlers'' continues. Proposal 3 was offered by 
the Cooperatives, Proposal 9 by the Handlers, and Proposal 7 by the 
Independent Dairy Producers of Akron (IDPA), an association of dairy 
farmers whose milk is pooled on the Mideast order.
    A proposal, published in the hearing notice as Proposal 6, did not 
receive testimony at the hearing and is considered by this decision to 
be abandoned. This proposal called for providing year-round diversion 
limits as did Proposal 3, but offered slightly differing seasonal 
adjustments. No further reference will be made in this proceeding to 
Proposal 6.
    Published in the hearing notice as Proposal 3, the Cooperatives 
seek changes in the number of days the milk of a dairy farmer must be 
physically received at a pool plant, and in what months the standards 
should apply (commonly referred to as a ``touch base'' provision), 
before being eligible for diversion to nonpool plants. Additionally, 
Proposal 3 would establish diversion limits for producer milk in months 
where no limit is currently provided by the order and would seasonally 
adjust these limits.
    (1) Touch base. Proposal 3 would change the touch base feature of 
the Producer milk provision by raising the current standard from one 
day's milk production to two days' milk production of a producer in 
each of the months of August through November. Additionally, Proposal 3 
also includes a proviso that, in the event a handler did not cause at 
least two days' milk production of a producer to touch base during each 
of the months of August through November, at least two days' production 
would need to touch base in each of the months of December through July 
before milk is eligible for diversion to nonpool plants. Proposal 7, 
proposed by the IDPA, seeks a 4-day touch base provision only for each 
of the months of August through March.
    (2) Diversion limits. Proposals 3 and 9 seek diversion limits that 
would be applicable year round but differ on the level proposed for the 
spring and summer months. Under Proposal 3, a 60 percent limit would be 
applicable in each of the months of August through February, and a 70 
percent limit would be applicable in each of the months of March 
through July. Alternatively, Proposal 9 would specify a 60 percent 
limit in each of the months of August through February, but an 80 
percent limit for each of the months of March through July. Proposal 7 
seeks only to change the months in which a diversion limit would be 
provided from the current 60 percent during each of the months 
September through February and have the 60 percent limit be applicable 
during each of the months of March through August.
    The witness representing the Cooperatives testified that the 
current provisions of the Mideast order do not adequately define the 
potential amount of milk that can be pooled on the order and attributed 
this shortcoming, in part, to the lack of adequate diversion limits. 
The witness also indicated that establishing a limit on the amount of 
producer milk that a pool plant can divert to a nonpool plant where 
none are now specified would correct these deficiencies of the order's 
pooling standards. The witness also cited the current touch base 
standard as contributing to the improper pooling of the milk of 
producers not actually serving the Class I needs of the market. The new 
2-day touch base standard offered by Proposal 3, indicated the witness, 
would need to be met before additional milk would be eligible for 
diversion to nonpool plants.
    Continental Dairy Products (Continental), a cooperative of dairy 
farmers with members whose milk is marketed and pooled on the Mideast 
order, indicated their support for amending the touch base standard as 
well as providing year-round diversion limits on producer milk. They 
noted that producer blend prices in the Mideast marketing area have 
been reduced by as much as $8 million in a single month because of 
inappropriate pooling standards. The pooling standards in the Mideast 
order do not currently require a physical and economic association with 
the marketing area, noted the witness, and therefore an enormous amount 
of milk has been pooled on the Mideast order.
    A witness from Prairie Farms, representing the positions of the 
Cooperatives, testified in support of Proposal 3. The witness testified 
that increasing the touch base provision would ensure that enough milk 
would be available to cover the day-to-day fluid needs of the market 
along with providing for adequate milk reserves. At the same time, said 
the witness, the proposal would reduce the ability to pool milk on the 
order that is not serving the markets fluid needs. The witness noted 
that their dairy farmer members have been financially harmed by the 
unwarranted additional supplies of milk being pooled on the order. The 
Cooperatives' witness stressed that pooling additional volumes of milk 
only serves to lower returns to Mideast producers and supplemental 
suppliers who are actually serving the fluid needs of the market every 
day.
    A witness appearing on behalf of MEMA also testified in support of 
Proposal 3.The MEMA witness related that in responding to changes in 
customer needs, in addition to variations in production, their need to 
secure additional volumes of milk for the fall months actually begins 
in August and continues through November. This, noted the witness, is 
because as schools return to session the demand for milk tends to 
increase.
    A witness appearing on behalf of MMPA testified in support of 
Proposal 3. The MMPA witness offered that increasing the touch base 
standard to 2-days' production better reflects the higher fluid needs 
of the market that exist during specific months of the year. The 
increase in demand for fluid milk attributed to school openings was 
also offered by the witness as an example of such increased demand 
beginning in August.
    MMPA also indicated support for the proviso in Proposal 3 that 
would establish a two-day touch base standard for each of the months of 
December through July for producer milk which did not meet the touch 
base standard in the preceding months of August through November. 
According to the witness, this feature of the touch base standard 
supports the concept that pooling standards be performance oriented and

[[Page 39881]]

more accurately identify the milk of those producers which actually 
service the fluid needs of the market.
    A witness from Dean also testified in general support of Proposal 
3. However, Dean offered a modification to Proposal 3 by endorsing a 3-
day touch base standard for producer milk. The witness provided an 
analysis on the effects of ``non-historic'' milk pooled on the Mideast 
order over the period of January 2001 through August 2001. This 
analysis concluded that the Mideast's Producer Price Differential (PPD) 
had been reduced by an average of 55 cents per hundredweight during 
this 8-month time period. The witness stressed that this loss of 
revenue is being borne by the producers who actually and regularly 
supply the fluid needs of the market. Accordingly, indicated the Dean 
witness, the pooling provision standards regarding producer milk need 
changing.
    A witness appearing on behalf of Suiza expressed similar general 
support for Proposal 3 and endorsed the Dean modification calling for a 
3-day touch base standard. Suiza was of the opinion that without a 
meaningful touch base standard, individual producer-suppliers do not 
actually have to perform by physically delivering milk to the Mideast 
market as a condition for pooling. Meaningful touch base provisions, 
noted Suiza, also provide handlers with reasonable assurance of 
performance while simultaneously ensuring that the milk of dairy 
farmers that actually serves the market is protected against lower 
returns caused by pooling unneeded milk. Additionally, the Suiza 
witness testified in support of specifying August as a month when lower 
diversion limits should be applicable. The witness also cited the 
opening of schools and the stresses on production from summer as 
reflections of increasing demand for Class I milk occurring during a 
time of generally lower milk production.
    A witness representing Scioto expressed general support for 
Proposal 3 but offered a 4-day touch base standard for each of the 
months of August through November and a 2-day touch base standard for 
each of the months of December and January.
    Testifying in support of Proposal 7, the IDPA witness stressed that 
increasing the touch base standard to 4 days' production should be 
applicable for each of the months of August through March and providing 
a 60 percent diversion limit for each of these same months would be 
beneficial to Mideast producers. The witness indicated that a physical 
delivery of milk to the order's pool plants is a key indicator of milk 
being a legitimate part of the market. The witness expressed support of 
the need for an emergency decision because their returns are being 
lowered by pooling milk that should not be considered as part of the 
Mideast market.
    Proposal 9, offered by the Handlers, seeks to limit the amount of 
milk that could be diverted from a pool plant to a nonpool plant. The 
proposal would set a 60 percent limit during each of the months of 
August through February and an 80 percent limit during each of the 
months of March through July. This proposal was abandoned by its 
proponents. Instead, the proponents agreed to support Proposal 3 
offered by the Cooperatives. While the Handlers indicated support for 
Proposal 3, they were of the opinion that adopting a 3-day touch base 
standard instead of a 2-day touch base standard would be best. They 
indicated a 3-day touch base standard would contribute to a more 
accurate identification of the milk of producers that actually supply 
the fluid milk needs of the Mideast marketing area.
    The witness representing Scioto testified in support of Proposal 9. 
Proposal 9 limits diversions to a percentage of the milk physically 
received at a plant, noted the witness. The concept of allowing 
diversions based on milk physically received is logical, said the 
witness, and is preferred by most of the dairy industry. The witness 
was also of the opinion that August should be included as a month that 
provides for a lower level of diversions to nonpool plants. The 
combination of schools opening in the middle of August together with 
the typically hot days of the summer season, cited the witness, has 
negative impact on milk production and therefore the order should have 
lower limits on the amount of milk that can divert to nonpool plants. 
Diversion limits of 60 percent during each of the months of August 
through February and 80 percent during each of the months of March 
through July would also assure consumers and fluid milk processing 
plants that their needs will be met, concluded the Scioto witness.
    All milk marketing orders, including the Mideast, provide some 
standard for identifying those producers who supply the market with 
milk. To qualify as a producer on most orders, including the Mideast, a 
producer can be associated with a market by making a delivery to a 
market's pool plant. Additionally, other standards need to be met 
before the milk of that producer is eligible to be diverted to a 
nonpool plant and have that diverted milk pooled and priced under the 
terms of the order. Currently, the Mideast order's standard is that one 
day's production of milk of a producer be delivered to a pool plant 
before that plant can divert the milk of the producer to a nonpool 
plant.
    The touch base standard of an order establishes an initial 
association by the producer and the milk of the producer with the 
market. Markets that exhibit a higher percentage of milk in fluid use 
generally have touch base standards specifying more frequent physical 
milk deliveries to pool plants. In this way, the touch base provision 
serves to maintain the integrity of the order's performance standards. 
When a touch base standard is too low, the potential for disorderly 
marketing conditions arises on two fronts. First, pool plants are less 
assured of milk supplies. Second, and most important for the Mideast 
marketing area, an inadequate touch base standard provides the means 
for the milk of producers, not providing a service in meeting the fluid 
needs of the market, to be pooled on the order. This reduces the 
order's blend price paid to producers who are providing service to the 
Class I market.
    The record of this proceeding indicated various opinions about what 
the proper touch base standard for the Mideast order should be and when 
it should be applicable. These opinions ranged from 2 days' to as much 
as 4 days' milk production of a producer. All agree that August would 
be a more appropriate beginning month for its applicability. The more 
compelling observation is that all participants in this proceeding 
recognized the need for, and supported increasing, the touch base 
standard. The issue for the Department is reduced to deciding which 
standard best serves the needs of the Mideast order.
    On the basis of the evidence, this decision supports adopting a 2-
day touch base standard and having this standard be applicable 
beginning in August. While a higher standard would tend to further 
maintain the integrity of the order's performance standards, adopting a 
higher touch base standard may result in the uneconomic movement of 
milk solely for the milk of producers to meet a pooling standard. 
Additionally, the Mideast order currently provides that the Market 
Administrator may adjust the touch base standard in the same way the 
order provides for the Market Administrator to adjust the performance 
standards for supply plants and the diversion limits for all pool 
plants. Other changes adopted in this decision will also serve to more 
accurately identify the milk of producers who should be pooled on the 
order. Together with the Market

[[Page 39882]]

Administrator's authority to administratively change the touch base 
standard, sufficient safeguards are provided to accomplish both needs.
    Provisions for diverting milk are a desirable and needed feature of 
an order because they facilitate the orderly and efficient disposition 
of the market's milk not used for fluid use. When producer milk is not 
needed by the market for Class I use, its movement to nonpool plants 
for manufacturing, without loss of producer milk status, should be 
provided for. Preventing or minimizing the inefficient movement of milk 
solely for pooling purposes need also be reasonably accommodated. 
However, it is just as necessary to safeguard against excessive milk 
supplies becoming associated with the market through the diversion 
process.
    A diversion limit establishes the amount of producer milk that may 
be associated with the integral milk supply of a pool plant. With 
regard to the pooling issues of the Mideast order, it is the lack of 
diversion limits to nonpool plants that significantly contributes to 
the pooling of milk on the order that does not provide service to the 
Class I market. Such milk is not a legitimate part of the reserve 
supply of the plant.
    Milk diverted to nonpool plants is milk not physically received at 
a pool plant. However, it is included as a part of the total producer 
milk receipts of the diverting plant. While diverted milk is not 
physically received at the diverting plant, it is nevertheless an 
integral part of the milk supply of that plant. If such milk is not 
part of the integral supply of the diverting plant, then that milk 
should not be associated with the diverting plant. Therefore, such milk 
should not be pooled.
    Associating more milk than is actually part of the legitimate 
reserve supply of the diverting plant unnecessarily reduces the 
potential blend price paid to dairy farmers. Additionally, pooling milk 
far in excess of reasonable needs of the market due to the lack of 
diversion limits only provides for the association of milk with the 
market by what is often described as ``paper-pooling'' and not by 
actual service in meeting 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.
    The lack of a diversion limit standard applicable to pool plants 
opens the door for pooling much more milk and, in theory, an infinite 
amount of milk on the market. While the potential size of the pool 
should be established by the order's pooling standards, the lack of 
diversion limits renders the potential size of the pool as undefined. 
With respect to the marketing conditions of the Mideast marketing area 
evidenced by the record, this decision finds that the lack of year-
round diversion limits on producer milk has caused more milk to be 
pooled on the order than can reasonably be considered as properly 
associated with the market.
    The lack of a diversion limit standard applicable for diversions to 
nonpool plants has also resulted in the pooling of milk that does not 
provide a service in meeting the Class I needs of the Mideast marketing 
area. Proposal 7 offers reasonable diversion limit standards that would 
be adjusted seasonally to reflect the changing supply and demand 
conditions of the Mideast marketing area. Therefore, a 60 percent 
diversion limit standard for each of the months of August through 
February and a 70 percent diversion limit standard for each of the 
months of March through July should be adopted immediately. To the 
extent that these diversion limit standards may warrant adjustments, 
the order already provides the Market Administrator with authority to 
consider and act to adjust these diversion standards as marketing 
conditions may warrant by the Market Administrator.
    As mentioned above, the Mideast order currently provides for the 
diversion of milk from a pool plant to a second pool plant. However, 
the order does not consider such diversions in the total diversion 
limit established for pool plants. It is through this shortcoming of 
the order's pooling standards that the intent to only pool the milk of 
producers who are consistently serving the Class I demands of the 
market are circumvented. In this regard, a pool plant is able to 
increase its milk diversions to a nonpool plant through diversions to a 
second pool plant. The amendment provided below in the Producer milk 
definition of the order provides the necessary technical correction 
that will include diversions to other pool plants in the manner no 
differently than diversions to nonpool plants.
    Several changes to the pooling standards contained in the Producer 
milk definition of the order are needed to maintain the integrity of 
the other amendments made in this decision affecting the performance 
standards for supply plants. As indicated earlier, the record indicates 
that certain pooling provisions of the Mideast order are either 
inadequate or unnecessary. With respect to the pooling standards of the 
order as they are contained in the Producer milk provision, this 
decision finds that certain features of the provision are inadequate. 
These include:
    (1) The touch base standard currently requiring one-days' milk 
production of a producer be delivered to a pool plant is not providing 
a sufficient standard in identifying those producers and the milk of 
those producers who are serving the fluid needs of the market.
    (2) The lack of year-round diversion limits for all pool plants has 
resulted in the ability to pool far more milk than can be reasonably 
part of the reserve supply of the plants pooling such milk. The lack of 
a diversion limit for each and every month of the year has left the 
potential size of the marketwide pool undefined. This inadequacy of the 
Mideast order has resulted, too, in pooling the milk of producers who 
are not providing a service to the Class I needs of the market. This 
inadequacy contributes to the unnecessary erosion of the order's blend 
price caused by pooling additional volumes of milk used in lower priced 
classes which, in turn, reduces the market's Class I utilization 
percentage of milk.
    (3) The lack of limiting the ability of a pool plant to divert milk 
to a second pool plant in the same manner as diverted milk to a nonpool 
plant contributes and magnifies the impact of pooling the milk of 
producers who provide no service to the Class I needs of the market. 
The receipt of a lower blend price to those producers who are serving 
the Class I needs of the market is found to be unwarranted and 
contributes to disorderly marketing conditions in the Mideast marketing 
area.
2. Rate of Partial Payment
    Proposal 4, seeking to increase the rate of partial payment for 
milk, should not be adopted. This proposal, offered by DFA, would 
increase the rate of partial payment to producers and cooperative 
associations for milk delivered during the first 15 days of a month to 
110 percent of the previous month's lowest class price.
    The intent of this proposal, according to the DFA witness, is to 
improve the cash flow of dairy farmers pooled on the Mideast order. 
According to DFA, a partial payment that more closely equals the final 
payment for milk would more accurately reflect the true value of the 
milk delivered to handlers during the first 15 days of the month. The 
DFA witness testified that the partial payment rate, as a share of the 
total payment for milk, has widened since the formation of the 
consolidated Mideast marketing area. The witness stressed that 
producers need a more consistent cash flow than they are

[[Page 39883]]

currently experiencing and adopting a higher partial payment rate would 
meet this need.
    The DFA witness provided data and an analysis they maintain 
indicates that since the implementation of order reform on January 1, 
2000, the amount of the partial payment received by producers relative 
to the total payment for milk each month has been reduced when compared 
to the pre-reform orders. The analysis consisted of approximating a 
weighted average blend price as a proxy for a comparable order from the 
pre-reform orders' information. The witness indicated that data for a 
36-month period, from January 1997 through December 1999, was compared 
to the current Mideast order data of 17 months--the number of months 
then available for which data existed.
    Since the current Mideast order provides 4 classes of milk use, the 
DFA witness indicated they used the pre-reform order's Class III-A 
price as a proxy for the lowest class price so that a comparison could 
be made between the pre-reform and post-reform partial payment 
relationships to the total price for the month. The result of this 
analysis, concluded the DFA witness, clearly indicates that by using 
the lowest class price of the previous month as the rate of partial 
payment, the relationship between the partial and total payment for 
milk during the month has widened since the implementation of order 
reform.
    Three other witnesses testified in support of amending the partial 
payment provision. These witnesses included an Ohio dairy farmer, a 
representative of MMPA, and Scioto. All three witnesses testified that 
their cash flow, or the cash flow of their members, has deteriorated 
since the implementation of order reform.
    Opposition by handler interests for increasing the rate of partial 
payment was significant. However, handler interests did not counter the 
expressed need for improvement in producers' cash flow positions. 
Rather, handler interests focused on presenting the impact to milk 
processors if a higher partial payment rate was adopted.
    A representative of Leprino Foods (Leprino), a national cheese-
processing firm which purchases and pools milk on the Mideast order, 
testified that disparity between the partial and final payments is a 
combination of a failure to blend the pool's higher use values into the 
partial payment and using the lowest class price of the previous month. 
The witness argued that increasing the rate of partial payment would 
merely transfer the burden of producers' cash flow concerns to 
processors. The Leprino witness was also of the opinion that increasing 
the rate of partial payment would violate minimum pricing principles 
used by Federal milk orders. In this regard, the witness noted that 
Class III and IV products compete for sales in a national market, 
unlike milk used in Class I products. The witness maintained that the 
resulting differences in the rate of partial payment between orders 
would cause disparate economic positions for handlers competing for 
sales in areas where the rate of partial payment is lower.
    A witness representing the Handlers also testified in opposition to 
increasing the rate of partial payment. The witness provided an 
analysis that evaluated the financial impact on handlers based on the 
economic principle of the time value of money. In the analysis, the 
Handlers' witness presented the financial impacts to handlers that 
would likely result by advancing or delaying the partial payment. 
Notwithstanding the desire or need of producers to improve their cash 
flow positions, the witness was of the opinion that the cash flow 
problem of producers would better be addressed through adoption of 
other proposals under consideration in this proceeding.
    Because of initial confusion in the data presented at the hearing 
regarding appropriate historical prices and the months for which they 
were applicable, the Department reconstructed noticed data that 
recreated the intended analysis presented by witnesses. The 
Department's reconstruction relied, in part, on the partial payment 
provisions of the pre-reform orders. The Department used the previous 
month's Class III price of the pre-reform orders as the lowest class 
price because the Class III price was used then to set the rate of 
partial payment. In this regard, comparing partial payment relationship 
outcomes using actual historical provisions provided for comparing pre- 
and post-reform partial payment relationships as to the total payment 
for milk in a month.
    Even with the limited amount of data available since the 
implementation of order reform, the Department's comparison of pre- and 
post-reform partial payment relationships to total payments does appear 
to support the observations made by the DFA witness. However, this 
initial observation alone is not sufficient basis for changing the rate 
of the partial payment. Some significant differences in certain key 
assumptions were made by the proponents of Proposal 4 from those 
assumptions used by the Department in comparing pre- and post-reform 
time periods.
    Also of concern is the limitations inherent in comparing a 36-month 
period to one of only 17 months. Additionally, the 36-month time period 
shows price trends rising and falling, while the 17-month time shows a 
period of generally an upward trend in prices. This may suggest that 
there has not yet been a sufficient period of elapsed time to infer the 
impact of downward trends in prices and the possible effect on the 
relationship between the partial and final payments to producers.
    With regard to Leprino's concern about uniformity of partial 
payment rates between orders, the current milk orders have a variety of 
partial payment rates. Several orders use a partial payment rate based 
on a percent of the previous month's blend price, and the Florida 
order, for example, provides for two partial payments. Additionally, 
the Western and Arizona-Las Vegas orders, both of which pool 
significant volumes of milk used in cheese, provide for partial payment 
rates of 120 and 130 percent, respectively, of the previous month's 
lowest class price.
    There may be times when the rate of partial payment exceeds the 
balance due for the month. In this regard, handler interests point to 
this outcome as requiring them to pay more for milk for part of the 
month than its actual value for the month. It is appropriate to note 
that this exact outcome occurred several times during the pre-reform 
36-month period used by DFA. Thus, it is determined that the concerns 
of handlers in this regard are unpersuasive.
    The DFA witness noted that deductions authorized by producers are 
normally made in the final payments for milk. There could be times when 
the amount deducted from the final payment exceeds the amount of the 
final payment. If the deductions are high enough for this to happen, it 
would be reasonable to conclude that producers desiring to even out 
their cash flow would opt to allow a portion of their deductions to be 
made with receipt of the partial payment, as the order allows.
    The partial payment provision in Federal orders is a minimum 
requirement placed on handlers to pay producers for milk delivered. It 
is important to note that cooperatives and handlers are not restricted 
to paying only one partial payment at the rate specified in the order; 
partial payments for milk can be made more often. Additionally, 
cooperatives and handlers are also at liberty to negotiate agreements 
for more frequent billings for milk and in payments for milk above the 
minimum established by the order. As made evident by the record, more

[[Page 39884]]

flexible partial payment options are available to both producers and 
handlers than relying solely on changing the minimum payment provision.
    As the Leprino witness noted, DFA's proposal does not incorporate 
or blend the higher-valued uses of milk in their analysis. In response 
to this observation, the Department compared the relationships between 
the partial and total payment using 90 percent of the previous month's 
Mideast blend price. Interestingly, if the desired objective is to more 
closely approximate the partial payment rate using the 36-month period 
before order reform, a 90 percent rate of the previous month's blend 
price seems to accomplish this. Nevertheless, the same limitations and 
concerns mentioned above prevent a finding that the Mideast order's 
rate for partial payment should be increased.
    This decision finds general agreement with the Handlers' opinion 
that the cash flow concerns of producers would be better served by the 
adoption of other proposals considered in this proceeding. Other 
amendments adopted in this decision affecting the pooling of milk in 
the Mideast order will likely end the unnecessary erosion in the blend 
price received by Mideast producers. Higher expected blend prices will 
result from more accurately identifying those producers and the milk of 
those producers who actually serve the Class I needs of the market. 
Similarly, the relationship between the partial payment and the total 
price received by producers may change by the adoption of these pooling 
standard amendments. Accordingly, a finding that the rate of partial 
payment to producers by handlers should be increased is not supported 
by the evidence contained in the record of this proceeding.
3. Conforming Changes
    One conforming change is made to the pool plant definition of the 
order. Words to implement the consolidated order were needed when the 
order first became effective on January 1, 2000. Since the order has 
become effective such wording is no longer needed to effectuate the 
implementation of the order. The removal of the wording presented below 
is self explanatory.
4. Emergency Marketing Conditions
    Evidence presented at the hearing establishes that the pooling 
standards of the Mideast order are inadequate and result in the erosion 
of the blend price received by producers who are serving the Class I 
needs of the market and should be changed on an emergency basis. The 
unwarranted erosion of such producers' blend price stems from improper 
performance standards as they relate to pool supply plants and the lack 
of diversion limits for pool plant diversions to pool and nonpool 
plants. These shortcomings of the pooling provisions have allowed milk 
to be pooled on the order that does not provide a reasonable or 
consistent service to meeting the needs of the Class I market as a 
standard for enjoying the pricing benefits arising from Class I sales 
in the Mideast marketing area. Consequently, it is determined that 
emergency marketing conditions exist and the issuance of a recommended 
decision is therefore being omitted. The record clearly establishes a 
basis as noted above for amending the order on an interim basis and the 
opportunity to file written exceptions to the proposed amended order 
remains.
    In view of this situation, an interim final rule amending the order 
will be issued as soon as the procedures are completed to determine the 
approval of producers.

Rulings on Proposed Findings and Conclusions

    Briefs and proposed findings and conclusions were filed on behalf 
of certain interested parties. These briefs 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 Mideast order was first issued. The 
previous findings and determinations are hereby ratified and confirmed, 
except where they may conflict with those set forth herein.
    (a) The interim marketing agreement and the interim 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 interim 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 interim 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 Mideast 
marketing area, which have 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

    The month of October, 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 Mideast 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.
    It is hereby directed that a referendum be conducted and completed 
on or before the 30th day from the date this decision is issued, in 
accordance with the procedure for the conduct of referenda (7 CFR 
900.300-311), to determine whether the issuance of the order, as 
amended and as hereby proposed to be amended, regulating the handling 
of milk in the Mideast marketing area is approved by producers, as 
defined under the terms of the order (as amended and 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.
    The representative period for the conduct of such referendum is 
hereby determined to be October, 2001.
    The agent e agent of the Department to conduct such referendum is 
hereby

[[Page 39885]]

designated to be David Z. Walker, Market Administrator.

List of Subjects in 7 CFR Part 1033

    Milk marketing orders.

    Dated: June 4, 2002.
A.J. Yates,
Administrator, Agricultural Marketing Service.

Interim Order Amending the Order Regulating the Handling of Milk in the 
Mideast 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 Mideast 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 Mideast 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 1033 continues to read as 
follows:

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

PART 1033--MILK IN THE MIDEAST MARKETING AREA

    1. Section 1033.7 is amended by revising ``; and'' at the end of 
paragraph (c)(1)(iii) to read ``.'', removing paragraph (c)(1)(iv), 
revising paragraphs (c)(2), (c)(4), and (d)(2), removing the words ``or 
its predecessor orders'' in paragraph (e) introductory text, and 
removing paragraph (h)(7) to read as follows:


Sec. 1033.7  Pool plant.

* * * * *
    (c) * * *
    (2) The operator of a supply plant located within the marketing 
area may include deliveries to pool distributing plants directly from 
farms of producers pursuant to Sec. 1033.13(c) as up to 90 percent of 
the supply plant's qualifying shipments. Handlers may not use shipments 
pursuant to Sec. 1033.13(c) to qualify plants located outside the 
marketing area.
* * * * *
    (4) Shipments used in determining qualifying percentages shall be 
milk transferred or diverted and physically received by pool 
distributing plants, less any transfers or diversions of bulk fluid 
milk products from such pool distributing plants.
* * * * *
    (d) * * *
    (2) The 30 percent delivery requirement may be met for the current 
month or it may be met on the basis of deliveries during the preceding 
12-month period ending with the current month. Shipments used in 
determining qualifying shipments in meeting this 30 percent delivery 
requirement shall be milk transferred or diverted and physically 
received by pool distributing plants, less any transfers or diversions 
of bulk fluid milk products from such pool distributing plants.
* * * * *
    2. Section 1033.13 is amended by revising paragraph (d)(2), re-
designating paragraphs (d)(3) through (d)(6) as paragraphs (d)(4) 
through (d)(7), adding a new paragraph (d)(3), and revising newly 
redesignated paragraph (d)(4) to read as follows:


Sec. 1033.13  Producer milk.

* * * * *
    (d) * * *
    (2) The equivalent of at least two days' milk production is caused 
by the handler to be physically received at a pool plant in each of the 
months of August through November;
    (3) The equivalent of at least two days' milk production is caused 
by the handler to be physically received at a pool plant in each of the 
months of December through July if the requirement of paragraph (d)(2) 
of this section in each of the prior months of August through November 
are not met, except in the case of a dairy farmer who marketed no Grade 
A milk during each of the prior months of August through November.
    (4) Of the total quantity of producer milk received during the 
month (including diversions but excluding the quantity of producer milk 
received from a handler described in Sec. 1000.9(c) or which is 
diverted to another pool plant), the handler diverted to nonpool plants 
not more than 60 percent in each of the months of August through 
February and 70 percent in each of the months of March through July.
* * * * *

Marketing Agreement Regulating the Handling of Milk in the Mideast 
Marketing Area

    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. 1033.1 to 1033.86 all inclusive, of the 
order regulating the handling of milk in the Mideast marketing area 
(7 CFR 1033 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 October, 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.

[[Page 39886]]

    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. 02-14455 Filed 6-10-02; 8:45 am]
BILLING CODE 3410-02-P