[Federal Register Volume 67, Number 216 (Thursday, November 7, 2002)]
[Proposed Rules]
[Pages 67906-67947]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-27570]



[[Page 67905]]

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Part II





Department of Agriculture





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Agriculture Marketing Service



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7 CFR Parts 1000, et al.



Milk in the Northeast and Other Marketing Areas; Decision on Proposed 
Amendments to Tentative Marketing Agreement and to Order; Proposed Rule

  Federal Register / Vol. 67, No. 216 / Thursday, November 7, 2002 / 
Proposed Rules  

[[Page 67906]]


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DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Parts 1000, 1001, 1005, 1006, 1007, 1030, 1032, 1033, 1124, 
1126,1131, and 1135

[Docket No. AO-14-A69, et al.: DA-00-03]


Milk in the Northeast and Other Marketing Areas; Decision on 
Proposed Amendments to Tentative Marketing Agreement and To Order

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Proposed rule; Final Decision.

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          7 CFR part                              Marketing area                              AO Nos.
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1001..........................  Northeast........................................  AO-14-A69.
1005..........................  Appalachian......................................  AO-388-A11.
1006..........................  Florida..........................................  AO-356-A34.
1007..........................  Southeast........................................  AO-366-A40.
1030..........................  Upper Midwest....................................  AO-361-A34.
1032..........................  Central..........................................  AO-313-A43.
1033..........................  Mideast..........................................  AO-166-A67.
1124..........................  Pacific Northwest................................  AO-368-A27.
1126..........................  Southwest........................................  AO-231-A65.
1131..........................  Arizona-Las Vegas................................  AO-271-A35.
1135..........................  Western..........................................  AO-380-A17.
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SUMMARY: This decision adopts revised product-price formulas for 
establishing Class III and Class IV milk prices. The formulas are 
applicable to all Federal milk marketing orders. The orders amended by 
this decision require producer approval. Referenda will be conducted in 
two markets, and dairy farmer cooperatives will be polled in the other 
nine markets to determine whether dairy farmers approve the issuance of 
the orders as amended.
    This final decision differs from the recommended decision by 
modifying the Class III and IV formulas to include farm-to-plant 
component losses. Modifications are adopted to the butterfat price 
formula, the protein price formula, the other solids price formula, and 
the nonfat milk solids price formula. Additionally, this decision 
converts the Class III and IV formula divisors to multipliers in order 
to simplify and promote consistency with all end-product pricing 
formulas.

FOR FURTHER INFORMATION CONTACT: Clifford M. Carman, Associate Deputy 
Administrator, USDA/AMS/Dairy Programs, Order Formulation and 
Enforcement Branch, Stop 0231, Room 2968, South Building, 1400 
Independence Avenue, Washington, DC 20250-0231, (202) 720-6274, 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 will 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

    This final decision responds to a Congressional mandate to 
reconsider the Class III and Class IV pricing formulas included in the 
final rule for the consolidation and reform of Federal milk orders. The 
mandate was included in the Consolidated Appropriations Act, 2000 (Pub. 
L. 106-113, 115 Stat. 1501).
    In accordance with the Regulatory Flexibility Act (RFA) (5 U.S.C. 
601 et seq.), the Agricultural Marketing Service (AMS) has considered 
the economic impact of this action on small entities and has prepared 
this regulatory flexibility analysis. When preparing such analysis an 
agency shall address: The reasons, objectives, and legal basis for the 
anticipated proposed rule; the kind and number of small entities which 
would be affected; the projected recordkeeping, reporting, and other 
requirements; and federal rules which may duplicate, overlap, or 
conflict with the proposed rule. Finally, any significant alternatives 
to the proposal should be addressed. This regulatory flexibility 
analysis considers these points and the impact of this proposed 
regulation on small entities. The legal basis for this action is 
discussed in the preceding section.
    The RFA seeks to ensure that, within the statutory authority of a 
program, the regulatory and informational

[[Page 67907]]

requirements are tailored to the size and nature of small businesses. 
For the purpose of the RFA, 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.
    USDA has identified as small businesses approximately 62,240 of the 
65,464 dairy producers (farmers) that have their milk pooled under a 
Federal order. Thus, small businesses constitute approximately 95 
percent of the dairy farmers in the United States. On the processing 
side, there are approximately 1,621 plants associated with Federal 
orders, and of these plants, approximately 928 qualify as ``small 
businesses,'' constituting about 57 percent of the total.
    During January 2002, there were approximately 410 fully regulated 
handlers (of which 148 were small businesses), 75 partially regulated 
handlers (of which 39 were small businesses), and 46 producer-handlers 
(of which 24 were considered small businesses) for the purpose of this 
regulatory flexibility analysis. In addition, there were ninety-three 
exempt handlers with Class I sales of less than 150,000 pounds during 
the month.
    Producer deliveries of milk used in Class I products (mainly fluid 
milk products) totaled 4.085 billion pounds in January 2002, 
representing 37.7 percent of total Federal order producer deliveries. 
The volume of milk pooled under Federal orders represents 76 percent of 
all milk marketed in the U.S. and is estimated at 78 percent of the 
milk of bottling quality (Grade A) sold in the country. More than 200 
million Americans reside in Federal order marketing areas, representing 
approximately 81 percent of the total U.S. population (2001).
    In order to accomplish the goal of imposing no additional 
regulatory burdens on the industry, a review of the current reporting 
requirements was completed pursuant to the Paperwork Reduction Act of 
1995 (44 U.S.C. Chapter 35). In light of this review, it was determined 
that these proposed amendments would have no impact on reporting, 
recordkeeping, or other compliance requirements because these would 
remain identical to the current Federal order program. No new forms 
have been proposed, and no additional reporting would be necessary.
    This proposed rule does not require additional information 
collection that requires clearance by the OMB beyond the currently 
approved information collection. The primary sources of data used to 
complete the forms are routinely used in most business transactions. 
The 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 upon the dairy industry as a 
result of overlapping Federal rules. This proposed rulemaking does not 
duplicate, overlap or conflict with any existing Federal rules.

Consideration of Impacts on Small Businesses

    To ensure that small businesses are not unduly or 
disproportionately burdened based on these proposed amendments, 
consideration was given to mitigating negative impacts.
    A comment filed in regard to the tentative final decision by the 
managing partner of a large dairy farm argued that dairy producers 
selling less than 326,000 pounds of milk per month may comprise the 
majority of dairy farms, but not the majority of milk sold. The comment 
further stated that it is not appropriate to identify one sector and 
imply that they are most in need of protection and preservation.
    Under the Regulatory Flexibility Act, the definition of a ``small'' 
dairy farm has been redefined from a business having an annual gross 
revenue of less than $500,000 to a business having an annual gross 
revenue of less than $750,000. Therefore, the production guideline of 
326,000 pounds per month has been increased to 500,000 pounds per month 
in identifying ``small'' dairy farms.
    The production guideline of 500,000 pounds per month in identifying 
``small'' dairy farms is an attempt to relate a measure of size for 
which data is available (pounds of production per farm) with the 
criteria specified by the Small Business Administration (revenue from 
sales), for which data is not readily available to USDA on an 
individual farm basis. The Regulatory Flexibility Analysis does not 
represent an attempt to create special privileges for farms defined as 
small, but to examine the regulations to assure that they do not create 
a disproportionate burden or competitive disadvantage for such farms.
    As was stated in the RFA in the recommended decision, one of the 
principal issues considered at the hearing was the source of price data 
that should be used to generate prices for milk components and, 
thereby, prices to be paid to producers. The options considered were 
the National Agricultural Statistics Service (NASS) surveys of selling 
prices of manufactured dairy products, Chicago Mercantile Exchange 
(CME) prices, and producer costs of production. The recommended 
decision selected the NASS-reported prices as the most appropriate for 
use in determining product prices because of the considerably larger 
volume of product represented in those price series than in the CME 
price data. Producer cost of production was not included in the 
calculation of prices because assuring dairy farmers that their costs 
of production will be covered addresses only the milk supply side of 
the market and ignores factors underlying demand or changes in demand 
for milk and milk products.
    Various proposals to reduce or increase the levels of the 
manufacturing (make) allowances of butter, nonfat dry milk, cheddar 
cheese and dry whey were considered. The present method adjusted these 
make allowances from the levels adopted under Federal order reform on 
the basis of data and testimony contained in the hearing record. Most 
of the adjustments are minimal. Primarily, manufacturing cost surveys 
performed by USDA's Rural Cooperative Business Service (RBCS) and the 
California Department of Food and Agriculture (CDFA) were used to 
determine the most appropriate levels of make allowance for the 
products used in calculating Federal order class prices.
    The only other actual collection of manufacturing cost data for 
cheddar cheese and dry whey that was cited in the hearing record was a 
survey of cheddar cheese and dry whey manufacturing costs arranged for 
by the National Cheese Institute (NCI). This survey was conducted by 
persons unfamiliar with the dairy industry among cheese processors who 
did not

[[Page 67908]]

testify about the data that they submitted for the survey and was 
entered into the hearing record by a witness who had no firsthand 
knowledge of the data included. As a result, the NCI survey should be 
relied upon to a lesser degree than the two studies used to determine 
the cheddar cheese make allowance. In the case of the RBCS study, the 
person who gathered the data testified about its collection and what it 
represented. In the case of the CDFA-collected data, a manual detailing 
the method by which the data was collected and presented was made 
available, and several witnesses familiar with the survey testified 
about it.
    In addition, one nonfat dry milk manufacturer testified to costs of 
manufacture that exceeded those of the two studies by a significant 
amount, mostly in the areas of return on investment and marketing 
costs. The data did not include any information about the pounds of 
product manufactured and could not have been weighted with the data 
from the two other studies.
    Several proposals to change the factor reflecting the yield of 
nonfat dry milk from nonfat solids in milk would have increased the 
nonfat solids price and the Class IV skim price, but ignored the need 
to reflect the generally lower price and higher manufacturing cost of 
buttermilk powder that also must be considered in calculating the Class 
IV nonfat solids price. Testimony and data in the record were used to 
determine a factor more representative of nonfat dry milk yield and the 
effect of buttermilk powder price and cost. The alternatives to the 
formula adopted either did not include consideration of the price, 
cost, and volume of buttermilk powder relative to those of nonfat dry 
milk or gave those factors too great an influence.
    Proposals were made to reduce the butter and cheese product prices 
used in calculating the butterfat price and the Class III component 
prices. The record of this proceeding continues to support the use of 
the product prices adopted in the final rule in the Federal milk order 
reform process as representing accurately the values of these products. 
In the case of adjusting the Grade AA butter price to reflect the value 
of Grade A butter, the record fails to reveal any source of information 
for obtaining current prices for Grade A butter. In the case of 
proposals to remove the 3-cent adjustment between the barrel and 40-
pound block cheese prices, there was no testimony about the actual 
difference in cost between the two types of packaging that overcame 
testimony that 3 cents is the actual cost difference, or any data that 
indicates that the customary price difference is not at least 3 cents.
    Proposals to reconsider the class price relationships in the orders 
were considered, although a proposal to use a weighted average of the 
Class III and Class IV prices as a Class I price mover was not noticed 
for hearing in this proceeding. The hearing record supports the 
continued relationships between the Class IV and Class II prices and 
between the higher of the manufacturing class prices and the Class I 
price.
    A proposal that the Class II differential be changed to negate any 
changes in the Class IV price formula that would affect the current 
price relationship between nonfat dry milk and Class II failed to 
consider that the Class II-Class IV price difference adopted in Federal 
order reform is based on the difference in the value of milk used to 
make dry milk and the value of milk used to make Class II products.
    Proposals that any increases resulting from changes to the Class 
III and Class IV price formulas not be allowed to result in increases 
in Class I prices did not address the rationale for the current Class I 
price differentials above the manufacturing price levels for the 
purpose of obtaining an adequate supply of milk for fluid (drinking) 
use.
    The changes to the Class III and Class IV price formulas included 
in the recommended decision would have had no special impact on small 
handler entities. All handlers manufacturing dairy products from milk 
classified as Class III or Class IV would remain subject to the same 
minimum prices regardless of the size of their operations. Such 
handlers would also be subject to the same minimum prices to be paid to 
producers. These features of minimum pricing are required by the 
Agricultural Marketing Agreement Act and should not raise barriers to 
the ability of small handlers to compete in the marketplace. It is 
similarly expected that small producers would not experience any 
particular disadvantage to larger producers as a result of any of the 
proposed amendments.
    An analysis was performed on the effects of the alternatives 
selected and is summarized below.

Final Decision Analysis

    In order to assess the impact of changes in Federal order milk 
pricing formulas, the Department conducted an economic analysis. While 
the primary purpose of this decision is to amend the product pricing 
formulas used to price milk regulated under Federal milk marketing 
orders and classified as either Class III or Class IV milk, these 
product price formulas also affect the prices of regulated milk 
classified as Class I and Class II.
    The modifications in this decision are analyzed simultaneously as a 
change from the set of Court-ordered formulas as implemented in January 
2001. This analysis focuses on impacts on milk marketed under Federal 
milk marketing orders. Milk marketed in California, milk marketed under 
other state regulations, and unregulated milk are treated separately.

Scope of Analysis

    Impacts are measured as changes from the model baseline as adapted 
from the USDA baseline developed in June 2002 for the mid-session 
budget review. The baseline projections are a Departmental consensus on 
a long-run scenario for the agricultural sector. Included is a 
national, annual projection of the supply-demand-price situation for 
milk. The mid-term review reflects the provisions of the Farm Security 
and Rural Investment Act of 2002. Baseline assumptions for dairy are: 
(1) The price support program will extend through December 31, 2007, 
supporting the price of milk (3.67 percent butterfat) at $9.90; (2) the 
Dairy Export Incentive Program will continue to be utilized; (3) the 
Federal Milk Marketing Order Program will continue as reformed on 
January 1, 2000, as modified by the Select, et al. vs. Veneman decision 
in January 2001, and (4) the National Dairy Market Loss Program will 
make payments to dairy farmers when the Class I price in Boston is less 
than $16.94 per cwt.
    In the model the U.S. is divided into 14 milk marketing regions, 11 
that generally correspond to the Federal order areas, California, other 
West, and Alaska-Hawaii. The 11 Federal orders share of the U.S. milk 
marketings is about 70 percent. About 83 percent of all fluid milk and 
about 65 percent of all manufactured milk is marketed under Federal 
order regulations. Given the prominence of Federal order marketings, 
prices paid for both fluid and manufactured milk outside of the order 
system are generally aligned with prices paid in the Federal order 
system. California stands out as the state with the highest production 
and has its own set of comprehensive market regulations similar to the 
Federal order system. California milk marketings are estimated as a 
function of the California pool price. Milk marketed through the 
Federal order system is the predominant subset of milk marketings in 
the United States. Fluid grade milk prices for the 11 Federal order 
regions are estimated as functions of Federal order minimum prices and 
dairy product prices. The regional all-milk prices, which are used

[[Page 67909]]

in the regional milk supply responses, are in turn estimated from the 
regional fluid grade milk price and the national dairy product prices.
    Demands for fluid milk and manufactured dairy products are 
functions of per capita consumption and population. Per capita 
consumption for the major milk and dairy products are estimated as 
functions of own prices, substitute prices, and income. Retail and 
wholesale margins are assumed unchanged from the baseline. The regional 
demands for fluid milk and soft manufactured products are satisfied 
first by the eligible supply of milk. The milk supply for manufacturing 
hard products is the volume of milk marketings remaining after 
satisfying the volumes demanded for fluid and soft manufactured 
products. Milk is manufactured into cheese or butter/nonfat dry milk 
according to returns to manufacturing in each class. Wholesale prices 
for cheese, butter, nonfat dry milk, and dry whey reflect national 
supply and demand for these products. These prices underlie the Federal 
order pricing system.

Summary of Results

    The impacts of the changes to the Class III and Class IV formulas 
that are adopted in this decision are summarized using annualized five-
year, 2003-2007, average changes from the model baseline. The results 
presented for the Federal order system are in the context of the larger 
U.S. market. In particular, the Federal order price formulas use 
national manufactured dairy product prices.
    The formula changes increase the protein prices and reduce the 
prices for butterfat and nonfat solids. The results are higher Class 
III prices, lower Class IV and Class II prices, and lower Class I 
prices. The advanced Class I base price is the higher of the Class III 
or Class IV advance pricing factors. The Class I base price is the 
Class IV price in all years of the analytical period for the baseline, 
while Class III becomes the Class I base price in 2003 through 2005 
under this decision. The Class I price falls in 2003, 2006 and 2007. 
The resulting increases in Class I and Class II demand for nonfat and 
fat solids, sufficiently absorbs production increases to very slightly 
increase cheese and butter prices and only slightly decrease nonfat dry 
milk prices.
    Producers. Over the five-year period, the Federal order minimum 
Class price for milk at test increases about $0.06 per hundredweight. 
The average fluid grade price for Federal order regions, which includes 
premiums, increases by about $0.03 per hundredweight. Federal order 
marketings increase by an average 58 million pounds annually due to the 
production increase in response to higher producer prices. Federal 
order milk cash receipts increase by an average $47.2 million annually 
(0.28 percent) from baseline receipts of $16,729 million.
    The distribution of the 2003-2007 annual average changes in the 
Federal order minimum blend prices across the 11 orders range from (-
)$0.05 to (+)$0.08 per hundredweight, reflecting declines in premiums 
associated with Class III milk. Estimates of annual average price and 
quantity changes by order are provided in the economic analysis for 
this decision.
    The five-year annual average U.S. all-milk price increases by $0.03 
per hundredweight over the baseline. U.S. milk marketings increase by 
an average 73 million pounds annually (0.04 percent), yielding an 
average cash receipts increase of $67.2 million annually (0.29 percent) 
from average baseline receipts of $23,535 million.
    Milk Manufacturers and Processors. Annual Class IV and Class II 
skim milk prices decline each year for an average of $0.07 per 
hundredweight (1.0 percent) for the 2003-2007 period. This decline 
results from changing the conversion factor for nonfat dry milk to 
nonfat solids from 1.0 to 0.99. The minimum butterfat prices decline 
from baseline levels by an average of 2.1 cents per pound. This decline 
is the result of recognizing farm-to-plant losses of milk which reduce 
the yield factor from the equivalent of 1.22 pounds of butter per pound 
of butterfat to 1.20. The Class IV price at test (about 8.45 percent 
butterfat) declines by an average of $0.26 per hundredweight, and the 
Class II price at test (7.92 percent butterfat) declines by an average 
$0.23 per hundredweight over 2003-2007.
    The annual average Class III price increase at test (3.52 percent 
butterfat) is about $0.23 over baseline (1.9 percent), increasing 
steadily from $0.15 in 2003 to $0.34 in 2007. The increase is the 
result of the protein price increase of $0.14 per pound, ranging from 
$0.10 to $0.18 per pound. The increase in the protein price is the 
result of reducing the impact of the butterfat price on the protein 
price. The butterfat price effect is reduced by multiplying the 
butterfat price by 0.90, reflecting a 90 percent butterfat retention 
rate in the cheese, and replacing the 1.28 factor with 1.17 reflecting 
the butterfat to protein ratio of milk standardized at 3.5 percent 
butterfat and 2.99 percent protein.
    The Class I base price shifts from the Class IV to the Class III 
price in 2003-05. The Class I skim milk price increases over baseline 
levels on average by nearly $0.04 cents per hundredweight, ranging from 
increases of about 18 cents in 2004-05 to declines of about 7 cents in 
2006-07. The Class I price at test (about 2 percent butterfat) declines 
by an average $0.01 per hundredweight from the baseline, and is similar 
to the skim milk price change pattern, ranging from 13-cent increases 
to 12-cent declines.
    Consumers. The expected $0.01 per hundredweight decrease in the 
minimum Class I price for 2003-2007 results in an average $0.001 
decrease in the price per gallon of fluid milk for consumers. Annual 
consumer costs for fluid milk over 2003-2007 are estimated to decrease 
on average by about $3.25 million in the Federal order system and by 
$4.1 million in the U.S.
    The price for manufactured dairy products are estimated to increase 
over baseline by an average $0.004 per pound for butter and $0.001 per 
pound of cheese. Average annual consumer expenditures over the five-
year period are estimated to increase over baseline levels by $5.6 
million on butter, and by $4.1 million on American cheese.
    A complete Economic Analysis for the Final Decision on Class III 
and Class IV Price Formulas is available upon request from Howard 
McDowell, Senior Economist, USDA/AMS/Dairy Programs, Office of the 
Chief Economist, Room 2753, South Building, U.S. Department of 
Agriculture, Washington, DC 20250, (202) 720-7091, e-mail address 
[email protected].

Civil Rights Impact Statement

    This final decision is based on the record of a public hearing held 
May 8-12, 2000, in Alexandria, Virginia, in response to a mandate from 
Congress included in the Consolidated Appropriations Act, 2000, that 
required the Secretary of Agriculture to conduct a formal rulemaking 
proceeding to reconsider the Class III and Class IV milk pricing 
formulas included in the final rule for the consolidation and reform of 
Federal milk orders. The consolidated orders were implemented on 
January 1, 2000. A tentative final decision on the issues considered at 
the hearing was issued November 29, 2000 (65 FR 76832), and an interim 
final order (65 FR 82832) became effective January 1, 2001. A 
preliminary injunction enjoining portions of the interim final order 
was granted in the U.S. District Court for the District of Columbia on 
January 31, 2001.
    Pursuant to Departmental Regulation (DR) 4300-4, a comprehensive 
Civil Rights Impact Analysis (CRIA) was

[[Page 67910]]

conducted and published with the final decision on Federal milk order 
consolidation and reform. That CRIA included descriptions of (1) the 
purpose of performing a CRIA; (2) the civil rights policy of the U.S. 
Department of Agriculture; and (3) basics of the Federal milk marketing 
order program to provide background information. Also included in that 
CRIA was a detailed presentation of the characteristics of the dairy 
producer and general populations located within the former and current 
marketing areas.
    The conclusion of that analysis disclosed no potential for 
affecting dairy farmers in protected groups differently than the 
general population of dairy farmers. All producers, regardless of race, 
national origin, or disability, who choose to deliver milk to handlers 
regulated under a Federal order will receive the minimum blend price. 
Federal orders provide the same assurance for all producers, without 
regard to sex, race, origin, or disability. The value of all milk 
delivered to handlers competing for sales within a defined marketing 
area is divided equally among all producers delivering milk to those 
handlers.
    The issues addressed at the May 2000 hearing are issues that were 
addressed as part of Federal milk order consolidation and reform. 
Establishing representative make allowances in the formulas that price 
milk used in Class III and Class IV dairy products is an issue that 
affects the obligations of handlers of those products to the Federal 
milk order pool, and similarly the pool obligations of Class I and 
Class II handlers. The decision should result in no differential 
benefits in dividing the pool among all producers delivering milk to 
those regulated handlers. Therefore, USDA sees no potential for 
affecting dairy farmers in protected groups differently than the 
general population of dairy farmers.
    Decisions on proposals to amend Federal milk marketing orders must 
be based on testimony and evidence presented on the record of the 
proceeding. The hearing notice in this proceeding invited interested 
persons to address any possible civil rights impact of the proposals 
being considered in testimony at the hearing. No such testimony was 
received.
    Copies of the Civil Rights Impact Analysis done for the final 
decision on Federal milk order consolidation and reform can be obtained 
from AMS Dairy Programs at (202) 720-4392; any Milk Market 
Administrator office; or via the Internet at: http://www.ams.usda.gov/dairy/.
    Prior documents in this proceeding:
    Notice of Hearing: Issued April 6, 2000; published April 14, 2000 
(65 FR 20094).
    Tentative Final Decision: Issued November 29, 2000; published 
December 7, 2000 (65 FR 76832).
    Interim Final Rule: Issued December 21, 2000; published December 
28, 2000 (65 FR 82832).
    Recommended Decision: Issued October 19, 2001; published October 
25, 2001 (66 FR 54064).
    Extension of Time: Issued November 26, 2001; published November 29, 
2001 (66 FR 59546).

Preliminary Statement

    Notice is hereby given of the filing with the Hearing Clerk of this 
final decision with respect to proposed amendments to the tentative 
marketing agreements and orders regulating the handling of milk in the 
Northeast and other marketing areas. This notice is issued pursuant to 
the provisions of the Agricultural Marketing Agreement Act of 1937, as 
amended (7 U.S.C. 601 et seq.), and the applicable rules of practice 
and procedure governing the formulation of marketing agreements and 
marketing orders (7 CFR part 900).
    The Hearing Notice specifically invited interested persons to 
present evidence concerning the probable regulatory and informational 
impact of the proposals on small businesses. To the extent that this 
issue was raised, it is considered in the following findings and 
conclusions.
    This final decision responds to a Congressional mandate to 
reconsider the Class III and Class IV pricing formulas included in the 
final rule for the consolidation and reform of Federal milk orders. The 
mandate was included in the Consolidated Appropriations Act, 2000 (Pub. 
L. 106-113, 115 Stat. 1501). The findings and conclusions set forth 
below are based on the record of a public hearing to consider proposals 
submitted by the industry to change the pricing formulas in the 
marketing agreements and the orders regulating the handling of milk in 
the Northeast and ten other marketing areas held in Alexandria, 
Virginia, on May 8-12, 2000. Notice of such hearing was issued on April 
6, 2000, and published on April 14, 2000 (65 FR 20094).
    The recommended decision responded to comments received on the 
tentative final decision (issued November 29, 2000; 65 FR 76832) on the 
above hearing and was consistent with the injunction issued by the U.S. 
District Court for the District of Columbia on January 31, 2001. This 
final decision responds to comments received on the recommended 
decision (issued October 19, 2001; 66 FR 54064).

Material Issues to Class III and IV Formulas

    As instructed by the legislation requiring this proceeding, the 
Class III and IV pricing formulas and all of the elements of the 
formulas were re-considered in developing the tentative final decision, 
the recommended decision, and this final decision.
    The material issues on the record of the hearing relate to:
    1. Role of producer costs of production.
    2. Commodity prices (CME vs. NASS).
    3. Commodity and component price issues.
    a. General approaches on make allowances.
    b. Class IV butterfat and nonfat solids prices.
    c. Class III butterfat, protein, and other nonfat solids prices.
    d. Effects of changes to Class III and Class IV price formulas.
    4. Class price relationships.
    5. Class I price mover.
    6. Miscellaneous and conforming changes.
    a. Advance Class I butterfat price.
    b. Classification.
    c. Distribution of butterfat value to producers.
    d. Inclusion of Class I other source butterfat in producer 
butterfat price computation.
    7. Reopening of hearing or issuance of a final decision.

Summary of Changes to the Interim Amendments

    The recommended decision differed from the tentative final decision 
in several respects and included summaries of comments submitted on 
each of the issues within the discussion of the issue. The key changes 
that were made to the interim order amendments in the recommended 
decision were as follows:
    1. In Issue 3c, changes were made to the formulas for calculating 
the protein and other solids prices, and the Class III butterfat price 
would be the same as that calculated for Class IV on the basis of 
butter.
    2. In Issue 3d, the changes made in the Class III component price 
formulas would result in different effects on Class III component, 
skim, and hundredweight prices.
    3. In Issue 6b, the classification of frozen cream, plastic cream 
and anhydrous milkfat would be changed back to Class III.
    4. In Issue 6c, butterfat values would be pooled for the purpose of 
calculating

[[Page 67911]]

producer butterfat prices in the orders in which producers are not paid 
on a component basis. In orders under which producers are paid on a 
multiple component basis, however, the producer butterfat price would 
be the same as that for butterfat used in Classes III and IV.
    5. In Issue 6d, the butterfat in other source milk used in Class I 
is included in calculating the producer butterfat price in marketwide 
pools that do not use multiple component pricing, but would continue to 
be included in the producer price differential calculation in multiple 
component pricing pools.
    6. Issue 7 was changed to explain the reasons for issuing a 
recommended decision at this point in this proceeding, instead of a 
final decision.

Summary of Changes to the Recommended Decision by This Final Decision

    The changes to the recommended decision formulas by this final 
decision are primarily the result of incorporating a farm-to-plant 
product loss:
    1. In issue 3a, an adjustment to the component price formula yield 
factors to account for farm-to-plant component losses is added.
    2. In issue 3b, changes are made to the yield factor used for 
computing both the nonfat solids price and the Class III and Class IV 
butterfat price to reflect farm-to-plant component losses. In addition, 
the yield factor used for computing the nonfat solids price and the 
butterfat price is converted from a divisor to a multiplier.
    3. In issue 3c, the yield factors used to compute the protein price 
are adjusted to account for farm-to-plant component losses and to 
reflect a reevaluation of the quantity of casein retained in the cheese 
making process. The other solids yield factor is adjusted to account 
for farm-to-plant component losses. In addition, the yield factor used 
for computing the other solids price is converted from a divisor to a 
multiplier.

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. Role of Producer Cost of Production

    Proposal 29 in the hearing notice proposed that producers' costs of 
production be incorporated into the Class III and Class IV pricing 
formulas. A number of dairy farmer witnesses testified that, just as 
manufacturing processors are assured that their costs of processing 
milk products will be covered, dairy farmers should also have some 
assurance that they will be able to continue to operate their dairy 
farms without losing money. Under the current system, according to the 
National Farmers Union (NFU) witness, incorporating a make allowance 
for processors but not for producers leaves dairy farmers to bear the 
entire burden of changes in supply and demand.
    Support for using cost of production in the Class III and IV 
pricing formulas was reiterated in the comments received in response to 
the tentative final decision issued November 29, 2000, and the 
recommended decision of October 25, 2001. The NFU comments expressed 
disappointment that no portions of the milk pricing formulas were based 
on producer cost of production. The American Raw Milk Producers Pricing 
Association suggested that the USDA ignored existing law as written in 
the 1937 Agricultural Agreement Act, section 608c(18). Two dairy 
farmers also mentioned their concern about the need to follow 608c(18). 
Another dairy farmer advocated a producer-influenced supply control/
price control system.
    Comments filed by the Maine Dairy Industry Association (MDIA) in 
response to the recommended decision joined in supporting cost of 
production as a part of the pricing formulas. They expressed the 
opinion that cost of production should be included because their 
producers' costs are higher than the price received. The MDIA also 
voiced the unfairness of processors' being assured some ability to 
offset their costs through product make allowances while producers are 
not able to receive such adjustment. Comments received from Schreiber 
Foods indicated agreement with the recommended decision to not use the 
cost of production in setting Class prices.
    As explained in both the proposed rule and final decision under 
Federal order reform and in the tentative final decision and the 
recommended decision in this proceeding, assuring producers that their 
costs of production will be covered addresses only the milk supply side 
of the market and ignores factors underlying demand or changes in 
demand for milk and milk products. As noted by the Dairy Farmers of 
America (DFA) witness, although pricing proposals incorporating cost of 
production have been noticed and reviewed several times in the last 
decade without success, if a sound mechanical concept could be advanced 
that overcomes the objections relative to supply and demand, it should 
be considered.
    The proposals by NFU and National Farmers Organization (NFO) that 
advocated adoption of make allowances that would be adjusted for 
changes in indexes reflecting dairy farmers' production costs are 
discussed under Issue 3a, General Approaches on Make Allowances.
    In this final decision, consideration has again been given to cost 
of production proposals. As noted by the NFO witness, the current 
pricing system uses the interaction of supply and demand for milk 
products as an indirect method of meeting the pricing requirements of 
the Agricultural Marketing Agreement Act of 1937 (the Act) for milk. 
According to the recommended decision, the record contained no new 
dairy farmer cost of production data that could be used to reflect both 
the supply and demand sides of the market for dairy products. The 
recommended decision continued to state that there was no evidence in 
the record that either USDA's Economic Research Service or the CDFA 
costs of production had ever been used to price milk.
    The Act stipulates that the price of feeds, the availability of 
feeds, and other economic conditions which affect market supply and 
demand for milk and its products be taken into account in the 
determination of milk prices. This requirement currently is fulfilled 
by the Class III and Class IV component price calculations. If 
conditions increase supply costs, the quantity of milk produced would 
be reduced due to lower profit margins. As the milk supply declines, 
plants buying manufacturing milk would pay a higher price to maintain 
an adequate supply of milk to meet their needs. As the resulting farm 
profit margins increase, so should the supply of milk. Likewise, the 
reverse would occur if economic conditions reduce supply costs. The 
price of feed is not directly included in the determination of the 
price for milk, but rather is one economic condition which may cause a 
situation in which the price of milk may increase or decrease. A change 
in feed prices may not necessarily result in a change in milk prices. 
For instance, if the price of feed increases but the demand for cheese 
declines, the milk price may not increase since milk plants would need 
less milk and therefore would not bid the price up in response to lower 
milk supplies. Also, other economic conditions could more than offset a 
change in feed prices and thus not necessitate a change in milk prices.
    The pricing system, according to the recommended decision, 
accounted for changes in feed costs, feed supplies, and other economic 
conditions, as explained above. The product price formulas adopted in 
the recommended decision would reflect accurately the market

[[Page 67912]]

values of the products made from producer milk used in manufacturing. 
As supply costs increase with a resulting decline in production, 
commodity prices would increase as manufacturers secure additional milk 
to meet their needs. Such increases in commodity prices would mean 
higher prices for milk. The opposite would be true if supply costs were 
declining. Additionally, since Federal order prices are minimum prices, 
handlers may increase their pay prices in response to changing supply/
demand conditions even when Federal order prices do not increase.
    Additionally, the pricing formulas contained in the recommended 
decision and this final decision are applicable to handlers, since 
handlers are the regulated parties under Federal milk order regulation. 
The formulas are used to establish minimum prices for milk used in 
making particular dairy products, not for determining payments to dairy 
farmers.

2. Commodity Prices (CME vs. NASS)

    As adopted in the interim final rule in this proceeding (published 
on December 28, 2000 (65 FR 82832)), commodity prices determined by 
surveys conducted by USDA's National Agricultural Statistics Service 
(NASS) continue to be used in the component price formulas that 
replaced the BFP. The recommended decision proposed no changes in the 
source of product price data. Likewise, this final decision adopts no 
changes in the source of product price data.
    Several proposals (1, 5, 10 and 19) were considered during the 
current proceeding that recommended using prices reported by the 
Chicago Mercantile Exchange (CME) instead of the NASS surveys to 
determine commodity prices. Both the CME and the NASS surveys were 
supported by testimony at the hearing and in briefs. Several comments 
to the recommended decision supported continuing to use the NASS 
surveys.
    The CME is a cash market where speculators, producers, and 
processors can buy and sell products. It is a mechanism for 
establishing prices on which the dairy industry relies. Thus, many 
contracts to buy and sell dairy products are based on CME prices. A 
USDA witness testified that he is unaware of any other indices used to 
price cheese in the U.S. According to several witnesses, cheese and 
butter processors generally base their contract sales on CME prices.
    The NASS price survey gathers selling prices of cheddar cheese, 
Grade AA butter, nonfat dry milk, and dry whey from a number of 
manufacturers of these products nationwide. At the time the proposed 
rule on Federal order reform was published (January 30, 1998), the NASS 
survey included prices for cheddar cheese only. This survey began in 
March 1997. In September 1998, before the final decision was published 
in April 1999, NASS began surveys of Grade AA butter prices, dry whey 
prices, and nonfat dry milk prices. In developing these commodity 
surveys, input was obtained from the dairy industry on appropriate 
types of products, packaging, and package sizes to be included for the 
purpose of obtaining unbiased representative prices. A sale is 
considered to occur when a transaction is completed, the product is 
shipped out, or title transfer occurs. In addition, all prices are 
f.o.b. the processing plant/storage center, with the processor 
reporting total volume sold and total dollars received or price per 
pound. NASS Dairy Product Prices reports wholesale cheddar cheese 
prices for both 500-pound barrels and 40-pound blocks, USDA Grade AA 
butter, USDA Extra Grade or USPH Grade A non-fortified dry milk, and 
USDA Extra Grade edible non-hygroscopic dry whey. A more detailed 
description of the surveys can be found in the final decision of April 
2, 1999 (64 FR 16093).
    The proponents of proposal 1, Western States Dairy Producers Trade 
Association, et al. (WSDPTA), a group of several trade associations and 
cooperatives, proposed that the NASS commodity prices for butter, 
cheese, and nonfat dry milk that currently are used for computing the 
Federal order component prices be replaced with prices determined by 
trading on the CME. Dry whey was not included in the proposal because 
there is no dry whey cash contract traded on the CME. A witness from 
WSDPTA did not oppose the collection and reporting of NASS data, but 
expressed the opinion that while it serves an important function as 
information, it should not be used to establish prices. The proponents 
presented several benefits of using the CME over the NASS survey for 
commodity prices.
    Proponents explained that by using CME prices in the formulas, 
prices would be known immediately rather than a week later when the 
NASS prices are published, reflecting more quickly the supply-demand 
conditions for dairy products. The one-week delay is caused by the time 
necessary to collect data. A witness for NFO noted that interested 
persons are able to check the CME value of products on a daily basis 
and use the reported prices as a factor in establishing what they will 
pay, or what they will be paid, for cheese.
    A witness from WSDPTA went on to explain that buyers, sellers, and 
speculators trade the CME, trying to obtain a price in their favor, 
while the price actually is determined by supply and demand forces. He 
described the rules as fair and the results as transparent, with 
participants having a number of interests. The witness continued by 
noting that the CME price result is instant and results cannot be 
altered. In contrast, he stated, NASS prices are reported by sellers 
only, who are not disinterested parties. He argued that NASS 
respondents can modify their numbers or file an initial report after 
calculating the price impact of the latest reports.
    The proponents also concluded that the urging by many hearing 
participants that the NASS price series include mandatory participation 
and be audited proves that the NASS series is not reliable enough to be 
used as a price-discovery method.
    Finally, the witness from WSDPTA expressed the view that the NASS 
price series would feed on itself and result in price setting, not 
price discovery. He continued by noting that plants and their buyers 
will obtain prices one week and sell the commodity in the following 
week at a price derived in large part from the price obtained in the 
prior week. The witness compared the NASS survey to the CDFA survey of 
powder prices which, he claimed, results in a circular pricing system 
that is mathematically incapable of fully reflecting the top of the 
market price for powder because so little of the survey volume is 
priced off of the spot market. Proponents expressed the belief that 
this circularity causes prices to remain lower than they would without 
it and that prices would increase more slowly and decrease more rapidly 
than would prices on the CME, causing overall lower prices for dairy 
farmers.
    In the comments filed on the tentative final decision, the 
proponents of changing from NASS to CME prices commented only that USDA 
should reconsider the use of NASS prices. A partner/manager of a dairy 
farm stated that there is little correlation between the NASS and 
wholesale prices, and questioned the accuracy of NASS survey numbers. 
He also stated that block and barrel cheese is traded only between 
manufacturers and that they therefore have an influence on setting the 
price, especially if the percentage of the product traded is very low. 
He argued that a fair price would reflect retail prices or at least 
true wholesale price,

[[Page 67913]]

not the value of the last pound of product produced.
    Opponents of changing from NASS to CME prices to compute component 
prices included International Dairy Foods Association (IDFA), DFA, and 
National Milk Producers Federation (NMPF). Witnesses for these parties 
argued that the NASS survey includes pricing based on a significantly 
larger volume of product than does the CME. In the case of the nonfat 
dry milk market, the table of 1999 monthly CME Cash Markets data from 
the 1999 Annual Dairy Market Statistics showed that there were no sales 
reported for either extra grade or Grade A in the year 1999.
    According to a witness from IDFA, the volume of cheddar cheese in 
the NASS survey is equal to 26.4 percent of all cheddar cheese 
production in the U.S. for the period September 1998 through February 
2000. During the same period, the CME volume of cheddar cheese traded 
represented only 1.7 percent of U.S. cheddar cheese production. The 
witness stated that for the same 18-month period, the NASS survey 
volumes represented 14.4 percent of all U.S. butter production while 
CME trading consisted of only 2.6 percent. He also noted that switching 
from the NASS survey data to the CME data would result in a change from 
a very broad to an extremely thin representation of actual product 
transactions.
    Opponents to the proposal to use CME prices also pointed out that 
prices at the CME are Chicago or Midwest prices based on the delivery 
location specification of the contract. Therefore, they argued, the 
scope of the reported prices for cheese, butter, and nonfat dry milk 
are not national. A witness for Kraft noted that reliance on the CME 
alone would exclude the substantial and growing volume of cheese 
produced in the western United States (U.S.), particularly California. 
A witness for Northwest Dairy Association suggested that a 
transportation credit would need to be used with CME prices, at least 
in the West, to reduce the value of the CME to a more representative 
level. Opponents went on to explain that since the NASS survey contains 
data from plants located all over the United States, NASS prices 
represent a national scope of the prices of each of the particular 
commodities.
    Several of the comments filed in response to the tentative final 
decision supported use of the NASS price series to determine product 
prices. Furthermore, there were several comments filed on the 
recommended decision and they all supported using NASS prices. The 
Michigan Milk Producers Association (MMPA) comment noted that NASS 
``provides the broadest range of price information and is 
representative of the product prices realized by the dairy industry.'' 
In response to the recommended decision, DFA indicated that legislation 
enacted subsequent to the recommended decision improved the 
reliability, completeness, and integrity of the NASS price surveys. On 
November 22, 2000, the Dairy Market Enhancement Act of 2000 was enacted 
thereby authorizing mandatory and verifiable price reporting.
    According to the testimony in the record and a number of the 
briefs, cheese and butter sellers and buyers look to the CME to 
identify the most current price levels. As a result, prices move in 
response to supply and demand conditions in the marketplace as 
reflected at the CME. Since the transaction prices of commodities are 
based off of the CME, it is difficult to see how the NASS survey can 
cause, or result in, circularity. The NASS prices reflect the CME 
prices with a short lag but are based on a much greater volume, 
enhancing the stability of the price series. Continued use of the NASS 
price survey appears to be the best method of obtaining reliable data 
about commodity prices.
    As stated in the final decision on Federal order reform, NASS data 
traditionally has been collected via a survey with voluntary 
participation. The price information, like most NASS data, has not been 
audited. NASS, however, applies various statistical techniques and 
cross-checking with other sources to provide the most reliable 
information available. The issue of mandatory and audited NASS data was 
not within the scope of the rulemaking and could not be addressed on 
the basis of the hearing record. At the time of the hearing NASS was 
not authorized to conduct such activities. As noted above, however, the 
Dairy Market Enhancement Act of 2000 authorized mandatory and 
verifiable price reporting.

3. Commodity and Component Price Issues

a. General Approaches on Make Allowances
    Make Allowances. Changes to the make allowances for each of the 
product formulas used in calculating component prices were proposed and 
discussed at length during this proceeding. Except in the case of dry 
whey, make allowances adopted in the component price formulas in the 
recommended decision were calculated using a weighted average of the 
most recent California Department of Food and Agriculture (CDFA) study 
and the Rural Business Cooperative Service (RBCS) study. A marketing 
cost of $0.0015 per pound is added to both the CDFA costs and the RBCS 
costs, and the CDFA value for return on investment is used to adjust 
the RBCS cost. This is generally the same approach used to determine 
the appropriate make allowances under Federal order reform, and results 
in values that differ little from the formulas adopted at that time.
    For the calculation of the Class III ``other nonfat solids'' price, 
neither the CDFA nor RBCS studies included information on the cost of 
making dry whey. The tentative final decision determined that the make 
allowance for dry whey should remain the same as that for nonfat dry 
milk. However, the results of a survey conducted for this proceeding 
under the auspices of IDFA were included in the recommended decision to 
determine the make allowance for dry whey.
    A number of the proposals considered in this proceeding would 
change the manufacturing, or make, allowances adopted for the pricing 
formulas under Federal order reform. There was considerable testimony 
on the appropriate factors to be considered in establishing make 
allowances, and several sources of data were cited as the most accurate 
to use for such a purpose.
    Two surveys of product manufacturing costs that were averaged for 
use in calculating make allowances under Federal order reform were the 
CDFA study, which is done annually and includes nearly 100 percent of 
dairy products manufactured in California, and the RBCS study, which is 
conducted annually by USDA as an in-plant benchmark study for 
participating cooperative associations. These two surveys had both been 
updated since earlier versions had been used in determining the 
manufacturing allowances used in the component pricing formulas adopted 
under Federal order reform. In addition, the National Cheese Institute 
(NCI), an affiliate of International Dairy Foods Association (IDFA), 
contracted with a third party to conduct a survey of the costs of 
manufacturing cheese and whey powder for use in this proceeding.
    A witness for National Milk Producers Federation (NMPF) stated that 
make allowances should reflect the costs incurred by average plants 
manufacturing the particular dairy product used in the component/Class 
price formulas: butter, nonfat dry milk, cheese, and dry whey. The 
witness went

[[Page 67914]]

on to explain that the procedure used by the Department for determining 
the make allowances under Federal order reform, using an average of the 
CDFA cost of production studies and the RBCS study, was sound and that 
the same procedure should be used as a result of this hearing, using 
the updated data from both surveys. In calculating an appropriate make 
allowance, the witness supported the addition of a marketing cost of 
$0.0015 per pound to both the CDFA costs and the RBCS costs, as under 
Federal order reform, and the CDFA value for return on investment used 
to adjust the RBCS costs under Federal order reform. The witness 
explained that both of these factors should be included as they are 
legitimate and necessary costs incurred in operating manufacturing 
plants. The witness for IDFA supported inclusion of the CDFA cost 
studies in the computation of the make allowance; however, the witness 
stated that the appropriate procedure for computing the make allowance 
for cheese was to compute a weighted average of the CDFA cost studies 
and the NCI survey. The witness explained that the RBCS study does not 
include all the necessary costs that must be recovered in the make 
allowance and that the NCI survey is needed to determine what the 
additional cost values should be. The costs that the IDFA witness 
pointed out--those which are not included in the RBCS survey but which 
are included in the NCI survey--are general plant administrative costs, 
such as the plant manager's salary and corporate overhead, return on 
investment or capital costs, and marketing costs.
    The IDFA representative testified that the danger inherent in 
regulated prices is setting the manufacturing allowance at a level too 
low to assure that manufacturers will be able to recover their costs of 
manufacturing finished products and to have the money needed to invest 
in new plants. The witness pointed out that an inadequate make 
allowance would force manufacturers either to move to areas that do not 
have regulated pricing or go out of business. At the very least, the 
witness explained, the manufacturers would not invest in new plants and 
equipment, which in the long run would cause a decline in the 
productivity of the dairy industry. A number of briefs filed on the 
basis of the hearing transcript emphasized the importance of covering 
all handlers' costs of manufacturing and not just average costs.
    The IDFA witness explained that if make allowances are established 
at too low a level, proprietary plants are placed at a competitive 
disadvantage relative to cooperative-owned plants. The witness 
explained that since cooperatives do not have to pay their producers 
the minimum order price, as proprietary plants are required to do, 
cooperative plants can reduce the prices paid to member producers to 
make up the difference in cost.
    The IDFA witness explained further that the problem with a make 
allowance established below the amount needed to cover plant costs 
occurs because the plant sells the finished product at the same price 
that is used in the formula for establishing the minimum price the 
plant must pay for the raw material (milk). The manufacturing 
allowances are the only place the plant has the opportunity to cover 
its costs, and those allowances are fixed in the formula that 
determines the raw material price.
    The witness for IDFA asserted that there is very little risk in 
setting a make allowance too high. He explained that if the make 
allowance is established at a level above plant costs, the additional 
revenue stream will be corrected through market forces by requiring the 
plant operators to pay competitive over-order premiums to milk 
suppliers to obtain an adequate supply of milk.
    A witness for WSDPTA explained that the most important part of 
determining a manufacturing allowance is to pick a method and stick 
with that method. The witness testified that the appropriate method is 
to use the results of the RBCS study with adjustments to include 
factors for marketing costs and for capital costs. The witness pointed 
out that use of the RBCS study is appropriate because the study is 
voluntary and represents the costs of making the particular 
commodities, and the plants are geographically widely dispersed. The 
WSDPTA witness stated that including the results of the CDFA study in 
the computation of the make allowance for pricing Federal order milk is 
inappropriate since there is no logical reason for considering the 
manufacturing costs of plants that do not procure any of the milk that 
would be priced using those costs.
    Witnesses testifying on behalf of NFU and NFO both supported the 
concept of variable make allowances, in which changes in dairy farmer 
production cost indexes would be used to adjust handler make 
allowances. The NFU proposal would use an average national cost of 
production, presumably as published by USDA's Economic Research 
Service, and the NFO proposal would use the CDFA milk production cost 
index. The witnesses supported such an approach as a means of 
addressing the problem of manufacturers being insulated from changes in 
supply and demand by their fixed make allowances.
    The NFU and NFO witnesses explained that a fixed make allowance, as 
contained in the current pricing system, does not vary with market 
conditions and creates a situation in which manufacturers will not 
respond to market signals since the manufacturers will receive a profit 
no matter what the supply and demand is for the finished products. The 
witnesses testified that as long as the make allowance allows 
manufacturers a sufficient return, the manufacturers will continue to 
produce the finished product even if there is limited demand for the 
product, thus resulting in a continued low price paid to producers for 
their milk. As a result, they argued, producers are left to bear the 
burden of changes in supply and demand. The NFO witness characterized a 
variable make allowance tied to the cost of producing milk as a market-
oriented system.
    The NFU witness described the California milk pricing system, in 
which manufacturers' production costs are covered through the make 
allowance, as an example of the problems encountered by producers with 
the use of product price formulas incorporating make allowances. He 
testified that California continues to produce a large quantity of 
lower-valued products because the pricing system makes the manufacturer 
immune to the supply of and demand for the products. The witness blamed 
the California make allowance system for the traditionally low milk 
prices in California that, he claimed, result in expansion of dairy 
herds to make up for reduced cash flow. The witness predicted that if 
the Federal order system follows the same pricing path, the same 
production patterns as witnessed in California would follow in the rest 
of the United States.
    In comments filed in response to the tentative final decision, NFU 
stated that producers, as well as processors, will fail if they don't 
attain their costs of production. NFU also argued in its comments that 
under a variable make allowance, processors can avoid reduced make 
allowances by increasing product prices.
    The NFU comment overlooks the fact that the make allowances 
included in the component price formulas do not cover all of the costs 
of all processors, and probably allow for greater costs than are 
experienced by some processors. In this sense, the margins experienced 
by processors under product price formulas are variable between plants. 
Also, it is likely that processors share some of their margin

[[Page 67915]]

with producers in the form of over order prices. The degree to which 
this sharing occurs certainly may vary with producers' cost/price 
situations, as perceived by processors. Although increased product 
prices would have the effect of increasing manufacturing margins, the 
ability of processors to increase prices while maintaining sales is 
limited by the fact that the marketplace in which they sell their 
products is competitive.
    There appears to be no logical or economic reason for changing make 
allowances for processing plants because of a change in the cost of 
producing milk. If milk is to clear the market, plants must be willing 
to accept it. Make allowances that decline as a result of increasing 
milk production costs would squeeze plant margins, and manufacturers 
will have to choose between not receiving milk, refusing to receive 
pooled milk, or paying less than order prices to cooperative 
associations for milk used in manufactured products. None of these 
outcomes would be in the best long-term interests of dairy farmers, 
processors, or consumers. Many dairy farmers, facing increased costs of 
production, would have to find alternative outlets for their milk. 
Decisions on the part of many processors to cease operating, use only 
nonpool milk, or buy milk below order prices likely would result in 
very disorderly conditions among dairy farmers looking for outlets for 
their milk.
    Most hearing participants agreed that the make allowance should 
cover the cost of converting milk to a finished manufactured dairy 
product. However, several participants disagreed with the IDFA 
contention that there is very little risk in setting the make allowance 
too high. They argued that if the make allowance is set in excess of 
the cost to manufacture finished products, the additional revenue would 
be kept by the manufacturing plants as higher profits and not 
distributed to the producers supplying milk to the plant. They 
explained that in many parts of the country there is little if any 
competition for the dairy farmers' milk and therefore no incentive for 
a plant to pay above the minimum Federal order price. These plants, 
according to the witnesses, could be expected to keep the extra make 
allowance for themselves. Comments filed by Michigan Milk Producers 
Association (MMPA) on the tentative final decision and the recommended 
decision continued to urge caution against logic that suggests a low 
risk of setting make allowances too high. The cooperative stated that 
not all of its 2,700 members might survive a market adjustment period 
if make allowances were set too high, even if theoretically greater 
premiums might be returned to producers.
    Several witnesses opposed the idea of setting make allowances at 
levels that guarantee plants a profit, or at least a return on 
investment, when the dairy farmers supplying milk to the manufacturing 
plants have no similar assurances for covering the costs of producing 
milk. These witnesses pointed to the Agricultural Marketing Agreement 
Act of 1937, sec. 608c(18), as justification for setting a lower make 
allowance for plants, resulting in higher milk prices that would come 
closer to covering dairy farmers' costs of producing milk.
    As supported by most of the hearing participants, the make 
allowances incorporated in the component price formulas under the 
Federal milk orders should cover the costs of most of the processing 
plants that receive milk pooled under the orders. In part, this 
approach is necessary because pooled handlers must be able to compete 
with processors whose milk receipts are not priced in regulated 
markets. The principal reason for this approach, however, is to assure 
that the market is cleared of reserve milk supplies.
    In comments on the tentative final decision, IDFA continued to 
argue that some legitimate manufacturing costs are excluded from the 
RBCS survey and attacked the data gathered as ``inherently suspicious 
and unreliable.'' IDFA also stated that the survey is not taken 
seriously by some of its participants. Both IDFA and Leprino Foods 
Company argued in comments on the tentative final decision that adding 
factors for costs excluded in the RBCS study constitutes a less 
accurate result than if those costs were included in a comprehensive 
study. IDFA also commented that the need to allow for changes in cost 
factors that might occur over time (such as recent increases in energy 
costs) also supports the need for a make allowance that is too high 
rather than one that is too low.
    Several comments filed on the recommended decision indicated 
opposition to establishing make allowances based on an average of plant 
manufacturing costs. Agri-Mark Dairy Cooperative argued that using an 
average manufacturing cost in the pricing formulas would result in half 
of all handlers having higher manufacturing costs. IDFA noted in their 
comments that mechanically adopting a make allowance survey ``would by 
definition mean that the one-half of cheese produced in plants with 
greater than average costs would be forced out of business.'' Comments 
received from Northwest Dairy Association and Westfarm Foods, Inc., 
stated that USDA's use of ``a simple average risks half the industry.''
    This final decision finds that continuing to use an average make 
allowance of dairy manufacturing plants' costs is appropriate. Reliance 
on product-price formulas necessitates the need to reflect and to 
offset the manufacturing costs incurred and is supported by the record 
even though there is disagreement on exactly how to accomplish this. 
Using an average make allowance provides a reasonable measure to 
reflect and offset manufacturing costs and is the only reasonable 
measure that can be supported by the record evidence.
    Although the RBCS survey does not include such costs as general 
plant administrative costs, return on investment or capital costs, and 
marketing costs, it is a survey that has been done for sixteen years 
with the same fundamental methodology and with some continuity of 
participants. Because the survey is done for the benefit of the 
participating organizations (cooperatives) to help them identify their 
costs and compare them with those of their peer group, there is every 
reason to believe that the costs provided are as accurate as possible. 
In addition, the years of experience with the survey have enabled USDA 
to shape the questions to obtain more accurate results.
    When the RBCS survey results are adjusted to include the factors 
that were mentioned above as not included by using the values for those 
factors from the CDFA survey, the two surveys' costs are comparable, 
especially considering that the RBCS survey represents manufacturing 
plants with a wide distribution around the U.S., while the CDFA survey 
includes only California plants. The CDFA survey is also done every 
year and is done according to a published procedure manual, with the 
costs being audited by personnel employed by the State for that 
purpose. Although no CDFA employee was available to respond to 
questions about the conduct of the survey, official notice was taken of 
the procedure manual and of California publications associated with 
manufacturing cost data. In addition, several witnesses who are deeply 
involved with the California dairy industry testified regarding the 
perceived reliability of the survey results.
    The use of manufacturing plant data from California plants that do 
not procure any of the milk that would be priced using those costs 
should not

[[Page 67916]]

cause concern. The costs of manufacturing dairy products may vary 
slightly by region, but adoption of representative make allowances in 
product price formulas should not fail to use a well-documented study 
that includes a large amount of audited data, such as the CDFA survey.
    In contrast to the RBCS and CDFA surveys, the survey of cheese and 
whey powder manufacturing costs arranged for by NCI was developed 
solely for the purpose of establishing costs to be used in determining 
make allowances for this proceeding. The survey was conducted by 
persons unfamiliar with the dairy industry among cheese processors who 
would benefit from the adoption of overgenerous make allowances. No one 
who actually conducted the survey was made available to testify, and 
although the IDFA witness stated that survey participants would testify 
regarding their responses to the survey later in the hearing, none of 
the participating firms' witnesses would respond to questions about 
their firms' results.
    Although less weight must be given the NCI survey than either the 
RBCS or the CDFA surveys for the reasons stated above, the NCI survey's 
resulting manufacturing costs for cheese are not considerably different 
from a weighted average of the RBCS and the CDFA surveys. In fact, 
although the IDFA hearing participants went to great lengths to 
discredit the RBCS study for use in identifying an appropriate level of 
manufacturing costs, the hearing record reflects that the NCI survey of 
cheese and dry whey manufacturing costs used the RBCS 1996 survey 
results to identify outliers (plus or minus 10 percent) in the study 
commissioned by NCI.
    In comments filed regarding the tentative final decision, IDFA 
urged that USDA use the NCI and CDFA studies for use in determining 
make allowances for cheese and whey powder rather than using the RBCS 
and CDFA studies. IDFA stated that the RBCS study was neutral and was 
not developed or commissioned for use in this proceeding. Cooperative 
associations attending the National Milk Producers Federation annual 
meeting were encouraged to participate in the survey so the results 
could be used in this proceeding. Since the RBCS study was developed 
and has continued for sixteen years for purposes other than 
establishing make allowances, and the methodology did not change from 
past years for the study used in the hearing, it is unlikely that it 
was designed for any purpose other than the one for which it was 
developed and has been used for that period. If the comment is intended 
to raise concerns that cooperative associations generally favor lower 
make allowances, it should be noted that only manufacturing 
cooperatives were surveyed. The record contains ample evidence that 
many manufacturing cooperatives desire make allowances just as generous 
as those favored by proprietary manufacturers.
    A comment filed on behalf of the Association of Dairy Cooperatives 
in the Northeast (ADCNE), some of which are national in scope, argued 
that use of the NCI data would demean the importance of sworn first-
hand testimony that is subject to cross-examination.
    As a result of the differences in conduct of the three surveys, 
manufacturing costs used to determine appropriate make allowances for 
cheddar cheese, butter, and nonfat dry milk in this proceeding are 
calculated primarily from a weighted average of the RBCS and CDFA 
surveys, with a check against the NCI survey cost of manufacturing 
cheddar cheese. Since the record lacks any other data regarding the 
cost of making whey powder, the NCI survey results are used for the 
make allowance in the other solids formula.
    One proposal included in the hearing notice would have eliminated 
any marketing allowance from the make allowances, and a number of 
witnesses' testimony objected to the inclusion of return on investment. 
The American Farm Bureau witness questioned the need for a marketing 
allowance since producers already pay a 15-cent assessment for 
promotion and research. A brief filed by the proponent of eliminating 
the marketing allowance stated that the allowance appears to be an 
``adjustment'' or a ``hedge,'' since it is not defined in the final 
decision in the Federal order reform process.
    There was general agreement among those testifying that a marketing 
allowance should be included in manufacturing costs, but no consensus 
about the appropriate number. Some of the costs covered by the 
marketing allowance include maintaining and staffing warehouses, 
supporting a marketing and sales staff, and transporting product to 
market, as well as accounting costs associated with the sale of 
products. The NCI survey identified a marketing cost of $0.0011 per 
pound of product, while the DFA witness stated that DFA's costs were 
approximately $0.0018. The DFA witness testified that because the costs 
included in the activities designated as marketing generally fall 
within a common department under common management, it is appropriate 
to apply the same allowance to each product.
    A witness for Northwest Dairy Association (NDA), a cooperative 
association in the Pacific Northwest, stated that NDA's marketing costs 
are $0.0026 but identified costs associated with the aging of cheese as 
included in that number. Since the NASS survey price does not include 
cheese intended for aging, the marketing allowance certainly should not 
include costs of aging cheese. The Associated Milk Producers, Inc. 
(AMPI), witness used a $0.0024 marketing allowance in the calculation 
of AMPI's proposed make allowance for nonfat dry milk. The witness for 
Agri-Mark, Inc., a large Northeast cooperative association with several 
processing plants, stated that Agri-Mark's estimates of marketing costs 
ranged from $0.0025 to $0.005 per pound.
    The costs identified as those included in a marketing allowance are 
necessarily incurred in getting a product to market and are not related 
to the consumer education and advertising activities covered by the 
National Dairy Board assessment. The recommended decision stated that 
since the marketing cost determined by NCI was the only estimate 
included in the hearing record that was supported by a survey. It 
varies from the $0.0015 rate included in Federal order reform by only 4 
one-hundredths of a cent and applies only to cheese and dry whey. The 
recommended decision concluded that there was no basis for making any 
change to the marketing allowance.
    Some producer witnesses objected to the inclusion of any allowance 
for return on investment in manufacturing allowances on the basis that 
dairy farmers are assured of no such return. The CDFA manufacturing 
cost surveys include allowances for depreciation, which is included in 
the non-labor processing costs; and for return on investment, which 
represents the opportunity cost of the processors' resources invested 
in the business. These costs are supported by audited data.
    Both the marketing allowance and return on investment factors 
should be included in the manufacturing allowances provided in the 
component price formulas at the rates supported by the CDFA data. If 
processors are not provided enough of a manufacturing allowance to 
market the product they process, or to earn any return on investment, 
they will not continue to provide processing capacity for producers' 
milk. At the same time, the manufacturing allowances incorporated in 
the formulas will not provide enough of an allowance to assure that 
every processor, no matter how inefficient or

[[Page 67917]]

high-cost, will earn a profit. Allowances set at such a level certainly 
could result in the situation warned of by producer groups in which 
processors manufacture greater volumes of product than the market 
demands because they are guaranteed a profit on all their production. 
As a result, the only way to market all of the product would be to 
reduce prices, with a profit to processors still locked in through the 
make allowance, which would result in decreasing prices paid to 
producers. In addition, manufacturers who are assured a profit on all 
of their output would have a lesser incentive to make a sufficient 
quantity of milk available for fluid use--a basic goal of the Federal 
milk order program.
    Farm-to-plant losses. One area addressed by several hearing 
participants in testimony and in briefs as appropriate to consider in 
establishing make allowances or yields was the loss of milk components 
during manufacturing processes.
    Two cheese manufacturers, IDFA and Land O'Lakes (LOL), continued to 
argue in their comments on the tentative final decision that make 
allowances should be increased, or yields reduced, to reflect shrinkage 
between farms and warehouses.
    The tentative final decision and the recommended decision stated 
that orders have always provided an allowance for shrinkage and that 
inflating costs of production or reducing yield factors to reflect 
shrinkage would not properly reflect the value of producers' milk used 
in manufactured products. The recommended decision also stated that 
processing costs determined by surveys underlie the manufacturing costs 
incorporated in the pricing formulas and were expressed in cents per 
pound of end product manufactured, not in the cost per hundredweight of 
converting milk to manufactured products. The recommended decision went 
on to state that the component pricing formulas were based on the 
content of those components in the finished products for which a 
manufacturing cost per pound had been established. The recommended 
decision concluded that both the CDFA and RBCS cost surveys allocated 
all plant costs to actual end products and that the yield factors in 
the formulas referred to the amount of finished product resulting from 
the processing of a given volume of input or to the amount of component 
present in the finished product.
    Comments on the recommended decision from Kraft Foods, Inc., 
Leprino Foods Company, IDFA, Hilmar Cheese Company, Agri-Mark Dairy 
Cooperative, Davisco Foods International, Glanbia Foods, Inc., Winger 
Cheese, Inc., and Northwest Dairy Association and WestFarm Foods (NDA) 
expressed concern that the Class III and IV milk pricing formulas 
offered in the recommended decision do not sufficiently address the 
costs incurred in the assembly, transportation, and delivery of milk 
and its components. Kraft, Leprino, Hershey, Dairy Farmers of America 
(DFA), and Dr. David Barbano of Cornell University testified at the 
hearing as to the need to specifically account for the losses in milk 
solid components that occur between moving milk from the farm or 
diverting plants and the receiving manufacturing plant. The witnesses 
and comments provided testimony that these losses are inherent in the 
handling of milk and that this issue was inadequately addressed in the 
recommended decision. This final decision finds the arguments for 
specific consideration of the impact of shrinkage in the product price 
formula persuasive.
    The hearing testimony as well as comments to the recommended 
decision provide sufficient evidence to conclude that the recommended 
decision formulas do not properly consider farm-to-plant losses that 
occur. Testimony indicates that these losses are 0.25 percent on all 
milk solids, and that butterfat solid losses are an additional 0.015 
pounds per hundredweight of milk. These losses need to be represented 
in the pricing formula, according to these claimants, to account for 
the out-of-plant losses that occur prior to processing raw milk into 
finished products such as cheese or butter/powder.
    Witnesses for Kraft, Leprino, DFA, and Hershey, among others, 
testified that the difference between the quantity of milk, including 
components, received at the plant should be accounted for in the price 
formulas, since the formulas are based on yields attributable to 
components received at the plant. Milk unrecoverable in the movement 
from farm-to-plant cannot yield finished product.
    Comments received from Select Milk Producers, Inc., and Continental 
Dairy Products, Inc., supported the Class III and IV pricing formulas 
as offered in the recommended decision, offering that including an 
adjustment for farm-to-plant loss would cause confusion.
    As indicated earlier, Federal orders have always contained 
provisions for ``shrinkage.'' Since handlers have to account for all 
receipts and utilization, the shrinkage provision allows assigning a 
value to milk losses at the lowest priced class, providing explicit 
recognition that some milk loss is inevitable in farm-to-plant 
movement. If, however, the loss exceeds the allowable level, the excess 
shrinkage is priced at Class I. This ``shrinkage,'' as discussed above, 
refers to milk losses associated with how the order classifies and 
pools milk. Current shrinkage provisions are associated with pool 
distributing plants that produce fluid milk products. In this context, 
shrinkage provisions also provide fluid milk handlers the ability to 
assign milk losses to a lower class use value within certain 
parameters.
    The loss allowances in the Class III and IV formulas are intended 
to reflect actual losses that are beyond the processing handler's 
ability to control. In addition, farm-to-plant losses cannot be 
assigned to a lower class value since the milk solids unavailable for 
processing effectively have no value in the Class III and IV formulas.
    The price formulas in the recommended decision included typical 
plant losses associated with the conversion of raw milk to the final 
dairy product and relied on Federal order reform findings that the 
value of Class III and IV milk would be determined from the NASS survey 
prices collected on butter, cheese, dry whey, and nonfat dry milk. 
Pricing formulas generally include both yield factors and make 
allowances which together account for the entire conversion of raw milk 
to a final dairy product. Comments received on the recommended decision 
indicated that milk solid losses between the farm and the receiving 
plant are real, unavoidable, and common.
    Prior to Federal order reform, milk pricing for all Federal milk 
marketing orders relied on the Grade B Minnesota-Wisconsin (M-W) price 
series and later the Basic Formula Price (BFP). These prices were 
determined by manufacture milk plant survey reports of Grade B milk 
purchases free of government price regulation and represented a 
competitive pay price for milk. The competitive pay price factored the 
entire cost of processing milk purchased from farms into finished dairy 
products. In contrast to the competitive pay prices, Federal order 
reform could no longer rely on a competitive pay price and purposefully 
chose NASS surveys of end-product prices and sales to establish Class 
III and IV prices with product price formulas. Many of the plants 
reporting to NASS purchase large quantities of milk from individual 
producer cooperatives. The end-product pricing formulas developed under 
reform were based in part upon the cost to process raw milk into 
finished dairy products.

[[Page 67918]]

    After reevaluation of the hearing testimony and comments, this 
final decision reverses the recommended decision by including an 
adjustment for farm-to-plant losses of butterfat and nonfat solids. It 
is necessary to include such an adjustment in using end-product pricing 
formulas for determining component prices. Since the handlers receiving 
milk from producers pay the producers on the basis of farm weights and 
tests, handlers do not receive all of the milk components due to farm-
to-plant losses. An adjustment to the price formulas to account for the 
difference in milk components paid for versus components actually 
received is appropriate. Based on the hearing record and comments filed 
by numerous parties, the farm-to-plant adjustment will reflect a 0.25 
percent loss of nonfat solids, including protein and other solids, and 
a 0.25 percent loss of butterfat plus a 0.015 pounds loss of butterfat. 
These adjustments are reasonable and are reflected in the respective 
yield factors used for computing the milk component prices.
    These loss allowances are adopted into the Class III and IV pricing 
formulas. The farm-to-plant losses are reflected on the end-products 
that result from Class III and IV milk, namely, cheese, dry whey, 
nonfat dry milk, and butter. They are reflected in this way to ease the 
concerns raised by Select Milk and Continental Dairy who indicated that 
reflecting farm-to-plant losses on the front-end of the product 
formulas (based on farm milk) may cause confusion.
    A detailed description of the amendments to each of the respective 
pricing formulas is provided below. This final decision incorporates an 
adjustment to the respective yield coefficients of each milk component. 
The adjustment is based on an overall factor of 0.25 percent loss of 
each milk component and an additional 0.015 pounds of butterfat lost 
between the farm and the receiving plant.
    In-plant losses. Several handlers commented that in-plant losses 
should be included in the formulas used for computing the component 
prices. In this regard in-plant losses represent milk that cannot be 
processed into dairy products due to the handling of milk by the plant. 
This final decision does not include an adjustment for in-plant losses 
because a manufacturing plant has control over the magnitude of in-
plant losses and therefore should not be compensated for such losses, 
unlike the farm-to-plant loss which is outside the control of the plant 
operator. This adjustment is reflected by recognizing that the cost of 
converting 100 pounds of milk into a finished product is not 
significantly affected by the quantity of finished product produced. 
For example, if it costs $20 to convert 100 pounds of milk into 10 
pounds of cheese assuming absolutely no losses, the make allowance 
would be $2 per pound. However, if there is a loss of a half pound of 
cheese prior to the final packaging of the cheese, only 9.5 pounds of 
cheese is ``produced.'' In this example, the make allowance would be 
$2.11 per pound of finished product. Thus the make allowance based on 
pounds of product produced does account for at least a portion of in-
plant losses.
    Ratemaking. In comments received to the recommended decision, 
Kraft, joined by NDA, argued that including make allowances in the 
pricing formulas was ``ratemaking.'' Kraft stated that the make 
allowances formulated and used in the Class III and Class IV formulas 
have not followed the standards needed to comply with ratemaking. Kraft 
stated that the make allowances are not constitutionally valid because 
they do not ensure that manufacturing costs provide for a reasonable 
rate of return for manufacturers.
    In seeking to characterize the provisions of make allowances in 
Class III and Class IV pricing formulas as ratemaking, the commentors 
are ignoring the unique and longstanding treatment of the milk pricing 
provisions, including make allowances, in Federal milk marketing order 
regulations. The make allowances in the Class III and Class IV pricing 
formulas do not constitute ratemaking despite arguments that they do. 
The make allowances adopted are used in establishing minimum prices for 
milk under the authority and requirements of the Agricultural Marketing 
Agreement Act and are different in kind from the ratemaking referred to 
by the commentors.
    Other issues. A comment filed by Lamers Dairy to the tentative 
final decision argued that using make allowances to calculate Class III 
and Class IV prices but not Class I and Class II prices constitutes 
unequal treatment. The comment disregarded that make allowances in the 
Class III and Class IV price calculations are used to determine prices 
for milk used in those classes, and that the prices for milk used in 
Classes I and II are based on those milk prices. The Class I and II 
prices are determined for the purpose of valuing milk in uses that are 
alternatives to manufacturing uses. Once the Class III and IV prices 
have been established, the Class I and II prices can be calculated 
using differentials from the base prices. No further comments on this 
issue were received.
b. Class IV Butterfat and Nonfat Solids Prices
    Butterfat Price. This final decision continues to use the NASS 
price for Grade AA butter in calculating the butterfat price to be used 
in Class IV, and uses the current and the recommended decision's make 
allowance of $0.115. However, this final decision changes the use of a 
0.82 divisor in the price formula to a multiplier of 1.20 in order to 
provide consistency to price formulas and to account for farm-to-plant 
milk losses.
    The recommended decision continued to use the NASS price for Grade 
AA butter for calculating the butterfat price to be used in Class IV, 
and it continued to change the manufacturing allowance in the butterfat 
formula by \1/10\ of a cent per pound of butter from the allowance used 
under Federal order reform. The recommended decision also recommended 
that the 0.82 divisor in the price formula be unchanged. The make 
allowance change is the same as that included in the tentative final 
decision, and neither it nor the other factors were affected by the 
injunction. However, the injunction resulted in the same butterfat 
price formula being used to value both Class III butterfat and Class IV 
butterfat.
    Several proposals were heard that would reduce butterfat prices, 
either by reducing the butter price used in the computation of the 
butterfat prices for all classes or by subtracting a fixed amount from 
the butterfat price computed for Class IV. Proposals also were made 
that would change the make allowance used in calculation of the 
butterfat prices. There were no proposals to change the butterfat 
divisor of 0.82, although one witness representing a western 
cooperative association suggested that it be reconsidered as he felt it 
did not include a shrinkage factor.
    Product Price (Butter). This final decision continues to use the 
NASS price for Grade AA butter in calculating the butterfat price to be 
used in Class IV. Several witnesses for proprietary processor 
proponents of the proposal to deduct six cents from the butter price 
before computing the butterfat price stated that historically the value 
of butterfat in the Federal milk orders has been based on the price of 
Grade A butter. The witnesses explained that an equivalent price 
determination had been issued in 1998 (when the CME discontinued 
trading Grade A butter)

[[Page 67919]]

where nine cents would be subtracted from the Grade AA butter price for 
use in calculating Federal order butterfat prices. This equivalent 
price, according to the witnesses, was found to be ``essential'' to the 
continued operation of the Federal milk order program. Further, they 
argued that its adoption continued the policy of basing butterfat 
pricing under the Federal milk orders on a value below that of Grade AA 
butter.
    The witnesses complained that under Federal order reform the 
butterfat value is determined by using the NASS Grade AA price of 
butter, which effectively increases the butterfat value under Federal 
milk orders. According to proponents' calculations, the increase does 
not amount to a full nine cents but is tempered by the use of the NASS 
Grade AA price, which has averaged approximately three cents below the 
CME Grade AA price, in the butterfat pricing formula. Therefore, they 
stated, the actual increase in the butter price used to calculate 
butterfat prices is approximately six cents. According to the 
witnesses, subtraction of six cents from the NASS butter price would 
return the relationship between the butterfat value under the orders 
and the selling price of butter to the relationship that existed prior 
to Federal order reform.
    Several witnesses explained that when handlers must pay for 
butterfat on the basis of the Grade AA butter market they cannot then 
sell cream or finished products at a price that would allow them to 
recover their costs. They testified that cream is sold at a price that 
is termed a ``multiple'' of the butter price, and that the multiples 
used when the butterfat price was calculated from the Grade A butter 
price have not adjusted to the new pricing formula using Grade AA 
butter.
    The IDFA witness pointed out that the IDFA proposal to subtract six 
cents from the NASS Grade AA butter price would apply not only to the 
butterfat formula for Class II, Class III, and Class IV but would apply 
to the advance butterfat formula used for computing the Class I 
butterfat price. The witness testified that by applying the same 
formula to all classes of butterfat, the current relationship between 
the class prices would be maintained. The witness contended that there 
is no justification for changing the relationships between the class 
prices, particularly if the adjustment would widen the class price 
spreads or, in effect, increase the Class I and Class II differentials.
    Witnesses for NMPF and several large cooperative associations 
testified in support of NMPF's proposal to reduce the calculated 
butterfat price by six cents, with the reduction applied to Class IV 
butterfat only. Under this proposal, the computation of the butterfat 
prices for other classes would not contain the six-cent adjustment. 
Several witnesses representing cooperative associations that process 
butter explained that butter manufacturers incur additional costs when 
procuring cream used for manufacturing butter as opposed to the cost of 
converting producer milk to butter. The witnesses explained that these 
additional costs include transportation, additional handling, and 
additional pasteurization. The witness for LOL testified that the 
additional costs amounted to 4.57 cents per pound of butterfat for 
transportation and 0.4 cents per pound for receiving, storing, and 
repasteurization. A witness for Agri-Mark stated that Agri-Mark's 
transportation costs are slightly less than LOL's, probably due to the 
proximity of the Agri-Mark plant to the sources of cream, but that the 
other additional costs are slightly higher than the LOL costs, at 0.5 
cents per pound of butterfat.
    The proponents of reducing the Class IV butterfat value also 
referred to the computation of the California Class 4a butterfat price, 
which involves a subtraction of 4.5 cents per pound from the CME Grade 
AA butter price to adjust for the costs of moving butter from the west 
coast to the Midwest.
    Those parties who favored reducing the butter price before using 
the butterfat price formula to calculate any of the butterfat prices 
disagreed vehemently with the proposal to reduce only the Class IV 
butterfat price. They argued that such a reduction would distort the 
relationship between the Class II and Class IV prices, resulting in a 
greatly-increased price for Class II butterfat in relation to Class IV 
butterfat. Specifically, the projected increase in the Class II-Class 
IV butterfat price difference was cited as 6.7 cents per pound (from 
the current difference of 0.7 cents). These parties argued that 
butterfat values would most appropriately be reduced by the same degree 
in all classes.
    The price to be used for butterfat in Class III and Class IV should 
be computed by subtracting a make allowance of 0.115 dollars per pound 
from the monthly average NASS Grade AA butter price and dividing the 
result by 0.82 since 1.2213 pounds of butter can be made from 1 pound 
of butterfat. The Class II butterfat price should continue to be the 
Class IV butterfat price plus 0.007 cents, while the Class I butterfat 
price will be the advance butterfat price plus the applicable Class I 
differential.
    Contrary to the belief stated by some witnesses, the use of the 
Grade AA butter price for computing the butterfat price under Federal 
order reform was not an ``oversight.'' Trading of Grade A butter on the 
CME ended June 26, 1998 (not by USDA, as implied in one brief, but by 
the CME) because the volume of Grade A butter traded was not great 
enough to warrant maintaining a trading venue. One brief argued that 
the Grade A butter price represents a minimum price, and that there is 
no need for concern that there will not be an available market for 
Grade A and Grade B butter. However, with the end of trading in Grade A 
butter on the CME, there is no published (or any other known) source 
for obtaining a price for Grade A butter.
    The use of the Grade AA butter price for establishing butterfat 
prices is appropriate since that is the only grade of butter that has 
significant enough trading volume to warrant a publicly-reported price. 
Grade AA butter prices are the only butter prices regularly available 
and represent the vast majority (about 95 percent) of the butter sold. 
Although the ``multiples'' of the butter price apparently had not 
adjusted to the use of the Grade AA price during the first 4 months of 
experience under the revised orders and probably should not be expected 
to adjust during the period in which this proceeding is under 
consideration, the marketplace should, in time, make the needed 
adjustments.
    Various witnesses estimated that Grade A and Grade B butter 
combined make up 3-7 percent of the butter in the U.S. Although a 
witness noted that the Minnesota-Wisconsin (M-W) price for non-Grade A 
milk continued to be surveyed even after the percentage of milk 
eligible for the survey had fallen below a 5 percent level, it was 
widely recognized for some time that a pricing alternative to the M-W 
must be found because the M-W eventually would no longer provide a 
representative price for a large volume of unregulated milk. Similarly, 
with the decline of Grade A butter (and the unavailability of prices 
for that product), the only alternative available for determining price 
is Grade AA butter. A finding in the equivalent price determination 
that a Grade A butter price was ``essential'' to continued operation of 
the orders referred solely to the fact that the Grade A price was 
specified in all of the orders at that time, not that the butterfat 
value under Federal milk orders could never be based on any other 
price.
    Making an adjustment to a clearly valid price series to approximate 
a price

[[Page 67920]]

series that has been discontinued for several years due to insufficient 
volume for trading is inappropriate. Comments to the tentative final 
decision from IDFA and Schreiber Foods continued to encourage the use 
of an estimate of the discontinued Grade A price series for the current 
formulas. Since it has been about four years since a publicly-traded 
price for Grade A butter has been available, it is impossible to 
determine what the current difference between these prices would be 
because there are no reports of the Grade A price available. The vast 
majority of butter made and sold in the U.S. is Grade AA, and that is 
the appropriate product to which to base a value of butterfat used in 
producing butter.
    The 3-cent average difference between the CME and NASS butter 
prices makes up \2/3\ of the 4.5-cent adjustment made by CDFA in 
calculating the value of butterfat used in butter. An additional 6 
cents deducted from the butterfat price calculated from the NASS price 
would much more than make up the remaining 1.5-cent difference. Also, 
the 4.5-cent CDFA adjustment is made for the purpose of reflecting the 
cost of moving butter from California to Chicago. The butterfat price 
calculated under the Federal order program is not intended to apply to 
only one state. The NASS price is a nationwide survey and likely 
includes a significant representation of California butter prices. If 
there are additional costs involved in making butter, they would more 
appropriately be included in the make allowance for butter.
    Make Allowance (Butter). This final decision continues to use the 
current and the recommended decision's make allowance of $0.115. The 
make allowance factor in the butterfat price formula should be derived 
from a combination of the manufacturing costs determined by CDFA and by 
RBCS, as they were in the tentative final and recommended decision. The 
CDFA cost data is divided into two groups representing high cost and 
low cost butter plants, with the four plants in the high cost group 
manufacturing, on average, about the same average number of pounds of 
butter as the seven plants in the RBCS study. Use of the data for the 
CDFA high-cost group of butter plants is more appropriate than use of 
the weighted average cost for all of the California plants because it 
is more likely that the high-cost plants, like the plants in the RBCS 
survey, serve a predominately balancing function.
    When the RBCS data is adjusted for packaging cost, general and 
administrative costs, and return on investment with the CDFA data for 
the high cost group, and with a marketing allowance of $0.0015 added to 
both sets of data, the weighted average of the two data sets is $0.115. 
This butter manufacturing allowance was very close to the Federal order 
reform allowance of $0.114. As adopted in the tentative final decision, 
the make allowance of $0.115 continues to represent the costs of making 
butter in plants that serve a balancing function.
    The increased costs of making butter, not including transportation, 
cited by the proponents of reducing the butterfat price are expected to 
be included in this manufacturing allowance, which exceeds the low cost 
group in the CDFA survey by 3 cents per pound. The only class of use 
for which adjustments for transportation have regularly been included 
under Federal order regulation is Class I. Assuring that the order 
provides an allowance for moving milk used in manufactured products 
would interfere with provisions designed to assure an adequate supply 
of milk for fluid use.
    Comments to the recommended decision from IDFA again encouraged 
lowering the Grade AA butter price by subtracting six cents from the 
NASS Grade AA butter price before computing the Class III and Class IV 
butterfat prices. IDFA added that if the Grade AA butter price was not 
reduced then the make allowance should be increased by 4.5 cents.
    For the same reasons as stated above in response to comments on the 
tentative final decision and the recommended decision, this final 
decision will continue to use the NASS Grade AA butter price to compute 
the ClassIII and Class IV butterfat price.
    Yield (Butter). As discussed above, this final decision provides an 
allowance for butterfat lost in moving milk from the farm to the 
processing plant. In response to the recommended decision, numerous 
Class III and IV processors provided comments expressing concern that 
the Class III and IV milk pricing formulas did not allow for general 
and common losses associated with the assembly, transportation, and 
delivery of milk and its components. The record supports concluding 
that the Class III and IV butterfat losses from the farm-to-the plant 
be computed as follows:

Class III & IV Fat Loss = (Fat Pounds x 0.0025) + 0.015

    The loss allowance for butterfat will be reflected by adjusting the 
0.82 divisor in the butterfat price formula. Testimony and comments 
indicate that farm-to-plant losses on all milk solids is 0.25 percent 
(0.0025) with butterfat incurring an additional loss of 0.015 per 100 
pounds of milk. The butterfat price formula is determined as follows:
    [sbull] For every pound of butterfat, 0.0025 pounds is lost in the 
farm-to-plant transfer (1.000-0.0025 = 0.9975).
    [sbull] In addition, for every pound of butterfat, there is an 
additional 0.0150 farm-to-plant loss on butterfat solids (0.9975-0.0150 
= 0.9825 pounds of butterfat).
    [sbull] Dividing 0.9825 by 0.82 results in a butterfat factor of 
1.20 (0.9825/0.82 = 1.20).
    [sbull] Therefore, the Class III and IV butterfat value per pound 
is computed as follows:

(NASS butter price -0.115) x 1.20

    This final decision chooses to multiply the NASS butter price by 
1.20 instead of dividing the NASS butter price by 0.82. This change in 
the formula from division to multiplication is made to simplify and 
provide consistency in the pricing formulas used for all milk 
components and includes an allowance for farm-to-plant losses.
    Although one witness suggested that the divisor in the butter price 
formula that reflects the butterfat content of butter be reconsidered, 
he did not indicate any number more appropriate than the 0.82 divisor 
used in the current formula. There was no other testimony in the record 
questioning the butter content factor. In fact, the only data in the 
record applicable to the issue was a CDFA report on butter and powder 
yields at California plants in 1996 that was included in an exhibit. 
This report shows a 1.2213 weighted average butter yield (1 pound of 
butterfat results in 1.2213 pounds of butter), which corresponds to the 
use of the 0.82 divisor.
    The record does not support adoption of a Class IV butterfat price 
that is not reflected directly in the Class II butterfat price. There 
was testimony from several witnesses that the current Class IV-Class II 
price relationship is rational and appropriate, and an adjustment to 
the Class IV butterfat price that is not reflected in the Class II 
butterfat price would disrupt the current relationship. In addition, it 
would seem reasonable that some of the extra costs claimed by butter 
manufacturers, such as transportation costs for supplemental cream 
supplies, butterfat standardization of outside cream sources, and 
additional pasteurization would be as applicable for Class II 
manufacturers of high-fat products using surplus cream as for butter 
makers. Accordingly, reduction of the Class IV butterfat price only is 
not considered appropriate.

[[Page 67921]]

    This final decision modifies the Class III and IV butterfat price 
formula as follows:

(NASS AA Butter Price -0.115) x 1.20

    Class IV Nonfat Solids Price. This final decision maintains the use 
of the NASS survey price reported for nonfat dry milk and maintains the 
make allowance of 14 cents per pound of nonfat dry milk as indicated in 
the previous decisions issued in this proceeding. This final decision 
also changes the divisor from 1 to 0.99 in order to account for farm-
to-plant losses of nonfat solids and to simplify and provide 
consistency to price formulas. Nonfat milk solids in buttermilk are 
removed from the computation of the Class IV nonfat solids price.
    The tentative final decision eliminated the 1.02 divisor in the 
nonfat solids price formula to reflect the incorporation of dry 
buttermilk (with a lower product price and higher make allowance).
    Six proposals to change some part of the nonfat solids price 
formula were considered at the hearing. Three of the proposals dealt 
with the manufacturing allowance for nonfat dry milk (NFDM), with two 
of the proposals advocating use of the RBCS survey results and one 
proposal supporting an increase in the make allowance. The other three 
proposals supported changes in the yield factor of the nonfat solids 
price formula that would reflect greater powder yield from a pound of 
nonfat solids. Two of the proposals to change yield factors included 
using CME NFDM prices instead of the NASS survey. As discussed in the 
recommended decision, the product prices used in the component pricing 
formulas will continue to be obtained from the NASS survey.
    Product Price (Nonfat dry milk). This final decision maintains the 
use of the NASS survey price reported for nonfat dry milk. No proposals 
were considered that would have changed the product price used in the 
nonfat solids price formula, and the record contains no basis for 
making any change in this formula factor.
    Make Allowance (Nonfat dry milk). This final decision maintains the 
make allowance of $0.140 per pound of nonfat dry milk as indicated in 
the previous decisions issued in this proceeding. At the time the 
hearing notice was issued, the most recent RBCS data were not 
available, and those costs were not specified in the proposals. By the 
time the hearing was held, however, the RBCS data had been released and 
were included in the information introduced at the hearing. NMPF 
supported continued use of a weighted average of the CDFA and the RBCS 
manufacturing cost surveys, with inclusion of a marketing allowance and 
the CDFA factor for return on investment. NMPF proposed that the NFDM 
make allowance be $0.140 per pound.
    Southeast Dairy Farmers Association also proposed that the RBCS 
survey be used to determine a make allowance for NFDM, but did not 
propose that a marketing allowance be included. The necessity of 
including a marketing allowance was discussed in the recommended 
decision.
    Associated Milk Producers, Inc. (AMPI), proposed that the NFDM 
manufacturing allowance be increased from $0.137 to $0.1563 per pound, 
a rate based on AMPI's cost of making NFDM at its own three plants in 
the Upper Midwest over a 5-year period. The AMPI witness stated that in 
addition to a processing and packaging cost of $0.1254, the make 
allowance should include a marketing allowance of $0.0024 and return on 
investment of $0.026, for a total allowance of $0.1538 per pound, 
modified from the level proposed in the hearing notice. The witness 
testified that the three AMPI plants operate at approximately 80 
percent of capacity.
    No comments were filed that specifically addressed the adopted make 
allowance for use in the nonfat solids price.
    On the basis of the data and testimony included in the hearing 
record, the manufacturing cost level that appears to be most 
appropriate for use in the pricing formula for nonfat solids is $0.14 
per pound. This value is calculated by using a weighted average of the 
RBCS survey and the two less-cost California groups of plants, adding 
the CDFA General and Administrative costs and Return on Investment 
expenses for those two groups to the RBCS numbers, and adding a $0.0015 
marketing allowance to both sets of data. The basis for using the two 
lower-cost groups of California plants is that the mid-cost group is of 
a similar average size as the group included in the RBCS survey, and 
that the lowest-cost California group has a very similar total cost to 
the mid-cost group. These three groups of plants (the RBCS plants and 
the two California groups) are similar enough in size and cost to 
consider as fairly representative, and should encompass those plants 
that perform a market balancing function. The highest-cost California 
group should not be included since its average cost is more than ten 
cents per pound of NFDM above the RBCS group or either of the other two 
California groups.
    The AMPI cost numbers cannot be included in the weighted average 
since the number of pounds of NFDM associated with those costs is not 
available. When the AMPI marketing allowance and return on investment 
estimates are replaced with the more moderate numbers used in the make 
allowance calculation, the AMPI manufacturing costs do not differ much 
from the other two sources. This is true despite the wide discrepancy 
in the capacity utilization percentage estimates for the two data sets 
(80 percent for the AMPI plants versus less than 50 percent for the 
plants in the RBCS survey). Inclusion of the AMPI costs in the RBCS 
survey would have included a larger representation of NFDM manufactured 
outside California. However, the record indicates that a high 
percentage of the NFDM manufactured in the U.S. comes from California 
and the proportion of cost data representing California in the 
manufacturing allowance is reasonable.
    ``Yield'' (Nonfat solids). This final decision adopts changes to 
the Class IV nonfat solids formula in order to account for farm-to-
plant losses, more accurately reflect the value of the nonfat milk 
solids in nonfat dry milk and buttermilk powder, and provide 
simplification and consistency to the milk price formulas.
    The tentative and recommended decisions included buttermilk solids 
in the value of nonfat milk solids. However, a reevaluation of the 
Class IV nonfat solids pricing formula finds that recognizing a minimum 
value for buttermilk powder does not materially affect the Class IV 
skim milk price. Record evidence indicates that the price of buttermilk 
powder can be a low of 70 percent of the nonfat dry milk price for the 
same period. In addition, according to the record, the make allowance 
of buttermilk powder is an additional 2 cents per pound higher than the 
nonfat dry milk make allowance. Official notice of weekly Dairy Product 
Prices published by the National Agricultural Statistics Service for 
January 2000 through May 2002 is hereby taken. Copies of Dairy Product 
Prices can be located at the Web site: http://www.usda.mannlib.cornell.edu/reports/nassr/price/dairy/.
    Using the 2-cent higher make allowance for buttermilk and prices 
for nonfat dry milk and buttermilk powder for the period of January 
2000 through May 2002 it was determined that the effect of including 
buttermilk powder in the nonfat solids price and the Class IV skim milk 
price was negligible. Therefore, this decision eliminates the

[[Page 67922]]

consideration of nonfat solids that end up in buttermilk powder from 
the Class IV nonfat solids pricing formula.
    According to the Economic Research Services publication Weights, 
Measures, and Conversion Factors for Agricultural Commodities and Their 
Products, nonfat milk solids in dry buttermilk are 0.0479 pounds per 
pound of nonfat milk solids and are calculated as follows:
    [sbull] For every pound of dry buttermilk there are 0.919 pounds of 
nonfat milk solids.
    [sbull] Assuming a dry buttermilk yield of 0.0521, the nonfat milk 
solids that end up in dry buttermilk are 0.0479 pounds per pound of 
nonfat dry milk solids (0.919 x 0.0521 = 0.0479).
    The Class IV nonfat milk solids price can therefore be calculated 
as follows:
    [sbull] For every pound of nonfat milk solids (nfms), 0.0025 pounds 
is lost in the farm-to-plant transfer.
    [sbull] One pound of nfms minus the farm-to-plant loss of 0.0025 
equals 0.9975 pounds of nfms at the plant.
    [sbull] For every pound of nfms, 0.0479 pounds of these solids end 
up in dry buttermilk powder.
    [sbull] 0.9975 pounds of nfms minus the 0.0479 pounds of solids in 
dry buttermilk equals 0.9496 pounds of nfms in the form of nonfat dry 
milk.
    [sbull] Since each pound of nonfat dry milk contains 96.2 percent 
nfms (3.8 percent moisture) then, 0.9496/0.962 = 0.9871 (rounded to 
0.99)
    Therefore, the Class IV nonfat milk solids price per pound is 
computed as follows:

(NASS nonfat dry milk price--0.14) x 0.99

    A considerable portion of the testimony dealing with the nonfat 
solids pricing formula pertained to the 1.02 divisor. The divisor is 
not strictly a yield factor but is intended to reflect the amount of 
nonfat solids in NFDM, with an adjustment for the small amount of 
buttermilk powder that is made in conjunction with the manufacture of 
butter and NFDM. Testimony by a number of witnesses asserted that the 
product price minus the make allowance should be either multiplied by a 
number greater than 1 (such as 1.02) or divided by a number smaller 
than 1 (such as 0.99 or 0.975) to reflect the fact that more than 1 
pound of NFDM can be expected to be manufactured from 1 pound of nonfat 
solids due to the moisture content of NFDM.
    Many of the hearing participants supported the 1.02 divisor, 
adopted under Federal order reform, and expressed understanding of the 
approach of adjusting the ``yield'' of NFDM to compensate for the fact 
that some of the powdered product made from Class IV milk is buttermilk 
powder (BMP). Although 1.03 to 1.05 pounds of NFDM generally can be 
obtained per pound of nonfat solids, the formula also recognizes a 
lower value and higher manufacturing cost for BMP.
    Several witnesses correctly assessed an alternate solution to the 
dilemma of calculating a component price from two commodities with 
different prices and different make allowances as one requiring 
addition of dry buttermilk as another component price in the Federal 
milk order pricing system. As described by at least one witness, such 
an undertaking would require adding dry buttermilk to the NASS price 
survey, determining a separate make allowance, and calculating a yield 
factor. This procedure would be a burdensome undertaking for very 
little benefit, since dry buttermilk represents only about 5 percent of 
the dry products resulting from the manufacture of butter and nonfat 
dry milk. The issue that remains is how best to reflect the value of 
nonfat solids used in both NFDM and BMP in the same component pricing 
formula.
    The IDFA witness testified that for the 19-month period beginning 
with September 1998, the Central States' dry buttermilk price had 
averaged $0.798 per pound, while the Central States' ``mostly'' price 
for NFDM averaged $1.043. The LOL witness similarly testified that the 
1999 Northeast ``mostly'' price for NFDM averaged $1.0389, while the 
BMP price was $0.7686 per pound. On the basis of these numbers, it 
would appear that the price of BMP is roughly 75 percent that of NFDM. 
However, comparison of BMP and NFDM prices for the years of 1996 
through 1999 and into 2000 reflects a more complex relationship between 
these prices than the hearing testimony would indicate. The BMP price 
as a percentage of the nonfat dry milk price (using Western prices) was 
100.9 percent in 1996, 94.5 percent in 1997, 88 percent in 1998, and 71 
percent in 1999. During the first third of 2000, BMP prices generally 
averaged less than 70 percent of NFDM prices. As the year 2000 
progressed, however, the percentage increased, being at levels up to 
100 percent in late July and remaining above 85 percent for the second 
half of the year in all areas.
    The witness representing Agri-Mark stated that Agri-Mark employees 
engaged in manufacturing operations had estimated that the costs of 
producing BMP range from 1 to 3 cents more per pound than those of 
producing NFDM. Given that the manufacturing costs estimated by the 
Agri-Mark witness for other products were somewhat higher than those 
supported by the bulk of the hearing record, it is reasonable to 
consider the extra cost of manufacturing BMP to be generally not more 
than 2 cents in excess of the cost of manufacturing NFDM. In addition, 
it is difficult to justify increasing the powder make allowance for all 
of the powdered product represented in the make allowance since the 
RBCS witness testified that manufacturing costs of BMP manufactured at 
the plants included in the RBCS survey are included in the powder costs 
reported by RBCS.
    Testimony regarding actual yields of NFDM and BMP were provided by 
only one witness representing a manufacturing plant operator. The 
numbers provided, while not complete enough for an exact accounting of 
the ultimate disposition of the plant's receipts of producer milk, 
indicate strongly that the approximate loss of nonfat solids used in 
the manufacture of NFDM at the specific plant was 3 percent, with 16 
percent lost in the manufacture of BMP, for a combined weighted average 
loss of more than 3.5 percent of nonfat solids. In comparison, data 
published by the State of California showed a weighted average loss of 
solids not fat of 2.13 percent in the manufacture of butter and 
powdered products.
    The California data indicate a weighted average powder yield of 
1.0252 pounds of NFDM and BMP from 1 pound of nonfat solids. One 
witness discounted this data by observing that the ``high'' California 
yield was reported as 1.0406, which would represent a higher-than-
allowable moisture content. This number may be influenced by the 
``high'' reported BMP yield of 0.0749.
    As noted above, the general impression conveyed by testimony in the 
hearing record, that BMP is worth considerably less than NFDM and that 
the cost of processing it is significantly greater than that of 
processing NFDM, is misleading. The average BMP price over the period 
1996-July 2000 is approximately 87 percent of the NFDM price, and the 
cost of manufacturing BMP is, on the basis of the information 
available, no more than 2 or 3 cents in excess of the $0.14 recommended 
as the NFDM make allowance.
    The following information from the hearing record was used to 
determine a multiplier or divisor for the total nonfat solids pricing 
formula that would result in a minimum price for nonfat solids while 
incorporating the data and testimony in the record about the 
manufacture of NFDM and BMP. To assure that the result represents a

[[Page 67923]]

minimum price, the low or high areas of ranges of numbers related to 
the manufacture of these two products were used. The CDFA report on 
butter and powder yield in California plants in 1996 was used in making 
some of the calculations regarding this factor.
    a. The price of BMP represents roughly 80 percent of the price of 
NFDM (80 percent is less than the average historical relationship of 
these prices over the past 5 years).
    b. The cost of manufacturing BMP is not more than 2 cents greater 
than the make allowance for manufacturing NFDM.
    c. Using a theoretical yield of 1.03 pounds of powder containing 3 
percent moisture made from milk containing 8.62 percent nonfat solids 
would result in 0.054 pounds of BMP and 0.976 pounds of NFDM.
    d. Adjusting the theoretical yield of 1.03 pounds to the minimal 
yield of 1.01 pounds (the ``low'' yield in the CDFA report) and 
prorating the BMP and NFDM to 1.01 pounds instead of to 1.03 pounds, 
the amount of BMP manufactured from a pound of nonfat solids used in 
butter/powder is approximately 0.053 pounds. When the NFDM yield is 
prorated, the resulting minimum yield is 0.957 pounds.
    Using a NFDM price of $1.03 per pound, a make allowance of $0.14 
cents per pound of NFDM, and a divisor of 1, the resulting calculation 
is: $1.03 - $0.14 = $0.89 per pound of nonfat solids. The same result 
is achieved through a more complicated calculation using both product 
prices and make allowances, as follows:

Buttermilk powder:

($1.03 x 0.80) - $0.16 = $0.664
$0.664 x 0.053 = $0.03519 + Nonfat dry milk:
$1.03 - $0.014 = $0.89
$ 0.89 x 0.957 = $0.85173
$0.88692 (Rounded to $0.89)

    On the basis of this analysis, no multiplier or divisor would be 
necessary in this formula (same as a multiplier or divisor of 1).
    A number of comments were filed in response to this aspect of the 
tentative final decision, with some supporting the use of a divisor of 
``1,'' two comments suggesting that a divisor of 1.01 would be more 
appropriate (but one determining that such a change would not be 
possible on the record of this proceeding), and several insisting that 
the above analysis is flawed by use of incorrect or inappropriate data 
and that the divisor should be returned to the 1.02 level in effect 
before January 1, 2001.
    The IDFA comments stated that, in the interest of establishing 
minimum pricing, no more than 70 percent of the NFDM value should be 
assumed for the BMP price and that 3 cents should be added to the BMP 
make allowance instead of 2. IDFA also indicated that the formula 
should include shrinkage. NDA and LOL criticized the use of the 
California yield data in determining the comparative yields of NFDM and 
BMP, both because some of the data reflected information that included 
powder with higher-than-allowable moisture and because no witnesses who 
had participated in the survey were present to testify about it. LOL 
criticized USDA's use of Western prices rather than the Northeast and 
Central prices quoted by witnesses who discussed the relative values of 
NFDM and BMP.
    Comments filed by Agri-Mark protested elimination of the 1.02 
divisor, arguing that USDA relied on a casual remark about the 
difference between the cost of manufacturing BMP and NFDM rather than 
on detailed cost information as in the other make allowances. Agri-Mark 
also stated that the role of Class IV in balancing surplus cream from 
Class I use increases the ratio of BMP to NFDM over that calculated 
from an assumption about uses of the nonfat solids in producer milk.
    Criticism of use of the Western BMP and NFDM price series to 
analyze the relative values of BMP and NFDM in the tentative final 
decision did not consider the fact that the Western price (mostly) 
series is the only one with an uninterrupted data series for the five 
years considered. In addition, the percentage of the NFDM price 
represented by the BMP price for the Western region was lower during 
each of the years 1996-2000 than for the Central region; and very 
similar, with some years averaging higher and some lower, to the 
Northeast region. Criticism of the CDFA yield data ignores the fact 
that the yield factors used in the initial analysis for the tentative 
final decision adjusted the relative ``weighted average'' yields of BMP 
and NFDM to the ``low'' yield.
    The hearing record contains enough information on the issue of the 
relative weights, values, and costs of manufacturing NFDM and BMP to 
support the conclusion reached in the tentative final decision about 
the appropriate divisor in the nonfat solids price formula. The 0.96 
divisor considered in the proposed rule on Federal order reform 
represented the pounds of nonfat solids in NFDM rather than the yield 
of nonfat dry milk from nonfat solids. Use of the divisor of 1 
recommended in the tentative final decision accounted for all of the 
nonfat solids used in Class IV and resulted in 3-4 cents less per pound 
of nonfat solids (over a NFDM price range of $0.86-$1.10) than the 
value that would be calculated if the formula attributed all of the 
Class IV skim value to NFDM.
    The Agri-Mark comment emphasized that the ratio of BMP to NFDM milk 
considered in the nonfat solids price calculation should be calculated 
on the basis of the butterfat content in Class IV because butterfat 
surplus to Class I use is used in butter. The Agri-Mark comment 
observed that the butterfat percentage of milk used in Class IV in the 
Northeast over a 3-month period averaged 5.67 percent.
    Even if the national average of butterfat in Class IV (6.4 percent) 
is used to determine the breakdown between nonfat solids used in BMP 
and nonfat solids used in NFDM, less than 0.8 pounds of nonfat solids 
out of the 8.4 contained in a hundredweight of Class IV milk at 6.4 
percent butterfat should be attributed to use in BMP. In effect, the 
price of each of the 8.4 pounds would be reduced by 3-4 cents. Such a 
calculation results in 25.2-33.6 cents per hundredweight of milk 
containing 6.4 percent butterfat to cover the additional costs of 
making 0.8 pounds of BMP and the lower value of 0.8 pounds of BMP 
compared to the NFMP manufacturing cost and price. A 3-cent additional 
cost per pound of manufacturing 0.8 pounds of BMP would equal 2.4 
cents, and a 25-percent reduction of the BMP value from that of NFDM 
would equal approximately 20 cents. These calculations would still 
leave 2.8-11.2 cents per hundredweight to cover any additional costs of 
making and selling BMP over those of NFDM.
    The recommended decision noted that the additional 3 cents per 
pound cost of making BMP is on the high end of the information in the 
hearing record, and that the 25 percent reduction in value of BMP 
compared to NFDM is on the low end. It was also noted that over the 
past 5 years, only during the period cited by witnesses testifying 
about the relative values of BMP and NFDM and during the first 4 months 
of 2000 had the BMP price as a percentage of the NFDM price fallen 
below eighty percent. It was also mentioned in the recommended decision 
that calculations assumed that all of the nonfat solids not used in 
NFDM were used in BMP, whereas some are used in whole milk powder, 
which has a higher value than either NFDM or BMP.
    In considering all of the above discussion, the record supports the 
finding that this final decision's incorporation of a Class IV nonfat 
dry

[[Page 67924]]

milk yield factor of 0.99 is appropriate. The formula is as follows:

((NASS nonfat milk solids price-0.14) x 0.99
c. Class III Butterfat, Protein, and Other Nonfat Solids Prices
    In a change from the orders promulgated under the Federal order 
reform process, the tentative final decision calculated a Class III 
butterfat price from the value of butterfat in cheese rather than using 
the butterfat price calculated from the value of butter for both 
Classes III and IV. The Class III butterfat price in the tentative 
final decision was calculated to represent the value of the component 
in the NASS cheddar cheese price, as was a revised protein price 
formula.
    Before the interim final rule became effective on January 1, 2001, 
several petitions were filed requesting the Secretary to delay 
implementation because industry participants objected to the effects of 
the separate Class III butterfat price.
    Implementation could not be stayed because of the Congressional 
deadline on the rulemaking procedure, and partial implementation was 
not possible because the interim final rule had been approved by 
producers in its entirety. Before the separate Class III and Class IV 
butterfat prices could become effective, implementation of the separate 
butterfat prices was enjoined in the Federal District Court for the 
District of Columbia at the urging of organizations representing most 
of the interests in the dairy industry. The Court's order returned the 
price formulas for the Class III components to their earlier forms, 
with the new make allowances and cheese moisture adjustment 
incorporated.
    By the end of the comment period on the tentative final decision, 
comments representing nearly 100 interested parties from most segments 
of the industry were received that objected to separating the Class III 
and Class IV butterfat prices and reducing the level of the protein 
price. The comments urged USDA to continue to calculate the Class III 
butterfat price on the basis of the value of butterfat in butter, and 
return to the Class III price formula formats in use before 
effectuation of the interim final rule.
    Several reasons were given for rejecting the change to Class III 
component prices based on the contribution of butterfat and protein to 
cheese yield. Numerous commenters cited the negative effects of a 
marked increase in the cost of milk for use in high-fat cheeses and the 
incentive created for handlers to substitute lower-valued Class IV 
forms of butterfat for use in cheese-making. Others stressed the 
difficulties created by the decision in marketing cream. Several 
commenters argued that the shift in value from protein to butterfat 
caused by the decision did not make sense in light of the importance of 
protein in cheese-making, and that the reduced protein price would send 
incorrect economic signals to dairy farmers. One particular concern was 
the potential significant reduction in the Class I skim value if the 
Class III price at 3.5 percent butterfat became the mover for the Class 
I price.
    Based on comments received, this final decision determines that the 
Class III butterfat price be the same as the Class IV butterfat price, 
calculated from the value of butterfat in butter. In addition, the 
portion of the protein price formula that adjusts the protein price to 
accommodate the differential value of butterfat in cheese, as opposed 
to butter, will continue to be incorporated into the protein price 
formula. The technical corrections to the protein price formula made in 
the recommended decision to make the protein price correlate somewhat 
more closely with the cheese price are adopted in this final decision.
    The tentative final decision made only one modification to the 
specifications of the cheese price, currently a weighted average of the 
prices of cheese sold in 40-pound blocks and 500-pound barrels (with a 
3-cent addition to the barrel price). That change, to adjust the price 
of 500-pound barrels to 38 percent moisture instead of the 39 percent 
moisture price currently reported by NASS, is continued in this final 
decision. Also, as in the tentative final and recommended decisions, 
this final decision reduces the make allowance for cheese from $0.1702 
to $0.165 per pound.
    As proposed in the recommended decision, the other nonfat solids 
price adopted in this final decision will continue to be calculated by 
subtracting the make allowance from the NASS-reported price for dry 
whey. However, the result will now be multiplied by 1.03 instead of 
dividing by 0.968. In addition, the recommended make allowance of 15.9 
cents per pound of dry whey is also adopted.
    Class III Product Price (Cheese). As proposed in the recommended 
decision, this final decision continues to utilize the NASS cheese 
price survey as a basis for determining a value for protein in 
computing a Class III milk price. The NASS 40-pound block price will 
continue as presently used. In addition, the NASS 500-pound barrel 
price will continue to be used as previously recommended at 38 percent 
moisture and a 3-cent addition to the barrel price.
    Several proposals included in the hearing notice would, if adopted, 
have changed the NASS cheese price used in the Class III pricing 
formulas. One proposal would limit the cheese prices included to 40-
pound blocks reported by the CME, while another would add 640-pound 
blocks to the prices surveyed by NASS for inclusion in the cheddar 
cheese price. A third proposal would replace the current 3-cent price 
adjustment between 500-pound barrel prices and 40-pound block prices to 
a value that reflects the actual differential industry cost of making 
40-pound blocks over 500-pound barrels. Still another proposal would 
adjust 40-pound block cheese prices for moisture, as 500-pound barrel 
prices are adjusted.
    As discussed above in Issue 2, CME commodity prices should not be 
used as the basis for calculating component prices. Eliminating 500-
pound barrels, which represent approximately two-thirds of the cheese 
represented in the NASS survey, from calculation of the market value of 
cheddar cheese would reduce greatly the degree to which the current 
product prices represent U.S. cheddar cheese prices. The record of this 
hearing provides no support for relying solely on prices for 40-pound 
blocks to identify a market price of cheddar cheese.
    Several parties testified that the NASS weighted average cheese 
price should include the value of 640-pound block cheese in the cheese 
price computation. They contended that such inclusion would improve the 
reliability of the average cheese price by adding a substantial 
quantity of cheese to the price survey. Witnesses' estimates of the 
percentage of U.S. cheddar cheese production represented by 640-pound 
blocks ranged from 20 to 27 percent. Witnesses testified that the 
increased volume would better reflect the true value of cheese and 
additionally would reduce the potential for price distorting 
manipulation by individual handlers.
    In comments filed on the tentative final decision, IDFA stated that 
USDA had erred by excluding 640-pound blocks. IDFA reiterated the 
argument that 640-pound blocks represent as much as 27 percent of total 
cheddar cheese production. Furthermore, the comment noted that past 
data-collection problems are irrelevant because ``all participation in 
NASS surveys regarding data used to calculate federal order minimum 
prices is now mandatory.'' IDFA concluded that the argument that 640-
pound blocks should not be used due to their being made on a custom 
basis to customers' specifications is not

[[Page 67925]]

valid because adjustments can be made, as they are for moisture in 
barrel cheese.
    Opponents to inclusion of the 640's in the cheese price computation 
explained that the vast majority of 640's are made on a custom basis to 
customers' specifications and therefore are not sufficiently uniform to 
have a standard identity. One witness noted that much of the commerce 
in 640's is made on a long-term contractual basis and as such would 
rarely be reflective of changing market conditions.
    The Association of Dairy Cooperatives in the Northeast (ADCNE) 
comments on the tentative final decision reiterated USDA's position, 
stating that ``the market in 640-pound blocks of cheddar cheese does 
not involve sufficient buyers and sellers in arms-length transactions 
to provide good data to establish the Class III price for producer milk 
in all federal milk orders.'' As stated in the tentative final 
decision, standardized pricing cannot be developed without a standard 
identity for the product, which 640-pound blocks lack. In addition, 
there appears to be an insufficient volume of 640-pound block cheese 
transactions to warrant inclusion. At the beginning of the NASS survey, 
price data for 640-pound blocks was collected but was discontinued due 
to lack of volume and too few participants to allow disclosure of data. 
Even earlier (1995-96), the former National Cheese Exchange attempted 
to include trading in 640-pound blocks but discontinued doing so 
because of lack of interest. Testimony from witnesses representing 
organizations that manufacture cheese in 640-pound blocks, and who 
favored inclusion of such product in the NASS survey, stated that the 
640-pound blocks manufactured by their organizations are used 
internally, making that cheese ineligible for inclusion. Therefore, 
even though price reporting is now mandatory, 640-pound blocks of 
cheese do not meet the criteria necessary for the prices of these 
products to be eligible for inclusion in the NASS survey.
    Elimination or reduction to one cent of the three-cent adjustment 
that is added to the barrel price for computing the weighted average 
cheese price was advocated in testimony at the hearing, comments 
contained in post-hearing briefs, and comments responding to the 
tentative final decision. The witnesses argued that since the barrel 
cheese price is adjusted to 39 percent moisture and block cheese is 
approximately 38 percent moisture, at least 2 cents of the observed 
difference in price between 40-pound blocks and 500-pound barrels is 
due to moisture and has nothing to do with actual differences in costs. 
In fact, they argued that there is no difference in packaging costs 
between block and barrel cheese.
    The witness for DFA, a cooperative that manufactures cheese 
packaged in both 40-pound blocks and 500-pound barrels, testified that 
three cents is an acceptable and reasonable spread between blocks and 
barrels and that there is no compelling reason to change the three-cent 
addition to the barrel price. The witness for LOL testified that the 
three cents is an appropriate difference between blocks and barrels and 
that adding three cents to the barrel price when computing the weighted 
cheese price is an appropriate adjustment. DFA and ADCNE argued, in a 
brief filed on behalf of both parties, that the record supports a 
conclusion that the 3-cent adjustment of the barrel price is 
attributable to volume utility and cost differences in packaging and 
handling.
    The National Cheese Institute, which proposed reducing or 
eliminating the 3-cent adjustment, argued that the adjustment should 
include only the actual cost differences involved in manufacturing and 
packaging the two sizes of cheese. Although a number of witnesses 
representing cheese manufacturers testified in favor of reducing or 
eliminating the adjustment, including one whose employer makes both 
sizes of cheddar, none of them addressed the actual cost differences of 
packaging and manufacturing 40-pound blocks and 500-pound barrels. 
Instead, the only testimony that was offered involved attributing a 2-
cent difference to the moisture-adjusted value of the two sizes of 
cheese packages. In comments responding to the tentative final 
decision, ADCNE argued that the 3-cent adjustment is representative of 
the historical difference in market value between barrel cheese and 
block cheese after adjustments for moisture.
    If the difference between the block and barrel prices were due to 
the difference in moisture, the difference between the prices should 
widen as the cheese price increases since the moisture adjustment is 
based on the price and moisture of the cheese. An analysis of 
historical cheese prices indicates that the difference between the 
block cheese and barrel cheese prices does not change with changes in 
price level. In fact, three of the largest differences between the 
block and barrel prices occurred at approximately the 40-month NASS 
weighted average monthly prices.
    In comments filed by Leprino Foods Company (Leprino) on the 
tentative final decision, Leprino argued that comparisons of the block 
and barrel cheese prices from May 1995 through December 1999 are not 
valid because of artificial market distortions. Leprino stated that 
valid relative price data is available only for calendar year 2000, 
during which the average spread is 1.54 cents. Leprino continued, in 
its comment, that the price spread between blocks and barrels does not 
move in lock-step because it is affected by many factors, and will 
continue to be driven by current market forces.
    In comments to the recommended decision, Kraft reiterated their 
position that at equal moisture tests of 38 percent, the appropriate 
value to add to the barrel price is 1-cent. In comments to the 
recommended decision, Glanbia stated that the difference in cost of 
production between blocks and barrels is $0.008 per pound of cheese at 
their plant. In comments received to the recommended decision, DFA and 
Select indicated that the 3-cent adjustment is the correct adjustment 
to the barrel price.
    The record contains no basis for concluding that the actual cost of 
manufacturing and packaging the two sizes of cheese is not the 
historical 3-cent price spread. In fact, during the period September 
1998 through June 2000 the difference between the block and barrel 
prices has been 4.4 cents per pound. The record supports maintaining 
the 3-cent addition to the barrel cheese price.
    An expert witness, and several other witnesses, testified that the 
moisture content of the cheese used for determining the NASS cheese 
prices and the moisture content used in the Van Slyke cheese yield 
formula used for computing the ``yield'' coefficients in the protein 
formula should be the same. The witnesses explained that failure to 
align the formula and the moisture content represented by the cheese 
price survey would result in overstating or understating the formula 
coefficients.
    The expert witness explained that the barrel cheese price is 
reported at 39 percent moisture after being adjusted from the actual 
moisture, while the block cheese price is reported at an unknown 
moisture level. The only testimony dealing with the actual moisture 
level of block cheese indicates that it averages about 38 percent.
    The coefficients originally used for determining the Class III 
protein price and the Class III butterfat price and used in the 
formulas in the recommended decision were derived from using the Van 
Slyke cheese yield formula at 38 percent moisture. Therefore, it is 
appropriate to use cheese prices that reflect cheese containing 38 
percent moisture. The current practice of using

[[Page 67926]]

the 40-pound block cheese price unadjusted for moisture and the 500-lb 
barrel price adjusted for moisture should be continued, but with the 
barrel price adjusted to 38 percent moisture instead of 39.
    In several comments on the tentative final decision, commenters 
stated that the 38-percent moisture adjustment to the barrel price 
requires an adjustment to 1 cent and not 3 cents for the price spread 
between 500-pound barrels and 40-pound blocks. Other interested persons 
filed comments supporting both adjustments. DFA argued in its comment 
that eliminating either adjustment should result in use of only 40-
pound block cheese prices.
    The hearing record provides no basis for altering the composition 
of cheese prices surveyed for use in the Class III pricing formulas or 
for changing the calculation of the NASS weighted average cheese price, 
other than the moisture adjustment to 38 percent for 500-pound barrels.
    Several witnesses testified that types of cheeses other than 
cheddar should be included in the NASS price survey as a more 
comprehensive basis for identifying a cheese price, although such a 
proposal was not included in the hearing notice. The cheddar cheese 
included in the NASS survey meets certain standard criteria that makes 
prices for the reported cheese sales comparable. If the survey included 
other descriptions of cheddar and other types of cheese, such as 
mozzarella, it would not be possible to consider the reported price as 
representative of the value of any particular product. Further, the 
manufacturing costs surveyed are, to a great extent, limited to the 
costs of processing cheddar cheese.
    Class III Make Allowance (Cheese). As in the tentative final and 
recommended decisions, this final decision reduces the make allowance 
for cheese from $0.1702 to $0.165 per pound. Several proposals to 
adjust the manufacturing allowance for cheese were included in the 
hearing notice and considered at the hearing. The NMPF witness 
testified that the organization had determined that the most 
appropriate cheese make allowance would be a weighted average of the 
updated RBCS and CDFA surveys, with addition of a marketing allowance. 
Thus, the NMPF supported adoption of a cheese make allowance of $0.1536 
per pound of cheese. Several witnesses representing cooperative 
associations supported the NMPF $0.1536 proposal but also would have 
included a cost factor for return on investment. One witness testified 
that the make allowance should be based on data from actual plant 
operations through the surveys conducted by RBCS and CDFA and testimony 
from individual plant operators; that it should include California 
data, as California plants represent a large proportion of cheese 
manufacture; and that it should be generous enough to assure adequate 
plant capacity for continued manufacture of cheese.
    The witness representing NCI testified that the cheese make 
allowance should be no less that $0.1687, the weighted average of the 
NCI-sponsored and CDFA surveys with the addition of a marketing cost of 
$0.0011. He stated that such an allowance would represent the 
production of 24 cheese plants and 53 percent of U.S. cheese. Several 
cheese manufacturer representatives supported use of the NCI-supported 
make allowance, stressing the importance of adoption of an allowance 
that covers all of the costs of manufacturing cheese.
    A witness representing Farmers Union and the American Farm Bureau 
witness both supported adoption of a make allowance of $0.1521, as a 
weighted average of RBCS and CDFA data; and a witness for National 
Farmers Organization supported a make allowance of $0.141 composed of 
the RBCS cost with the addition of a marketing allowance and return on 
investment.
    Although ADCNE, in its comments on the tentative final decision, 
supported the use of California data as compiled and audited by a state 
agency, ADCNE disagreed with inclusion in the cheese make allowance of 
the CDFA ``general and administrative expense'' item, which added 1.9 
cents per pound to the make allowance. ADCNE described this allowance 
as ``generous, to say the least,'' as it represents $2-$3.5 million for 
the newest, largest, and most efficient cheese plants, and stated a 
preference for having some basis in testimony before building that sort 
of expense level into plant costs at the expense of minimum producer 
prices.
    The general and administrative expense was one of the cost factors 
included in the CDFA weighted average cost study, but not in the RBCS 
study. Therefore, it must be added to the RBCS data to make the two 
cost studies comparable.
    The make allowance used for computing the Class III protein and 
butterfat prices, $0.165, was determined by combining the CDFA plant 
survey with the RBCS survey. As was pointed out by several witnesses at 
the hearing, several cost factors that are necessary to maintain the 
viability of processing plants are not represented in one or both of 
the RBCS and the CDFA studies. These cost factors include marketing 
costs, return on investment, and general and administrative expenses. A 
discussion of these expenses is included earlier. Neither the CDFA nor 
the RBCS survey included a marketing cost, so the $0.0015 marketing 
allowance was added to both studies. In addition, the CDFA return on 
investment cost of $0.0103 and the general and administrative expense 
of $0.0190, both of which were included in the CDFA weighted average 
cost, were added to the RBCS study, which included neither factor. The 
resulting adjusted costs for each survey are $0.1708 for CDFA and 
$0.15996 for RBCS. A weighted average of the two studies was computed 
using the respective adjusted make allowances and the pounds of cheese 
reported in each study--466,396,548 for the CDFA study and 633,142,812 
for the RBCS study--to arrive at the Class III price make allowance of 
$0.165.
    In a comment filed in response to the tentative final decision, NFU 
stated that the reduction in the cheese make allowance should have been 
greater than $0.0052, but that the cooperative could support an 
increased make allowance if it were tied to producer cost of production 
and market price through implementation of a variable make allowance. 
The $0.165 make allowance is based on actual costs discovered by two 
surveys, the conduct of which were open to review in the hearing 
record, and is very close to the results of another that was conducted 
in a somewhat less accessible manner. There is no basis in the record 
for adopting a lower make allowance and, as discussed earlier, no 
acceptable rationale for implementing variable make allowances.
    Class III Butterfat Price. As discussed in the introductory portion 
of the Class III price section of the recommended decision, the Class 
III butterfat price adopted in the tentative final decision was changed 
by a court injunction to be the same as the Class IV butterfat price. 
This final decision continues to calculate butterfat prices for all 
classes based on the value of butterfat in butter. The order will refer 
to both the Class III and Class IV butterfat prices as ``the butterfat 
price,'' as it did previously.
    The tentative final decision was based on the observation that 
market distortions occur due to using the Class IV butterfat price 
calculated from the value of butterfat in butter to also represent the 
value of butterfat in cheese (Class III), and trying to incorporate the 
difference in value in the protein price. Analysis shows that there is 
very little relationship between the cheese price and either the 
current butterfat price or the current protein price.

[[Page 67927]]

    As a result, instances have occurred when the protein price 
declines while, at the same time, the cheese price is increasing. This 
outcome is contrary to the concept of pricing components on the basis 
of the value of the products in which they are used. The same inverse 
price scenario has affected the butterfat price, with occurrences in 
which the Class III butterfat price increases because the butter price 
has increased while the cheese market has been declining.
    Although reflection of the value of a manufactured product in the 
prices for the milk components that are instrumental in the yield of 
that product would require that the Class III protein and butterfat 
prices be tied more directly to their value in cheese than the result 
obtained from the Federal order reform price formulas, that outcome 
cannot be accomplished on the basis of this hearing record. However, 
any distortion between the Class III butterfat and protein prices and 
the cheese price should be ameliorated partially by the following 
changes included in the protein formula.
    Protein price. The protein price in this final decision is changed 
from the recommended decision by changing the 1.405 factor to 1.383 to 
reflect an adjustment for farm-to-plant losses and to reflect a change 
from a 0.8325 casein factor to a casein factor of 0.822 based on a 
reevaluation of the hearing record and comments filed in response to 
the recommended decision. In addition, the butterfat yield coefficient 
is changed from 1.582 to 1.572 to reflect the farm-to-plant butterfat 
losses. The remainder of the protein price formula is unchanged.
    The tentative final decision on the hearing record for this 
proceeding derived formulas for calculating a Class III butterfat price 
and a protein price that considered only the contribution of each of 
those components to cheese yield and resulted in a 100 percent 
correlation with the cheese market. Therefore, the individual factors 
in the portion of the earlier protein price formula that adjusted the 
contribution of protein to cheese yield to account for differences in 
value between butterfat used in cheese and in butter and accounted for 
much debate in the hearing record were not considered in any detail.
    The protein price formula resulting from the tentative final 
decision took the following form:

(NASS weighted average cheese price -0.165) x 1.405.

    This formula eliminated the following butterfat adjustment portion 
of the earlier protein price formula:

+{[(NASS weighted average cheese price -0.165) x 1.582] -[the butterfat 
price]{time}  x 1.28

    This butterfat adjustment portion of the formula represents the 
difference between the value of butterfat used in cheese and the value 
of butterfat used in butter. The butterfat adjustment portion became 
unnecessary when the Class III butterfat price was calculated from the 
value of butterfat in cheese in the tentative final decision.
    Reconsideration of the protein formula in light of the 
determination that there should be only one butterfat price for Class 
III and Class IV resulted in the following recommended protein price 
formula:

[(NASS weighted average cheese price -0.165) x 1.405] + ({[(NASS 
weighted average cheese price-0.165) x 1.582]-[the butterfat price x 
0.9]{time}  x 1.17).
    Leprino, in response to the tentative final decision, urged that 
the 1.405 factor used to reflect the yield effect of one pound of 
protein in milk be reduced to 1.367 because the 1.405 factor assumes 
that true protein contains more casein (83.3 percent) than is supported 
by testimony in the record (82.2-82.4 percent).
    The hearing record contained much discussion of the derivation of 
the 1.32 cheese yield factor per pound of crude protein used to 
determine the 1.405 cheese yield factor per pound of true protein. Two 
explanations of the factor were advanced. The first involved assumption 
of 75 percent casein retention, 90 percent butterfat retention, and 38 
percent moisture content in the cheese. Holding butterfat and moisture 
constant and changing the protein content by 0.1 results in a 0.1318 
(rounded to 0.132) pound change in the cheese yield, or a one percent 
change in protein results in a 1.32 pound change in cheese yield. The 
second method assumes 78 percent casein retention, 90 percent butterfat 
retention, and a 38 percent moisture content in the cheese. In this 
second method the cheese yield is computed using a 3.2 percent protein 
and zero butterfat. The resulting cheese yield is divided by 3.2 to 
arrive at 1.316 pounds of cheese per pound of protein. The 1.316 was 
rounded to 1.32. Given these particular assumptions, both methods 
resulted in the same answer--1.32. A witness for National All Jersey 
testified that the second method is the appropriate procedure and was 
the one used to compute the 1.32 yield factor in past Federal order 
protein price decisions. However, if 78 percent is a more appropriate 
factor to use as the appropriate value for casein retention, then the 
first method yields a 1.37 yield factor. The 1.32 factor was used in 
the protein price formula in the Federal order reform proposed rule and 
in the five Upper Midwest markets beginning in January 1996 to compute 
the protein price prior to Federal order reform. The 1.32 yield factor 
generally has been accepted as an appropriate factor to use for 
computing a protein price.
    When the final decision on Federal order reform was issued, the 
protein price computation was changed to compute the protein price on 
the basis of true protein rather than crude protein, which had been the 
basis for protein price computations in the past. As in determining the 
1.32 factor, certain assumptions were made to arrive at the current 
1.405 yield factor. The 1.405 factor was computed based on the 
assumption that milk testing 3.3 percent crude protein has an 
equivalent true protein test of 3.1 percent. The relationship between 
crude protein and true protein was based on the results of laboratory 
testing of producer milk for both crude and true protein. The resulting 
percentage change in protein is 1.0645 (3.\3/3\.1), which was then 
multiplied by 1.32 to arrive at 1.405. In addition, use of the 1.405 
yield factor when pricing true protein results in a protein value 
equivalent to use of the 1.32 factor in pricing crude protein.
    Regardless of which procedure is used, assumptions must be made 
with regard to the various factors used in the formulas. These 
assumptions directly affect the outcome of the factors used in the 
protein formula and the resulting protein price and value. Since use of 
the 1.405 factor resulted in an equivalent protein value to use of 
1.32--and there was no testimony or comments filed that the 1.32 factor 
was not appropriate--there was no reason to change the 1.405 cheese 
yield factor in the recommended decision.
    Leprino argued that the appropriate casein recovery should be 82.3 
percent which, when using the second procedure above with a 2.99 true 
protein level, would result in a factor of 1.388. However, the majority 
(\2/3\) of the difference between 1.405 and the 1.367 factor advocated 
by Leprino accounts for shrinkage between the farm and the cheese vat. 
The issue of including shrinkage as an additional make allowance or 
yield factor in the calculation of component prices was discussed in 
the tentative final decision and was determined to be inappropriate at 
that time. Eliminating shrinkage from the 1.367 protein factor resulted 
in a

[[Page 67928]]

factor close to the recommended decision's 1.405. The recommended 
decision also stated that using the second procedure and a 82.95 casein 
recovery, which an expert witness testified was equivalent to the 78 
percent casein recovery used for crude protein, and a true protein test 
of 3 percent, which was equivalent to the 3.2 percent used in the 
second procedure, the protein factor would have been 1.3997, again, not 
significantly less than the recommended decision's 1.405. Testimony 
from other parties also stated that the 1.405 was appropriate and 
should be continued. Based on the hearing record, comments filed in 
response to the hearing and tentative final decision, and the analysis 
prior to the recommended decision, it was determined that there was no 
justification for reducing the 1.405 cheese yield factor.
    Comments received from Leprino, IDFA, Kraft, NDA and others 
explained that the recommended decision did not correct what these 
parties considered as errors in the protein price formula. With regard 
to the protein price computation, the parties argued that the 
percentage of casein in true protein used in the Van Slyke formula was 
too high. They were of the opinion that since the Van Slyke formula is 
generally used to analyze in-plant efficiencies, an adjustment needs to 
be made for applying the formula to milk priced on farm weights and 
tests. Leprino, commenting on behalf of cheese processors, stated that, 
``In order to properly adopt the Van Slyke formula for use in setting 
milk price policy * * * it is critical to understand the context for 
its use.'' Leprino further commented that the Van Slyke formula is 
commonly used by the industry to measure in-plant operational 
performance, namely, product yield. Leprino expressed the importance of 
including an allowance in the Van Slyke formula for farm-to-plant 
shrinkage. Leprino stated that ``The Van Slyke yield formula can be 
used to determine cheddar yields of milk measured at the farm, but only 
if component losses [farm-to-plant] are accounted for. Although the Van 
Slyke yield formula was developed to measure production efficiency 
starting at the vat, the yield formula can still be useful in 
determining the yield of farm level milk. However, if the Van Slyke 
formula is to be used for this purpose, component losses prior to the 
vat must be accounted for to accurately reflect the composition of milk 
actually entering the vat.'' Nine other comments supported Leprino's 
position on the need to include an allowance for farm-to-plant losses 
within the Van Slyke cheese yield computation in order for it to 
accurately determine the value of Class III farm milk.
    This final decision finds that good reason exists to provide for 
incorporating farm-to-plant loss allowances into the Van Slyke cheese 
yield formula for determining the Class III milk price. As explained 
earlier in this final decision, the record supports a finding that such 
losses are 0.25 percent on all milk solid components and that butterfat 
losses are fractionally higher. Butterfat losses are an additional 
0.015 pounds on top of the 0.25 percent farm-to-plant loss. When farm-
to-plant losses are incorporated into the Van Slyke cheese yield 
formula, the Van Slyke formula results in the protein price factors 
from which the Class III protein price is derived.
    The Van Slyke formula as proposed under reform and in the 
recommended decision utilized a casein-to-protein ratio of 83.25 
percent or 0.8325.
    Comments received on the recommended decision indicated that the 
cheese industry considers 82.2 percent casein as a reasonable and 
appropriate reflection of milk composition nationally. An expert 
witness testified that the casein from true protein ranges between 
0.822 and 0.824. In this regard, according to Leprino, ``The Hearing 
Record contains clear evidence regarding milk chemistry * * * that true 
protein contains 82.20 percent casein.''
    This final decision finds that using a casein percentage of 82.2 is 
appropriate. The 0.822 is at the lower end of the range indicated by 
the expert witness and is appropriate for use in determining minimum 
Federal order prices. This casein-to-protein ratio is included in the 
Van Slyke formula for determining the Class III protein formula 
factors. In addition, this final decision computes the protein yield 
factor by dividing the cheese yield attributable to protein by the 
protein test. This method is consistent with record evidence and, 
according to comments received in response to the recommended decision, 
is superior to using the additional cheese yield that occurs when 
additional protein is added. This results in reducing the 1.405 factor 
in the protein price formula to 1.383. The computation of 1.383 is 
shown later in this discussion.
    As was proposed in the recommended decision, this final decision 
adopts a butterfat-to-protein ratio of 1.17. The recommended decision 
proposed a fat-to-protein ration of 1.17 that was based upon the fat-
to-protein ratio of standard milk at the dairy farm (3.5/2.9915 = 
1.17). The recommended decision concluded that a 1.17 (or lower) 
butterfat-to-protein ratio assured that the value adjustment for 
butterfat in butter to the value of butterfat in cheese (included in 
the protein price formula) would account for the total value of 
butterfat in producer milk.
    Comments received in response to the recommended decision from 
NMPF, Select, Leprino and others supported the use of the 1.17 
butterfat-to-protein ratio in the protein price formula. This final 
decision continues to use the 1.17 factor.
    This final decision uses the following variables in the Van Slyke 
formula for computing the protein and butterfat yield factors used for 
computing the protein price:
    1. Butterfat at the farm: 3.50 pounds per hundredweight.
    2. Protein at the farm: 2.9915 pounds per hundredweight.
    3. Butterfat retention: 0.9.
    4. Casein to true protein ratio: 0.822.
    5. Moisture: 38 percent.
    For illustration purposes how the Van Slyke cheese yield formula 
has been relied upon since Federal order reform is provided below for 
ease in comparing the adopted changes to previous formulas.

The Van Slyke Formula Used Under Order Reform

    [sbull] Cheddar cheese pounds attributable to butterfat = ((0.9 x 
3.5) x 1.09)/(1-0.38) = 5.5379 pounds of cheddar cheese
    [sbull] Cheddar cheese pounds attributable to protein = ((0.8325 x 
2.9915) -0.01 ) x1.09/(1-0.38) = 4.2025 pounds of cheddar cheese
    [sbull] Cheddar cheese pounds attributable to standard farm milk =

 
    5.5379  pounds of cheese from butterfat
   +4.2025  pounds of cheese from protein
-----------
    9.7404  total pounds of cheese from standard milk
 

    [sbull] Cheddar cheese yield contribution per pound of fat at farm 
= 5.5379 pounds of cheddar/3.5 pounds of fat at farm = 1.582
    [sbull] Cheddar cheese yield contribution per pound of protein at 
farm = 4.2025 pounds of cheddar/2.9915 pounds of protein at farm = 
1.405
    [sbull] Protein pounds in standard milk = 3.1 x 0.965 = 2.9915
    [sbull] The butterfat-to-protein ratio factor used under reform was 
a fixed 1.28

[[Page 67929]]

The Van Slyke Formula as Proposed Under the Recommended Decision

    [sbull] Cheddar cheese pounds attributable to butterfat = ((0.9 x 
3.5) x 1.09)/(1-0.38) = 5.5379 pounds of cheddar cheese
    [sbull] Cheddar cheese pounds attributable to protein = ((0.8325 x 
2.9915) -0.01 ) x1.09/(1-0.38) = 4.2025 pounds of cheddar cheese
    [sbull] Cheddar cheese pounds attributable to standard farm milk =

 
    5.5379  pounds of cheese from butterfat
   +4.2025  pounds of cheese from protein
-----------
    9.7404  total pounds of cheese from standard milk
 

    [sbull] Cheddar cheese yield contribution per pound of fat at farm 
= 5.5379 pounds of cheddar/3.5 pounds of fat at farm = 1.582
    [sbull] Cheddar cheese yield contribution per pound of protein at 
farm = 4.2025 pounds of cheddar/2.9915 pounds of protein at farm = 
1.405
    [sbull] The butterfat-to-protein ratio factor proposed under the 
recommended decision was 1.17 and was derived by dividing the butterfat 
in standard milk by the protein in standard farm milk (i.e. 3.5 pounds 
of butterfat/2.9915 pounds of protein = 1.17).

The Van Slyke Formula Used in This Final Decision

    [sbull] Cheddar cheese pounds attributable to butterfat = ((0.9 x 
3.5) x 1.09 / (1 - 0.38) = 5.5379 pounds of cheddar cheese
    [sbull] Cheddar cheese pounds lost due to the 0.015 farm-to-plant 
butterfat loss = ((0.9 x 3.5) x 1.09 / (1 - 0.38) = 0.0237 pounds of 
cheddar cheese, 5.5379 - 0.0237 = 5.5142 of cheese after farm-to-plant 
loss.
    [sbull] Cheddar cheese pounds lost due to the 0.25 percent solids 
loss on fat solids = 5.5142 pounds of cheese from butterfat x (1 - 
0.0025), 5.5142 x 0.9975 = 5.5004 pounds of cheese from farm butterfat
    [sbull] Cheddar cheese yield contribution per pound of fat at farm 
= 5.5004 pounds of cheddar / 3.5 pounds of fat at farm = 1.572
    [sbull] Cheddar cheese pounds attributable to protein = ((0.8220 x 
2.9915) - 0.01) x 1.09 / (1 - 0.38) = 4.1473 pounds of cheddar cheese
    [sbull] Cheddar cheese pounds lost due to the 0.25 percent solids 
loss on protein solids = 4.1473 pounds of cheese from protein x (1 - 
0.0025) for farm-to-plant loss = 4.1473 x 0.9975 = 4.1369 pounds of 
cheese from farm protein
    [sbull] Cheddar cheese yield contribution per pound of protein at 
farm = 4.1369 pounds of cheddar / 2.9915 pounds of protein at farm = 
1.383
    [sbull] Cheddar cheese pounds from standard farm milk =

 
    5.5004  pounds of cheese from standard farm butterfat
   +4.1369  pounds of cheese from standard farm protein
-----------
    9.6615  total pounds of cheese from standard farm milk
 

    [sbull] The butterfat-to-protein ratio factor in this final 
decision is 1.17 and is derived by dividing the farm butterfat by the 
farm protein (i.e. 3.5 pounds of butterfat / 2.9915 pounds of protein = 
1.17).
    The results of the above computations yield the following protein 
price formula:

((NASS cheese price -0.165) x 1.383) + (((NASS cheese price - 0.165) x 
1.572) -(butterfat price x 0.9)) x 1.17

    As stated in the recommended decision, since all of the butterfat 
used in Class III is to be priced on the basis of its value in butter, 
an adjustment must be made to account for the difference in butterfat 
values between cheese and butter. The butterfat adjustment portion of 
the protein price formula is the method chosen for making that 
adjustment. The first part of the butterfat adjustment portion of the 
protein price formula calculates the value of butterfat in Cheddar 
cheese using the Van Slyke formula, assuming a 90 percent recovery of 
butterfat in the finished cheese. The resulting cheese yield factor 
attributable to butterfat is a multiplier of 1.582. Testimony in the 
hearing record and comments on the tentative final decision urged 
adoption of different multipliers in the butterfat adjustment portion 
of the protein price formula that represents the effects of butterfat 
on cheese yield. Suggestions to increase the butterfat recovery factor 
of 1.582 (to 1.6 or 1.617) were made by DFA; Select, Elite, et. al; and 
National All-Jersey, Inc. These commenters relied on hearing testimony 
that butterfat recovery in cheddar cheese generally ranges between 90 
and 93 percent, although Kraft testified that their butterfat recovery 
is lower. The commenters favored use of a factor that reflected 91 or 
92 percent fat recovery because that level of recovery is common. In a 
comment filed by Leprino, the cheese manufacturer urged that the 1.582 
factor not be increased, as any increase would exacerbate the 
overvaluation of whey fat in the current formula and because the 90 
percent recovery factor reflects results from many cheese vats 
installed prior to the late 1980's.
    The recommended decision stated that even though many cheese makers 
may be able to achieve a higher fat retention in cheese, the use of the 
1.582 factor representing 90 percent fat recovery in cheese continued 
to be appropriate. The recommended decision also stated that as a 
result of the 90 percent level, butterfat in cheese was not overvalued, 
and those cheese makers who fail to recover more than 90 percent of the 
fat would not suffer a competitive disadvantage. The preponderance of 
the record indicates that most cheese manufacturers should be able to 
obtain a 90 percent butterfat recovery.
    In testimony at the hearing and comments filed on the tentative 
final decision the issue was raised of whether the butterfat adjustment 
portion of the protein price formula in which the value of butterfat in 
butter is subtracted from the value of butterfat in cheese is based on 
equivalent amounts of butterfat. The 1.582 factor represents 90 percent 
recovery in cheese of one pound of butterfat used in its manufacture, 
while the butterfat price represents the value of one pound of 
butterfat used to make butter. Clearly, subtracting the value of a 
pound of butterfat in butter from the value of 0.9 pounds of butterfat 
in cheese reduces the actual value of butterfat used in cheese. 
Therefore, the value of butterfat used in butter should be reduced by 
10 percent in this calculation.
    Comments received from Select, NMPF, LOL and National All-Jersey 
(NAJ), in response to the recommended decision, supported the use of 
the factor resulting from multiplying the butterfat price by 0.9 prior 
to subtracting the butterfat price from the value of butterfat in 
cheese. NAJ was of the opinion that the 0.9 adjustment is appropriate 
in that it recognizes that only ninety percent of the butterfat is 
retained in cheese. Select explained that using an adjustment to the 
value of butterfat in cheese (the 0.9) provides an important factor for 
correcting the relatively low butterfat retention in cheese, but 
maintained that the butterfat retention factor should be larger. LOL 
supported the addition of the 0.9 factor and indicated that it 
represented a more consistent margin across a wide range of butter and 
cheese prices.
    Opponents to the use of the 0.9 adjustment factor to the butterfat 
value included Leprino, Kraft, IDFA, and the Wisconsin Cheese Makers 
Association (WCMA). These parties instead favored using a 0.95 factor. 
They explained that

[[Page 67930]]

not all of the butterfat attributable to the 0.9 factor is represented 
in whey cream, but rather is lost in the handling process. They were of 
the opinion that the portion that is lost in the handling process 
should be accounted for in the protein price by using a factor of 0.95. 
They explained that butterfat in whey cream is overvalued in the Class 
III pricing formulas and that sweet cream is worth approximately 40 
cents more than whey cream. In addressing this difference in value, the 
commenters suggested subtracting 2-cents from the butterfat adjustment 
portion of the protein price formula.
    As explained in the previous discussion on shrinkage, this final 
decision makes a purposeful adjustment for farm-to-plant milk losses, 
but not for in-plant losses. The use of the 0.9 factor is more 
appropriate than a 0.95 factor since the Van Slyke formula uses a 0.9 
butterfat retention factor for computing the cheese yield attributable 
to butterfat. The aforementioned adjustment for farm-to-plant loss is 
also contained in the butterfat factor (1.572) used for computing the 
protein price, as well as an adjustment for farm-to-plant losses in the 
Class III butterfat price. It would not be appropriate to include 
additional reductions in the protein price for butterfat losses. This 
finding is also supported by testimony by several witnesses indicating 
that whey cream is often returned to the cheese vat for use in cheese 
making, thus increasing the value of whey cream above the value of whey 
cream used for whey butter, which is not accounted for in the protein 
formula.
    As stated in the recommended decision, testimony at the hearing and 
analysis of the relationship between the current cheese, butterfat, and 
protein prices revealed that the current Class III pricing formulas 
cause inequities in producer payments based on the relationship between 
producers' butterfat and protein tests. The inequities were attributed 
to the use of the 1.28 factor used in the portion of the protein price 
formula that is designed to incorporate the butterfat value of milk 
used in cheese that is not already accounted for by the Class III and 
IV butterfat price. Such a factor is necessary to reflect the fact that 
there is more than one pound of butterfat in cheese for every pound of 
protein. The record supports a conclusion that when the price of butter 
increases, the price paid for milk used in cheese and for milk 
delivered by producers will decline if the milk has a fat to protein 
ratio of less than 1.28, and decline at a more rapid rate than that at 
which the butter price increases. According to the record and numerous 
comments filed, most milk delivered by producers has a fat-to-protein 
ratio less than 1.28.
    In a number of the comments filed in response to the tentative 
final decision, commenters argued that this factor should be reduced--
to 1.22, 1.19, or 1.17--to better reflect the fat-to-protein ratio in 
producer milk. The factor, which originally appeared in a comment filed 
early in the Federal order reform process as 1.20, was calculated by 
dividing 1.582 by 1.32. When the change was made from crude protein to 
true protein, 1.20 was multiplied by 1.0645 to reflect that change, 
becoming 1.28. The recommended factor of 1.17 in the protein price 
formula represented a minimum value for the ratio of butterfat to true 
protein in producer milk. Its use assures that the value adjustment for 
butterfat in butter to butterfat in cheese included in the protein 
price formula accounts for the full amount of butterfat in producer 
milk.
    The Alliance of Western Milk Producers argued in a comment filed in 
response to the tentative final decision that the Class III component 
price formulas adopted in that decision would lead to disorderly 
marketing and provide an incentive for processors to seek alternative 
sources of butterfat, resulting in negative effects on producer income. 
The Alliance favored a return to the Federal order reform Class III 
component price formulas, but suggested that a snubber to prevent the 
butterfat value adjustment to the protein price from becoming negative 
would mitigate the potential for undervaluing protein under the 
formula.
    This final decision concludes that the Class III protein formula to 
be adopted is as follows:

((NASS Cheese
    Price -0.165) x 1.383) +
((((NASS Cheese
    Price -0.165) x 1.572) -
(Class III & IV Butterfat
    Price x 0.9)) x 1.17)
    Class III--Other Nonfat Solids price (Dry Whey). As discussed 
above, this final decision provides a loss allowance for the other 
solids lost in moving milk from the farm to the processing plant. This 
loss is reflected in the Class III dry whey formula by adjusting the 
0.968 divisor for farm-to-plant losses. The divisor is also converted 
to a multiplier in order to provide simplification and consistency in 
the price formulas.
    As proposed in the recommended decision, the manufacturing 
allowance for dry whey is increased from the 14 cents per pound adopted 
in the tentative final decision to 15.9 cents per pound of dry whey to 
reflect a higher cost of drying whey relative to the cost of drying 
nonfat dry milk.
    The hearing included several proposals that would change the dry 
whey or other solids price formula by changing the make allowance. 
Although the hearing notice included a proposal to use the CME average 
dry whey price, the proponent withdrew support for the proposal when it 
became apparent that the CME has no cash exchange market for dry whey. 
The NASS survey that currently is being used to identify commodity 
prices has included price data on dry whey since September 1998. There 
were no proposals to change the 0.968 yield factor in the other solids 
price formula. The 0.968 factor reflects the solids content of dry 
whey, given a 3.2 percent moisture content.
    As explained earlier in this decision, an adjustment factor for 
farm-to-plant losses on all milk solids is 0.0025. Application of this 
loss adjustment to the other solids price computation formula is as 
follows:
    [sbull] One pound of dry whey minus 0.0025 farm-to-plant solids 
loss equals 0.9975 pounds of dry whey.
    [sbull] Since each pound of dry whey contains 96.8 percent milk 
solids, 0.9975 is divided by 0.968 to equal a dry whey factor of 1.03.
    [sbull] Therefore, the Class III dry whey price per pound is 
computed as follows:

(NASS butter price - 0.159) x 1.03

    The other solids formula divisor is converted to a multiplier to 
simplify and provide consistency with the other formulas contained in 
this final decision.
    Make Allowance (Dry Whey). This final decision continues to use a 
dry whey make allowance of 0.159 as contained in the recommended 
decision.
    Since the most recent CDFA and RBCS cost surveys did not include 
costs for drying whey, there is no information from those two studies 
to use for computing the dry whey make allowance. A witness from NMPF 
suggested using the nonfat dry milk manufacturing cost allowance for 
dry whey since both products involve similar processing equipment and 
then adding $0.01 per pound to reflect the additional energy and higher 
equipment costs incurred in drying whey. Since the make allowance for 
nonfat dry milk adopted under the tentative final decision is $0.140, 
this procedure would result in a dry whey make allowance of $0.150. DFA 
proposed a dry whey make allowance of $0.1478 per pound based on costs 
at its plant at Smithfield, Utah. The plant is a cheddar block plant 
running throughout the year

[[Page 67931]]

that condenses and dries whey from the cheese manufactured in this 
Smithfield plant only. The DFA costs include both direct and indirect 
costs, and return on investment and marketing cost data.
    A witness from Western States Dairy Producers Trade Association, et 
al. (WSDPTA) testified that there is no reason to change the other 
solids price computation from the current formula, and that it is a 
necessary component of the cheese pricing formula. He noted that the 
use of dry whey as a commodity is correct and that the 0.968 factor in 
the pricing formula reflects 96.8 pounds of solids in 100 pounds of dry 
whey.
    Most witnesses who testified about the cost of drying whey 
expressed the belief that drying whey costs more than drying nonfat dry 
milk. Two cooperative association witnesses testified that their 
organizations have determined that the returns from whey powder with 
the current make allowance would not cover the costs associated with 
building and operating whey powder plants. At the hearing, IDFA 
presented the results of the survey contracted for by NCI. The IDFA 
witness testified that the survey showed a dry whey manufacturing cost 
of at least $0.1592. The IDFA witness testified that using the nonfat 
dry milk make allowance significantly understates the manufacturing 
cost of dry whey due to the relatively higher percentage of water in 
liquid whey compared to skim milk and the additional crystallization 
process required.
    A witness representing Leprino testified on the differences in the 
manufacturing processes for dry whey and nonfat dry milk that result in 
higher costs to produce whey powder. The witness concluded that the 
cost of making dry whey is $0.02559 above the cost of drying nonfat dry 
milk.
    The brief submitted by Leprino argued that the additional costs of 
processing whey powder over those of processing nonfat dry milk should 
include additional staffing, cleaning, and maintenance associated with 
the additional equipment for whey product.
    A witness from Kraft agreed that the dry whey manufacturing costs 
are about 2.6 cents per pound greater than the nonfat dry milk 
manufacturing costs. Although Kraft described its Tulare plant as large 
and efficient, it also represents a recent capital investment, meaning 
that depreciation costs are likely higher than average.
    Comments on the dry whey make allowance portion of the tentative 
final decision generally followed the lines of the testimony in the 
hearing record. WSDPTA favored maintaining the 14-cent make allowance 
adopted in the tentative final decision, and ADCNE/DFA supported not 
using the NCI survey on the manufacturing cost of dry whey. IDFA, 
Leprino, and Northwest Dairy Association advocated adoption of a dry 
whey make allowance of at least 15.92 cents per pound, the level 
determined in the NCI survey. These comments cited testimony in the 
record that the cost of drying whey is as much as 2.6 cents greater 
than that of drying skim milk, a calculation that would result in a 
make allowance of 16.6 cents. Kraft favored adding a value reflecting 
the reduced value of butterfat in whey to the whey make allowance and 
increasing the make allowance by at least 2 cents.
    Since information regarding the costs of drying whey was not 
available from the sources used for determining the other make 
allowances in product price formulas, the tentative final decision 
determined that the dry whey make allowance should remain the same as 
that for nonfat dry milk. However, in the recommended decision it was 
determined that the dry whey make allowance should be changed to 
reflect testimony and other evidence in the hearing record that the 
cost of drying whey is greater than that of drying nonfat dry milk.
    The recommended decision concluded that the other solids price 
would be computed by subtracting the make allowance of $0.159 from the 
NASS weighted average dry whey price and dividing the result by 0.968. 
The differential costs of manufacturing whey powder, from one source, 
over those of nonfat dry milk, from others, did not provide close 
enough agreement with the NCI-sponsored survey to use them with any 
confidence. Neither of the witnesses who testified that the extra costs 
of drying whey are 2.6 cents greater than the costs of drying nonfat 
dry milk testified about the total costs of either operation.
    In lieu of other studies and direct evidence of the total cost of 
drying whey, the recommended decision concluded that the NCI-
commissioned study results, rounded to the nearest \1/10\ cent, should 
be used for determining the dry whey make allowance. National Milk 
Producers, in their comments on the recommended decision, stated that 
the dry whey make allowance was acceptable. Schreiber and Leprino also 
stated that they supported the dry whey make allowance of 0.1592 
(essentially 0.159).
    DFA and Select/Continental, in their comments to the recommended 
decision, opposed the recommended decision's proposed increase from 
0.14 to 0.159. They based their opposition on lack of credible 
evidence.
    The comments opposing the recommended decision's increase to the 
dry whey make allowance are not persuasive. This final decision 
concludes that the NCI-commissioned study should be utilized in the 
absence of other studies or direct evidence of the total cost of drying 
whey. This final decision adopts the $0.159 make allowance as proposed 
in the recommended decision.
    Snubber/Other Solids Price. The tentative final decision snubbed 
the other solids price at zero. Thus, if the NASS dry whey price minus 
the make allowance resulted in a negative number, the other solids 
price would become zero. Michigan Milk Producers Association supported 
the inclusion of such a ``snubber'' concept for the whey price in a 
brief, citing testimony in which the DFA witness referred to the 
difficulty of explaining to producers a negative component price. 
Snubbing the other solids price to zero would have prevented it from 
negatively affecting the value of other Class III components or having 
a negative impact on the producer price differential. Support was 
expressed for use of the snubber in two additional comments received on 
the tentative final decision.
    The snubber in the other solids price formula was opposed in 
comments filed by two parties. Leprino stated that sound policy should 
allow not only positive, but negative net revenues to be reflected in 
the milk price to prevent overvaluing milk. IDFA opposed the snubber on 
the grounds that it would prevent manufacturers of dry whey from 
covering all manufacturing costs if wholesale prices for dry whey 
failed to fully cover manufacturing costs. Both commenters suggested 
that if the component price were to become negative, the negative value 
could be pooled as part of the producer price differential, as inferred 
by the DFA witness.
    The prices calculated for the components in Class III milk are 
intended to reflect the value of those components in the products from 
which the prices are calculated. Use of a snubber to limit the other 
nonfat solids price would be inconsistent with the purpose of a pricing 
formula to reflect a component value and would appear to be an 
arbitrary adjustment to the price formula. After a thorough review of 
the record, including briefs and the comments on the tentative final 
decision and the recommended decision, USDA has determined that the 
snubber on the other solids price should be eliminated.

[[Page 67932]]

d. Effects of Changes to Class III and Class IV Price Formulas
    The changes to the Class III and Class IV component price formulas 
discussed above would result not only in changes to the respective 
component prices, but also to the resulting Class III and Class IV skim 
milk and hundredweight milk prices at 3.5 percent butterfat. The 
changes discussed are relative to the formulas resulting from Federal 
order reform. The calculations that were made in the recommended 
decision showed some increase in the level of the Class III price. USDA 
believed that the Class III pricing formulas incorporated in the 
recommended decision were more technically correct than those adopted 
as a result of Federal order reform because they were based on more 
complete information derived through the formal rulemaking process. The 
product-price formulas adopted as part of Federal order reform have 
contributed to further industry analysis and participation in 
developing more precise and accurate measures of determining the 
pricing formulas adopted herein.
    It is important to note that these calculated class price 
differences, or the ``static effect'' of the recommended changes, are 
based on historical product price data and not on product prices that 
will occur in the future. The price differences calculated in this 
portion of the decision cannot be used to calculate or estimate changes 
in revenue that would have occurred or may occur in the future because 
changing intersections of supply and demand for each product result in 
different prices.
    The 19-month comparisons included in the recommended decision were 
calculated based on the NASS weighted average commodity prices from 
January 2000 through July 2001. NASS weighted average commodity prices 
for that time period were available, and no estimates of the relevant 
commodity prices were needed. Although that time period was relatively 
short, a number of interesting price relationships occurred in the data 
series.
    For instance, during that period the cheddar cheese (39 percent 
moisture) market ranged from a low of $1.0245 per pound during November 
2000 to a high of $1.6434 per pound during July 2001. The November low 
was about 7.5 cents below the $1.10 per pound support price for 40-
pound blocks of cheddar. During this same 19-month period the NASS 
weighted average nonfat dry milk price showed little movement until 
July 2001, ranging from a high of $1.0165 per pound during January 2001 
to a low of $0.9634 per pound during July 2001. The July 2001 decline 
was the result of a reduced support price. In fact, the nonfat dry milk 
price stayed within about one cent of support over the January 2000 
through June 2001 period.
    Unlike the cheese and nonfat dry milk market, the butter price did 
not trade anywhere near the butter support price of $0.65 per pound or 
the revised support price of $0.8548 per pound. The butter price traded 
in a range from a low of $0.8820 per pound during January 2000 to a 
high of $1.9263 per pound during June 2001. It is important to keep in 
mind that since all milk is priced on the basis of butterfat and skim 
or nonfat components under Federal orders, focusing on the calculated 
hundredweight prices at 3.5 percent butterfat that are announced for 
comparison purposes may result in misleading conclusions.
    The formulas used for computing the Class IV prices in the 
recommended decision were unchanged from those contained in the 
tentative final decision which currently are being used.
    Changing the butterfat price make allowance from $0.114 to $0.115 
would have resulted in a calculated average decline in the Class IV 
butterfat price of $0.0012 over the 19-month period included in the 
recommended decision. The two changes to the Class IV nonfat solids 
formula--increasing the make allowance from $0.137 to $0.140 and 
eliminating the 1.02 divisor--would have resulted in a net increase of 
$0.0141 per pound in the Class IV nonfat solids price in the absence of 
any other changes. Since the Class II prices were to continue to be 
computed on the basis of the Class IV formulas plus the Class II 
differential of $0.70 per hundredweight, changes to the Class II prices 
would have been the same as the changes to the Class IV prices. The 
calculated Class IV skim milk price would have increased by an average 
of $0.127 per hundredweight. The calculated 3.5 percent Class IV milk 
price would have increased by an average of $0.118 per hundredweight, 
reflecting the net difference between the increase in the skim milk 
price and the very small decline in the Class IV butterfat price.
    As a result of the 38 percent moisture adjustment to barrel cheese 
prices, the NASS weighted average cheese price used for computing the 
Class III protein price would have been calculated to be higher by 
$0.011 per pound over the 19-month period January 2000 through July 
2001. Use of this cheese price increase in the recommended protein 
price formula would have resulted in an increase of 3.6 cents per pound 
of protein. The decrease in the make allowance from $0.1702 to $0.165 
in the recommended protein price formula would have accounted for an 
increase of 1.7 cents per pound of protein. The two changed factors in 
the protein price formula (0.9 and 1.17), using data for the 19-month 
period, would have resulted in an increase in the calculated protein 
price averaging approximately 14.8 cents. The total increase in the 
protein price as a result of three changes to aspects of the Federal 
order reform protein price formula (moisture adjustment, make 
allowance, and formula changes) would have been approximately 20.6 
cents above the price that would have been computed based on the 
formula prior to 2001.
    At the same time, the increase from $0.137 to $0.159 in the dry 
whey make allowance for calculating the other solids price would have 
resulted in a calculated decline in the other solids price of $0.0227 
over the 19-month period. Elimination of the snubber on the other 
solids price would have made no difference during the period 
considered. The combination of the changes in both the protein price 
and the other solids price would have resulted in an average of about 
$0.50 per hundredweight increase in the Class III skim milk price over 
the 19-month period if cheese and dry whey prices were unchanged.
    The recommended decision showed that the changes in the protein 
price formula improved significantly the relationship between the 
cheese price and the protein price, from a correlation coefficient of 
0.54, using the Federal order reform protein formula, to a correlation 
coefficient of 0.70 using the formula recommended in that decision. In 
addition to improving the relationship between the cheese price and the 
protein price, the recommended protein formula reduced the variability 
of the protein price and moderated the extremes that occurred under the 
Federal order reform protein formula, thereby giving producers a more 
consistent and positive protein price signal.
    The calculation of the Class III price at 3.5 percent butterfat, 
based on the formulas contained in the recommended decision, would have 
averaged about $0.48 per hundredweight above the 3.5 percent Class III 
price based on the Class III formulas implemented under Federal order 
reform.
    In comments filed in response to the tentative final decision, IDFA 
and Leprino urged that in no case should the Class III price be 
enhanced relative to price levels under Federal order reform. Leprino 
reiterated the importance of assuring that yield factors not be too

[[Page 67933]]

high or make allowances too low for cheese plants to retain sufficient 
revenue to maintain their operations. IDFA focused on the negative 
long-term effects on producer prices, as described in USDA's analysis, 
of adopting enhanced Class III and Class IV prices. As described in 
detail above (in Issue 3c), the factors incorporated in the Class III 
component price calculations are based solidly on testimony and data in 
the hearing record.
    The recommended decision stated that the record provided ample 
basis for believing that the margins provided in the formulas would 
have been adequate for cheesemakers to maintain their operations. As 
observed at the hearing and in comments filed in response to the 
tentative final decision by the expert witness from Cornell, a break-
even point would be where the value of cheese plus whey cream plus whey 
powder equals the value of the milk price plus the make allowances. 
According to the witness, under Federal order reform, and to a greater 
extent in the tentative final decision, the total value of these 
products exceeded the sum of the milk price and the make allowances.
    The discussion at the hearing centered specifically on the make 
allowance used in the protein formula, with the implication that it 
represented the entire make allowance for cheese. The recommended 
decision stated that unlike the Class IV price formulas, where the make 
allowances used in the butterfat and nonfat solids price formulas can 
be attributed directly to butter and nonfat dry milk, the make 
allowances used for butterfat, protein, and other solids in the pricing 
formulas for Class III must be looked at in aggregate. The recommended 
decision also stated that all three components are involved in the 
cheesemaking process and have a significant effect on cheesemakers' 
costs and returns.
    The recommended decision stated that gross margins (including make 
allowances) could be compared using both the cost of milk based on the 
Federal order reform Class III formulas, and the cost of milk based on 
the Class III formulas. For this purpose, gross margins in the 
recommended decision were defined as the difference between the sum of 
the selling price of cheese and dry whey based on monthly average NASS 
prices and whey butter, estimated at nine cents below the NASS AA 
butter price, and the cost of milk under the two sets of formulas. The 
gross margins therefore reflected the amount of money available to 
processors to procure, process, and market the end products of milk 
used in Class III: cheese, whey butter and dry whey.
    The recommended decision stated that using Class III component 
tests from the Upper Midwest market to estimate product yields, the 
estimated gross margins would have averaged approximately $3.00 per 
hundredweight using the Federal order reform Class III formulas and 
$2.52 per hundredweight over the 19-month period of January 2000 
through July 2001 if the recommended Class III formulas had been in 
effect. The gross margins indicated in the recommended decision were 
significantly different than the cheese make allowances of $0.1702 and 
$0.165 used in the formulas, which would have been equivalent to 
approximately $1.70 and $1.65 per hundredweight of milk with an 
estimated yield of 10 pounds of cheese. Such a difference was expected 
since the make allowances for whey butter and dry whey were 
significantly lower than the cheese make allowance. Any residual value 
could have been used by the handler to improve returns or increase 
producer pay prices. Also, the lower gross margins under the 
recommended formulas could have lead to reduced over-order premiums to 
reflect increased milk costs and maintain current gross margins.
    Comments received from Leprino, IDFA, and NDA expressed concern 
with the accuracy of gross margin analysis contained in the recommended 
decision. Comments received from Select and Continental stated that the 
gross margins presented in the recommended decision effectively 
restored the margins to their computed ``implied margin'' offered in 
their testimony at the hearing. Because of industry concerns regarding 
the accuracy of the gross margin analysis together with the industry's 
concern regarding the definition of ``implied margin,'' the gross 
margin analysis was not considered in adopting the provisions contained 
in this final decision.
    This final decision compares prices over the period of January 2000 
through May 2002 instead of the more limited 19-month price period from 
January 2000 to July 2001. Nevertheless, the 29-month period from 
January 2000 through May 2002 used in this final decision arrives at 
similar conclusions as those reached in the recommended decision. In 
particular, the conclusions made in the recommended decision regarding 
make allowances continue to be valid. Product yield formulas have been 
amended to include a farm-to-plant loss allowance and to provide 
simplification and consistency in pricing formulas. The effects on 
class prices are different due to the amendments adopted in this final 
decision together with their application to the expanded 29-month 
period.
    It is important to again note that these calculated class price 
differences, or the ``static effect'' of the following adopted changes, 
are based on historical product price data and not on product prices 
that will occur in the future. The price differences calculated in this 
portion of the decision cannot be used to calculate or estimate changes 
in revenue that would have occurred or may occur in the future because 
changing intersections of supply and demand for each product result in 
different prices.
    Class III Butterfat. When the Class III formulas adopted in this 
decision are applied to the 29-month period from January 2000 through 
May 2002, the value of Class III fat would have been $0.0247 per 
butterfat pound lower from the announced price of $1.5126 per butterfat 
pound. The adopted formula results in an average of $1.4879 per 
butterfat pound. As proposed in the recommended decision, Class III 
formulas would have resulted in an average butterfat price of $1.5121. 
The following table is provided for comparison purposes:

                                            Class III Butterfat Price
                                                     [$/lb]
----------------------------------------------------------------------------------------------------------------
                                                                     Announced      Recommended
                                                                       price         decision     Final decision
----------------------------------------------------------------------------------------------------------------
2000 average....................................................          1.2522          1.2509          1.2309
2001 average....................................................          1.8480          1.8480          1.8184
Jan-May 2002 average............................................          1.3325          1.3325          1.3112
29-month average................................................          1.5126          1.5121          1.4879
----------------------------------------------------------------------------------------------------------------


[[Page 67934]]

    Class III Protein. Using the same 29-month period, the Class III 
protein price would have been higher if the formula adopted herein had 
been used. The Class III protein price would have increased from the 
announced average of $1.8610 per protein pound to $2.0213 per protein 
pound. The Class III protein price as proposed in the recommended 
decision would have resulted in an average protein price of $2.0334. 
The following table is provided for comparison purposes:

                                             Class III Protein Price
                                                     [$/lb]
----------------------------------------------------------------------------------------------------------------
                                                                     Announced      Recommended
                                                                       price         decision     Final decision
----------------------------------------------------------------------------------------------------------------
2000 average....................................................          1.6938          1.8631          1.8513
2001 average....................................................          1.9613          2.1612          2.1498
Jan-May 2002 average............................................          2.0218          2.1352          2.1210
29-month average................................................          1.8610          2.0334          2.0313
----------------------------------------------------------------------------------------------------------------

    Class III Other Solids. Using the 29-month period, the Class III 
other solids price would have been lower if the formula adopted herein 
had been used. Most of this difference is explained by using the 
increased dry whey make allowance of $0.159 instead of $0.140. Under 
the same conditions, the Class III other solids price would have 
decreased from the announced average of $0.0904 per other solids pound 
to $0.0692 per other solids pound. The Class III other solids price as 
proposed in the recommended decision would have resulted in an average 
other solids price of $0.0694. The following table is provided for 
comparison purposes:

                                          Class III Other Solids Price
                                                     [$/lb]
----------------------------------------------------------------------------------------------------------------
                                                                     Announced      Recommended
                                                                       price         decision     Final decision
----------------------------------------------------------------------------------------------------------------
2000 average....................................................          0.0509          0.0282          0.0281
2001 average....................................................          0.1343          0.1146          0.1143
Jan-May 2002 average............................................          0.0796          0.0600          0.0598
29-month average................................................          0.0904          0.0694          0.0692
----------------------------------------------------------------------------------------------------------------

    Class III Standard Skim. Using the 29-month period, the Class III 
standard skim milk price would have been higher if the formula adopted 
herein had been used. The Class III standard skim price would have 
increased from the announced average of $6.30 per hundredweight to 
$6.67 per hundredweight. The Class III skim price as proposed in the 
recommended decision would have resulted in an average Class III skim 
price of $6.71 per hundredweight. The following table is provided for 
comparison purposes:

                                       Class III Standard Skim Milk Price
                                                     [$/cwt]
----------------------------------------------------------------------------------------------------------------
                                                                     Announced      Recommended
                                                                       price         decision     Final decision
----------------------------------------------------------------------------------------------------------------
2000 average....................................................            5.55            5.94            5.90
2001 average....................................................            6.87            7.38            7.34
Jan-May 2002 average............................................            6.74            6.97            6.93
29-month average................................................            6.30            6.71            6.67
----------------------------------------------------------------------------------------------------------------

    Class III Standard Milk. Using the 29-month period, the Class III 
standard milk price would have been higher if the formula adopted 
herein had been used. The Class III standard milk price would have 
increased from the announced average of $11.38 per hundredweight to 
$11.65 per hundredweight. The Class III milk price as proposed in the 
recommended decision would have resulted in an average Class III 
standard milk price of $11.77 per hundredweight. The following table is 
provided for comparison purposes:

[[Page 67935]]



                                          Class III Standard Milk Price
                                                     [$/cwt]
----------------------------------------------------------------------------------------------------------------
                                                                     Announced      Recommended
                                                                       price         decision     Final decision
----------------------------------------------------------------------------------------------------------------
2000 average....................................................            9.74           10.11           10.01
2001 average....................................................           13.10           13.59           13.45
Jan-May 2002 average............................................           11.16           11.39           11.27
29-month average................................................           11.38           11.77           11.65
----------------------------------------------------------------------------------------------------------------

    Class IV Butterfat (same as Class III butterfat). When the Class IV 
formulas adopted in this decision are applied to the 29-month period 
from January 2000 through May 2002, the value of Class IV fat would 
have been $0.0247 per butterfat pound lower from the announced price of 
$1.5126 per butterfat pound. The adopted formula results in an average 
of $1.4879 per butterfat pound. As proposed in the recommended 
decision, Class IV formulas would have resulted in an average butterfat 
price of $1.5121. The following table is provided for comparison 
purposes:

                                            Class IV Butterfat Price
                                                     [$/lb]
----------------------------------------------------------------------------------------------------------------
                                                                     Announced      Recommended
                                                                       price         decision     Final decision
----------------------------------------------------------------------------------------------------------------
2000 average....................................................          1.2522          1.2509          1.2309
2001 average....................................................          1.8480          1.8480          1.8184
Jan-May 2002 average............................................          1.3325          1.3325          1.3112
29-Month average................................................          1.5126          1.5121          1.4879
----------------------------------------------------------------------------------------------------------------

    Class IV Nonfat Milk Solids (NFMS). When the Class IV formulas in 
this decision are applied to the 29-month period the prices of Class IV 
nonfat milk solids would have been lower. Using the 29-month period, 
the Class IV NFMS solids price would have decreased from an average of 
$0.8340 per NFMS pound to $0.8315 per NFMS pound. Class IV NFMS as 
proposed in the recommended decision would have resulted in an average 
NFMS price of $0.8399 per hundredweight. The following table is 
provided for comparison purposes:

                                        Class IV Nonfat Milk Solids Price
                                                     [$/lb]
----------------------------------------------------------------------------------------------------------------
                                                                     Announced      Recommended
                                                                       price         decision     Final decision
----------------------------------------------------------------------------------------------------------------
2000 average....................................................          0.8574          0.8715          0.8629
2001 average....................................................          0.8391          0.8391          0.8306
Jan-May 2002 average............................................          0.7656          0.7658          0.7580
29-month average................................................          0.8340          0.8399          0.8315
----------------------------------------------------------------------------------------------------------------

    Class IV Standard Skim. Using the 29-month period, the Class IV 
standard skim milk price would have been lower if the pricing formulas 
adopted herein had been used. The Class IV standard skim milk price 
would have decreased from the announced average of $7.51 per 
hundredweight to $7.48 per hundredweight. The Class IV skim milk price 
as proposed in the recommended decision would have resulted in an 
average Class IV skim price of $7.56 per hundredweight. The following 
table is provided for comparison purposes:

                                        Class IV Standard Skim Milk Price
                                                     [$/cwt]
----------------------------------------------------------------------------------------------------------------
                                                                     Announced      Recommended
                                                                       price         decision     Final decision
----------------------------------------------------------------------------------------------------------------
2000 average....................................................            7.72            7.84            7.77
2001 average....................................................            7.55            7.55            7.48
Jan-May 2002 average............................................            6.89            6.89            6.82
29-month average................................................            7.51            7.56            7.48
----------------------------------------------------------------------------------------------------------------


[[Page 67936]]

    Class IV Standard Milk. The Class IV milk price over the 29-month 
period would have decreased from the announced average price of $12.54 
per hundredweight to a $12.43 per hundredweight price (a decrease of 
$0.11/cwt) if the formulas adopted herein had been used. Class IV milk 
as proposed in the recommended decision would have resulted in an 
average Class IV milk price of $12.59 per hundredweight. The following 
table is provided for comparison purposes:

                      Class IV Standard Milk Price
                                 [$/cwt]
------------------------------------------------------------------------
                                  Announced    Recommended      Final
                                    price       decision      decision
------------------------------------------------------------------------
2000 average..................         11.83         11.95         11.80
2001 average..................         13.76         13.76         13.58
Jan-May 2002 average..........         11.31         11.31         11.17
29-month average..............         12.54         12.59         12.43
------------------------------------------------------------------------

Class Price Relationships

    The price relationships between Classes I, II , III and IV 
established under the Federal order reform process should be 
maintained. One proposal heard in this proceeding would have reduced 
the Class IV butterfat price without affecting the computation of other 
butterfat or product prices. That proposal is addressed specifically in 
the Class IV Butterfat price.
    The current pricing system uses the same formulas for computing the 
advance component prices used to compute the Class I skim milk and 
butterfat prices and Class II skim milk price as are used to calculate 
the Class III and Class IV component prices. Several witnesses 
testified as to what the class price relationships should be if changes 
were made to any of the Class III or Class IV component price formulas. 
The witness for IDFA and several other parties stated that any changes 
to the Class III and Class IV formulas should also apply to the advance 
price formulas used for computing the Class I and Class II prices. The 
witness explained that failure to use the same formulas between the 
related classes of use would result in a direct impact on the Class I 
and Class II differentials which was clearly not the intent of Congress 
when it instructed the Secretary to conduct a rulemaking proceeding 
concerning the Class III and Class IV price formulas.
    A witness for Hershey Foods pointed out that the Secretary went to 
great lengths to justify the 70-cent Class II differential above the 
Class IV price. In support of Proposal 31, the witness said that there 
is no justification or new evidence for changing the current price 
relationship that exists between the manufactured products (butter and 
nonfat dry milk) and the Class II price if the Class IV formulas were 
revised as suggested in several proposals. The witness stated that such 
changes in price relationships clearly were not the intent of Congress. 
A brief filed on behalf of IDFA in support of Proposal 31 stated that 
the correct price relationship between NFDM and Class II is 70 cents 
and that the record provides no basis for changing that relationship. 
Actually, as explained in the final decision on Federal order reform, 
70 cents represents the correct price relationship between milk used to 
make dry milk powder and milk used in Class II, as nearly as can be 
determined from the information available.
    A proposal (Proposal 30) by two parties that any increases 
resulting from changes to the Class III and Class IV price formulas not 
be allowed to result in increases in Class I prices was supported in 
testimony by one of the parties, who argued that any increases in the 
Class I price mover should be balanced with reductions in Class I 
differentials. The witness stated that the proponents want to be sure 
that Class I prices are not further decoupled from Class III and Class 
IV pricing formulas, or that Class I prices are not artificially 
inflated.
    Neither Proposal 30 nor Proposal 31 was adopted under the tentative 
final decision.
    In comments on the tentative final decision filed by ADCNE and 
fully supported by DFA, consideration of Proposal 30 was opposed as 
being beyond the scope of the Congressional mandate and not fully 
debated at the hearing. ADCNE further opposed any modifications to 
Proposal 30, such as the Family Dairies' testimony supporting a 
weighted average Class I price mover, or to a similar proposal relative 
to the Class II price, that would change the basis for Class I and 
Class II prices or Class I and Class II differentials. ADCNE continued 
that there was no evidence presented at the hearing that would support 
the substantial revenue reductions to farmers throughout the Federal 
order system which Proposals 30 and 31 would cause. ADCNE urged that 
the conclusions of the tentative final decision to deny proposals 30 
and 31 be affirmed.
    The recommended decision also did not adopt Proposal 30 or Proposal 
31. Comments received on the recommended decision from DFA indicated 
agreement with the Department's reasoning for rejecting these proposals 
and any modifications to those proposals that called for changing how 
Class I and Class II prices as established. Accordingly, this final 
decision continues with the findings contained in the recommended 
decision for not adopting Proposal 30 or 31.
    According to the recommended decision, neither the price 
relationships established in the tentative final decision between milk 
used in Class III and Class IV, nor milk used in Classes I and II, 
should be changed. The recommended decision stated that changes should 
be reflected in the Class I and Class II prices to the extent that 
there may be differences in the Class III or Class IV prices between 
the current prices as a result of adjustments to the component pricing 
formulas. Any reevaluation of the formulas used to price the components 
used in manufactured products should be carried through to the class 
prices that are based on those component prices. A change in the 
computation of the nonfat solids price, for instance, is intended to 
better reflect the value of those solids in dry milk products. If the 
new nonfat solids price formula results in an increase in the Class IV 
price, the record provides no basis for changing the difference in the 
value of the milk used in those solids between Class IV and Class II 
use. Similarly, the availability of milk for use in Class I is related 
to the higher of the alternative manufacturing

[[Page 67937]]

values for that milk. The current relationships should be maintained.

California Price Relationships

    Many witnesses provided comments on the recommended decision in 
regard to the relationship of Federal order Class III prices as 
compared to the California 4b prices. These two prices are considered 
to be minimum prices that reflect the value of producer milk used to 
make cheese. Multiple comments received indicated the importance of 
maintaining a close relationship between these prices.
    Northwest Dairy Association expressed concern that the recommended 
decision ``simply ignored'' the ``issue of price alignment with the 
nation's largest dairy producing state'' and that there are 
``differences between the Federal and California pricing systems that 
the Department has utterly failed to explore and explain.''
    A comment received from Agri-Mark stated that ``USDA must take in 
consideration the competitive situation between California and Federal 
Order Class III and IV plants.''
    In their comments, Dairylea stated that ``It is important that 
manufacturers buying Federal order milk pay Class prices that are 
competitive with similar manufacturers in California and Idaho.''
    A comment received from Western United Dairymen stated that, ``It 
is imperative that California's prices maintain a close relationship 
with Federal order prices.''
    Lastly, a comment received from Select Milk Producers and 
Continental Dairy Products stated that, ``Considering the fact that 
California has transformed itself into the number one dairy state and 
soon to be number one cheese producing state in little more than a 
decade, it is appealing to consider modeling the decision in this 
hearing off the California system.'' They go on to state that 
``Producer groups in California along with others are now seeking to 
have California adjust to the Federal scheme. It would be a sad day 
indeed if the [Department] reduced prices to meet California's while 
California was in the process to make such an effort unnecessary.''
    Class III and Class IV prices established under the Federal milk 
order program should not be based upon, aligned with, or identical to 
the equivalent class prices established for milk under California's 
State milk order program. The equivalent class prices established under 
the California milk order program are based largely on the conditions 
unique to California while the Class III and Class IV prices 
established under Federal milk orders are based on national dairy 
product prices which reflect the national supply and demand conditions 
of milk used in these two classes. The California milk program is 
single-state oriented while the Federal program is national in scope.
    Class III and Class IV dairy products compete in a national market. 
Because of this, Class III and Class IV milk prices established for all 
Federal milk marketing order areas are the same. The Federal milk order 
program gradually adopted the Minnesota-Wisconsin (M-W) price as the 
Class III price in all Federal milk marketing orders. Although the M-W 
was first adopted in 1963, it was not until the mid 1970's that the M-W 
established a uniform class price for milk used in Class III products 
in all Federal milk orders. Observations of the market place for 
cheese, butter, and nonfat dry milk provided the basis for concluding 
that these products compete in a market that is national in scope. Such 
findings were upheld with the adoption of the Basic Formula Price 
(BFP), which provided an interim pricing method for milk (due largely 
to the declining statistical reliability of the M-W price series) until 
a more long-term pricing method could be developed.
    The implementation of milk order reform in January 2000 continued 
finding that Class III and Class IV dairy products compete in a 
national marketplace. However, a competitive price for milk, as 
represented by the M-W and BFP prices, was no longer viable. As an 
intended long-term method, the Federal milk order program has adopted 
end-product price formulas, valuing Class III and Class IV milk on the 
basis of the value of Class III and Class IV end-products in the 
marketplace. The NASS price survey for dairy products used as a basis 
for establishing Class III and Class IV prices includes all dairy 
product prices and sales volumes in all regions of the country, 
including California. In this regard, the Federal order program has and 
will continue to reflect California's impact on dairy product prices 
while establishing Class III and Class IV prices that are reflective of 
national supply and demand conditions.
    With the adoption of end-product pricing formulas under order 
reform, the need for periodic adjustments that would arise with the 
changes in marketing conditions is acknowledged. Although the 
relationship of Federal Order prices to California prices is important, 
the record does not indicate how California and Federal order prices 
should be aligned or what the appropriate relationship between the 
California and the Federal order program should be.

5. Class I Price Mover

    A proposal that was not included in the hearing notice was made at 
the hearing by a Family Dairies, USA, witness on behalf of that 
cooperative and the Midwest Dairy Coalition, which represents 13 
additional organizations of dairy farmers. The proposal would change 
the Class I price mover from the higher of the Class III and Class IV 
prices to a weighted average of the two. The witness for Family Dairies 
testified that the results of the current regulation are disturbing and 
unanticipated with the unexpected strength of the Class IV price 
relative to Class III.
    In testimony at the hearing, the Family Dairies representative 
complained that 10 percent of production under Federal orders (milk 
used to make nonfat dry milk) has been driving the Class I price that 
applies to 40 percent of the milk. As a result, he testified, milk 
production for fluid purposes is encouraged in markets with high Class 
I differentials and relatively high Class I use at a time when 
marketing conditions (an oversupply of milk) should have the opposite 
effect. As fluid-oriented markets are receiving increased prices 
relative to markets in which cheese is the dominant use, he complained, 
inequities in blend prices between markets are increasing.
    A group representing Upper Midwest producer interests filed a brief 
describing the recent movement of milk from the Upper Midwest pool onto 
the Central and Mideast marketwide pools as disorderly marketing caused 
by increases of Class I prices in these higher-Class I use markets.
    An argument in another brief stated that since the 1960's the dairy 
industry has used a Class I mover tied to a market-clearing price 
represented by a weighted average of milk used in butter, cheese, and 
powder.
    In several briefs it was argued that the Regulatory Impact Analysis 
(RIA) published with the final decision on Federal order reform stated 
that the price formulas adopted therein were expected to generate a 
sufficient quantity of milk, and that both the adoption of Class I 
pricing option IA and use of the higher of the Class III and IV prices 
as the price mover have worked to enhance Class I price levels.
    A brief filed by a group representing fluid milk handlers suggested 
that USDA should give careful consideration to the proposal to use a 
weighted average of the Class III and Class IV prices to move Class I 
prices.

[[Page 67938]]

    Based on analysis of the hearing record and briefs filed by 
interested persons, the tentative final decision continued use of the 
higher of the advance Class III or Class IV prices as the mover for 
Class I prices.
    In comments on the tentative final decision, the Midwest Dairy 
Coalition repeated its position that the existing mover should be 
changed to a weighted average of the advanced Class III and advanced 
Class IV prices, with the weight based on the portion of manufacturing 
milk used for Class III and Class IV during the prior year. The 
Coalition stated that using the higher of Class III or Class IV prices 
could result in setting a minimum fluid milk price that is actually 
above the market clearing price for milk, especially if the higher of 
the Class III and IV prices were not representative of manufacturing 
markets. The Coalition also expressed concern that the tentative final 
decision adopted, as an unnoticed and unsupported change, the higher of 
the advanced Class III or Class IV milk prices at 3.5 percent butterfat 
as the new Class I mover instead of using the skim value.
    In comments, NMPF noted that significant fluctuation that could 
occur in the Class I skim milk price mover due to using the higher of 
the advanced Class III or Class IV prices at 3.5 percent butterfat. 
Several parties noted that use of the advanced price at 3.5 percent 
butterfat could cause the Class III price to be the Class I price 
mover, even with a very low Class III skim milk price, causing 
significant month-to-month changes in the Class I skim milk price.
    Michigan Milk Producers Association (MMPA) filed comments, stating 
that using a weighted average to set the Class I mover would severely 
impact fluid users' ability to attract sufficient quantities of milk 
when there were large differences between Class III and Class IV 
prices. MMPA and NMPF supported the continued use of the higher of the 
Class III or Class IV prices as the Class I mover.
    ADCNE's comments to the tentative final decision, fully supported 
by DFA, expressed opposition to the Family Dairies' proposal for a 
weighted average Class I price mover or any other proposal that would 
change the basis for Class I and Class II prices or Class I and Class 
II differentials. ADCNE argued that there was no evidence presented at 
the hearing that would support the substantial revenue reductions to 
farmers throughout the Federal order system which would result from 
adoption of the weighted average Class I price mover. ADCNE urged that 
the conclusions of the tentative final decision to continue to use the 
higher of the advanced Class III and IV prices as the basis for 
calculating the Class I price mover be affirmed.
    The shift in the pooling of milk from the Upper Midwest to higher-
valued markets complained of in one Upper Midwest brief has been a 
long-sought outcome on the part of Upper Midwest producer groups. It is 
difficult to understand why it is now seen as a manifestation of 
disorderly marketing.
    Those briefs that cited the sufficient level of milk production 
projected under the RIA for Federal order reform appeared to base their 
arguments in opposition to use of the ``higher of'' Class I price mover 
on that projection. It should be noted that Congressional action 
relative to Class I prices following issuance of the final decision on 
Federal order reform applied only to the Class I pricing surface. Use 
of the higher of the Class III and IV prices as the Class I price mover 
was included in Federal order reform and in the accompanying RIA.
    The Upper Midwest Coalition's concern that the tentative final 
decision adopted the higher of the advanced Class III or Class IV milk 
prices at 3.5 percent butterfat instead of using the skim value as the 
new Class I mover, and the NMPF criticism that doing so would result in 
significant fluctuations in the Class I skim price is now moot because 
of the return to the use of one butterfat price. Use of the same 
butterfat price for the Class III and Class IV prices will result in 
the ``higher of'' the two being determined by the relative skim milk 
prices. Therefore, the recommended decision concluded that fluctuations 
in the Class I skim milk price projected under the tentative final 
decision should be reduced.
    The price referred to in the brief expressing preference for the 
historical use of a weighted average of prices paid for milk used in 
butter, cheese, and powder was, at first, the Minnesota-Wisconsin price 
series (the M-W). The M-W, and later the M-W adjusted by a weighted 
average of current product prices for manufactured products, was 
specific to the Upper Midwest area and included very little NFDM, since 
that area manufactures a higher percentage of cheese, relative to NFDM, 
than the rest of the U.S. The current pricing system is much more 
representative of national supply and demand for manufactured dairy 
products than either of the versions of the former Class I mover.
    As explained in the final decision on Federal order reform, the 
higher of the Class III or Class IV prices are used to move the Class I 
price to assure that fluid plants will be better able to attract milk 
away from manufacturing uses. Use of the weighted average of the two 
prices when there is a significant difference between them would 
provide no assurance that milk would be available as needed for fluid 
uses and would be more likely to result in Class price inversions 
(where the Class I price falls below one or more of the manufacturing 
class prices). In addition, use of a weighted average Class I price 
mover would increase the occurrence of the blend price falling below 
the Class III or IV price in markets with low Class I utilization.
    Aside from the fact that the proposal to use a weighted average of 
the Class III and Class IV prices as the Class I mover was not noticed 
for consideration in this proceeding, it should be rejected on the 
basis of its lack of merit.
    Comments received on the recommended decision from the Kroger 
Company opposed using the higher of Class III or Class IV for 
establishing the Class I price for milk. They suggested a review of 
alternatives that would not lead to higher Class I milk prices. 
Comments received from MMPA and DFA on the recommended decision, 
however, continued to express their support for using the ``higher 
of.'' MMPA was of the opinion that using the higher of the Class III or 
Class IV prices as the Class I mover establishes farm milk prices that 
assure priority in providing milk for Class I uses. After consideration 
of the entire record on this proceeding this final decision adopts the 
recommended decision provision to continue to use the higher of the 
advance Class III or Class IV prices for establishing the Class I base 
price or, as it is sometimes referenced, the Class I mover.

6. Miscellaneous and Conforming Changes

    a. Advanced Class I butterfat price. Because of the change made 
between the interim rule and this final decision--to use only one 
butterfat price for butterfat used in both Class III and Class IV--the 
conforming change made in the interim final rule to the procedure for 
calculating the Class I butterfat and hundredweight prices is no longer 
necessary. The advanced butterfat price used for pricing Class I 
butterfat will continue to be calculated by the application of the 
Class III and Class IV price formulas to the advanced NASS prices as 
announced.
    b. Classification. The classification of anhydrous milkfat, 
butteroil, and plastic cream was changed in the tentative final 
decision from Class III to Class IV as a conforming change required by 
the

[[Page 67939]]

adoption of separate butterfat prices for the two classes. The hearing 
notice contained no proposal to change the classification of these 
products, and there was no testimony in the record of the proceeding 
supporting their re-classification. Therefore, with the elimination of 
the separate Class III butterfat price, the sole basis for the change 
in classification also is eliminated.
    As noted in the tentative final decision, a difference between the 
classification of these products, which have a very high butterfat 
content, and butter should not cause any market dislocation in a 
pricing plan where butterfat used in Class III products has the same 
value as butterfat used in Class IV products. One commenter to the 
tentative final decision opposed changing the classification of these 
products.
    In comments to the recommended decision, MMPA disagreed with 
returning anhydrous milkfat, butteroil, and plastic cream back to Class 
III classification because, in their opinion, the products compete with 
butter and therefore should have a cost base similar to butterfat. 
Comments received from NDA and WestFarm Foods also indicated opposition 
to returning these products back to Class III.
    As a result of the elimination of the separate Class III butterfat 
price, this final decision finds that anhydrous milkfat, butteroil, and 
plastic cream is most appropriately classified as Class III.
    In a comment filed in response to the tentative final decision, 
Hershey Foods urged that the Federal orders adopt a 2-class pricing 
system. Such a suggestion is entirely outside the scope of the current 
proceeding.
    c. Distribution of Butterfat Value to Producers. There were several 
responses in comments on the tentative final decision to the issue of 
whether the butterfat price paid to producers should be the result of 
pooling butterfat prices from the different classes or continue to 
reflect the value of butterfat in Class III. A witness from Northwest 
Dairy Association testified that being able to line up the Class III 
price to plants with the component value calculation for producers is 
helpful, especially with regard to forward pricing. In a brief filed on 
behalf of DFA and ADCNE, the co-op groups supported continued use of 
the Class III butterfat price as the producer butterfat price. 
According to the brief, changes in direct pricing to the producer are 
not prudent at this time, and any change between the Class III and 
Class IV butterfat price should be settled through the producer price 
differential mechanism in the market order pools. The brief continued 
that the producer price differential is a blending of various debits 
and credits in the pooling process and the additional equalizing of any 
butterfat pricing adjustments through this procedure currently makes 
the most sense.
    In a post-hearing brief, National All-Jersey (NAJ) urged that USDA 
retain the current practice of using Class III milk component values to 
price producer component values. NAJ noted that this scenario makes it 
easier to use accepted hedging tools, such as Class III futures 
contracts, and helps simplify pricing for producers. NAJ further stated 
that the current procedure maintains the same producer butterfat price 
in all Federal orders with multiple component pricing (MCP).
    Seventy-nine dairy organizations supported payment to producers on 
the basis of the milk components priced in Class III, including the 
Class III butterfat price instead of a pooled butterfat price, plus the 
producer price differential in a comment filed in response to the 
tentative final decision. The commenters argue that payment to 
producers on the basis of Class III components facilitates the use of 
risk management tools by producers and avoids wider fluctuations in 
Class I and producer fat, skim, and component values.
    One of the principal reasons given in the tentative final decision 
for changing the pooling provisions of the MCP orders was that 
potential large differences between the Class III and Class IV/II 
butterfat prices would be likely to result in significant distortions 
in the effect of those differences on the producer price differential. 
The recommended decision also concluded that according to observation 
made under the tentative final decision, it was possible that pool 
calculations in some markets would result in a negative producer price 
differential if the producer butterfat price was not changed to 
represent a blend of the values of butterfat in the four classes of 
use.
    The reversal to calculate separate Class III and Class IV butterfat 
prices invalidated the principal reason for pooling butterfat under the 
MCP orders.
    Therefore, in the recommended decision it was determined that 
producer payments under the MCP orders would continue to be made on the 
basis of the prices for milk components used in Class III rather than 
pooling the butterfat values of the four classes and this continues in 
this final decision. The four orders that do not have component pricing 
will continue to pool the class use butterfat values and return a 
weighted average butterfat price to producers. The difference adopted 
in this final decision may result in some inconsistency between the 
producer butterfat prices under MCP and non-MCP orders. However, it is 
expected that such inconsistency will not result in disorderly 
marketing.
    d. Inclusion of Class I other source butterfat in producer 
butterfat price computation. In the process of promulgating the 
tentative final decision, it was determined that the value associated 
with the occasional classification of other source milk as Class I 
should be included in pooling the class butterfat values to determine 
butterfat prices to producers. For the orders under which butterfat is 
pooled, this change was made in the interim final rule and should 
continue so that the value of all of the butterfat in the pool will be 
reflected in the producer butterfat price.
    In the component pricing orders, the changes made in the interim 
final rule to include the Class I other source butterfat value in the 
butterfat pool should be reversed. Although the District Court's 
injunction had the effect of reversing these changes and the Federal 
order reform language has continued in effect, the order language in 
the Code of Federal Regulations reflects the provisions adopted in the 
interim final rule. The proposed order language amendments in the 
recommended decision and in this final decision reflect the language 
that is currently in effect in the MCP orders, reversing the changes 
that were made to include Class I other source butterfat in the 
butterfat pool.

7. Issue of Reopening of the Hearing, or Issuance of a Final Decision

    The statute requiring that this proceeding be held to reconsider 
the Class III and Class IV pricing formulas also required that a final 
decision be published by December 1, 2000, with any amendments to the 
orders to be effective January 1, 2001.
    The hearing record reflected unanimity among those addressing the 
issue that the industry should be afforded the opportunity to comment 
on a decision before its content results in a final rule. Consequently, 
a tentative final decision was issued affording interested persons an 
opportunity to comment even though the amendments adopted in the 
decision were to become effective January 1, 2001. An injunction was 
issued on January 31, 2001, to prevent some of the provisions adopted 
in the interim final rule from becoming effective.

[[Page 67940]]

    The recommended decision noted that several interested parties 
commented in opposition to reopening the proceeding with regard to the 
Class III butterfat and protein price formulas. The only commenter that 
favored revisiting any of the issues involved stated that some way of 
reflecting increased energy costs in make allowances should be 
explored. The commenter seemed to refer to conducting an entirely new 
proceeding rather than reopening the current proceeding. At that time 
it was decided that reopening the proceeding would not be considered 
due to the lack of interest in pursuing development of Class III 
component prices that are more closely correlated with cheese prices.
    Two commenters on the tentative final decision urged that USDA act 
quickly to conclude the proceeding. The most rapid conclusion to the 
proceeding was through issuance of a tentative final decision, followed 
by a determination of producer approval and issuance of a final rule 
for the orders approved. However, because significant changes were made 
to the tentative final decision by the District Court order and by the 
recommended decision, interested parties were given an additional 
opportunity to comment on those changes. Therefore, USDA issued the 
recommended decision and provided for a 30-day comment period. 
Additional time to file comments was requested by a number of 
proprietary and cooperative handlers in order to allow for more 
thorough analysis of the impacts of the technical changes in the 
pricing formulas.
    Several comments on the recommended decision were received urging 
prompt implementation of the amendments recommended. The National Milk 
Producers Federation (NMPF) supported the recommended decision's 
amendments in their entirety. They stated that, ``In the absence of a 
clear-cut industry consensus for change, and without clear evidence of 
a market failure caused by federal order provisions, we believe it 
would be detrimental to the industry to reopen these proceedings in the 
near future.''
    Several comments from both processors and producers on the 
recommended decision suggested reopening the hearing. A few comments 
noted the outdated nature of some of the data, while other comments 
indicated a need to further study the impacts that new price formulas 
would have on cheese plants that are small businesses. The proceeding 
is not being reopened and this final decision is being issued.

Rulings on Proposed Findings and Conclusions

    Briefs, proposed findings and conclusions, and comments on the 
tentative final decision and the recommended decision were filed on 
behalf of certain interested parties. These briefs, the proposed 
findings and conclusions, the comments, 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 final 
decision.

General Findings

    The findings and determinations hereinafter set forth supplement 
those that were made when each of the aforesaid orders were first 
issued and when they were amended. The previous findings and 
determinations are hereby ratified and confirmed, except where they may 
conflict with those set forth herein.
    The following findings are hereby made with respect to each of the 
aforesaid tentative marketing agreements and orders;
    (a) The tentative marketing agreements and the orders, 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 aforesaid marketing areas, and the 
minimum prices specified in the tentative marketing agreements and the 
orders, 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 agreements and the orders, 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, marketing 
agreements upon which a hearing has been held.

Rulings on Exceptions

    In arriving at the findings and conclusions, and the regulatory 
provisions adopted in this final decision, all exceptions received were 
considered in conjunction with the record evidence. To the extent that 
the findings and conclusions and the regulatory provisions of this 
final decision are at variance with any of the exceptions, such 
exceptions are hereby overruled for the reasons previously stated in 
this final decision.

Marketing Agreement and Order

    Annexed hereto and made a part hereof are two documents, a 
Marketing Agreement regulating the handling of milk, and an Order 
amending the orders regulating the handling of milk in the Northeast 
and other marketing areas, which have been decided upon as the detailed 
and appropriate means of effectuating the foregoing conclusions.
    It is hereby ordered that this entire decision and the two 
documents annexed hereto be published in the Federal Register.

Referendum Order to Determine Producer Approval; Determination of 
Representative Period; and Designation of Referendum Agent

    It is hereby directed that referenda 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 orders as 
amended and as hereby proposed to be amended, regulating the handling 
of milk in the Northeast and Mideast marketing areas are approved or 
favored by producers, as defined under the terms each of the orders, 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 areas.
    The representative period for the conduct of such referenda is 
hereby determined to be May 2002.
    The agents of the Secretary to conduct such referenda are hereby 
designated to be the respective market administrators of the aforesaid 
orders.

Determination of Producer Approval and Representative Period for All 
Other Orders

    May 2002 is hereby determined to be the representative period for 
the purpose of ascertaining whether the issuance of the orders, as 
amended and as hereby proposed to be amended, regulating the handling 
of milk in the Appalachian, Florida, Southeast, Upper Midwest, Central, 
Pacific Northwest, Southwest, Arizona Las-Vegas, and Western marketing 
areas is approved or favored by producers, as defined under

[[Page 67941]]

the terms of each of these orders 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 areas.

List of Subjects in 7 CFR Parts 1000, 1001, 1005, 1006, 1007, 1030, 
1032, 1033, 1124, 1126, 1131, and 1135.

    Milk marketing orders.

    Dated: October 25, 2002.
A.J. Yates,
Administrator, Agricultural Marketing Service.
Order Amending the Orders Regulating the Handling of Milk in the 
Northeast and Other Marketing Areas
    (This 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 orders were first issued and when they 
were 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 agreements and to the orders 
regulating the handling of milk in the Northeast and other marketing 
areas. 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 orders 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 areas. The 
minimum prices specified in the orders 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 orders as hereby amended regulate the handling of milk 
in the same manner as, and are applicable only to persons in the 
respective classes of industrial or commercial activity specified in 
marketing agreements 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 Northeast and other marketing areas 
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 provisions of the proposed marketing agreements and orders 
amending the orders contained in the recommended decision issued by the 
Associate Administrator, Agricultural Marketing Service, on October 19, 
2001, and published in the Federal Register on October 25, 2001 (66 FR 
54064), as modified herein, shall be and are the terms and provisions 
of this order, amending the orders, and are set forth in full herein.
    1. The authority citation for 7 CFR parts 1000, 1001, 1005, 1006, 
1007, 1030, 1032, 1033, 1124, 1126, 1131, and 1135 continues to read as 
follows:

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

PART 1000--GENERAL PROVISIONS OF FEDERAL MILK MARKETING ORDERS

    1. Section 1000.40 is amended by adding paragraph (c)(1)(ii) and 
revising paragraph (d)(1)(i) to read as follows:


Sec.  1000.40  Classes of Utilization.

* * * * *
    (c) * * *
    (1) * * *
    (ii) Plastic cream, anhydrous milkfat, and butteroil; and
* * * * *
    (d) * * *
    (1) * * *
    (i) Butter; and
* * * * *
    2. Section 1000.50 is amended by revising the last sentence of the 
introductory text; by revising paragraphs (a), (b), (c), (g), (h), (j), 
(l), (m), (n), (o), (p)(1), and (q)(3); and by removing paragraph 
(q)(4) to read as follows:


Sec.  1000.50  Class prices, component prices, and advanced pricing 
factors.

    * * * The price described in paragraph (d) of this section shall be 
derived from the Class II skim milk price announced on or before the 
23rd day of the month preceding the month to which it applies and the 
butterfat price announced on or before the 5th day of the month 
following the month to which it applies.
    (a) Class I price. The Class I price per hundredweight, rounded to 
the nearest cent, shall be 0.965 times the Class I skim milk price plus 
3.5 times the Class I butterfat price.
    (b) Class I skim milk price. The Class I skim milk price per 
hundredweight shall be the adjusted Class I differential specified in 
Sec.  1000.52 plus the higher of the advanced pricing factors computed 
in paragraph (q)(1) or (2) of this section.
    (c) Class I butterfat price. The Class I butterfat price per pound 
shall be the adjusted Class I differential specified in Sec.  1000.52 
divided by 100, plus the advanced butterfat price computed in paragraph 
(q)(3) of this section.
* * * * *
    (g) Class II butterfat price. The Class II butterfat price per 
pound shall be the butterfat price plus $0.007.
    (h) Class III price. The Class III price per hundredweight, rounded 
to the nearest cent, shall be 0.965 times the Class III skim milk price 
plus 3.5 times the butterfat price.
* * * * *
    (j) Class IV price. The Class IV price per hundredweight, rounded 
to the nearest cent, shall be 0.965 times the Class IV skim milk price 
plus 3.5 times the butterfat price.
* * * * *
    (l) Butterfat price. The butterfat price per pound, rounded to the 
nearest one-hundredth cent, shall be the U.S. average NASS AA Butter 
survey price reported by the Department for the month less 11.5 cents, 
with the result multiplied by 1.20.
    (m) Nonfat solids price. The nonfat solids price per pound, rounded 
to the nearest one-hundredth cent, shall be the U.S. average NASS 
nonfat dry milk survey price reported by the Department for the month 
less 14 cents and multiplying the result by 0.99.
    (n) Protein price. The protein price per pound, rounded to the 
nearest one-hundredth cent, shall be computed as follows:
    (1) Compute a weighted average of the amounts described in 
paragraphs (n)(1)(i) and (ii) of this section:
    (i) The U.S. average NASS survey price for 40-lb. block cheese 
reported by the Department for the month; and
    (ii) The U.S. average NASS survey price for 500-pound barrel 
cheddar cheese (38 percent moisture) reported by the Department for the 
month plus 3 cents;
    (2) Subtract 16.5 cents from the price computed pursuant to 
paragraph (n)(1) of this section and multiply the result by 1.383;

[[Page 67942]]

    (3) Add to the amount computed pursuant to paragraph (n)(2) of this 
section an amount computed as follows:
    (i) Subtract 16.5 cents from the price computed pursuant to 
paragraph (n)(1) of this section and multiply the result by 1.572; and
    (ii) Subtract 0.9 times the butterfat price computed pursuant to 
paragraph (l) of this section from the amount computed pursuant to 
paragraph (n)(3)(i) of this section; and
    (iii) Multiply the amount computed pursuant to paragraph (n)(3)(ii) 
of this section by 1.17.
    (o) Other solids price. The other solids price per pound, rounded 
to the nearest one-hundredth cent, shall be the U.S. average NASS dry 
whey survey price reported by the Department for the month minus 15.9 
cents, with the result multiplied by 1.03.
    (p) * * *
    (1) Multiply 0.0005 by the weighted average price computed pursuant 
to paragraph (n)(1) of this section and round to the 5th decimal place;
* * * * *
    (q) * * *
    (3) An advanced butterfat price per pound, rounded to the nearest 
one-hundredth cent, shall be calculated by computing a weighted average 
of the 2 most recent U.S. average NASS AA Butter survey prices 
announced before the 24th day of the month, subtracting 11.5 cents from 
this average, and multiplying the result by 1.20.

PART 1001--MILK IN THE NORTHEAST MARKETING AREA

    1. Section 1001.60 is amended by revising paragraphs (c)(3), 
(d)(2), and (h) to read as follows:


Sec.  1001.60  Handler's value of milk.

* * * * *
    (c) * * *
    (3) Add an amount obtained by multiplying the pounds of butterfat 
in Class III by the butterfat price.
    (d) * * *
    (2) Add an amount obtained by multiplying the pounds of butterfat 
in Class IV by the butterfat price.
* * * * *
    (h) Multiply the difference between the Class I price applicable at 
the location of the nearest unregulated supply plants from which an 
equivalent volume was received and the Class III price by the pounds of 
skim milk and butterfat in receipts of concentrated fluid milk products 
assigned to Class I pursuant to Sec.  1000.43(d) and Sec.  
1000.44(a)(3)(i) and the corresponding step of Sec.  1000.44(b) and the 
pounds of skim milk and butterfat subtracted from Class I pursuant to 
Sec.  1000.44(a)(8) and the corresponding step of Sec.  1000.44(b), 
excluding such skim milk and butterfat in receipts of fluid milk 
products from an unregulated supply plant to the extent that an 
equivalent amount of skim milk or butterfat disposed of to such plant 
by handlers fully regulated under any Federal milk order is classified 
and priced as Class I milk and is not used as an offset for any other 
payment obligation under any order.
* * * * *
    2. Section 1001.61 is revised to read as follows:


Sec.  1001.61  Computation of producer price differential.

    For each month, the market administrator shall compute a producer 
price differential per hundredweight. The report of any handler who has 
not made payments required pursuant to Sec.  1001.71 for the preceding 
month shall not be included in the computation of the producer price 
differential, and such handler's report shall not be included in the 
computation for succeeding months until the handler has made full 
payment of outstanding monthly obligations. Subject to the conditions 
in this paragraph, the market administrator shall compute the producer 
price differential in the following manner:
    (a) Combine into one total the values computed pursuant to Sec.  
1001.60 for all handlers required to file reports prescribed in Sec.  
1001.30;
    (b) Subtract the total of the values obtained by multiplying each 
handler's total pounds of protein, other solids, and butterfat 
contained in the milk for which an obligation was computed pursuant to 
Sec.  1001.60 by the protein price, other solids price, and the 
butterfat price, respectively;
    (c) Add an amount equal to the minus location adjustments and 
subtract an amount equal to the plus location adjustments computed 
pursuant to Sec.  1001.75;
    (d) Add an amount equal to not less than one-half of the 
unobligated balance in the producer-settlement fund;
    (e) Divide the resulting amount by the sum of the following for all 
handlers included in these computations:
    (1) The total hundredweight of producer milk; and
    (2) The total hundredweight for which a value is computed pursuant 
to Sec.  1001.60(h); and
    (f) Subtract not less than 4 cents nor more than 5 cents from the 
price computed pursuant to paragraph (e) of this section. The result, 
rounded to the nearest cent, shall be known as the producer price 
differential for the month.
    3. Section 1001.62 is amended by revising paragraphs (e) and (g) to 
read as follows:


Sec.  1001.62  Announcement of producer prices.

* * * * *
    (e) The butterfat price;
* * * * *
    (g) The statistical uniform price for milk containing 3.5 percent 
butterfat computed by combining the Class III price and the producer 
price differential.
    4. Section 1001.71 is amended by revising paragraphs (b)(2) and 
(b)(3) to read as follows:


Sec.  1001.71  Payments to the producer-settlement fund.

* * * * *
    (b) * * *
    (2) An amount obtained by multiplying the total pounds of protein, 
other solids, and butterfat contained in producer milk by the protein, 
other solids, and butterfat prices respectively; and
    (3) An amount obtained by multiplying the pounds of skim milk and 
butterfat for which a value was computed pursuant to Sec.  1001.60(h) 
by the producer price differential as adjusted pursuant to Sec.  
1001.75 for the location of the plant from which received.
    5. Section 1001.73 is amended by revising paragraphs (a)(2)(ii) and 
(b)(3)(vi) to read as follows:


Sec.  1001.73  Payments to producers and to cooperative associations.

    (a) * * *
    (2) * * *
    (ii) Multiply the pounds of butterfat received by the butterfat 
price for the month;
* * * * *
    (b) * * *
    (3) * * *
    (vi) Multiply the pounds of butterfat in Class III and Class IV 
milk by the butterfat price for the month;
* * * * *

PART 1030--MILK IN THE UPPER MIDWEST MARKETING AREA

    1. Section 1030.60 is amended by revising paragraphs (c)(3), 
(d)(2), and (i) to read as follows:


Sec.  1030.60  Handler's value of milk.

* * * * *
    (c) * * *
    (3) Add an amount obtained by multiplying the pounds of butterfat 
in Class III by the butterfat price.
    (d) * * *

[[Page 67943]]

    (2) Add an amount obtained by multiplying the pounds of butterfat 
in Class IV by the butterfat price.
* * * * *
    (i) Multiply the difference between the Class I price applicable at 
the location of the nearest unregulated supply plants from which an 
equivalent volume was received and the Class III price by the pounds of 
skim milk and butterfat in receipts of concentrated fluid milk products 
assigned to Class I pursuant to Sec.  1000.43(d) and Sec.  
1000.44(a)(3)(i) and the corresponding step of Sec.  1000.44(b) and the 
pounds of skim milk and butterfat subtracted from Class I pursuant to 
Sec.  1000.44(a)(8) and the corresponding step of Sec.  1000.44(b), 
excluding such skim milk and butterfat in receipts of fluid milk 
products from an unregulated supply plant to the extent that an 
equivalent amount of skim milk or butterfat disposed of to such plant 
by handlers fully regulated under any Federal milk order is classified 
and priced as Class I milk and is not used as an offset for any other 
payment obligation under any order.
* * * * *
    2. Section 1030.61 is revised to read as follows:


Sec.  1030.61  Computation of producer price differential.

    For each month the market administrator shall compute a producer 
price differential per hundredweight. The report of any handler who has 
not made payments required pursuant to Sec.  1030.71 for the preceding 
month shall not be included in the computation of the producer price 
differential, and such handler's report shall not be included in the 
computation for succeeding months until the handler has made full 
payment of outstanding monthly obligations. Subject to the conditions 
of this paragraph, the market administrator shall compute the producer 
price differential in the following manner:
    (a) Combine into one total the values computed pursuant to Sec.  
1030.60 for all handlers required to file reports prescribed in Sec.  
1030.30;
    (b) Subtract the total values obtained by multiplying each 
handler's total pounds of protein, other solids, and butterfat 
contained in the milk for which an obligation was computed pursuant to 
Sec.  1030.60 by the protein price, other solids price, and the 
butterfat price, respectively, and the total value of the somatic cell 
adjustment pursuant to Sec.  1030.30(a)(1) and (c)(1);
    (c) Add an amount equal to the minus location adjustments and 
subtract an amount equal to the plus location adjustments computed 
pursuant to Sec.  1030.75;
    (d) Add an amount equal to not less than one-half of the 
unobligated balance in the producer-settlement fund;
    (e) Divide the resulting amount by the sum of the following for all 
handlers included in these computations:
    (1) The total hundredweight of producer milk; and
    (2) The total hundredweight for which a value is computed pursuant 
to Sec.  1030.60(i); and
    (f) Subtract not less than 4 cents nor more than 5 cents from the 
price computed pursuant to paragraph (e) of this section. The result 
shall be known as the producer price differential for the month.
    3. Section 1030.62 is amended by revising paragraphs (e) and (h) to 
read as follows:


Sec.  1030.62  Announcement of producer prices.

* * * * *
    (e) The butterfat price;
* * * * *
    (h) The statistical uniform price for milk containing 3.5 percent 
butterfat, computed by combining the Class III price and the producer 
butterfat price differential.
    4. Section 1030.71 is amended by revising paragraphs (b)(2) and 
(b)(4) to read as follows:


Sec.  1030.71  Payments to the producer-settlement fund.

* * * * *
    (b) * * *
    (2) An amount obtained by multiplying the total pounds of protein, 
other solids, and butterfat contained in producer milk by the protein, 
other solids, and butterfat prices respectively;
* * * * *
    (4) An amount obtained by multiplying the pounds of skim milk and 
butterfat for which a value was computed pursuant to Sec.  1030.60(i) 
by the producer price differential as adjusted pursuant to Sec.  
1030.75 for the location of the plant from which received.
    5. Section 1030.73 is amended by revising paragraphs (a)(2)(ii), 
(c)(2)(v), and (c)(3)(ii) to read as follows:


Sec.  1030.73  Payments to producers and to cooperative associations.

    (a) * * *
    (2) * * *
    (ii) The pounds of butterfat received times the butterfat price for 
the month;
* * * * *
    (c) * * *
    (2) * * *
    (v) The pounds of butterfat in Class III and Class IV milk times 
the butterfat price;
* * * * *
    (3) * * *
    (ii) The pounds of butterfat received times the butterfat price for 
the month;
* * * * *

PART 1032--MILK IN THE CENTRAL MARKETING AREA

    1. Section 1032.60 is amended by revising paragraphs (c)(3), 
(d)(2), and (i) to read as follows:


Sec.  1032.60  Handler's value of milk.

* * * * *
    (c) * * *
    (3) Add an amount obtained by multiplying the pounds of butterfat 
in Class III by the butterfat price.
    (d) * * *
    (2) Add an amount obtained by multiplying the pounds of butterfat 
in Class IV by the butterfat price.
* * * * *
    (i) Multiply the difference between the Class I price applicable at 
the location of the nearest unregulated supply plants from which an 
equivalent volume was received and the Class III price by the pounds of 
skim milk and butterfat in receipts of concentrated fluid milk products 
assigned to Class I pursuant to Sec.  1000.43(d) and Sec.  
1000.44(a)(3)(i) and the corresponding step of Sec.  1000.44(b) and the 
pounds of skim milk and butterfat subtracted from Class I pursuant to 
Sec.  1000.44(a)(8) and the corresponding step of Sec.  1000.44(b), 
excluding such skim milk and butterfat in receipts of fluid milk 
products from an unregulated supply plant to the extent that an 
equivalent amount of skim milk or butterfat disposed of to such plant 
by handlers fully regulated under any Federal milk order is classified 
and priced as Class I milk and is not used as an offset for any other 
payment obligation under any order.
* * * * *
    2. Section 1032.61 is revised to read as follows:


Sec.  1032.61  Computation of producer price differential.

    For each month the market administrator shall compute a producer 
price differential per hundredweight. The report of any handler who has 
not made payments required pursuant to Sec.  1032.71 for the preceding 
month shall not be included in the computation of the producer price 
differential, and such handler's report shall not be included in the 
computation for succeeding months until the handler has made full 
payment of outstanding monthly obligations.

[[Page 67944]]

Subject to the conditions of this paragraph, the market administrator 
shall compute the producer price differential in the following manner:
    (a) Combine into one total the values computed pursuant to Sec.  
1032.60 for all handlers required to file reports prescribed in Sec.  
1032.30;
    (b) Subtract the total values obtained by multiplying each 
handler's total pounds of protein, other solids, and butterfat 
contained in the milk for which an obligation was computed pursuant to 
Sec.  1032.60 by the protein price, the other solids price, and the 
butterfat price, respectively, and the total value of the somatic cell 
adjustment pursuant to Sec.  1032.30(a)(1) and (c)(1);
    (c) Add an amount equal to the minus location adjustments and 
subtract an amount equal to the plus location adjustments computed 
pursuant to Sec.  1032.75;
    (d) Add an amount equal to not less than one-half of the 
unobligated balance in the producer-settlement fund;
    (e) Divide the resulting amount by the sum of the following for all 
handlers included in these computations:
    (1) The total hundredweight of producer milk; and
    (2) The total hundredweight for which a value is computed pursuant 
to Sec.  1032.60(i); and
    (f) Subtract not less than 4 cents nor more than 5 cents from the 
price computed pursuant to paragraph (e) of this section. The result 
shall be known as the producer price differential for the month.
    3. Section 1032.62 is amended by revising paragraphs (e) and (h) to 
read as follows:


Sec.  1032.62  Announcement of producer prices.

* * * * *
    (e) The butterfat price;
* * * * *
    (h) The statistical uniform price for milk containing 3.5 percent 
butterfat, computed by combining the Class III price and the producer 
price differential.
    4. Section 1032.71 is amended by revising paragraphs (b)(2) and 
(b)(4) to read as follows:


Sec.  1032.71  Payments to the producer-settlement fund.

* * * * *
    (b) * * *
    (2) An amount obtained by multiplying the total pounds of protein, 
other solids, and butterfat contained in producer milk by the protein, 
other solids, and butterfat prices respectively;
* * * * *
    (4) An amount obtained by multiplying the pounds of skim milk and 
butterfat for which a value was computed pursuant to Sec.  1032.60(i) 
by the producer price differential as adjusted pursuant to Sec.  
1032.75 for the location of the plant from which received.
    5. Section 1032.73 is amended by revising paragraphs (a)(2)(ii), 
(c)(2)(v), and (c)(3)(ii) to read as follows:


Sec.  1032.73  Payments to producers and to cooperative associations.

    (a) * * *
    (2) * * *
    (ii) The pounds of butterfat received times the butterfat price for 
the month;
* * * * *
    (c) * * *
    (2) * * *
    (v) The pounds of butterfat in Class III and Class IV milk times 
the butterfat price;
* * * * *
    (3) * * *
    (ii) The pounds of butterfat received times the butterfat price for 
the month;
* * * * *

PART 1033--MILK IN THE MIDEAST MARKETING AREA

    1. Section 1033.60 is amended by revising paragraphs (c)(3), 
(d)(2), and (i) to read as follows:


Sec.  1033.60  Handler's value of milk.

* * * * *
    (c) * * *
    (3) Add an amount obtained by multiplying the pounds of butterfat 
in Class III by the butterfat price.
    (d) * * *
    (2) Add an amount obtained by multiplying the pounds of butterfat 
in Class IV by the butterfat price.
* * * * *
    (i) Multiply the difference between the Class I price applicable at 
the location of the nearest unregulated supply plants from which an 
equivalent volume was received and the Class III price by the pounds of 
skim milk and butterfat in receipts of concentrated fluid milk products 
assigned to Class I pursuant to Sec.  1000.43(d) and Sec.  
1000.44(a)(3)(i) and the corresponding step of Sec.  1000.44(b) and the 
pounds of skim milk and butterfat subtracted from Class I pursuant to 
Sec.  1000.44(a)(8) and the corresponding step of Sec.  1000.44(b), 
excluding such skim milk and butterfat in receipts of fluid milk 
products from an unregulated supply plant to the extent that an 
equivalent amount of skim milk or butterfat disposed of to such plant 
by handlers fully regulated under any Federal milk order is classified 
and priced as Class I milk and is not used as an offset for any other 
payment obligation under any order.
* * * * *
    2. Section 1033.61 is revised to read as follows:


Sec.  1033.61  Computation of producer price differential.

    For each month the market administrator shall compute a producer 
price differential per hundredweight. The report of any handler who has 
not made payments required pursuant to Sec.  1033.71 for the preceding 
month shall not be included in the computation of the producer price 
differential, and such handler's report shall not be included in the 
computation for succeeding months until the handler has made full 
payment of outstanding monthly obligations. Subject to the conditions 
of this paragraph, the market administrator shall compute the producer 
price differential in the following manner:
    (a) Combine into one total the values computed pursuant to Sec.  
1033.60 for all handlers required to file reports prescribed in Sec.  
1033.30;
    (b) Subtract the total values obtained by multiplying each 
handler's total pounds of protein, other solids, and butterfat 
contained in the milk for which an obligation was computed pursuant to 
Sec.  1033.60 by the protein price, the other solids price, and the 
butterfat price, respectively, and the total value of the somatic cell 
adjustment pursuant to Sec.  1033.30(a)(1) and (c)(1);
    (c) Add an amount equal to the minus location adjustments and 
subtract an amount equal to the plus location adjustments computed 
pursuant to Sec.  1033.75;
    (d) Add an amount equal to not less than one-half of the 
unobligated balance in the producer-settlement fund;
    (e) Divide the resulting amount by the sum of the following for all 
handlers included in these computations:
    (1) The total hundredweight of producer milk; and
    (2) The total hundredweight for which a value is computed pursuant 
to Sec.  1033.60(i); and
    (f) Subtract not less than 4 cents nor more than 5 cents from the 
price computed pursuant to paragraph (e) of this section. The result 
shall be known as the producer price differential for the month.
    3. Section 1033.62 is amended by revising paragraphs (e) and (h) to 
read as follows:


Sec.  1033.62  Announcement of producer prices.

* * * * *

[[Page 67945]]

    (e) The butterfat price;
* * * * *
    (h) The statistical uniform price for milk containing 3.5 percent 
butterfat, computed by combining the Class III price and the producer 
price differential.
    4. Section 1033.71 is amended by revising paragraphs (b)(2) and 
(b)(4) to read as follows:


Sec.  1033.71  Payments to the producer-settlement fund.

* * * * *
    (b) * * *
    (2) An amount obtained by multiplying the total pounds of protein, 
other solids, and butterfat contained in producer milk by the protein, 
other solids, and butterfat prices, respectively;
* * * * *
    (4) An amount obtained by multiplying the pounds of skim milk and 
butterfat for which a value was computed pursuant to Sec.  1033.60(i) 
by the producer price differential as adjusted pursuant to Sec.  
1033.75 for the location of the plant from which received.
    5. Section 1033.73 is amended by revising paragraphs (a)(2)(ii) and 
(b)(3)(v) to read as follows:


Sec.  1033.73  Payments to producers and to cooperative associations.

    (a) * * *
    (2) * * *
    (ii) The pounds of butterfat received times the butterfat price for 
the month;
* * * * *
    (b) * * *
    (3) * * *
    (v) The pounds of butterfat in Class III and Class IV milk times 
the butterfat price;
* * * * *

PART 1124--MILK IN THE PACIFIC NORTHWEST MARKETING AREA

    1. Section 1124.60 is amended by revising paragraphs (c)(3), 
(d)(2), and (h) to read as follows:


Sec.  1124.60  Handler's value of milk.

* * * * *
    (c) * * *
    (3) Add an amount obtained by multiplying the pounds of butterfat 
in Class III by the butterfat price.
    (d) * * *
    (2) Add an amount obtained by multiplying the pounds of butterfat 
in Class IV by the butterfat price.
* * * * *
    (h) Multiply the difference between the Class I price applicable at 
the location of the nearest unregulated supply plants from which an 
equivalent volume was received and the Class III price by the pounds of 
skim milk and butterfat in receipts of concentrated fluid milk products 
assigned to Class I pursuant to Sec.  1000.43(d) and Sec.  
1000.44(a)(3)(i) and the corresponding step of Sec.  1000.44(b) and the 
pounds of skim milk and butterfat subtracted from Class I pursuant to 
Sec.  1000.44(a)(8) and the corresponding step of Sec.  1000.44(b), 
excluding such skim milk and butterfat in receipts of fluid milk 
products from an unregulated supply plant to the extent that an 
equivalent amount of skim milk or butterfat disposed of to such plant 
by handlers fully regulated under any Federal milk order is classified 
and priced as Class I milk and is not used as an offset for any other 
payment obligation under any order.
* * * * *
    2. Section 1124.61 is revised to read as follows:


Sec.  1124.61  Computation of producer price differential.

    For each month the market administrator shall compute a producer 
price differential per hundredweight. The report of any handler who has 
not made payments required pursuant to Sec.  1124.71 for the preceding 
month shall not be included in the computation of the producer price 
differential, and such handler's report shall not be included in the 
computation for succeeding months until the handler has made full 
payment of outstanding monthly obligations. Subject to the conditions 
of this paragraph, the market administrator shall compute the producer 
price differential in the following manner:
    (a) Combine into one total the values computed pursuant to Sec.  
1124.60 for all handlers required to file reports prescribed in Sec.  
1124.30;
    (b) Subtract the total values obtained by multiplying each 
handler's total pounds of protein, other solids, and butterfat 
contained in the milk for which an obligation was computed pursuant to 
Sec.  1124.60 by the protein price, the other solids price, and the 
butterfat price, respectively;
    (c) Add an amount equal to the minus location adjustments and 
subtract an amount equal to the plus location adjustments computed 
pursuant to Sec.  1124.75;
    (d) Add an amount equal to not less than one-half of the 
unobligated balance in the producer-settlement fund;
    (e) Divide the resulting amount by the sum of the following for all 
handlers included in these computations:
    (1) The total hundredweight of producer milk; and
    (2) The total hundredweight for which a value is computed pursuant 
to Sec.  1124.60(h); and
    (f) Subtract not less than 4 cents nor more than 5 cents from the 
price computed pursuant to paragraph (e) of this section. The result 
shall be known as the producer price differential for the month.
    3. Section 1124.62 is amended by revising paragraphs (e) and (g) to 
read as follows:


Sec.  1124.62  Announcement of producer prices.

* * * * *
    (e) The butterfat price;
* * * * *
    (g) The statistical uniform price for milk containing 3.5 percent 
butterfat, computed by combining the Class III price and the producer 
price differential.
    4. Section 1124.71 is amended by revising paragraphs (b)(2) and 
(b)(3) to read as follows:


Sec.  1124.71  Payments to the producer-settlement fund.

* * * * *
    (b) * * *
    (2) An amount obtained by multiplying the total pounds of protein, 
other solids, and butterfat contained in producer milk by the protein, 
other solids, and butterfat prices respectively; and
    (3) An amount obtained by multiplying the pounds of skim milk and 
butterfat for which a value was computed pursuant to Sec.  1124.60(h) 
by the producer price differential as adjusted pursuant to Sec.  
1124.75 for the location of the plant from which received.
    5. Section 1124.73 is amended by revising paragraphs (a)(2)(ii), 
(c)(2)(v), and (c)(3)(ii) to read as follows:


Sec.  1124.73  Payments to producers and to cooperative associations.

    (a) * * *
    (2) * * *
    (ii) The pounds of butterfat received times the butterfat price for 
the month;
* * * * *
    (c) * * *
    (2) * * *
    (v) The pounds of butterfat in Class III and Class IV milk times 
the butterfat price;
* * * * *
    (3) * * *
    (ii) The pounds of butterfat received times the butterfat price for 
the month;
* * * * *

[[Page 67946]]

PART 1126--MILK IN THE SOUTHWEST MARKETING AREA

    1. Section 1126.60 is amended by revising paragraphs (c)(3), 
(d)(2), and (i) to read as follows:


Sec.  1126.60  Handler's value of milk.

* * * * *
    (c) * * *
    (3) Add an amount obtained by multiplying the pounds of butterfat 
in Class III by the butterfat price.
    (d) * * *
    (2) Add an amount obtained by multiplying the pounds of butterfat 
in Class IV by the butterfat price.
* * * * *
    (i) Multiply the difference between the Class I price applicable at 
the location of the nearest unregulated supply plants from which an 
equivalent volume was received and the Class III price by the pounds of 
skim milk and butterfat in receipts of concentrated fluid milk products 
assigned to Class I pursuant to Sec.  1000.43(d) and Sec.  
1000.44(a)(3)(i) and the corresponding step of Sec.  1000.44(b) and the 
pounds of skim milk and butterfat subtracted from Class I pursuant to 
Sec.  1000.44(a)(8) and the corresponding step of Sec.  1000.44(b), 
excluding such skim milk and butterfat in receipts of fluid milk 
products from an unregulated supply plant to the extent that an 
equivalent amount of skim milk or butterfat disposed of to such plant 
by handlers fully regulated under any Federal milk order is classified 
and priced as Class I milk and is not used as an offset for any other 
payment obligation under any order.
* * * * *
    2. Section 1126.61 is revised to read as follows:


Sec.  1126.61  Computation of producer price differential.

    For each month the market administrator shall compute a producer 
price differential per hundredweight. The report of any handler who has 
not made payments required pursuant to Sec.  1126.71 for the preceding 
month shall not be included in the computation of the producer price 
differential, and such handler's report shall not be included in the 
computation for succeeding months until the handler has made full 
payment of outstanding monthly obligations. Subject to the conditions 
of this paragraph, the market administrator shall compute the producer 
price differential in the following manner:
    (a) Combine into one total the values computed pursuant to Sec.  
1126.60 for all handlers required to file reports prescribed in Sec.  
1126.30;
    (b) Subtract the total of the values obtained by multiplying each 
handler's total pounds of protein, other solids, and butterfat 
contained in the milk for which an obligation was computed pursuant to 
Sec.  1126.60 by the protein price, other solids price, and the 
butterfat price, respectively, and the total value of the somatic cell 
adjustment pursuant to Sec.  1126.30(a)(1) and (c)(1);
    (c) Add an amount equal to the minus location adjustments and 
subtract an amount equal to the plus location adjustments computed 
pursuant to Sec.  1126.75;
    (d) Add an amount equal to not less than one-half of the 
unobligated balance in the producer-settlement fund;
    (e) Divide the resulting amount by the sum of the following for all 
handlers included in these computations:
    (1) The total hundredweight of producer milk; and
    (2) The total hundredweight for which a value is computed pursuant 
to Sec.  1126.60(i); and
    (f) Subtract not less than 4 cents nor more than 5 cents from the 
price computed pursuant to paragraph (e) of this section. The result 
shall be known as the producer price differential for the month.
    3. Section 1126.62 is amended by revising paragraphs (e) and (h) to 
read as follows:


Sec.  1126.62  Announcement of producer prices.

* * * * *
    (e) The butterfat price;
* * * * *
    (h) The statistical uniform price for milk containing 3.5 percent 
butterfat, computed by combining the Class III price and the producer 
price differential.
    4. Section 1126.71 is amended by revising paragraphs (b)(2) and 
(b)(4) to read as follows:


Sec.  1126.71  Payments to the producer-settlement fund.

* * * * *
    (b) * * *
    (2) An amount obtained by multiplying the total pounds of protein, 
other solids, and butterfat contained in producer milk by the protein, 
other solids, and butterfat prices respectively;
* * * * *
    (4) An amount obtained by multiplying the pounds of skim milk and 
butterfat for which a value was computed pursuant to Sec.  1126.60(i) 
by the producer price differential as adjusted pursuant to Sec.  
1126.75 for the location of the plant from which received.
    5. Section 1126.73 is amended by revising paragraphs (a)(2)(ii) and 
(b)(3)(v) to read as follows:


Sec.  1126.73  Payments to producers and to cooperative associations.

    (a) * * *
    (2) * * *
    (ii) Multiply the pounds of butterfat received times the butterfat 
price for the month;
* * * * *
    (b) * * *
    (3) * * *
    (v) The pounds of butterfat in Class III and Class IV milk times 
the butterfat price;
* * * * *

PART 1135--MILK IN THE WESTERN MARKETING AREA

    1. Section 1135.60 is amended by revising paragraphs (c)(3), (d)(2) 
and (h) to read as follows:


Sec.  1135.60  Handler's value of milk.

* * * * *
    (c) * * *
    (3) Add an amount obtained by multiplying the pounds of butterfat 
in Class III by the butterfat price.
    (d) * * *
    (2) Add an amount obtained by multiplying the pounds of butterfat 
in Class IV by the butterfat price.
* * * * *
    (h) Multiply the difference between the Class I price applicable at 
the location of the nearest unregulated supply plants from which an 
equivalent volume was received and the Class III price by the pounds of 
skim milk and butterfat in receipts of concentrated fluid milk products 
assigned to Class I pursuant to Sec.  1000.43(d) and Sec.  
1000.44(a)(3)(i) and the corresponding step of Sec.  1000.44(b) and the 
pounds of skim milk and butterfat subtracted from Class I pursuant to 
Sec.  1000.44(a)(8) and the corresponding step of Sec.  1000.44(b), 
excluding such skim milk and butterfat in receipts of fluid milk 
products from an unregulated supply plant to the extent that an 
equivalent amount of skim milk or butterfat disposed of to such plant 
by handlers fully regulated under any Federal milk order is classified 
and priced as Class I milk and is not used as an offset for any other 
payment obligation under any order.
* * * * *
    2. Section 1135.61 is revised to read as follows:


Sec.  1135.61  Computation of producer price differential.

    For each month the market administrator shall compute a producer 
price differential per hundredweight. The report of any handler who has 
not made payments required pursuant to Sec.  1135.71 for the preceding 
month shall

[[Page 67947]]

not be included in the computation of the producer price differential, 
and such handler's report shall not be included in the computation for 
succeeding months until the handler has made full payment of 
outstanding monthly obligations. Subject to the conditions of this 
paragraph, the market administrator shall compute the producer price 
differential in the following manner:
    (a) Combine into one total the values computed pursuant to Sec.  
1135.60 for all handlers required to file reports prescribed in Sec.  
1135.30;
    (b) Subtract the total values obtained by multiplying each 
handler's total pounds of protein, other solids, and butterfat 
contained in the milk for which an obligation was computed pursuant to 
Sec.  1135.60 by the protein price, the other solids price, and the 
butterfat price, respectively;
    (c) Add an amount equal to the minus location adjustments and 
subtract an amount equal to the plus location adjustments computed 
pursuant to Sec.  1135.75;
    (d) Add an amount equal to not less than one-half of the 
unobligated balance in the producer-settlement fund;
    (e) Divide the resulting amount by the sum of the following for all 
handlers included in these computations:
    (1) The total hundredweight of producer milk; and
    (2) The total hundredweight for which a value is computed pursuant 
to Sec.  1135.60(h); and
    (f) Subtract not less than 4 cents nor more than 5 cents from the 
price computed pursuant to paragraph (e) of this section. The result 
shall be known as the producer price differential for the month.
    3. Section 1135.62 is amended by revising paragraphs (e) and (g) to 
read as follows:


Sec.  1135.62  Announcement of producer prices.

* * * * *
    (e) The butterfat price;
* * * * *
    (g) The statistical uniform price for milk containing 3.5 percent 
butterfat computed by combining the Class III price and the producer 
price differential.
* * * * *
    4. Section 1135.71 is amended by revising paragraph (b)(2) and 
removing and reserving paragraph (b)(3) to read as follows:


Sec.  1135.71  Payments to the producer-settlement fund.

* * * * *
    (b) * * *
    (2) An amount obtained by multiplying the total pounds of protein, 
other solids, and butterfat contained in producer milk by the protein, 
other solids, and butterfat prices respectively; and
    (3) [Reserved]
* * * * *
    5. Section 1135.73 is amended by revising paragraphs (a)(2)(ii) and 
(b)(3)(v) to read as follows:


Sec.  1135.73  Payments to producers and to cooperative associations.

    (a) * * *
    (2) * * *
    (ii) The pounds of butterfat received times the butterfat price for 
the month;
* * * * *
    (b) * * *
    (3) * * *
    (v) The pounds of butterfat in Class III and Class IV milk times 
the butterfat price;
* * * * *

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.  --------\1\ to --------, all 
inclusive, of the order regulating the handling of milk in the (----
---- Name of order--------) marketing area (7 CFR PART--------\2\) 
which is annexed hereto; and
---------------------------------------------------------------------------

    \1\ First and last sections of order.
    \2\ Appropriate Part number.
---------------------------------------------------------------------------

    II. The following provisions: Sec.  --------\3\ Record of milk 
handled and authorization to correct typographical errors.
---------------------------------------------------------------------------

    \3\ Next consecutive section number.
---------------------------------------------------------------------------

    (a) Record of milk handled. The undersigned certifies that he/
she handled during the month of--------\4\, hundredweight of milk 
covered by this marketing agreement.
---------------------------------------------------------------------------

    \4\ Appropriate representative period for the order.
---------------------------------------------------------------------------

    (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.
    Sec.  --------\3\ Effective date. This marketing agreement shall 
become effective upon the execution of a counterpart hereof by the 
Secretary 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. 02-27570 Filed 11-6-02; 8:45 am]
BILLING CODE 3410-02-P