[Federal Register Volume 67, Number 173 (Friday, September 6, 2002)]
[Proposed Rules]
[Pages 56936-56944]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-22686]


 ========================================================================
 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
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 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. 173 / Friday, September 6, 2002 / 
Proposed Rules  

[[Page 56936]]



DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Part 1124

[Docket No. AO-368-A29; DA-01-06]


Milk in the Pacific Northwest 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 Pacific Northwest Federal milk order. Specifically, 
this tentative decision establishes a cooperative manufacturing plant 
provision and ``system pooling'' for cooperative manufacturing plants. 
Additionally, this decision establishes a standard for the number of 
days during the month that the milk of a producer would need to be 
delivered to a pool plant in order for the rest of the milk of that 
producer to be eligible to be diverted to nonpool plants. A year-round 
diversion limit of 80 percent of total receipts for pool plants also is 
established. Public comments on the amendments adopted in 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 must be submitted on or before November 5, 2002.

ADDRESSES: Comments (6 copies) should be filed with the Hearing Clerk, 
Room 1083, South Building, United States Department of Agriculture, 
Washington, DC 20250. Reference should be made to the title of action 
and docket number.

FOR FURTHER INFORMATION CONTACT: Gino M. Tosi, Marketing Specialist, 
Order Formulation and Enforcement Branch, USDA/AMS/Dairy Programs, Stop 
0231--Room 2971, 1400 Independence Avenue, SW., Washington, DC 20250-
0231, (202) 690-1366, e-mail address: [email protected].

SUPPLEMENTARY INFORMATION: This administrative action is governed by 
the provisions of Sections 556 and 557 of Title 5 of the United States 
Code and, therefore, is excluded from the requirements of Executive 
Order 12866.
    The amendments to the rules proposed herein have been reviewed 
under Executive Order 12988, Civil Justice Reform. They are not 
intended to have a retroactive effect. If adopted, the proposed 
amendments would not preempt any state or local laws, regulations, or 
policies, unless they present an irreconcilable conflict with this 
rule.
    The Agricultural Marketing Agreement Act of 1937, as amended (7 
U.S.C. 601-674), provides that administrative proceedings must be 
exhausted before parties may file suit in court. Under section 
608c(15)(A) of the Act, any handler subject to an order may request 
modification or exemption from such order by filing with the Department 
of Agriculture (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 Act and Paperwork Reduction Act

    In accordance with the Regulatory Flexibility Act (5 U.S.C. 601 et 
seq.), the Agricultural Marketing Service has considered the economic 
impact of this action on small entities and has certified that this 
proposed rule will not have a significant economic impact on a 
substantial number of small entities. For the purpose of the Regulatory 
Flexibility Act, a dairy farm is considered a ``small business'' if it 
has an annual gross revenue of less than $750,000, and a dairy products 
manufacturer is a ``small business'' if it has fewer than 500 
employees. For the purposes of determining which dairy farms are 
``small businesses,'' the $750,000 per year criterion was used to 
establish a production guideline of 500,000 pounds per month. Although 
this guideline does not factor in additional monies that may be 
received by dairy producers, it should be an inclusive standard for 
most ``small'' dairy farmers. For purposes of determining a handler's 
size, if the plant is part of a larger company operating multiple 
plants that collectively exceed the 500-employee limit, the plant will 
be considered a large business even if the local plant has fewer than 
500 employees.
    During May 2002, there were 972 producers pooled on, and 86 
handlers regulated by, the Pacific Northwest order. Based on these 
criteria, 596 producers and 49 handlers would be considered small 
businesses. The adoption of the proposed pooling standards service to 
revise established criteria that determine those producers, producer 
milk, and plants that have a reasonable association with, and are 
consistently serving the fluid needs of, the Pacific Northwest 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 that determine those that are eligible 
to share in the revenue which 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 proposed amendments will not have a significant economic 
impact on a substantial number of small entities.
    A review of reporting requirements was completed under the 
Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35). It was 
determined that these proposed amendments would have no impact on 
reporting, record keeping, 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

[[Page 56937]]

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 from 
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. The rulemaking proceeding does not 
duplicate, overlap, or conflict with any existing Federal rules.
    Prior document in this proceeding: Notice of Hearing: Issued 
November 14, 2001; published November 19, 2001 (66 FR 57889).

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 Pacific Northwest marketing area. This notice is issued 
pursuant to the provisions of the Agricultural Marketing Agreement Act 
and the applicable rules of practice and procedure governing the 
formulation of marketing agreements and marketing orders (7 CFR part 
900).
    Interested parties may file written exceptions to this decision 
with the Hearing Clerk, U.S. Department of Agriculture, Washington, DC 
20250, November 5, 2002. Six (6) copies of the exceptions should be 
filed. All written submissions made pursuant to this notice will be 
made available for public inspection at the office of the Hearing Clerk 
during regular business hours (7 CFR 1.27(b)).
    The proposed amendments set forth below are based on the record of 
a public hearing held at Seattle, Washington, on December 4, 2001, 
pursuant to a notice of hearing issued November 14, 2001 (66 FR 57889).
    The material issues on the record of hearing relate to:
    1. Establishing a touch-base provision and year-round diversion 
limits for producer milk.
    2. Establishing a cooperative pool manufacturing plant provision 
and ``system'' pooling for cooperative manufacturing plants.
    3. Determining if 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. Standards for Producer Milk--the Touch Base Standard

    A proposal seeking to change certain standards and features of the 
Producer milk provision of the order should be adopted immediately. The 
changes include: (1) Establishing a year-round standard for the number 
of days in each month that a dairy farmer's milk production needs to be 
delivered to a pool plant in order for the rest of the milk of that 
dairy farmer to be eligible for diversion to nonpool plants. This 
standard is often referred to as a ``touch-base'' provision. A 3-day 
touch-base standard is adopted in this decision. (2) Setting a limit on 
the amount of milk that can be diverted from pool plants to nonpool 
plants in each month of the year. Currently, a diversion limit of 99 
percent is applicable in each of the months of March through August, 
while a diversion limit of 80 percent is applicable for each of the 
months of September through February. The adopted year-round diversion 
limit is 80 percent of all milk receipts, including diversions, and 
continues the current diversion limits that were adjusted by the Market 
Administrator. (3) Providing authority to the Market Administrator to 
adjust the touch-base standard.
    Proposal 2, offered by Northwest Milk Marketing Federation (NMMF), 
Northwest Dairy Association (NDA), and the Tillamook County Creamery 
Association (TCCA), seeks to modify the order's pooling standards by 
establishing a 6-day touch-base standard during the month in order for 
the rest of the milk of a dairy farmer to be eligible to be diverted to 
nonpool plants and by establishing an 80 percent year-round limit on 
the amount of milk received by a pool plant that can be diverted to 
nonpool plants. NMMF, NDA, and TCCA are organizations owned by dairy-
farmer members that supply a significant portion of the milk needs of 
the Pacific Northwest marketing area and whose milk is pooled on the 
Pacific Northwest order.
    NDA, a proponent of Proposal 2, testified that pooling standards 
must be changed in order to prevent what they described as 
``artificial'' pooling or ``pool loading'' that has been occurring in 
the Pacific Northwest order since the implementation of Federal order 
reform. The NDA witness noted that when milk is pooled on the order but 
never physically received, service to the Class I market is not 
demonstrated. To allow the pooling of milk which does not provide 
service to the Class I needs of the market only lowers returns to dairy 
farmers whose milk is actually supplying the local Class I market. The 
witness asserted that this occurs because the order's pooling standards 
are inadequate.
    According to the NDA witness, pooling provisions that were once 
applicable in Federal orders more accurately identified the milk of 
producers serving the Class I market. These provisions included a 
touch-base standard that specified the minimum number of days during 
the month that a dairy farmer's milk needed to be received at a pool 
plant in order to be eligible to divert to nonpool plants the rest of 
the milk of that dairy farmer. In addition, the witness noted that the 
``dairy farmers for other markets'' provision, that was applicable 
prior to order reform, provided that a dairy farmer would not be 
considered a producer on the order unless all of the farmer's milk was 
pooled on the order during the month. Also, the witness noted, milk was 
valued and priced by its relative location to the market prior to order 
reform. Milk farther from plants in the marketing area would have a 
lower value than milk located nearer to plants located in the marketing 
area, stressed the witness.
    The NDA witness testified that provisions prior to Federal order 
reform deterred milk that did not serve the Order's Class I market from 
being pooled on the Pacific Northwest order. The witness explained that 
milk located outside of the marketing area and pooled on the order 
received the Pacific Northwest blend price minus the applicable 
location adjustment specified in the order. This measure, the witness 
said, made it unprofitable for milk located far from the marketing area 
to be pooled on the Pacific Northwest order. However, the witness 
emphasized that Federal order reform adopted a Class I price surface 
that does not provide for location adjustments in determining a 
relative value for milk to the market. According to the witness, the 
newly adopted Class I price surface establishes fixed values for milk 
regardless of its use for fluid or manufactured products. The witness 
characterized that this change effectively created a ``backward 
incentive'' to move milk from one order's bottling plant to a 
manufacturing

[[Page 56938]]

plant located farther away in another marketing order.
    The NDA witness referred to a Cornell University economic model 
that was used in formulating the current Class I price surface. The 
model, according to the witness, produced a price surface map that 
valued milk in the east higher than milk in the west, inferring that 
milk should move from west to east. The witness asserted that when 
establishing the new Class I price surface, the Department did not take 
into account the variable price surface used by the model for 
manufactured products. The witness noted that while the Class I 
differential at Salt Lake City, Utah, is the same as in Seattle, 
Washington ($1.90 per hundredweight), the Pacific Northwest order blend 
price is often higher than the Western order blend price. According to 
the witness, the combined effect of fixed Class I differential values 
and blend price differences causes milk from Utah to move west to the 
Pacific Northwest, instead of moving east as predicted in the Cornell 
model.
    The witness concluded that this movement of milk has resulted in 
disorderly market conditions in the Pacific Northwest and Western 
orders because the price surface provides an inappropriate incentive to 
move milk to manufacturing plants in the Pacific Northwest order where 
a higher Class I value prevails, rather than to bottling plants in the 
Western order where a lower Class I value prevails. The witness 
testified that the pooling provisions of the Pacific Northwest order 
need revision to correct disorderly market conditions.
    NMMF's witness, testifying in support of Proposal 2, stated that 
the proposal is designed to correct unintended consequences generated 
by Federal order reform regarding the manner in which the producer 
location value of milk is determined. The witness testified that prior 
to order reform, location adjustments also acted as an effective means 
of identifying the producers who consistently served the Class I needs 
of the market. The witness testified that Federal order reform also 
established a new Class I price structure that reflected supply and 
demand conditions for fluid milk in every county of the United States. 
The witness asserted that this new structure uses the same Class I 
pricing locations to adjust pool draws on all milk regardless of how 
that milk is utilized.
    According to the NMMF witness, under the new pricing system, milk 
that is diverted from plants in the marketing area and delivered 
hundreds of miles away can be valued at the same price as milk at the 
plant from which the milk was diverted. Value is then adjusted, the 
witness said, by differences in the level of the Class I differentials 
where the milk is actually delivered. According to the witness, this 
demonstrates a lack of economic consistency.
    The NMMF witness also testified that millions of dollars have been 
transferred from dairy farmers who actually supply the fluid needs of 
the Pacific Northwest order to dairy farmers located in Southern Idaho 
and Utah who do not supply the local Class I market. Also, data was 
presented by the witness to demonstrate that when the milk of producers 
distant to the market is pooled on the Pacific Northwest order but 
never physically received at a Pacific Northwest pool plant, the milk 
of those distant producers receives a share of the Class I proceeds 
without the producers ever actually supplying milk to meet the Class I 
needs of the market.
    According to the NMMF witness, the 80 percent diversion limit 
recommended in Proposal 2 would permanently continue the Market 
Administrator's February 2001 temporary revision to the marketing 
order. According to the witness, the 80 percent diversion limit has 
been operating well and should become the order's adopted standard for 
producer milk.
    The NMMF witness also spoke on the merits of instituting a 6-day 
touch-base standard. The witness was of the opinion that producer milk 
standards should be linked to the order's supply plant performance 
standard of 20 percent. According to the witness, 6 days of a dairy 
farmer's milk production per month is equal to 20 percent of monthly 
production and is consistent with the 20 percent performance standard 
applicable for pool supply plants.
    Dairy Farmers of America (DFA), a supporter of Proposal 2, 
testified about changes in the marketplace resulting from the new Class 
I price surface implemented under Federal order reform. It was DFA's 
opinion that the pooling of milk not serving the Class I market is 
inconsistent with Federal order policy. Returns to producers who 
regularly supply the Class I market are unnecessarily reduced when milk 
that does not service the Class I market is pooled, said the witness.
    The DFA witness also testified that milk not actually supplying the 
Class I needs of the market but sharing in the revenue generated from 
fluid milk sales is an indicator of faulty pooling provisions. The 
witness asserted that if the current pooling standards are not amended, 
local dairy farmers who are actually supplying the local Class I market 
will continue to receive lower returns.
    The DFA witness testified that the Pacific Northwest order's 
current diversion limit standard of 99 percent for certain months is 
inadequate because of the potential volume of milk that could be pooled 
on the order. According to the witness, it is this shortcoming of the 
current pooling provisions that has allowed milk which performs no 
reasonable service in meeting fluid milk demands to be pooled on the 
Pacific Northwest order. In this regard, DFA thought it was appropriate 
to set a limit on the amount of producer milk that pool plants can 
divert to nonpool plants consistent with the Market Administrator's 
temporary revision. The DFA witness indicated that a year-round 
diversion limit of 80 percent would be reasonable in light of the 
marketing area's Class I use of milk. The witness also supported the 6-
day touch-base provision of Proposal 2 because it would better identify 
the milk of those producers that actually serve the Class I needs of 
the market.
    Two Washington State dairy farmers also testified in support of 
Proposal 2. One dairy farmer asserted that Proposal 2 would correct 
what the witness described as a loophole in the Pacific Northwest 
pooling provisions that allows milk which does not serve the fluid 
market to be pooled on the Pacific Northwest order. The witness 
maintained that current provisions are contributing to the loss of 
millions of dollars to Washington State dairy farmers. The witness also 
stated that adopting Proposal 2 would provide for restoring the orderly 
marketing of milk in the Pacific Northwest and promote trust in the 
Federal milk order program. A second dairy farmer testified that 
disorderly marketing conditions are demonstrated when the blend price 
is reduced through what the witness described as manipulation of the 
order's pooling standards.

2. Standards for Pool Plants--Cooperative Pool Manufacturing Plant

    Several amendments to the Pool plant provision of the Pacific 
Northwest order should be adopted immediately. Certain inadequacies and 
unneeded features of the current Pool plant provision are contributing 
to disorderly marketing conditions and unwarranted erosion of the blend 
price received by those producers who actually supply milk to satisfy 
the fluid demands of the Pacific Northwest marketing area. 
Specifically, the following changes to the Pool plant provision should 
be adopted immediately: (1) Eliminate a supply

[[Page 56939]]

plant feature applicable to cooperative supply plants; (2) establish a 
``cooperative manufacturing plant'' provision; and (3) provide for two 
or more cooperative manufacturing plants to operate as a ``system'' for 
the purpose of meeting applicable performance standards.
    A cooperative manufacturing plant is a type of pool supply plant 
and will be defined as a manufacturing plant, owned and operated by a 
cooperative association or a wholly owned subsidiary, that delivers at 
least 20 percent of producer-member milk shipments either directly from 
farms or supply plants owned by the same cooperative association and is 
located within the marketing area. A cooperative manufacturing plant 
will have the same performance standards applicable to a supply plant 
specifying that 20 percent of total milk receipts must be supplied to a 
pool distributing plant in order to pool all other physical receipts 
and diversions of milk.
    The Pacific Northwest marketing order Pool plant provision 
currently contains a feature applicable for supply plants operated by a 
cooperative association to include deliveries to distributing plants 
directly from the farms of their producer members as qualifying 
shipments for pooling.
    Proposal 1, offered by NMMF, NDA, and TCCA seeks to establish a 
``cooperative manufacturing plant'' provision as a type of pool supply 
plant, and also to provide that two or more cooperative manufacturing 
plants may operate as a ``system'' of supply plants for the purpose of 
meeting pooling performance standards. According to the witnesses, the 
proposal eliminates the need for the current provision for cooperative 
associations that operate supply plants.
    A witness for NMMF testified that the adoption of a provision 
providing for a cooperative manufacturing plant as a type of supply 
plant is predicated on the adoption of a touch-base standard contained 
in Proposal 2. According to the witness, if a touch-base standard is 
adopted, certain accommodations for cooperative manufacturing plants 
should be provided to prevent the inefficient movement of milk. A 
provision for a ``system'' of cooperative manufacturing plants should 
be made, noted the witness, so that the system of plants could qualify 
to have their combined milk receipts pooled when a single plant of the 
system meets all of the performance standards for the system of plants. 
The witness noted that providing this flexibility in the movement of 
milk will enable cooperative manufacturing plants to minimize 
transportation costs while still meeting the established touch-base 
standard. The witness noted that a similar provision for cooperative 
manufacturing plants is currently a feature of the Arizona-Las Vegas 
and Western milk marketing orders and would be beneficial for the 
Pacific Northwest order.
    The NMMF witness predicted that the adoption of a cooperative 
manufacturing plant provision would encourage all supply plants in the 
Pacific Northwest to change their pooling status to this new type of 
pool supply plant because all supply plants in the Pacific Northwest 
are owned by cooperative associations. According to the witness, the 
proposed changes contained in Proposals 1 and 2 would serve to deter 
supply plants located far from the Pacific Northwest marketing area 
from inappropriately pooling milk on the Pacific Northwest order 
because these changes eliminate the ability to pool milk that is not 
physically received at the plants which actually provide milk to 
satisfy the marketing area's Class I demands.
    A witness appearing on behalf of NDA, also a proponent of Proposal 
1, agreed with the NMMF witness' conclusion that pooling provisions 
should ensure that only milk which actually performs in supplying the 
market's Class I needs would prevent the ``artificial'' pooling of 
milk. The witness stressed that NDA does not object to milk located 
outside of the order that regularly serves the fluid needs of the 
market from receiving the order's blend price.
    The adoption of the proposed cooperative manufacturing plant 
provision, according to the NDA witness, also would provide producers 
who regularly serve the fluid needs of the market more flexibility in 
meeting the touch-base standard contained in Proposal 2. The witness 
was in agreement with NMMF that the proposal would prevent the 
inappropriate pooling of milk that is located at plants far from the 
marketing area that does not actually supply the fluid needs of the 
market. The NDA witness asserted that these changes to the order would 
ensure that only milk actually available to meet the market's fluid 
needs would be pooled.
    A witness representing the TCCA also testified in support of 
Proposal 1. The witness presented an analysis on the loss of income to 
dairy farmers in Tillamook County, Oregon, due to the pooling of milk 
on the order that does not actually serve the Class I needs of the 
market. The impact of inappropriate pooling standards to Pacific 
Northwest dairy farmers, according to the witness' calculations, showed 
an average monthly decrease in revenue of $755 per farm. The witness 
testified that the adoption of Proposal 1 would correct the disorderly 
marketing conditions in the Pacific Northwest order by only allowing 
milk that actually serves the fluid needs of the market to receive the 
order's blend price.
    The witness representing DFA testified in support of Proposal 1. 
According to the witness, 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 to clear the market when not used 
in Class I, noted the witness. The witness testified that marketwide 
pooling allows qualified producers to equitably share in the returns 
from the market 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 DFA witness asserted that Proposal 1 properly addresses the 
problem associated with what the witness described as the near ``open 
pooling'' of milk on the Pacific Northwest order. Specifically, the 
witness testified that the proposal would establish appropriate pooling 
performance standards for producer milk and handlers that are 
consistent with the objectives of the Federal milk order program.
    Two members of the Washington State Dairy Federation also testified 
in support of Proposal 1. One witness indicated that when milk not 
serving the fluid needs of the Pacific Northwest market is pooled, 
returns that should be received by producers serving the Class I needs 
of the market are ``siphoned'' away. Another witness testified that 
dairy producers in Washington have lost millions of dollars in revenue 
as a result of the ``loopholes'' in the order's pooling provisions. The 
adoption of Proposal 1 would, according to the witness, make needed 
changes to the pooling standards and re-establish orderly marketing 
conditions for the Pacific Northwest marketing area.
    All milk marketing orders, including the Pacific Northwest, provide 
standards for identifying producers and the milk of producers that 
supply the market's Class I needs. The pooling standards of an order 
serve to assure that an adequate supply of fluid milk is delivered to 
the market. Pooling

[[Page 56940]]

standards also act to identify the milk of those producers that 
actually meets this need. Some milk orders have touch-base standards to 
determine which dairy farmers and the milk of those dairy farmers who 
perform in the market by delivering a certain amount of production to 
pool plants. When such standards are met, the milk not needed to meet 
fluid demands becomes eligible to be diverted to a nonpool plant and be 
pooled and priced by the order.
    It is largely the revenue from Class I sales that provides 
additional returns to milk being pooled which is reflected in the 
order's blend price. Accordingly, the Federal order system consistently 
has stressed actual performance in meeting pooling standards designed 
to ensure an adequate supply of Class I milk for the market as a 
condition for receiving the order's blend price.
    The pooling standards of an order are designed to identify those 
producers and the milk of those producers that demonstrate service to 
the Class I market. A touch-base standard serves to identify the 
producers and the milk of those producers who actually supply milk to 
the market in a specified minimum amount. Markets that exhibit a higher 
percentage of milk in fluid use typically have touch-base standards 
specifying more frequent physical milk deliveries to pool plants than 
in markets where Class I use is lower. When a touch-base standard is 
too low, the potential for disorderly marketing conditions arise on two 
fronts. First, pool plants are less assured of milk supplies. Second, 
and most germane to the Pacific Northwest marketing area, the lack of a 
touch-base standard provides a way for the milk of producers not 
serving the fluid needs of the market to be pooled on the order while 
not actually supplying milk to the market's pool plants. This reduces 
the blend price paid to producers who are actually incurring the costs 
of supplying the Class I needs of the market.
    A significant portion of the testimony received at the hearing 
placed blame on the current Class I price structure as the root cause 
of the inappropriate pooling of milk on the Pacific Northwest order. 
The current price structure was faulted specifically as not providing 
location adjustments for milk as had been the case prior to the 
implementation of milk order reform.
    Testimony indicated that the lack of location adjustments 
effectively undermines the pooling standards of the order. The decision 
to pool milk was once based on the economics of transporting milk--
comparing the costs of transporting milk to the benefit of receiving 
the order's blend price. Testimony indicates this factor is as 
important as the pooling standards of the order. Hearing participants 
were of the opinion that placing a relative value on milk based on its 
distance from the market provided appropriate pooling discipline and 
fostered orderly marketing conditions. Some participants indicated 
disappointment by asserting that the Department did not offer a 
recommended decision in order reform from which to provide comments on 
the Class I pricing structure.
    The reform of milk orders, contained in the recommended decision 
(63 FR 4802) and final decision (64 FR 16026), made purposeful changes 
to the Class I pricing structure. In this regard, a fixed adjustment 
for Class I milk prices was provided for every county location in the 
48 contiguous states to create a national Class I pricing surface for 
the system of milk marketing orders. Changing this characteristic of 
the pricing structure ensured handlers that regardless of the marketing 
order by which regulated, the applicable prices would be the same.
    Such change made a more clear distinction between the value milk 
has at a location from the pooling standards of any individual 
marketing order. Location adjustments were never a part of the pooling 
standards of the Pacific Northwest order or any other milk marketing 
order. Instead, location adjustments were an integral part of the 
pricing provisions of the order. However, it should be noted that 
location adjustments tended to strengthen the effectiveness of the 
order's pooling standards. Location adjustments determined the relative 
value of milk to the market. The pooling standards established the 
criteria for pooling milk on the order. With the Class I price surface 
adopted by order reform, more direct reliance is placed on pooling 
standards to identify the milk that should be pooled on the order.
    Pooling provisions of all orders, including the Pacific Northwest, 
are intended to define appropriate standards for the prevailing 
marketing conditions in assuring that the marketing area would be 
supplied with a sufficient supply of milk for fluid use and to identify 
those producers--and the milk of those producers--that actually service 
the Class I needs of the market. Taken as a whole, the pooling 
provisions of milk orders, including the Pacific Northwest order, are 
contained in the Pool plant, Producer, and Producer milk provisions. 
The intent of these pooling provisions prior to reform and after reform 
has not changed.
    The issue before the Department is to consider amendments to 
standards of the order that currently allow milk to be pooled on the 
Pacific Northeast order without such milk being regularly and 
consistently supplied to pool plants within the marketing area in order 
to supply the market's Class I needs. On the basis of the record, the 
pooling standards of the order need to be reconsidered.
    It is the pooling standards of the order that address those 
producers who are relied upon to supply the Class I needs of the 
marketing area. The record evidence indicates that milk is being pooled 
on the Pacific Northwest order which does not demonstrate any 
reasonable association with the market and which is not actually 
received at pool plants that supply the Class I demands of the market. 
Instead, the milk being pooled is physically retained at plant 
locations located in another marketing area for manufacturing lower 
valued Class III or Class IV dairy products. This is causing producers 
who actually supply the market to receive a lower blend price.
    On the basis of the record evidence, together with analysis 
performed by the Department, this decision finds reason to support 
adopting a 3-day touch-base standard. Analysis was performed using 
officially noticed Market Administrator data from June 2001 through 
April 2002. This time period was selected because of the change in 
Commodity Credit Corporation (CCC) purchase prices for butter and 
nonfat dry milk that occurred on May 31, 2001, as part of the price 
support program. This change in the CCC support price purchases, or the 
``butter-powder tilt,'' has caused the price gap between Class III and 
Class IV milk to be significantly reduced. This change in CCC purchase 
prices has had a noticeable effect on the total value of the marketwide 
pool for both the Pacific Northwest and Western orders.
    A hypothetical blend price was computed for the Pacific Northwest 
order marketing area, absent the Class III and Class IV milk physically 
located in areas within the Western Order milk marketing area. Milk 
from this area had not historically been pooled on the Pacific 
Northwest. Additionally, a similar blend price was computed for the 
Western Order that assumed the Class III and Class IV milk pooled on 
the Pacific Northwest Order would instead be pooled on the Western 
order. The results indicated that the blend price received by dairy 
farmers pooled in the Pacific Northwest would increase, while the blend 
price received by dairy farmers pooled on the Western order would 
decrease.
    Analysis of the newly derived blend price differences was performed 
to

[[Page 56941]]

determine how many days of a dairy farmers' production could seek to be 
received at a pool plant in the Pacific Northwest so that the costs of 
shipping milk to the market would not exceed the benefits of being 
pooled. The results of this analysis ranged from a low of 1 day's milk 
production in the month of February 2002 to a high of 5 day's milk 
production in June 2001.
    On average the milk of a dairy farmer could be received at a pool 
plant in the Pacific Northwest order 3 days per month to adequately 
demonstrate that the milk of a producer is actually providing a 
reasonable and consistent service in meeting the fluid needs of the 
marketing area.
    Providing a higher touch-base standard requires milk located 
outside the marketing area to demonstrate its availability to service 
the Class I needs of the Pacific Northwest marketing area. While this 
standard should continue to assure an adequate supply of Class I milk, 
it also will serve as a safeguard against the unwarranted erosion of 
blend prices caused by the pooling of milk which could not reasonably 
be determined as bearing the cost associated with serving the fluid 
needs of the market.
    The establishment of a touch-base standard also reinforces the 
integrity of the order's other performance standards. Together with 
providing for a cooperative manufacturing plant and their system 
pooling, reasonable assurance is provided that milk which does not 
regularly service the fluid needs of the market will not receive the 
Pacific Northwest order's blend price. Additionally, this decision 
provides authority for the Market Administrator to adjust the touch-
base standard in the same way the order currently provides authority 
for the Market Administrator to adjust the performance standards for 
supply plants and diversion limits for all pool plants.
    Providing for the diversion of milk is a desirable and needed 
feature of an order because it facilitates the orderly and efficient 
disposition of milk not needed for fluid use. When producer milk is not 
needed by the market for Class I use, some provision should be made for 
milk to be diverted to nonpool plants for use in manufactured products 
and to be pooled and priced under the order. However, it is just as 
necessary to safeguard against excessive milk supplies becoming 
associated with the market through the diversion process.
    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 by 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 and should not be 
pooled.
    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 Pacific Northwest order, the record 
reveals that high diversion limits contributed to the pooling of large 
volumes of milk on the order that may not have serviced to the Class I 
market needs. Therefore, lowering the order's diversion limit standard 
would be appropriate.
    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 who service the market's 
Class I needs. Without reasonable diversion limits, the order's ability 
to provide for effective performance standards and orderly marketing is 
weakened.
    Diversion limit standards that are too high can open the door for 
pooling more milk on the market, as seen with the 99 percent diversion 
limit that had been applicable for the months of March through August 
prior to the adjustments made by the Market Administrator in February 
2001. With respect to the marketing conditions of the Pacific Northwest 
marketing area evidenced by the record, this decision finds good reason 
to continue with the diversion limits on producer milk set by the 
Market Administrator at 80 percent of total receipts as the order's 
appropriate diversion limit for every month of the year.
    Therefore, an 80 percent diversion limit standard for producer milk 
in each month of the year should be adopted immediately. To the extent 
that this diversion limit standard may warrant future adjustments, the 
order already provides the Market Administrator authority to adjust 
these diversion standards as marketing conditions may warrant.
    This decision finds that several changes to the pooling standards 
contained in the Producer milk definition of the order are needed to 
reinforce the integrity of the other changes made in this decision that 
affect supply plants. As indicated earlier, the record indicates that 
the pooling provisions of the Pacific Northwest order are inadequate. 
This decision finds that the absence of a touch-base standard results 
in the inability to adequately and properly identify the milk of those 
producers who should be pooled. The lack of a touch-base standard 
together with a 99 percent diversion limit applicable in the months of 
March through August results in the pooling of more milk than can 
reasonably be considered as actually serving the market's Class I 
needs. These inadequacies of the Pacific Northwest order have resulted 
in pooling milk which can not demonstrate actual service in supplying 
the Class I needs of the market. Such inadequacies only contribute to 
the unnecessary erosion of the order's blend price to those producers 
who do demonstrate such service.
    This decision also finds agreement with the proponents of Proposal 
1 that a cooperative manufacturing plant provision will provide 
flexibility in qualifying milk to be pooled. Allowing cooperative 
manufacturing plants the option to function as part of a pooling system 
will also assist producers and handlers in transporting milk in the 
most cost-efficient manner. This provision will give the cooperatives 
operating manufacturing plants the ability to supply milk to 
distributing plants from a plant of the system located nearer a 
distributing plant without causing disruption to the market. System 
pooling will allow cooperative manufacturing plants to make more cost-
effective decisions in transporting milk while still satisfying the 
Class I demands of the order without disruption.

3. Emergency Marketing Conditions

    Evidence presented at the hearing establishes that the pooling 
standards of the Pacific Northwest order are inadequate and are 
resulting in a significant present and ongoing erosion of the blend 
price received by producers who actually demonstrate performance by 
supplying the Class I needs of the market. This unwarranted erosion of 
blend prices stems from the lack of a reasonable and effective standard 
to ensure that the milk of the producer being pooled is actually being 
delivered to pool plants that supply milk to meet the Class I needs of 
the market. The erosion of the blend price received by producers is 
also compounded by an unnecessarily high diversion limit standard for 
the months of March through August. These shortcomings have allowed 
milk that has not provided a reasonable expectation of or demonstration 
of service in meeting the Class I needs of the marketing area to be 
pooled on the order. Consequently, it is determined that emergency 
marketing conditions exist in the Pacific

[[Page 56942]]

Northwest marketing area, and the issuance of a recommended decision is 
therefore being omitted. The record establishes a basis as noted above 
for amending the order on an interim basis. The opportunity to file 
written exceptions remains.
    In view of this situation, an interim final rule amending the order 
will be issued as soon as the approval of producers is determined.

Rulings on Proposed Findings and Conclusions

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

General Findings

    The findings and determinations hereinafter set forth supplement 
those that were made when the Pacific Northwest 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) The tentative marketing agreement and the order, as hereby 
proposed to be amended, and all of the terms and conditions thereof, 
will tend to effectuate the declared policy of the Act;
    (b) The parity prices of milk as determined pursuant to section 2 
of the Act are not reasonable in view of the price of feeds, available 
supplies of feeds, and other economic conditions which affect market 
supply and demand for milk in the marketing area, and the minimum 
prices specified in the tentative marketing agreement and the order, as 
hereby proposed to be amended, are such prices as will reflect the 
aforesaid factors, insure a sufficient quantity of pure and wholesome 
milk, and be in the public interest; and
    (c) The tentative marketing agreement and the order, as hereby 
proposed to be amended, will regulate the handling of milk in the same 
manner as, and will be applicable only to persons in the respective 
classes of industrial and commercial activity specified in, the 
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 Pacific 
Northwest Marketing Area, which has been decided upon as the detailed 
and appropriate means of effectuating the foregoing conclusions.
    It is hereby ordered, that this entire tentative decision and the 
interim order and the interim marketing agreement annexed hereto be 
published in the Federal Register.

Determination of Producer Approval and Representative Period

    The month of May, 2002, 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 Pacific Northwest marketing area 
is approved or favored by producers, as defined under the terms of the 
order as hereby proposed to be amended, who during such representative 
period were engaged in the production of milk for sale within the 
aforesaid marketing area.

List of Subjects in 7 CFR Part 1124

    Milk marketing order.

    Dated: August 30, 2002.
A.J. Yates,
Administrator, Agricultural Marketing Service.

Interim Order Amending the Order Regulating the Handling of Milk in the 
Pacific Northwest 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 Pacific Northwest 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 by 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 Pacific Northwest 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 1124 continues to read as 
follows:

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

PART 1124--MILK IN THE PACIFIC NORTHWEST MARKETING AREA

    1. Section 1124.7 is amended by:
    a. Removing paragraph (c)(2) and (c)(3);
    b. Redesignating paragraph (c)(4) as (c)(2);
    c. Adding new paragraphs (d) and (f); and
    d. Revising paragraph (g).
    The revisions and additions read as follows:


Sec.  1124.7  Pool Plant.

* * * * *
    (d) A manufacturing plant located within the marketing area and 
operated by a cooperative association, or its wholly owned subsidiary, 
if, during the month, or the immediately preceding 12-month period 
ending with the current month, 20 percent or more of

[[Page 56943]]

the producer milk of members of the association (and any producer milk 
of nonmembers and members of another cooperative association which may 
be marketed by the cooperative association) is physically received in 
the form of bulk fluid milk products (excluding concentrated milk 
transferred to a distributing plant for an agreed-upon use other than 
Class I) at plants specified in paragraph (a) or (b) of this section 
either directly from farms or by transfer from supply plants operated 
by the cooperative association, or its wholly owned subsidiary, and 
from plants of the cooperative association, or its wholly owned 
subsidiary, for which pool plant status has been requested under this 
paragraph subject to the following conditions:
    (1) The plant does not qualify as a pool plant under paragraph (a), 
(b), or (c) of this section or under comparable provisions of another 
Federal order; and
    (2) The plant is approved by a duly constituted regulatory agency 
for the handling of milk approved for fluid consumption in the 
marketing area.
    (3) A request is filed in writing with the market administrator 
before the first day of the month for which it is to be effective. The 
request will remain in effect until a cancellation request is filed in 
writing with the market administrator before the first day of the month 
for which the cancellation is to be effective.
* * * * *
    (f) A system of two or more plants identified in Sec.  1124.7(d) 
operated by one or more cooperative handlers may qualify for pooling by 
meeting the above shipping requirements subject to the following 
additional requirements:
    (1) The cooperative handler(s) establishing the system submits a 
written request to the market administrator on or before the first day 
of the month for which the system is to be effective requesting that 
such plants qualify as a system. Such request will contain a list of 
the plants participating in the system in the order, beginning with the 
last plant, in which the plants will be dropped from the system if the 
system fails to qualify. Each plant that qualifies as a pool plant 
within a system shall continue each month as a plant in the system 
until the handler(s) establishing the system submits a written request 
before the first day of the month to the market administrator that the 
plant be deleted from the system or that the system be discontinued. 
Any plant that has been so deleted from a system, or that has failed to 
qualify in any month, will not be part of any system. In the event of 
an ownership change or the business failure of a handler that is a 
participant in the system, the system may be reorganized to reflect 
such a change if a written request to file a new marketing agreement is 
submitted to the market administrator; and
    (2) If a system fails to qualify under the requirement of this 
paragraph, the handler responsible for qualifying the system shall 
notify the market administrator of which plant or plants will be 
deleted from the system so that the remaining plants may be pooled as a 
system. If the handler fails to do so, the market administrator shall 
exclude one or more plants, beginning at the bottom of the list of 
plants in the system and continue up the list as necessary until the 
deliveries are sufficient to qualify the remaining plants in the 
system.
    (g) The applicable shipping percentage of paragraphs (c) and (d) of 
this section may be increased or decreased by the market administrator 
if the market administrator finds that such adjustment is necessary to 
encourage needed shipments or to prevent uneconomic shipments. Before 
making such a finding, the market administrator shall investigate the 
need for adjustment either on the market administrator's own initiative 
or at the request of interested parties if the request is made in 
writing at least 15 days prior to the month for which the requested 
revision is desired to be effective. If the investigation shows that an 
adjustment of the shipping percentages might be appropriate, the market 
administrator shall issue a notice stating that an adjustment is being 
considered and invite data, views and arguments. Any decision to revise 
an applicable shipping percentage must be issued in writing at least 
one day before the effective date.
* * * * *
    2. Section 1124.13 is amended by:
    a. Redesignating paragraphs (e)(1) through (5) as paragraphs (e)(2) 
through (6);
    b. Adding a new paragraph (e)(1); and
    c. Revising redesignated paragraphs (e)(2), (e)(5), and (e)(6).
    The revisions and additions read as follows:


Sec.  1124.13  Producer Milk.

* * * * *
    (e) * * *
    (1) Milk of a dairy farmer shall not be eligible for diversion 
unless at least 3 days' production of such dairy farmer's production is 
physically received at a pool plant during the month.
    (2) Of the 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)) the handler 
diverts to nonpool plants not more than 80 percent.
* * * * *
    (5) Any milk diverted in excess of the limits prescribed in 
paragraph (e)(2) of this section shall not be producer milk. If the 
diverting handler or cooperative association fails to designate the 
dairy farmers' deliveries that are not to be producer milk, no milk 
diverted by the handler or cooperative association during the month to 
a nonpool plant shall be producer milk. In the event some of the milk 
of any producer is determined not to be producer milk pursuant to this 
paragraph, other milk delivered by such producer as producer milk 
during the month will not be subject to Sec.  1124.12(b)(5).
    (6) The delivery day requirement in paragraph (e)(1) of this 
section and diversion percentage in paragraph (e)(2) of this section 
may be increased or decreased by the market administrator if the market 
administrator finds that such revision is necessary to assure the 
orderly marketing and efficient handling of milk in the marketing area. 
Before making such finding, the market administrator shall investigate 
the need for the revision either on the market administrator's own 
initiative or at the request of interested persons if the request is 
made in writing at least 15 days prior to the month for which the 
requested revision is desired to be effective. If the investigation 
shows that a revision might be appropriate, the market administrator 
shall issue a notice stating that the revision is being considered and 
inviting written data, views, and arguments. Any decision to revise the 
delivery day requirement or the diversion percentage must be issued in 
writing at least one day before the effective date.

Marketing Agreement Regulating the Handling of Milk in Certain 
Marketing Areas

    The parties hereto, in order to effectuate the declared policy of 
the Act, and in accordance with the rules of practice and procedure 
effective thereunder (7 CFR part 900), desire to enter into this 
marketing agreement and do hereby agree that the provisions referred to 
in paragraph I hereof as augmented by the provisions specified in 
paragraph II hereof, shall be and are the provisions of this marketing 
agreement as if set out in full herein.
    I. The findings and determinations, order relative to handling, and 
the provisions of Sec. Sec.  1124.1 to 1124.86 all inclusive, of the 
order regulating the

[[Page 56944]]

handling of milk in the Pacific Northwest marketing area (7 CFR part 
1124) 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 May 2002, -------- hundredweight of milk 
covered by this marketing agreement.
    (b) Authorization to correct typographical errors. The undersigned 
hereby authorizes the Deputy Administrator, or Acting Deputy 
Administrator, Dairy Programs, Agricultural Marketing Service, to 
correct any typographical errors which may have been made in this 
marketing agreement.
    Effective date. This marketing agreement shall become effective 
upon the execution of a counterpart hereof by the Department in 
accordance with Section 900.14(a) of the aforesaid rules of practice 
and procedure.
    In Witness Whereof, The contracting handlers, acting under the 
provisions of the Act, for the purposes and subject to the limitations 
herein contained and not otherwise, have hereunto set their respective 
hands and seals.

Signature By (Name)

(Title)----------------------------------------------------------------

(Address)--------------------------------------------------------------

(Seal)

Attest

[FR Doc. 02-22686 Filed 9-5-02; 8:45 am]
BILLING CODE 3410-02-P