[Federal Register Volume 67, Number 223 (Tuesday, November 19, 2002)]
[Proposed Rules]
[Pages 69910-69926]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-29030]



[[Page 69909]]

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Part III





Department of Agriculture





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Agricultural Marketing Service



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7 CFR Part 1032



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

  Federal Register / Vol. 67, No. 223 / Tuesday, November 19, 2002 / 
Proposed Rules  

[[Page 69910]]


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DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Part 1032

[Doc. No. AO-313-A44; DA-01-07]


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

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Proposed rule.

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SUMMARY: This tentative decision adopts, on an interim final and 
emergency basis, provisions that amend certain features of the pooling 
standards of the Central Federal milk order. Specifically, this 
tentative decision adopts amendments to the Pool plant provisions 
which: Establish lower but year-round supply plant performance 
standards; will not consider the volume of milk shipments to 
distributing plants regulated by another Federal milk order as a 
qualifying shipment on the Central order; exclude from receipts 
diverted milk made by a pool plant to another pool plant in determining 
pool plant diversion limits; and establish a ``net shipments'' 
provision for milk deliveries to distributing plants. This decision 
recommends adopting provisions to limit supply plant system formation, 
but not on an emergency basis. For Producer milk, this tentative 
decision adopts amendments that: Establish higher year-round diversion 
limits; will base diversion limits for supply plants on deliveries to 
Central order distributing plants; and eliminate the ability to 
simultaneously pool milk on the Central milk order and a State-operated 
milk order that has marketwide pooling. Public comments on these 
actions and the other pooling and payment issues not adopted by this 
tentative decision are requested. Additionally, this decision requires 
determination of whether producers approve the issuance of the amended 
order on an interim basis.

DATES: Comments are due on or before January 21, 2003.

ADDRESSES: Comments (6 copies) should be filed with the Hearing Clerk, 
United States Department of Agriculture, Room 1083--Stop 9200, 1400 
Independence Avenue, SW., Washington, DC 20250-9200.

FOR FURTHER INFORMATION CONTACT: Gino M. Tosi, Marketing Specialist, 
USDA/AMS/Dairy Programs, Order Formulation and Enforcement Branch, Room 
2968, 1400 Independence Avenue, SW., STOP 0231, Washington, DC 20250-
0231, (202) 690-1366, e-mail address: [email protected].

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

Regulatory Flexibility Act and Paperwork Reduction Act

    In accordance with the Regulatory Flexibility Act (5 U.S.C. 601 et 
seq.), the Agricultural Marketing Service has considered the economic 
impact of this action on small entities and has certified that this 
proposed rule will not have a significant economic impact on a 
substantial number of small entities. For the purpose of the Regulatory 
Flexibility Act, a dairy farm is considered a ``small business'' if it 
has an annual gross revenue of less than $750,000, and a dairy products 
manufacturer is a ``small business'' if it has fewer than 500 
employees. For the purposes of determining which dairy farms are 
``small businesses,'' the $750,000 per year criterion was used to 
establish a production guideline of 500,000 pounds per month. Although 
this guideline does not factor in additional monies that may be 
received by dairy producers, it should be an inclusive standard for 
most ``small'' dairy farmers. For purposes of determining a handler's 
size, if the plant is part of a larger company operating multiple 
plants that collectively exceed the 500-employee limit, the plant will 
be considered a large business even if the local plant has fewer than 
500 employees.
    Approximately 9,695 of the 10,108 dairy producers (farmers), or 
95.9 percent, whose milk was pooled under the Central Federal milk 
order at the time of the hearing, November 2001, would meet the 
definition of small businesses. On the processing side, approximately 
10 of the 56 milk plants associated with the Central milk order during 
November 2001 would qualify as ``small businesses,'' constituting about 
17.9 percent of the total.
    Based on these criteria, more than 95 percent of the producers 
would be considered as small businesses. The adoption of the proposed 
pooling standards serves to revise established criteria that determine 
those producers, producer milk, and plants that have a reasonable 
association with, and are consistently serving the fluid needs of, the 
Central milk marketing area and are not associated with other 
marketwide pools concerning the same milk. Criteria for pooling are 
established on the basis of performance levels that are considered 
adequate to meet the Class I fluid needs and, by doing so, determine 
those that are eligible to share in the revenue that arises from the 
classified pricing of milk. Criteria for pooling are established 
without regard to the size of any dairy industry organization or 
entity. The criteria established are applied in an identical fashion to 
both large and small businesses and do not have any different economic 
impact on small entities as opposed to large entities. Therefore, the 
proposed amendments will not have a significant economic impact on a 
substantial number of small entities.
    A review of reporting requirements was completed under the 
Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35). It was 
determined that these proposed amendments would have no impact on 
reporting, recordkeeping, or other compliance requirements because they 
would remain identical to the current requirements. No new forms are 
proposed and no additional reporting requirements would be necessary.
    This notice does not require additional information collection that 
requires clearance by the Office of Management and Budget (OMB) beyond 
currently approved information collection. The primary sources of data

[[Page 69911]]

used to complete the forms are routinely used in most business 
transactions. Forms require only a minimal amount of information which 
can be supplied without data processing equipment or a trained 
statistical staff. Thus, the information collection and reporting 
burden is relatively small. Requiring the same reports for all handlers 
does not significantly disadvantage any handler that is smaller than 
the industry average.
    Interested parties are invited to submit comments on the probable 
regulatory and informational impact of this proposed rule on small 
entities. Also, parties may suggest modifications of this proposal for 
the purpose of tailoring their applicability to small businesses.
    Prior documents in this proceeding:
    Notice of Hearing: Issued October 17, 2001; published October 23, 
2001 (66 FR 53551).

Preliminary Statement

    Notice is hereby given of the filing with the Hearing Clerk of this 
tentative final decision with respect to proposed amendments to the 
tentative marketing agreement and the order regulating the handling of 
milk in the Central marketing area. This notice is issued pursuant to 
the provisions of the Agricultural Marketing Agreement Act and the 
applicable rules of practice and procedure governing the formulation of 
marketing agreements and marketing orders (7 CFR part 900).
    Interested parties may file written exceptions to this decision 
with the Hearing Clerk, U.S. Department of Agriculture, Room 1083--Stop 
9200, 1400 Independence Avenue, SW., Washington, DC 20250-9200, by 
January 21, 2003. Six (6) copies of the exceptions should be filed. All 
written submissions made pursuant to this notice will be made available 
for public inspection at the office of the Hearing Clerk during regular 
business hours (7 CFR 1.27(b)).
    The hearing notice specifically invited interested persons to 
present evidence concerning the probable regulatory and informational 
impact of the proposals on small businesses. While no evidence was 
received that specifically addressed these issues, some of the evidence 
encompassed entities of various sizes.
    The proposed amendments set forth below are based on the record of 
a public hearing held at Kansas City, Missouri, on November 14-15, 
2001, pursuant to a notice of hearing issued October 17, 2001, and 
published October 23, 2001 (66 FR 53551).
    The material issues on the record of the hearing relate to:
    1. Pooling Standards:
    a. Supply plant pooling standards.
    b. Cooperative supply plant performance standards.
    c. Supply plant system standards.
    d. Standards applicable for Producer milk.
    e. Establishing pooling standards for ``State units.''
    2. Simultaneous pooling of milk on the order and on a State-
operated milk order providing for marketwide pooling.
    3. Rate of partial payments to producers.
    4. Determining whether emergency marketing conditions exist that 
would warrant the omission of a recommended decision and the 
opportunity to file written exceptions.

Findings and Conclusions

    The following findings and conclusions on the material issues are 
based on evidence presented at the hearing and the record thereof:

1. Pooling Standards of the Order

a. Supply Plant Pooling Standards
    Several amendments to the pooling provisions of the Central order 
should be adopted immediately. Certain inadequacies of the supply plant 
pooling provisions are resulting in disorderly marketing conditions and 
the unwarranted erosion of the blend price received by those producers 
who are consistently providing milk to meet the fluid demands of the 
Central marketing area. Specifically, the following amendments for pool 
supply plants should be adopted immediately: (1) Lower the performance 
standards to 20 percent in each of the months of August through 
February and 15 percent in each of the months of March through July. 
Accordingly, automatic pool plant status during the 3-month period of 
May through July is thereby eliminated from the order; (2) Eliminate 
the volume of milk shipments made by supply plants to distributing 
plants regulated by another Federal milk marketing order as qualifying 
shipments in meeting the Central supply plant shipping standard; (3) 
Exclude from receipts the diversions made by a pool plant to a second 
pool plant from the calculation of the diversion limits established for 
pool plants; and (4) Provide a ``net shipments'' standard for supply 
plant deliveries to the order's distributing plants for the purpose of 
meeting the Central order's supply plant shipping standard. Expanding 
pool supply plant qualification to include milk shipments to any plant 
that is part of a distributing plant unit is not adopted.
    The Central order currently provides a supply plant performance 
standard whereby 35 percent of the milk received directly from dairy 
farms and cooperative handlers must be transferred or diverted to 
distributing plants, including milk diverted by the plant operator, 
during each of the months of September through November and January. 
For all other months a 25 percent standard applies.
    The Central marketing order currently provides automatic pool plant 
status during the 3-month period of May through July for supply plants 
provided they were pool plants during each of the immediately preceding 
months of August through April. The order does not currently include a 
performance standard which considers shipments to any plant that is 
part of a distributing plant unit as a qualifying shipment. The current 
order does not limit supply plant shipments to distributing plants on a 
``net shipments'' basis.
    In addition, handlers may currently qualify supply plants as pool 
plants located inside or outside the market area by diverting milk to a 
pool distributing plant regulated by the Central order. Supply plant 
transfers to distributing plants regulated by another Federal order 
currently are considered as qualifying shipments for the purpose of 
determining if the Central supply plant shipping standard has been met.
    These amendments to the supply plant pooling standards were 
presented in testimony related to a proposal published in the hearing 
notice as Proposal 1. This proposal was offered by Dairy Farmers of 
America (DFA), Prairie Farms Cooperative (Prairie Farms), and Swiss 
Valley Farms (Swiss Valley). These organizations are cooperative 
associations that historically have pooled milk on the Central milk 
order or one of the nine orders consolidated to form the Central milk 
order. Hereinafter, this decision will refer to these proponents as 
``DFA, et al.'' All three cooperative associations have ownership 
interests in fluid milk processing plants. Prairie Farms and Swiss 
Valley operate fluid plants.
    Amendments to the supply plant pooling standards were offered, the 
proponents assert, because the pooling provisions of the order are not 
appropriately linking the ability to pool milk on the order with 
demonstrating consistent service in supplying the fluid needs of the 
market. DFA, et al., proposed changing the seasonally adjusted 
performance standard for supply plants to 25 percent during each of the 
months of August through November and to 20 percent for each of the 
months of December through July.

[[Page 69912]]

Adopting these standards would also eliminate automatic pool plant 
status for the 3-month period of May through July currently provided by 
the order.
    Proposal 1 as offered would no longer consider milk deliveries to 
distributing plants regulated by another Federal milk marketing order 
as qualifying shipments for determining if the supply plant performance 
standard for the Central Order had been met. Similarly, the proposal 
would not consider milk deliveries to distributing plants that are part 
of a distributing plant unit as qualifying shipments for determining if 
the supply plant performance standard had been met.
    Proposal 1 also would limit a handler's ability to qualify supply 
plants located outside the Central Order marketing area as pool plants 
through direct deliveries of milk to pool distributing plants. The 
proposal also calls for establishing a ``net shipments'' provision. A 
net shipments standard would exclude from a supply plant's qualifying 
shipments any transfer or diversion of bulk fluid milk products made by 
a distributing plant receiving a qualifying shipment.
    In support for Proposal 1, the DFA, et al., witness testified that 
the orderly marketing of milk requires appropriate performance 
standards for supply plants to ensure that distributing plants are 
adequately supplied with milk as a condition for receiving the Central 
order's blend price. The witness explained that performance standards 
should require a level of association to a market by demonstrating the 
ability to supply the Class I needs of that market. The witness 
testified that milk located far from the market also should have 
performance standards that are workable and consistent with Federal 
order policy. According to the witness, the current practice of using 
direct deliveries from farms to distributing plants located inside the 
marketing area as a method to qualify plants located outside of the 
Central order marketing area as pool supply plants is inappropriate 
because milk pooled in this manner does not provide any reasonable 
service to the Class I needs of the market.
    According to the DFA, et al., witness, the reform of Federal milk 
orders provided unique pooling standards that apply to each market on 
an individual basis. The witness testified that during the reform 
process, the more lenient performance standard was often selected for 
the new consolidated orders. According to the witness, such standards 
are proving to be inappropriate for the larger consolidated Central 
milk marketing order.
    As evidence that milk is being inappropriately pooled on the order, 
the DFA, et al., witness noted that at the time of implementing Federal 
milk order reform, the consolidated Central order was expected to have 
Class I use of nearly 50 percent. Instead, Class I use is averaging 
below 30 percent, the witness noted. The witness was of the opinion 
that this shortfall in projected Class I use was due to pooling much 
more milk from sources outside the marketing area than could be 
explained by consolidating the nine pre-reform orders into the current 
Central order. The DFA, et al., witness asserted that milk order reform 
did not intend to provide for pooling milk supplies on the Central 
order that would not also provide a consistent and reliable service to 
the Class I needs of the market. Stressing that such milk does not 
provide a consistent and reliable service to the Class I needs of the 
market, the witness maintained that such milk should not be pooled on 
the Central order and receive the order's blend price.
    The DFA, et al., witness testified that the ability of handlers to 
pool large volumes of milk from distant sources without having to 
actually deliver the milk to the market has resulted in a significant 
reduction of the blend price received by producers who are serving the 
market's Class I needs. The witness also asserted that some Central 
order fluid handlers are having difficulties in obtaining sufficient 
milk supplies and find themselves competing for a supply of milk with 
other fluid handlers regulated under adjacent orders where blend prices 
are higher.
    The DFA, et al., witness also explained that a portion of the pre-
reform Southwest Plains order area had contributed a significant share 
of the milk supply needed for fluid use in the southeastern portion of 
the current Central marketing area. Much of the milk produced in 
Arkansas and southern Missouri became part of the milk supply for the 
Southeast order area, added the DFA, et al., witness. The witness was 
of the opinion that adoption of Proposal 1 would result in a higher 
blend price for the Central order dairy farmers and enhance the ability 
of local Class I handlers to procure local milk supplies.
    A DFA, et al., witness from Prairie Farms testified that the 
significantly higher blend prices paid to producers under the 
neighboring Southeast and Appalachian orders are attracting milk 
supplies located in the southern and southeastern areas of the Central 
marketing area. The witness observed that these producers receive a 
higher price for their milk without incurring a significant change in 
hauling costs. The witness indicated that this situation is resulting 
in distributing plants needing to pay substantial over-order premiums 
to obtain a supply of milk for distribution in the Central marketing 
area.
    Witnesses representing several distributing plant operators 
confirmed that they are experiencing problems obtaining an adequate 
supply of milk for fluid use, especially during the fall months. These 
fluid handlers supported the adoption of Proposal 1 because the link 
between milk pooled on the Central order needs to be tied to actual 
deliveries of milk to the order's pool distributing plants.
    A witness from Anderson-Erickson (A-E), a distributing plant 
operator regulated by the Central order, testified that the order's 
pooling provisions need to be revised to better condition the receiving 
of the order's blend price to actual performance in supplying the 
market's Class I needs. Similarly, a witness representing Suiza Foods 
(Suiza), a company which owns and operates distributing plants 
regulated by the Central order, testified that the pooling of milk on 
the Central order needs to be directly tied to actual performance in 
serving the fluid market. The Suiza witness stressed that actual 
performance in serving the fluid market should be necessary because it 
is the fluid market that generates the additional dollars to the 
marketwide pool.
    The Suiza witness testified that their costs and ability to obtain 
raw milk for Class I use are tied directly to the pooling provisions of 
Federal milk orders, including the Central milk order. The witness 
stressed that blend prices, especially relative blend prices, provide 
the incentives for producers to move milk to where it is needed. 
However, explained the witness, Suiza faces new challenges in the 
Central marketing area since its formation under milk order reform. 
Specifically, the witness noted difficulty in procuring milk at one of 
their plants because local dairy farmers are delivering their milk to 
plants regulated on the Southeast and Appalachian orders. According to 
the witness, the blend prices in those orders are higher than in the 
Central milk order and therefore attract milk to those markets.
    The Suiza witness was of the opinion that milk order reform placed 
other Central order distributing plants at a similar competitive 
disadvantage in competing for a supply of milk. While noting that the 
purpose of this proceeding is to address pooling

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problems resulting in lower blend prices to Central order dairy 
farmers, the witness stressed that in their opinion, the real issue 
that needs to be addressed is whether the Central order is too large. 
The witness cited the geographic diversity of the order and vastly 
differing marketing conditions within the marketing area's boundaries 
to question whether the Central order is truly a viable, single milk 
marketing area.
    A witness from Mid States Dairy, an organization that operates a 
distributing plant regulated by the Central order, testified that they 
were no longer able to source milk from their usual milksheds in 
southern Missouri and central Illinois. This witness stated that until 
recently, they had to rely on contracts with southern milk sources at 
premium prices to obtain a supply of milk because milk supplies were 
not available locally.
    The DFA, et al., witness testified that the order's supply plant 
performance standards should continue to be adjusted seasonally but at 
slightly different times. According to the witness, a higher standard 
of performance is needed for the months of August through November 
because increased customer demand occurs in those months. More 
importantly, the witness indicated that performance should be specified 
for every month of the year. In this regard, the witness from Prairie 
Farms added that specifying August through November for increased 
performance would help to ease their need to obtain additional milk 
supplies from other marketing areas.
    Using milk located within the marketing area to qualify milk for 
pooling at plants located far from the marketing area was described by 
the DFA, et al., witness as ``pyramiding.'' The witness also attributed 
pyramiding to inadequate performance standards. As an illustration, the 
witness provided evidence to show how pooling provisions permit the 
pooling of milk volumes that cannot reasonably demonstrate performance 
in serving the Class I needs of the Central marketing area. As an 
example, the witness explained how a single tanker load of milk 
delivered to a pool plant within the Central order marketing area can 
qualify as many as 15 additional tanker loads of milk for pooling on 
the order though diversions. The witness contended that the ability to 
pyramid milk for pooling in this way reveals the inadequacy of the 
current pooling standards. Eliminating the ability to pyramid milk for 
pooling, the witness stressed, provides a basis for lowering the 
order's supply plant performance standard.
    The DFA, et al., witness testified that supply plants delivering 
milk to distributing plants not regulated by the Central milk order 
should not be counted in determining if the Central order's performance 
standards have been met. The witness indicated that such milk does not 
serve the Class I needs of the Central order. The witness offered that 
standards allowing for pool qualification to be earned from shipments 
to another order's distributing plants stem from pre-reform pooling 
provisions that were generally associated with ``reserve supply'' 
orders where Class I use was relatively small. The witness contended 
that the consolidated Central order is not such an order. While 
deliveries of milk to another order could still occur, noted the 
witness, the deliveries should not count toward pool qualification.
    The witness from DFA, et al., also offered a modification to 
Proposal 1 for incorporating a ``net shipments'' feature for pool 
supply plants as a way to ensure that fluid milk was actually received 
and retained at a distributing plant for Class I use. According to the 
witness, this feature would prevent a supply plant from physically 
shipping milk into the facilities of a distributing plant only to have 
the milk reloaded and moved to another plant for uses other than Class 
I. The witness also noted that without a ``net shipments'' provision, 
suppliers could qualify milk for pooling on the Central order without 
that milk ever being available to service the Class I needs of the 
market.
    The witnesses from A-E concurred with the need for a ``net 
shipments'' provision, as did a witness from Foremost Farms, a fluid 
handler whose plants were regulated under the Central and Upper Midwest 
milk marketing orders. A witness from Suiza, testified that while they 
did not oppose a ``net shipments'' provision, they were of the view 
that milk actually delivered to a distributing plant was performing a 
service to the Class I needs of the market. To the extent that the same 
milk is subsequently pumped back out of the plant, indicated the 
witness, that decision is made by the receiving handler. Therefore, 
concluded the Suiza witness, such milk should be counted in determining 
if the supply plant performance standard is being met.
    Briefs from both A-E and Dean Foods \1\ reaffirmed their opposition 
to the inclusion of supply plant shipments to distributing plant unit 
plants as counting towards meeting pool qualifying performance 
standards noting that a relatively large non-Class I volume of milk is 
often associated with distributing plant units. The briefs contended 
that pooling stand-alone Class II operations could result in placing 
pooling priority for milk used in Class II dairy products on a par with 
milk used for Class I. They viewed that adoption of expanding supply 
plant qualifying deliveries to distributing plant units would create 
inequities and perhaps even result in creating new disorderly marketing 
conditions.
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    \1\ Suiza Foods Corporation merged with Dean Foods Company on 
December 21, 2001, at which time the name of the merged company 
became Dean Foods Company.
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    A group of cooperative associations with members located primarily 
in the Upper Midwest milk marketing area opposed amendments included in 
Proposal 1 because it was their view that the amendments would limit 
their ability to pool milk on the Central order. The cooperative 
associations included: Associated Milk Producers, Inc. (AMPI); Foremost 
Farms USA (Foremost); Land O'Lakes (LOL); First District Association 
(FDA); Family Dairies USA; and Lakeshore Federated Dairy Cooperative 
(Lakeshore), comprised of Midwest Dairymen's Company, Manitowoc Milk 
Producers Cooperative, and Milwaukee Cooperative Milk Producers. 
Hereinafter this decision will collectively refer to this group of 
cooperative associations as the ``Upper Midwest Cooperatives.''
    Testimony by the Upper Midwest Cooperatives' witnesses argued that 
the adoption of more restrictive pooling standards would force milk 
that currently is pooled on the Central order to be pooled instead with 
the Upper Midwest pool. According to the witnesses, this would result 
in lower blend prices to Upper Midwest producers because of the lower 
Class I use in that area. The witnesses also argued that adopting the 
amendments contained in Proposal 1 would establish the more stringent 
pooling provisions that were in effect prior to milk order reform. 
According to the witnesses, this would establish a barrier to pooling 
the milk of producers who had long been associated with the markets 
merged to form the Central order.
    To illustrate their point that the amendments of Proposal 1 would 
limit their ability to pool milk on the Central order, an Upper Midwest 
Cooperatives' witness testified that under current pooling provisions, 
every pound of milk delivered to Central order pool distributing plants 
provides the ability to pool 15 additional pounds of milk. If the 
pooling provisions proposed are adopted, the witnesses indicated that 
only 3 additional pounds of milk could

[[Page 69914]]

be pooled for each pound of milk delivered on the Central order.
    The Foremost Farms witness, testifying on behalf of AMPI, LOL, 
Family Dairies, Midwest Dairymen, and First District Association, 
testified that if Proposals 1 and 5 (Proposal 5 is discussed in more 
detail later in this decision) were adopted, and if they were pooling 
the maximum amount of milk allowed in the pre-reform orders, 
approximately 400 million pounds of milk per month would no longer be 
pooled on the Central order. Instead, the witness testified, this milk 
would be pooled on the Upper Midwest order. The witness maintained that 
this would increase the blend price differences between the two orders.
    According to the Foremost Farms witness, the blend price 
differences would have ranged between 32 cents per hundredweight (cwt) 
to as much as 91 cents per cwt for the one-year period of September 
2000 through August 2001 if the pooling standards proposed had been in 
effect during that time. The witness emphasized this would have had an 
enormous adverse effect on the net income of Upper Midwest producers.
    An Upper Midwest Cooperatives' witness from Family Dairies 
testified in opposition to pooling provision amendments that would 
limit the ability to pool milk on the Central Order and result in lower 
blend prices to producers located in the Upper Midwest. The witness 
stated that adoption of such proposals would result in creating more 
regional pricing problems and give selected handlers the ability to use 
the blend price as a procurement tool in areas outside the Central 
Order.
    A witness for Lakeshore joined other Upper Midwest Cooperatives' 
witnesses by also stating their concern that the proposed pooling 
changes specifically in Proposals 1, 3, 5, and 7 (Proposals 3, 5 and 7 
are discussed later in this decision) could force milk currently pooled 
on the Central order to instead be pooled on the Upper Midwest order. 
According to the witness, this would result in decreasing producer 
returns for those dairy farmers located in Northern Illinois and the 
surrounding area. Specifically, the Lakeshore witness explained that 
while a fluid milk plant at Rockford, Illinois, and a Dubuque, Iowa, 
distributing plant have the same federal order-dictated Class I price, 
the Rockford plant is disadvantaged because it has to pay a higher 
competitive value to attract Class I milk, adversely impacting their 
northern Illinois businesses.
    A witness from LOL emphasized the necessity of basing pooling 
provisions on performance in serving the Class I needs of the market 
rather than the location of where milk originates. The witness was also 
of the opinion that the current order provisions provide adequate 
incentives to service Central order distributing plants. Stating that 
producers who share in the pool must be willing to serve the market, 
the LOL witness nevertheless stressed that the ability to pool milk on 
the Central order pool should not be restricted for the benefit of a 
select few. The LOL witness testified that milk no longer pooled on the 
Central order would instead be pooled on adjoining milk orders such as 
the Upper Midwest or Western marketing areas and characterized these 
areas as already carrying a disproportionate volume of reserve milk.
    In response to concerns that Central order Class I handlers are 
having difficulty in obtaining a supply of milk, the LOL witness 
provided an analysis which suggested that tightening pooling provisions 
would not achieve what the proponents of Proposal 1 assert. The witness 
estimated that adopting the proposed pooling provisions would result in 
an increase of 35 cents per cwt in the Central Order blend price. 
According to the witness, such an increase would still leave the 
Central order blend price $1.48 per cwt below the blend price of the 
Southeast order thus weakening the argument that the higher blend 
prices in orders to the south and southeast would mitigate the problem 
of Central order distributing plants securing a supply of milk.
    The LOL witness asserted that the combination of Proposals 1, 3, 5, 
and 7 would place unreasonable restrictions on milk produced outside 
the marketing area relative to milk produced inside the marketing area. 
The witness indicated that supply plants located outside the marketing 
area would be required to receive milk and transfer it to distributing 
plants, thereby causing uneconomic movements of milk, adding costs and 
degrading milk quality due to additional handling. Furthermore, 
barriers to trade would be created by adopting these proposals, 
indicated the witness.
    Two of the Upper Midwest Cooperatives' witnesses introduced cost-
of-production studies conducted by universities indicating that dairy 
farmers in northern Illinois and Wisconsin enjoy little financial 
return from their dairy operations. The Foremost Farms witness cited 
the Wisconsin study to indicate that in Wisconsin the marginal return 
of producing milk can be less than zero. According to the witnesses, 
the financial impact by limiting participation in the Central order 
pool through increased performance standards would be detrimental to 
Upper Midwest dairy farmers. In this regard, all of the Upper Midwest 
Cooperatives' witnesses stressed that their member producers are 
considered small businesses pursuant to the Regulatory Flexibility Act 
and that such status should be considered in determining appropriate 
performance standards for the Central order.
    The witnesses for A-E and Suiza testified in opposition to 
considering supply plant shipments to distributing plant ``units'' as 
counted in determining pool-qualifying deliveries unless each plant of 
the ``unit'' could independently be a distributing plant under the 
terms of the order. The witness noted that relatively large non-Class I 
volumes of milk associated with a distributing plant unit could result 
in reducing the actual need for qualifying shipments made to 
distributing plants. In post-hearing briefs, Dean Foods indicated 
opposition to expanding qualifying shipments to any plant that is part 
of a distributing plant unit, noting that such performance standards 
would be inequitable and result in the creation of new disorderly 
marketing conditions.
    The record of this proceeding strongly supports concluding that the 
various features of the Central milk marketing order's supply plant 
pooling standards are either inadequate or unnecessary. These 
deficiencies contained in the pooling standards for supply plants are 
causing much more milk to be pooled on the Central milk order than can 
reasonably be considered as properly associated with the Central 
marketing area. Such milk does not demonstrate reasonable levels of 
performance necessary to conclude that it provides a regular and 
reliable service in satisfying the Class I milk demands of the Central 
marketing area.
    The pooling standards of all milk marketing orders, including the 
Central order, are intended to ensure that an adequate supply of milk 
is supplied to meet the Class I needs of the market and to provide the 
criteria for identifying those who are reasonably associated with the 
market as a condition for receiving the order's blend price. The 
pooling standards of the Central order are represented in the Pool 
Plant, Producer, and the Producer milk provisions of the order. Taken 
as a whole, these provisions are intended to ensure that an adequate 
supply of milk is supplied to meet the Class I needs of the market. In 
addition, it provides the

[[Page 69915]]

criteria for identifying those whose milk is reasonably associated with 
the market by meeting the Class I needs and thereby sharing in the 
marketwide distribution of proceeds arising primarily from Class I 
sales. Pooling standards of the Central order are based on performance, 
specifying standards that, if met, qualify a producer, the milk of a 
producer, or a plant to share in the benefits arising from the 
classified pricing of milk.
    Pooling standards that are performance-based provide the only 
viable method for determining those eligible to share in the marketwide 
pool. This is because it is the additional revenue from the Class I use 
of milk that adds additional income, and it is reasonable to expect 
that only those producers who consistently bear the costs of supplying 
the market's fluid needs should be the ones to share in the 
distribution of pool proceeds. Pool plant standards--specifically 
standards that provide for the pooling of milk through supply plants--
also need to reflect the supply and demand conditions of the marketing 
area. This is important because producers whose milk is pooled receive 
the market's blend price.
    Similarly, supply plant pooling standards should provide for those 
features and accommodations that reflect the needs of proprietary 
handlers and cooperatives in providing the market with milk and dairy 
products. When a pooling feature's use deviates from its intended 
purpose, and its use results in pooling milk that cannot reasonably be 
determined as serving the fluid needs of the market, it is appropriate 
to re-examine the need for continuing to provide that feature as a 
necessary component of the pooling standards of the order. Because one 
of the objectives of pooling standards is ensuring an adequate supply 
of fluid milk for the market, a feature which results in pooling milk 
on the order that does not provide such service should be considered as 
unnecessary for that marketing area.
    Pooling standards are needed to identify the milk of those 
producers who are providing service in meeting the Class I needs of the 
market. If a pooling provision does not reasonably accomplish this end, 
the proceeds that accrue to the marketwide pool from fluid milk sales 
are not properly shared with the appropriate producers. The result is 
the unwarranted lowering of returns of those producers who actually 
incur the costs of servicing and supplying the fluid needs of the 
market.
    The post-hearing brief received from the Upper Midwest Cooperatives 
continued to stress opposition to the amendments offered by Proposals 1 
(and Proposals) 3, 5, and 7. They view that such changes to the Central 
milk marketing order are discriminatory and that the proposed 
amendments would foster inefficiencies in milk marketing. The brief re-
iterated their view that the Department's policy has been to design 
plant and producer pooling provisions that provide a regulatory balance 
between the fluid needs of the market and transportation efficiency to 
meet those needs. In this regard, the brief stressed the opinion that 
orderly marketing is promoted by not requiring shipments to 
distributing plants when such shipments are not needed for fluid uses. 
Additionally, the brief asserts that the Department has long recognized 
that excluding milk from the pool is a greater threat to orderly 
marketing in surplus marketing areas than is the pooling of surplus 
milk supplies under rigid performance rules.
    The Upper Midwest Cooperatives' brief added that marketwide pooling 
has been determined as a constitutional means for surplus Grade A milk 
to share in the additional revenue resulting from fluid sales. 
Additionally, the brief noted that the 43-day national hearing review 
and reform proceeding of 1990--and the Second Amplified Decision of 
1996 of that proceeding--articulate the policy of the Department to 
allow milk to shift to different markets in response to blend price 
changes. The brief also cited case law to maintain that the statutory 
scheme for promoting orderly marketing is the sharing of proceeds among 
producers in the form of uniform, or blend, prices. The opinion 
expressed in the Upper Midwest brief cites that case law has concluded 
that producer blend prices cannot be thwarted by a discriminatory 
transportation burden imposed on distant producers by government 
mandate.
    The record of this proceeding clearly supports a finding that 
certain features of pooling standards of the Central Order established 
under the Federal order reform process, especially as they relate to 
supply plants, are either inadequate or unnecessary. The Final Decision 
of milk order reform examined and discussed the various pooling 
standards and features of the pre-reform orders for their applicability 
in a new, larger consolidated milk order. The pooling standards and 
features adopted for the consolidated Central Order were designed to 
reflect and retain those standards and features of the pre-reform 
orders so as not to cause a significant change and indeed to provide 
for the continued pooling of milk that had been pooled by those market 
participants.
    The record provides strong evidence to conclude that several 
features of the Pool plant definition, specifically the provisions and 
features for supply plants, are not being used for the reasons they 
were intended. Other shortcomings of the Central order, specifically as 
they relate to producer milk (discussed later in this decision) also 
contribute to the inappropriate pooling of the milk of producers who 
are not a legitimate part of the Central milk marketing area. Here too 
the impact is an unwarranted pooling of milk classed at lower prices 
resulting in a lower blend price to those producers who actually and 
consistently supply the Class I needs of the market.
    This decision finds that the milk of some producers is benefitting 
from the blend price of the Central order while not demonstrating 
actual and consistent service in satisfying the Class I needs of the 
Central milk marketing area. This finding is attributed to faulty 
pooling standards. The pooling provisions provided in the Final 
Decision of milk order reform established pooling standards and pooling 
features that envisioned the needs of the market participants resulting 
from the consolidation of nine pre-reform milk marketing areas 
consolidated to form the current Central milk marketing area. The 
reform Final Decision, as it related to the Central marketing area, did 
not intend or envision that the pooling standards and pooling features 
adopted would result in the sharing of Class I revenues with those 
persons, or the milk of those persons, who would not be demonstrating a 
measure of service in providing the Class I needs of the Central 
marketing area.
    The reform Final Decision examined and discussed various pooling 
standards and features of the pre-reform orders for applicability in a 
new, larger consolidated milk order. The pooling standards and features 
adopted for the Central order were intended to reflect and retain those 
standards and features of the pre-reform orders so as to not cause a 
significant change, and indeed to provide for the continued pooling of 
milk that had been pooled by those market participants. The pooling 
provisions of the Central order were based largely on the predecessor 
Iowa milk marketing order (then known as Order 79). The Iowa milk 
marketing order contained the more liberal pooling provisions of the 
nine orders consolidated to form the current Central order. The record 
of this proceeding reveals that the combination and features adopted 
for pool plants, especially as they apply to pool supply plants, are 
not reasonable or appropriate

[[Page 69916]]

standards for the much larger consolidated Central order.
    The record of this proceeding reveals that two-thirds of the 
Central marketing area population (and corresponding demand for fluid 
milk) is located in the southern and western portions of the marketing 
area. However, the adoption of the current Central order pooling 
provisions did not anticipate that the adopted pooling standards would 
not adequately consider the impact on the northern Central marketing 
area resulting from the Arkansas and southern Missouri portions of the 
pre-reform Southwest Plains marketing area becoming part of the current 
Southeast marketing area. Milk produced in these regions had been 
regularly pooled on the Southeast milk order prior to the expansion of 
the Southeast order as part of milk order reform and is an integral 
part of the current Southeast marketing area milkshed. Changes in 
marketing conditions, as revealed in the record, have resulted from the 
existing pooling standards as an important factor in explaining why 
fluid handlers in the southern reaches of the Central order have had 
difficulties obtaining a supply of milk.
    As previously indicated, pooling milk on the Central order without 
demonstrating actual performance in servicing the Class I needs of the 
market area is neither appropriate nor intended. The record indicates 
that the volume of milk pooled on the Central Order originating from 
sources far outside the marketing areas of the nine predecessor 
marketing areas increased by 186 percent when comparing, for example, 
the pre-reform month of December 1998 with the post-reform month of 
December 2000. Of the increase shown in this comparison, milk pooled on 
the order and originating within the marketing area increased by only 
10 percent. Of the additional milk pooled on the Central order, the 
greatest increase is represented by milk priced at lower class prices. 
Additionally, testimony by Upper Midwest Cooperatives' witnesses 
clearly indicated that under the Central order's current pooling 
provisions, milk pooled on the Central order is not necessarily 
available to fill the Central market's fluid needs.
    This decision agrees with the proponents and those entities who 
expressed support for adopting Proposal 1 that the order's pooling 
standards warrant changes. This decision finds, however, that the 
performance standards of Proposal 1 are unreasonably high when 
considering the complete context of the pooling provision modifications 
made in this decision. If adopted as proposed together with the other 
amendments adopted in this decision, milk that has had a long-
established association in supplying those pre-reform marketing order 
areas consolidated to form the Central order may no longer be pooled on 
the Central order. Most of this milk originates from areas in the Upper 
Midwest marketing area. The performance standards sought in Proposal 1 
may unintentionally compound the difficulties of Central order 
distributing plants in securing needed milk supplies that could be made 
available if not for unreasonably high performance standards. 
Accordingly, this decision adopts the following amendments to the 
pooling standards and features of the order:
    1. Performance standards for supply plants are reduced to (1) 20 
percent in each of the months of August through February and (2) 15 
percent in each of the months of March through July. Lower supply plant 
shipping performance standards are established because of accompanying 
adjustments to the order's other pooling provisions and features. 
Lowering supply plant performance standards also addresses the concern 
by Upper Midwest Cooperatives that a ``tightening'' of the order's 
performance standards would erect an unreasonable barrier in supplying 
to, and to pooling milk on, the Central order. To the extent that the 
supply plant performance standards may warrant further refinement, the 
order already provides the means for initiating a change by providing 
authority for the Market Administrator to consider and make needed 
changes.
    Given that performance standards are specified in every month, the 
need to continue with the automatic pool plant feature for supply 
plants during the 3-month period of May through July is rendered 
unnecessary and contrary to establishing such standards of performance 
in the first place. The adoption of year-round performance standards, 
adjusted seasonally, will better assure that a consistent and reliable 
supply of milk will be provided to the fluid market throughout the 
year.
    August should be included for those months in which a higher 
performance standard is warranted. Including August in the higher 
performance months is supported by record evidence which reveals August 
as the beginning of seasonal increased demand due to the opening of 
schools occurring at the same time as a general overall decline in milk 
supplies.
    2. This decision eliminates a handler's ability to qualify plants 
located outside the marketing area by cooperative handlers (as defined 
in Sec.  1000.9(c)) or diversions from a pool plant of the Central 
order to another pool plant of the Central order. The record supports a 
finding that milk pooled in this manner does not actually demonstrate 
real service in meeting the Class I needs of the Central marketing 
area. Milk pooled in this manner was often referred to in record 
testimony as ``pyramiding.'' No reasonable basis can be found in the 
record evidence to conclude that milk pooled in this manner warrants 
receiving the Central order blend price. The record can only support 
concluding that milk pooled in this manner serves to lower the blend 
price paid to producers who actually do supply the market's Class I 
needs.
    3. This decision finds that shipments of milk to distributing 
plants regulated by another Federal milk marketing order should not be 
considered in determining if a supply plant meets the specified 
performance standard for pooling. The performance standards adopted in 
this decision for the Central order are designed so that its 
distributing plants are adequately supplied with milk. Milk shipments 
to distributing plants regulated by another Federal order only serve 
the Class I needs of that other order. Pooling standards for the 
Central marketing area provide the criteria for determining the milk of 
those producers who are serving the Class I needs of the Central 
marketing area and who would thereby receive the Central order blend 
price. It is reasonable in light of this objective to conclude that 
serving the needs of another market is not providing a service to the 
Central marketing area. Accordingly, such milk should not be considered 
as a qualifying shipment for meeting the supply plant performance 
standards of the Central order.
    4. This decision finds that the modification of Proposal 1 offered 
by DFA to limit pool qualifying deliveries to distributing plants on a 
``net shipments'' basis is warranted. Milk deliveries to distributing 
plants will be limited to milk transferred or diverted and physically 
received by distributing pool plants, less any transfers or diversions 
of bulk fluid milk products from the distributing plant. Relying on net 
shipments for determining pool qualifying deliveries to distributing 
plants is applicable to both supply plant deliveries and milk moved to 
distributing plants directly from the farms of producers. Adoption of 
this feature will help ensure that milk not serving the market's Class 
I needs will not be counted towards meeting the specified performance 
standard.

[[Page 69917]]

    Providing a net shipments feature for the Central order is 
reasonable and will likely not be burdensome despite opposition to its 
adoption. Even with the inappropriate pooling of milk on the order, 
lower supply plant performance standards adopted in this decision are 
at levels below the Central market's Class I use of milk. While 
distributing plants do have some transfers and diversions of milk 
resulting from variations in demand arising from changing fluid milk 
needs on weekend days and holidays, this decision finds it is doubtful 
that the magnitude of these transfers and diversions would be such that 
a supply plant would risk loss of pool plant status. Additionally, 
other changes to the order's pooling standards adopted in this decision 
(discussed below) should provide the necessary safeguards that would 
make it even more unlikely that a supply plant would lose its pool 
status. This decision finds that adoption of a net shipments feature in 
the pooling standards of the Central order also will aid in properly 
identifying the milk of those producers who actually supply milk to 
meet the Central marketing area's fluid needs.
b. Cooperative Supply Plant Performance Standards
    A cooperative supply plant pooling provision, together with the 
feature of authorizing the market administrator to adjust the 
performance standards for cooperative supply plants, should be 
retained. It is unclear whether Proposals 2 and 4, seeking removal of 
the cooperative supply plant performance standard and the corresponding 
provision authorizing the market administrator to adjust those 
standards, should be adopted in this tentative decision. Based on this, 
the Department has not adopted these proposals in this tentative 
decision.
    The Central marketing order provides for a cooperative association 
plant as a type of supply plant on the order provided the cooperative 
association's plant is located within the marketing area and that at 
least 35 percent of the milk which the cooperative association handles 
is shipped to a Central order distributing plant during any current 
month or in the immediately preceding 12-month period. In addition, the 
provision requires that the cooperative association plant not qualify 
as a distributing or supply plant under the Central order or any other 
Federal milk marketing order.
    The DFA, et al., witness stated that adoption of some of the other 
proposals considered in this proceeding, such as modifying supply plant 
performance standards and providing for net shipments and a one-time 
``touch base'' standard, makes retaining this provision unnecessary. 
The witness also testified that the provision has not been used since 
implementation of the consolidated Central order.
    Elimination of the provision was supported in testimony by 
witnesses representing both A-E and Suiza Foods. Both witnesses stated 
that the provision is unnecessary and is not being used. In their post-
hearing briefs, both A-E and Dean Foods reiterated that no plant is 
presently qualified under the cooperative supply plant definition.
    Although there was no opposition testimony to the removal of the 
cooperative supply plant provision in the Central Order, this provision 
and the corresponding provision authorizing the market administrator to 
make needed adjustments should be retained pending further public 
comment. The testimony contained in the record does not contain 
sufficient reason for a finding to eliminate this standard other than 
it is a provision that is not used. The provision allows pool 
qualification for cooperative supply plants on either an average of the 
preceding 12-month's shipments or the current month's shipments and 
provides pooling flexibility for cooperatives. The cooperative supply 
plant definition contains features that are unique and intentional. 
While the proponents and supporters of Proposals 2 and 4 testified that 
the cooperative supply plant provision is not currently being used, 
testimony received did not address the apparently diminished importance 
of this pooling provision that was used in four of the nine pre-reform 
milk orders consolidated to form the Central order. The provision also 
is a pooling feature provided in most other Federal orders and, as with 
the Central order, is not currently being used in most of the other 
Federal orders containing this provision. Given the current record, 
removing this provision from the Central order may result in the 
unintended removal of a pooling provision intended for cooperative 
associations that may be needed at some future time. Accordingly, this 
decision does not adopt Proposals 2 and 4.
c. Supply Plant System Standards
    Proposal 3 of the hearing notice seeking to increase the 
performance standards for a system of supply plants--and modified at 
the hearing to limit supply plant system formation to single handler 
entities instead of currently allowing such systems to be formed by 
multiple handlers--is not adopted in this tentative decision. As 
previously discussed, the record contains evidence that distributing 
plants regulated by the Central milk order are having difficulty 
obtaining an adequate supply of milk for fluid use. While this 
proposal's aim is, in part, to address this problem, there nevertheless 
remains the potential for a supply plant system to pool milk supplies 
that may not demonstrate actual service to the fluid needs of the 
Central marketing area. The modification of the proposal seeking to 
limit supply plant system formation to a single handler entity has 
merit. However, taking into account the current record, it should not 
be adopted as a modification to the order's current system pooling 
provision in this tentative decision. It is noted that the hearing 
testimony often referred to supply plant systems as ``supply plant 
units.'' Nevertheless, it is clear that hearing participants intended 
to mean ``supply plant systems'' and accordingly, this tentative 
decision considered the testimony in the context intended.
    The supply plant system provisions of the Central order currently 
provide that a system of supply plants may qualify for pooling if 2 or 
more plants operated by one or more handlers meet the applicable 
performance standards established for a supply plant. A supply plant 
system would qualify to pool all of its milk receipts, including 
diversions, by meeting a performance standard of 25 percent in each of 
the months of September through November and January and of 35 percent 
for all other months. The order currently limits the formation of a 
supply plant system to plants located within the marketing area.
    Proposal No. 3, by DFA, et al., would raise the performance 
standards for supply plant systems by 5 percentage points for each of 
the months of August through November and by 3 percentage points higher 
in all other months. The proponent witness (representing DFA, et al.) 
testified that providing for supply plant systems extends benefits and 
efficiencies not otherwise available for individual handlers to reduce 
transportation costs by delivering milk from a more advantageously 
located supply plant at a volume that would satisfy the performance 
standards as if all supply plants not as advantageously located had 
individually met the indicated performance standard. According to the 
witness this also would avail plant efficiencies in the manufacturing 
operation of all supply plants that are part of the system. The witness 
also envisioned that the proposal could ease otherwise disruptive 
shipping obligations to their manufacturing operations, potentially

[[Page 69918]]

reduce paperwork, and provide the opportunity for producers to receive 
prices higher than regulated minimum prices. Because system pooling 
offers a rewarding degree of pooling flexibility, the witness was of 
the opinion that a supply plant system should meet slightly higher 
performance standards than those applicable for a single supply plant. 
This rationale is consistent, the witness indicated, with the pre-
reform Chicago Regional order which specified a performance standard at 
twice the rate for supply plant systems than was applicable for 
individual supply plants.
    According to the DFA, et. al., witness, a higher performance 
standard for supply plant systems would contribute to making it easier 
to obtain additional milk supplies in the most efficient manner. 
Additionally, the witness was of the opinion that this change, together 
with other changes proposed, would eliminate the ability to ``pyramid'' 
the pooling of milk on the order and renew interest in supply plant 
systems for the market.
    A witness from Associated Milk Producers, Inc. (AMPI), who also 
testified on behalf of the Upper Midwest Cooperatives, opposed adoption 
of Proposal 3. The witness explained that increased performance 
standards would simply cause a handler to discontinue pooling its 
plants as a system, thus forcing the handler to ship a lower percentage 
of milk receipts from each of the individual supply plants. The witness 
asserted that this alternative would increase transportation costs 
without providing additional milk to distributing plants.
    An Upper Midwest Cooperatives' witness of AMPI also testified that 
a supply plant system operated by multiple handlers has the potential 
for one handler with substantially more sales to distributing plants 
than needed to meet the supply plant performance standard to pool the 
milk receipts of other handlers. According to the witness, this could 
reduce the total volume of milk shipments to distributing plants while 
technically meeting the order's performance standards. According to the 
witness, such a provision allows some handlers to entirely escape 
responsibility for supplying the fluid market and encourages handlers 
to pay other handlers to qualify their milk supplies for pooling. In 
light of these concerns, the witness offered a modification to Proposal 
3 that limits supply plant system formation to single handler entities.
    A witness testifying on behalf of Foremost, AMPI, LOL, Family 
Dairies, Midwest Dairymen, and First District Association supported the 
advantages supply plant systems offer as a means to promote more 
efficient movement of milk to distributing plants. However, given the 
higher performance standards called for by the proposal, the witness 
indicated opposition to Proposal 3. The witness was of the opinion that 
there is no justification for supply plant systems to be required to 
meet higher performance standards than individual supply plants. The 
witness did note that a higher performance standard for a supply plant 
system formed by multiple handlers may be appropriate.
    Providing pooling flexibility by permitting more than a single 
supply plant to form into a single pooling system offers the potential 
to increase efficiencies by minimizing transportation costs that may 
not be obtainable when each supply plant of the handler would need to 
meet the performance standards separately for each plant. Additionally, 
providing for supply plant systems serves to accommodate the 
specialization of plant operations without otherwise encouraging such a 
plant to deliver milk to a distributing plant solely to retain pool 
status. Providing the opportunity to gain such efficiencies is intended 
by the supply plant system provision because it does not disrupt the 
flow of milk for Class I use from supply plants to distributing plants.
    The record suggests that supply plant systems formed by multiple 
handler entities offer the potential to pool milk on the Central order 
without meeting intended performance standards. The modification to 
Proposal 3, which would limit the formation of a supply plant system to 
a single handler entity, may offer a warranted change in the current 
supply plant system provisions without changing the current performance 
standards. However, this tentative decision finds that the record does 
not provide sufficient evidence to tentatively adopt a change in the 
performance standards for supply plant systems or to limit the 
formation of supply plant systems.
d. Standards for Producer Milk
    Several changes to the pooling standards contained in the Producer 
milk definition of the Central Order should be adopted immediately. The 
adopted amendments were largely contained in a proposal, published in 
the hearing notice as Proposal 5, which was modified at the hearing by 
its proponents. These producer milk pooling standard changes are 
necessary to more accurately identify the milk of those dairy farmers 
who actually serve the Class I needs of the market. The amendments 
include: (1) Establishing year-round diversion limits, adjusted 
seasonally, for the amount of milk that a pool plant may divert to 
nonpool plants at 80 percent for each of the months of August through 
February and at 85 percent for each of the months of March through 
July. Accordingly, the current lack of diversion limits for the months 
of May through August is corrected; (2) Diversion limits for supply 
plants will be based on deliveries to Central order pool distributing 
plants and will not include deliveries to other pool supply plants of 
the Central order. This will eliminate the ability of a pool plant to 
pool increased volumes of milk by diversion to nonpool plants by 
diverting milk to a second pool plant; and (3) Establishing a net 
shipments feature for producer milk. These amendments will maintain the 
integrity of the performance standards for pool plants of the Central 
marketing area and will more appropriately identify those producers 
whose milk actually is supplying the Central marketing area's Class I 
milk needs.
    The Producer milk provision of the Central order provides for 
diversion limits of 65 percent during the months of September through 
November and January and 75 percent during the months of February 
through April and December. While the Central order limits the pooling 
eligibility of diverted milk to nonpool plants in specified months, the 
order places no limits on milk diversions to other pool supply plants 
of the order. Milk diverted from one pool plant to another pool plant 
enables the diverting pool plant to increase the amount of milk that 
can be pooled but diverted to nonpool plants. During the months of May 
through August, an unlimited amount of producer milk may be diverted by 
pool plants to nonpool plants. The milk of a producer is not eligible 
for diversion until at least one day's production of a dairy farmer has 
been physically received at a pool plant and the producer has 
continually retained producer status on the Central order. Finally, the 
order does not currently determine producer milk on a net-shipments 
basis.
    Proposal No. 5, offered by DFA, et al., seeks to establish new 
year-round diversion limits for producer milk at 75 percent for each of 
the months of August through November and at 80 percent for each of the 
months of December through July. These limits are subject to satisfying 
certain performance measures and would specify that at least 20 percent 
of receipts in each of the months of August through February and

[[Page 69919]]

15 percent in each month of all other months are delivered to Central 
order distributing plants. Because year-round diversion limits would be 
established for all months, the proposal is intended to eliminate the 
ability to pool an unlimited amount of milk on the order during May 
through August by diversion.
    Proposal 5, offered by DFA, et al., was modified in testimony by 
the DFA witness. The modification proposed sought also to incorporate a 
net-shipments feature for producer milk as they had proposed as a 
modification to Proposal 1. According to the witness, the net-shipments 
feature would be used to determine pool-qualifying diverted milk on the 
basis of milk receipts transferred or diverted to and physically 
received by Central order distributing plants less any transfers or 
diversions of milk from such distributing plants.
    The DFA, et al., witness testified that the core issues of the 
hearing are restoring orderly marketing conditions and economically 
justifying the appropriate performance standards that, if met, warrant 
receiving the Central Order blend price. The witness explained that 
orderly marketing embodies the principles of common terms and pricing 
that attracts milk to move to the highest-valued use when needed and 
for milk to clear the market when not needed in higher-valued uses. The 
DFA witness was of the opinion that the percentage of allowable 
diversions should be increased over those currently applicable in the 
Central order. The witness indicated that this becomes possible with 
the adoption of the other pooling provision amendments, including 
changing performance standards and considering milk deliveries to 
distributing plants on a net shipments basis.
    The DFA, et al., witness testified that the Central order should 
provide a limit on the amount of milk that can be diverted to nonpool 
plants each month by conditioning diversions on the basis of milk 
shipments to pool distributing plants or distributing plant units of 
the Central order. The witness stated that the aim of these features is 
to provide a better correlation between the order's pooling provision 
standards.
    A witness representing several fluid milk processing plants joined 
in expressing their support for adopting year-round diversion limits. 
They were of the opinion that this would enhance pooling the milk of 
only those who provide an adequate supply of milk for fluid uses.
    Witnesses representing the Upper Midwest cooperatives testified in 
opposition to the adoption of Proposal 5 and to the proposal's 
modification to incorporate a net-shipments feature. In their opinion, 
these changes would unnecessarily limit the amount of milk that could 
be pooled on the Central order. The witnesses indicated that this would 
force surplus milk supplies to be pooled instead on the Upper Midwest 
order. As a result, they testified, the Upper Midwest pool would be 
diluted and result in a lower blend price for their producers in the 
Upper Midwest.
    A witness for the First District Association testified that 
diversion limits are not always needed for every month. The witness 
maintained that having year-round diversion limits would reduce 
competition and result in lower milk prices for producers of the 
Central marketing area. The witness argued that diversion limits should 
be provided only for ensuring the orderly marketing of fluid milk but 
should not be used so as to constitute a barrier to pooling milk.
    The Central milk order, as all other Federal milk marketing orders, 
provides and accommodates for diverting milk because it facilitates the 
orderly and efficient disposition of the market's milk not needed for 
fluid use without the loss of the benefits that arise from being pooled 
on the order. When producer milk is not needed by the market for Class 
I use, its movement to nonpool plants for manufacturing should be 
provided for without loss of producer milk status. Preventing or 
minimizing the inefficient movement of milk solely for pooling purposes 
also needs to be reasonably accommodated. However, it is just as 
necessary to safeguard against excessive milk supplies becoming 
associated with the market through the diversion process.
    A diversion limit establishes the amount of producer milk that may 
be an integral milk supply of a pool plant. With regard to the pooling 
issues of the Central order, it is the lack of diversion limits to 
nonpool plants, in part, that significantly contributes to the pooling 
of much more milk on the order that does not provide service to the 
Class I market yet receives the Central order blend price. Such milk is 
not a legitimate part of the reserve supply of the plant.
    Milk diverted to nonpool plants is milk not physically received at 
a pool plant. However, it is included as a part of the total producer 
milk receipts of the diverting plant. While diverted milk is not 
physically received at the diverting plant, it is nevertheless an 
integral part of the milk supply of that plant. If such milk is not 
part of the integral supply of the diverting plant, then that milk 
should not be associated with the diverting plant. Therefore, such milk 
should not be pooled.
    The lack of diversion limits only provides a means for associating 
much more milk with the market without the burden of demonstrating 
actual service in meeting the Class I needs of the market. Associating 
more milk than is actually part of the legitimate reserve supply of the 
diverting plant unnecessarily reduces the potential blend price paid to 
dairy farmers. Without diversion limits, the order's ability to provide 
for effective performance standards and orderly marketing is weakened.
    The lack of diversion limit standards applicable to pool plants 
opens the door for pooling much more milk on the market. While the 
potential size of the pool should be established by the order's pooling 
standards, the lack of diversion limits renders the potential size of 
the pool as undefined. With respect to the marketing conditions of the 
Central marketing area evidenced by the record, this decision finds 
that the lack of year-round diversion limits on producer milk has 
caused much more milk to be pooled on the order than can reasonably be 
considered part of the legitimate reserve supplies of the pool plants 
and does not provide any actual service in meeting the Central market's 
Class I needs.
    The lack of standards applicable for diversions to nonpool plants 
for the months of May through August has resulted in the pooling of 
much more milk than can demonstrate any actual service in meeting the 
Class I needs of the Central marketing area. The diversion limit 
standards of Proposal 5 address this concern. However, the diversion 
limits adopted herein are higher than those proposed. Increasing the 
diversion limit standard is made possible because of other changes 
being adopted by this tentative decision. The changes adopted to the 
diversion limits standards in this tentative decision are set at a 
level to appropriately complement the adopted performance standards. 
Accordingly, this decision establishes a diversion limit for producer 
milk of 80 percent for each of the months of August through February 
and 85 percent for each of the months of March through July. In 
addition, it should be noted that the diversion limits may be adjusted 
by the Market Administrator.
    As previously discussed, this decision has determined that only 
deliveries or diversions to pool distributing plants, and not 
deliveries to pool supply plants, should be allowed to qualify 
subsequent supply plant diversions for pooling on

[[Page 69920]]

the order. Such conditions are carried into the producer milk 
definition as a condition for diversion eligibility. It is also 
consistent, in light of such linkage, that a net shipments feature 
should be provided as part of the producer milk provision. However, as 
discussed earlier in the section on pooling standards, the evidence 
contained in the record does not support the inclusion of deliveries to 
pool distributing plant units to qualify supply plant diversions for 
pooling. Accordingly, this feature of Proposal 5 is not adopted.
    A proposal, published in the hearing notice as Proposal 9, seeking 
to allow milk to be eligible for diversion to nonpool plants and for 
such milk to retain its association with the market for any months 
during which a handler failed to pool a dairy farmer's milk under any 
milk marketing order is not adopted. This decision finds that a dairy 
farmer's milk must be physically received at a pool plant of the 
Central order before it is eligible for diversion to nonpool plants. 
Additionally, this decision finds that if milk is not continuously 
pooled, that it again must be received at a pool plant before regaining 
pooling eligibility.
    The Central order currently specifies that the milk of a new 
producer, or a producer who has broken association with the market, is 
not eligible for diversion until one day's production is physically 
received at a pool plant in the first month, and the dairy farmer 
continuously retained producer status in following months. The dairy 
farmer's milk is associated with the market if it is included in the 
pool each month, except as a result of a temporary loss of Grade A 
approval.
    Proposal 9 would allow milk diverted to a nonpool plant before the 
producer's milk is actually delivered to a pool plant in the same month 
to be considered producer milk. Proposal 9 also included a provision to 
allow the milk of a dairy farmer to retain its association with the 
market for any months during which the handler failed to pool the 
producer's milk under any order.
    Proposal 9 was offered by the Upper Midwest Cooperatives. A witness 
from AMPI, testifying on behalf of the Upper Midwest Cooperatives, 
explained that Proposal 9 is needed to assure that producers' milk can 
be pooled for the entire month as long as one day's production is 
physically received at a pool plant any day during the month. According 
to the witness, producers could miss several days of being able to pool 
milk on the Central order due to unexpected phenomena, such as weather, 
trucking problems, and scheduling conflicts.
    According to the AMPI witness, Proposal 9 also would allow milk to 
return for pooling on the order in the month following the month in 
which it was not pooled due to a price inversion (when the blend price 
is less that the Class III or Class IV price). In this regard, the 
witness noted that the order currently provides for milk to be pooled 
at least one day each month before being eligible for diversion to 
nonpool plants regardless of whether it is economically sound to pool 
milk based on the blend price that would result for the month.
    The touch base standard of an order establishes an initial 
association by the producer, and the milk of the producer, with the 
market. In this way, the touch base provision serves to maintain the 
integrity of the order's performance standards. The record does not 
contain sufficient evidence for setting conditions that negate the need 
to properly re-establish association with the market. Doing so is 
neither burdensome nor unreasonable considering that only one day's 
milk production of a dairy farmer needs to be delivered to a plant and 
pooled in order to maintain association with the market. The possible 
occurrence of a price inversion which may cause cooperatives to not 
pool milk for a given month to date is speculative and is an unlikely 
event because of milk order reform changes in how Class I prices are 
established. Class I prices are established on the basis of the higher 
of an advance Class III or Class IV price. In part, such change was 
made so as to minimize the possibility of price inversions. 
Accordingly, Proposal 9 is not adopted.
e. Establishing Pooling Standards for ``State units''
    A proposal, published in the hearing notice as Proposal 7, seeks to 
establish pooling units organized and reported by State, specifying 
that in order to pool milk from those States located outside of the 
States and specified counties that comprise the Central marketing area, 
each State unit would need to meet the performance standards applicable 
for pool supply plants. This proposal is not adopted. The Central order 
does not currently provide for pooling milk located outside of the 
marketing area in this manner.
    Proposal 7, offered by Dairy Farmers of America (DFA), would group 
and report milk in State units and specify performance standards for 
such State units as those applicable to pool supply plants. The milk 
that would be affected would be milk located outside the States of 
Colorado, Illinois, Iowa, Kansas, Missouri, Nebraska, Oklahoma, and 
South Dakota, the Minnesota counties of Fillmore, Houston, Lincoln, 
Mower, Murray, Nobles, Olmstead, Pipestone, Rock, and Winona, and the 
Wisconsin counties of Crawford, Grant, Green, Iowa, Lafayette, Richland 
and Vernon.
    The DFA witness testified that milk is being pooled on the Central 
order that is located in areas so far from the marketing area that such 
milk cannot and does not service the Class I needs of the Central 
market. The witness argued that milk from such distant areas was never 
intended to be a source of milk or a part of the Central milk marketing 
area. According to the witness, large portions of the States of 
Minnesota and Wisconsin, characterized as a ``distant'' source of milk, 
had not historically been part of the supply area for the pre-reform 
marketing areas consolidated to form the Central milk marketing area. 
DFA argued that milk from these areas should be subject to the same 
performance standards as milk from other distant areas such as 
California or New Mexico.
    According to the DFA witness, distant milk currently pooled on the 
Central order likely would not seek to be pooled on the order because 
the benefits of receiving a higher blend price for milk actually 
delivered to Central order pool plants would not offset the costs that 
would be incurred in transporting milk. In attempting to clarify what 
would be determined as being not distant, the DFA witness offered a 
method to distinguish between historical and distant milk supplies. 
Milk from counties associated with the Central market's pre-reform 
orders, which in 1998 had a daily supply volume in excess of one 50,000 
pound load, would be included with milk considered to be local or in-
area and not distant milk.
    The principal problem confronting the Central order, as identified 
by the DFA witness, is that the distant milk receives the order's blend 
price without the burden of providing any regular and consistent 
service to the market beyond meeting a one-day touch-base standard. The 
witness argued that their proposal would set standards for milk from 
distant areas identical to local milk as a condition for receiving the 
order's blend price. Providing for this would not, according to the 
witness, discriminate, penalize, or establish any barriers to the 
pooling of milk on the Central order because the standards for local 
milk supplies and distant milk supplies are the same. Support was given 
in testimony for establishing State units by witnesses representing 
Prairie Farms and Suiza.
    A number of hearing participants opposed the adoption of the State 
unit

[[Page 69921]]

pooling proposal, specifically the witnesses representing Upper Midwest 
cooperative associations. The Foremost Farms witness argued that 
adoption of the proposal would discourage efficient movements of milk 
to distributing plants and that such a provision would be inconsistent 
with the Agricultural Marketing Agreement Act (AMAA). This witness 
questioned why an organization with milk in the Central marketing area 
should be required to transport milk from distant areas in Minnesota 
and Wisconsin when the same organizations already have enough milk in 
the marketing area to satisfy the order's pooling standards. The 
witness indicated that this could result in forcing milk located within 
the marketing area to be hauled long distances to make room for the 
receipt of milk from distant locations.
    The AMPI witness agreed with the Foremost witness's testimony and 
the witness representing the First District Association which asserted 
that adopting State unit pooling for distant milk would destroy the 
benefits of pooling milk on the Central order. They held this opinion 
because the differences between Class I use and blend prices between 
the Central and Upper Midwest orders would narrow.
    In post-hearing briefs, the Upper Midwest Cooperatives continued to 
express opposition to DFA's Proposal 7 (and to Proposals 1, 3, and 5). 
They characterized their opposition as establishing barriers to pooling 
on the basis of where milk is located through government-mandated 
transportation costs. As indicated above on proposals affecting pool 
plants and producer milk, their brief cited case law to advance their 
contention that such amendments would not be legal.
    The record does not support the adoption of performance standards 
for pooling milk on the order on the basis of its location, or as the 
proponent and supporters of Proposal 7 describe as State units. The 
marketing conditions of the Central order do not exhibit the need to 
require additional performance standards for milk located outside of 
the marketing area beyond those adopted in this tentative decision. 
Accordingly, all plants, regardless of location, may become eligible to 
have the milk of producers pooled on the Central order by meeting the 
performance standards specified for the various types of pool plants.
    It is not important who provides the milk for Class I use or from 
where this milk originates. The order boundaries of the Central order 
were not intended to limit or define which producers, which milk of 
those producers, or which handlers could enjoy the benefits of being 
pooled on the Central order. What is important and fundamental to all 
Federal orders, including the Central order, is assuring an adequate 
supply of milk to meet the market's fluid needs, the proper 
identification of those producers who supply the market, and an 
equitable means of compensating those producers from the market's pool 
proceeds.
    As discussed earlier on pooling standards for pool supply plant 
qualification, the provisions of the consolidated Federal milk orders 
were not intended to exclude any milk from being pooled on any order, 
as long as the fluid needs of a marketing area are being served by the 
milk. At the same time, reform of Federal milk orders did not adopt 
open pooling, but attempted to provide that each market pool would 
include the milk that actually is available for serving the fluid needs 
of the market. The determination of the boundaries of the Central 
marketing area was guided by the identification of the common 
characteristics of the predecessor orders that could be consolidated to 
form the marketing area and to promulgate a marketing order to provide 
for orderly marketing conditions. The consolidation of the pre-reform 
orders into the current Central order was not intended to determine 
those areas from which milk should, or should not, be obtained to serve 
the market. The adoption of revised pooling standards in this tentative 
decision should assure milk will be available for the Central market's 
fluid needs and therefore renders the proposed State unit provision 
unnecessary. Proposal 7 is not adopted.

2. Simultaneous Pooling on More Than One Marketwide Pool

    A proposal, published in the hearing notice as Proposal 8, seeking 
to exclude the same milk from being simultaneously pooled on the 
Central order and any State-operated order which provides for 
marketwide pooling should be adopted immediately. The practice of 
pooling milk on a Federal order and simultaneously pooling the same 
milk on a State-operated order also has come to be referred to as 
``double dipping.'' The Central order does not currently prohibit milk 
to be simultaneously pooled on the order and a State-operated order 
that provides for marketwide pooling. Proposal 8 was offered by A-E, 
Swiss Valley Dairy, AMPI, Family Dairies USA, FDA, Foremost, Milwaukee 
Cooperative Milk Producers, Manitowoc Milk Producers Cooperative, and 
Mid-West Dairymen's Company.
    The AMPI witness, testifying on behalf of all the proponents of 
Proposal 8, stressed that a producer is prohibited from pooling the 
same milk on more than one Federal order. The witness maintained that 
the same restriction should be applicable between the Central order and 
any other regulatory authority that provides for marketwide pooling and 
the marketwide distribution of pooling revenue. According to the 
witness, this has been occurring with milk pooled under the California 
State-operated milk order program since March 2001, and continues.
    The AMPI witness explained that the Central order pooling 
provisions allow a one-time minimal delivery of a single day's milk 
production of California producers to a Central order pool plant to 
qualify all subsequent milk production of California producers on the 
Central order by diversion. However, the witness stressed, all of the 
same California milk is pooled on the State's milk order program and 
receives the pricing benefits that the California state program offers 
its dairy farmers.
    The AMPI witness testified that the volume of California milk 
pooled on the Central order has been increasing since March 2001 and is 
unnecessarily reducing milk prices paid to Central order producers. The 
witness presented calculations that indicated that the impact on the 
Central order blend price was an average reduction of about 2 cents per 
hundredweight, amounting to almost $2 million in the 7-month period of 
March through September 2001. The witness stated that due to the 
obvious injurious effect on Midwest dairy farmers, the Department 
should put an end to the practice of double dipping and to do so on an 
emergency basis.
    A witness testifying on behalf of the proponents explained that the 
reason milk used in manufactured products is included in a marketwide 
pool is that such milk represents a reserve supply of milk that is 
available to serve fluid distributing plants when needed. Accordingly, 
the witness stressed that the same milk cannot be considered to be 
available as a supply for fluid distributing plants regulated under two 
different marketwide pools. The witness explained that Proposal 8 would 
not preclude the pooling of California milk, or milk from any other 
jurisdiction that has marketwide pooling on the Central order. However, 
the proposal would preclude the pooling of the same milk on the Central 
order when pooled under the other order, like the California State milk 
order that provides for marketwide pooling. In this regard, the witness 
stated that there is no doubt that California's milk order pooling plan

[[Page 69922]]

provides for marketwide pooling, adding that those who say it does not 
probably are basing their conclusion on California's quota and overbase 
pricing for milk.
    Several other proponent witnesses representing cooperative 
associations whose member milk is pooled under the Central order 
supported the adoption of the proposal to eliminate ``double dipping'' 
as did two distributing plant operators. Both of the fluid processor 
representatives argued that milk originating from outside of a 500-mile 
radius of any of the order's distributing plants is not realistically 
available to serve the Class I market on a regular basis.
    The representative from Land O'Lakes was opposed to adopting 
Proposal 8. The witness asserted that, despite evidence to the 
contrary, California does not have a marketwide pool. The witness 
explained that producers are paid on the basis of a quota price for 
milk used in fluid and soft dairy product uses, while the basis for 
non-quota milk is manufacturing values. The returns to producers 
arising from quota uses of milk, stated the LOL witness, are not 
distributed marketwide.
    The LOL witness proposed a modification to Proposal 8 that would 
eliminate ``double dipping'' only with respect to the ``quota'' portion 
of the milk associated with the Central order and allow simultaneous 
pooling of ``overbase'' California milk on both the California and 
Central orders. The witness expressed concern that elimination of the 
ability of the same milk to be pooled simultaneously under a Federal 
order and a State order with marketwide pooling would cause problems in 
dealing with milk supplies from other States--such as Pennsylvania and 
North Dakota--that are considering modifying provisions to include 
marketwide pooling.
    For over 60 years, the Federal Government has operated the milk 
marketing order program. The law authorizing the use of milk marketing 
orders, the Agricultural Marketing Agreement Act of 1937 (AMAA), as 
amended, provides authority for milk marketing orders as an instrument 
which dairy farmers may voluntarily opt to use to achieve objectives 
consistent with the AMAA and that are in the public interest. An 
objective of the AMAA, as it relates to milk, was the stabilization of 
market conditions in the dairy industry. The declaration of the AMAA is 
specific: ``the disruption of the orderly exchange of commodities in 
interstate commerce impairs the purchasing power of farmers and 
destroys the value of agricultural assets which support the national 
credit structure and that these conditions affect transactions in 
agricultural commodities with a national public interest, and burden 
and obstruct the normal channels of interstate commerce.''
    The AMAA provides authority for employing several methods to 
achieve more stable marketing conditions. Among these is classified 
pricing, which entails pricing milk according to its use by charging 
processors differing milk prices on the basis of form and use. In 
addition, the AMAA provides for specifying when and how processors are 
to account for and make payments to dairy farmers. Plus, the AMAA 
requires that milk prices established by an order be uniform to all 
processors and that the price charged can be adjusted by, among other 
things, the location at which milk is delivered by producers (section 
608(c)(5)).
    As these features and constraints provided for in the AMAA were 
employed in establishing prices under Federal milk orders, some 
important market stabilization goals were achieved. The most often 
recognized goal was the near elimination of ruinous pricing practices 
of handlers competing with each other on the basis of the price they 
paid dairy farmers for milk and in price concessions made by dairy 
farmers. The need for processors to compete with each other on the 
price they paid for milk was significantly reduced because all 
processors are charged the same minimum amount for milk, and processors 
had assurance that their competitors were paying the same value-
adjusted minimum price.
    The AMAA also authorizes the establishment of uniform prices to 
producers as a method to achieve stable marketing conditions. 
Marketwide pooling has been adopted in all Federal orders because of 
its superior features of providing equity to both processors and 
producers, thereby helping to prevent disorderly marketing conditions. 
A marketwide pool, using the mechanism of a producer settlement fund to 
equalize on the use-value of milk pooled on an order, meets that 
objective of the AMAA of ensuring uniform prices to producers supplying 
a market.
    The California State milk order program clearly has objectives 
similar to those of the AMAA. Exhibits presented at the hearing 
indicate that the California State order program has a long history in 
the development and evolution of a classified pricing plan and in 
providing equity in pricing to handlers and producers. Important as 
classified pricing has been in setting minimum prices, the issue of 
equitable returns to producers for milk could not be satisfied by only 
the use of a classified pricing plan. Some California plants had higher 
Class I fluid milk use than did others and some plants processed little 
or no fluid milk products. As with the Federal order system, producers 
who were fortunate enough to be located nearer Class I processors had 
been receiving a much larger return for their milk than producers 
shipping to plants with lower Class I use or to plants whose main 
business was the manufacturing of dairy products. Over time, disparate 
price differences grew between producers located in the same production 
area of the state which, in turn, led to disorderly marketing 
conditions and practices. These included producers who became 
increasingly willing to make price concessions with handlers by 
accepting lower prices and in paying higher charges for services such 
as hauling. Contracts between producers and handlers were the norm, but 
the contracts were not long-term (rarely more than a single month) and 
could not provide a stable marketing relationship from which the dairy 
farmers could plan their operations.
    In 1967, the California State legislature passed and enacted the 
Gonsalves Milk Pooling Act. The law provided the authority for the 
California Agriculture Secretary to develop and implement a pooling 
plan, which was implemented in 1968. The California pooling plan 
provides for the operation of a State-wide pool for all milk that is 
produced in the State and delivered to California pool plants. It uses 
an equalization fund that equalizes prices among all handlers and sets 
minimum prices to be paid to all producers pooled on the State order. 
While the pooling plan details vary somewhat from pooling details under 
the Federal order program, the California pooling objectives are 
basically identical to those of the Federal program.
    It is clear from this review of the Federal and the California 
State programs that the orderly marketing of milk is intended in both 
systems. Both plans provide a stable marketing relationship between 
handlers and dairy farmers and both serve the public interest. It would 
be incorrect to conclude that the Federal and California milk order 
programs have differing purposes when the means, mechanisms, and goals 
are so nearly identical. In fact, the Federal order program has 
precedent in recognizing that the California State milk order program 
has marketwide pooling. Under milk order provisions in effect prior to 
milk order reform, and under Sec.  1000.76(c), a provision

[[Page 69923]]

currently applicable to all Federal milk marketing orders, the 
Department has consistently recognized California as a State government 
with marketwide pooling.
    Since the 1960's the Federal milk order program recognized the harm 
and disorder that resulted to both producers and handlers when the same 
milk of a producer was simultaneously pooled on more than one Federal 
order. When this occurs, producers do not receive uniform minimum 
prices, and handlers receive unfair competitive advantages. The need to 
prevent ``double pooling'' became critically important as distribution 
areas expanded and orders merged. The issue of California milk, already 
pooled under its State-operated program and able to simultaneously be 
pooled under a Federal order, has, essentially, the same undesirable 
outcomes that Federal orders once experienced and subsequently 
corrected. It is clear that the Central order should be amended to 
prevent the ability of milk to be pooled on more than one order when 
both orders employ marketwide pooling.
    There are other State-operated milk order programs that provide for 
marketwide pooling. For example, New York operates a milk order program 
for the western region of that State. A key feature explaining why this 
State-operated program has operated for years alongside the Federal 
milk order program is the exclusion of milk from the State pool when 
the same milk is already pooled under a Federal order. Because of the 
impossibility of the same milk being pooled simultaneously, the Federal 
order program has had no reason to specifically address double dipping 
or double pooling issues, the disorderly marketing conditions that 
arise from such practice, or the primacy of one regulatory program over 
another. The other states with marketwide pooling similarly do not 
double-pool Federal order milk.
    The record testimony and evidence show milk pooled on the Central 
order originating from places distant from the area. However, this 
decision acknowledges that with the advent of the economic incentives 
for California milk to be pooled on the Central order and, at the same 
time, enjoy the benefits of being pooled under California's State-
operated milk order program, more milk has come to be pooled on the 
order that has no legitimate association with the integral milk 
supplies of the Central order pool plants. The association at present 
has been made possible only through what some market participants 
describe as a regulatory loophole.
    California milk should only be eligible for pooling on the Central 
order when it is not pooled on the California State order and when it 
meets the Central's pooling standards. It is the ability of milk from 
California to ``double dip'' that is a source of disorderly marketing 
conditions and for much more milk being pooled on the Central order.
    Proposal 8 offers a reasonable solution for adding a prohibition on 
allowing the same milk to draw pool funds from Federal and State 
marketwide pools simultaneously. It is consistent with the current 
prohibition against allowing the same milk to participate in two 
Federal order pools simultaneously. Adoption of Proposal 8 will not 
establish any barrier to the pooling of milk from any source that 
actually demonstrates performance in supplying the Central market's 
need for milk used in Class I.

3. Rate of Partial Payments to Producers

    A proposal that would change the rate of the partial payment to 
producers and cooperatives for milk delivered during the first 15 days 
of the month to the lowest class price for the prior month times 110 
percent, published in the hearing notice as Proposal 6, is not adopted. 
Therefore, the partial payment rate will remain as currently provided 
for by the order--at the lowest class price for the prior month.
    This proposal offered by DFA intends to improve producer cash flow 
by bringing the partial payment into a closer relationship to the final 
blend price and to have the partial payment more closely reflect the 
value of the milk delivered to handlers during the first 15 days of the 
month. According to the DFA et al., witness, the partial payment rate 
has declined as a share of the final payment since the consolidation of 
the Central market under milk order reform.
    The DFA, et al., witness stressed that producers need a more 
consistent cash flow than they currently are experiencing. The witness 
acknowledged that overpayment in the partial payment could be a problem 
if the producer does not have enough funds coming in the month's final 
payment to cover the producer's authorized deductions. The witness 
noted that the existing $1.00 per hundredweight premiums above minimum 
order prices enjoyed by Central order producers are probably adequate 
to cover any overpayments made to producers.
    Data provided by the DFA, et al., witness sought to indicate that 
since order reform on January 1, 2000, the amount of the partial 
payment received by producers relative to the total payment for milk 
each month has been reduced when compared to the pre-reform orders. The 
analysis consisted of approximating a weighted average blend price as a 
proxy for a comparable order from the pre-reform order's information. 
The analysis, explained the witness, is a comparison of the current 
month's blend price with the lowest of the two lower class prices of 
the prior month. For the entire 56-month period, the witness stated, 
the average of the blend price minus the lowest class price was $1.59; 
the first 36 months the average was $1.52; and the last 20 months the 
average was $1.75. The witness concluded that the main concern revealed 
by this data is that the spread is widening. After evaluating several 
differing partial payment rates, the witness concluded that a five 
percent inflation at the prior month's lowest class price was a 
reasonable adjustment to approximating the spread that existed over the 
first 36-month period.
    The DFA, et al., witness also testified that there are a wide 
variety of payment dates and payment levels among the 11 orders. There 
are currently, said the DFA witness, three groupings: The Southern 
orders' payments are a percentage of the prior month's blend price 
adjusted for location; the Northwest and Central orders areas set the 
advanced payment at the prior month's lowest class price; and the 
Western orders use an add-on percentage applied to the prior month's 
lowest class price. The witness also noted that while most orders have 
one partial payment, the Florida order has two partial payments before 
a final payment is due.
    Several individual dairy farmers also testified that their cash 
flow situations have deteriorated since the current partial payment 
rate provisions became effective. In this regard, all dairy farmers 
testified in support of increasing the rate of partial payment.
    A representative of Leprino Foods, a national cheese-processing 
firm, testified that USDA should reject Proposal 6 since it does not 
appropriately address the issue it purports to remedy and since it 
violates the minimum pricing concepts for manufacturers, but not 
because there is lack of need for an amendment. The Leprino witness 
testified that the cause of the disparity between the partial and final 
payment rates is a combination of a failure to blend the pool's higher 
use values into the partial payment and the use of a price level from 
the previous month rather than the current month. This witness argued 
that rather than addressing these problems in the

[[Page 69924]]

proposal, the proposed increase in the rate merely transfers the burden 
to processors. The witness stated that the proposal violates minimum 
pricing principles by setting the partial rate above the equivalent 
market value for Classes III and IV, with the resulting differences in 
partial payment rates between orders causing disparate economic 
positions for competing Class III and IV handlers in different orders.
    The witness from Leprino concluded that the most appropriate 
approach to address the root cause of the disparity between the partial 
and final payment would be the implementation of a similar minimum 
payment in pooling structure for the partial payment that exists in the 
final payment. However, the witness did not propose its adoption 
because such a remedy would require significant administration in terms 
of plant reporting, report analysis, pool calculation, and movement of 
funds into and out of the pool in the current system of minimum payment 
at the lowest class price. This concept was not properly noticed, the 
witness argued, and a more comprehensive review of all provisions of 
the order that would be affected and the magnitude of the impact would 
be necessary.
    The Department reconstructed noticed data that recreated the 
intended analysis presented by witnesses. The Department's 
reconstruction relied, in part, on the partial payment provisions of 
the pre-reform orders. The Department used the previous month's Class 
III price of the pre-reform orders as the lowest class price because 
the Class III price was used then to set the rate of partial payment. 
In this regard, comparing partial payment relationship outcomes using 
actual historical provisions provided for comparing pre- and post-
reform partial payment relationships as to the total payment for milk 
in a month.
    Even with the limited amount of data available since the 
implementation of order reform, the Department's comparison of pre- and 
post-reform partial payment relationships to total payments does appear 
to support the observations made by the DFA witness. However, this 
initial observation alone is not a sufficient basis for changing the 
rate of the partial payment. Some significant differences in certain 
key assumptions were made by the proponents of Proposal 6 from those 
assumptions used by the Department in comparing pre- and post-reform 
time periods.
    Also of concern is the limitation inherent in comparing a 36-month 
period to one of only 21 months. The 36-month time period shows price 
trends rising and falling, while the 21-month time shows a period of 
generally an upward trend in prices. This may suggest that there has 
not yet been a sufficient period of elapsed time to infer the impact of 
downward trends in prices and the possible effect on the relationship 
between the partial and final payments to producers.
    With regard to Leprino's concern about uniformity of partial 
payment rates between orders, the current milk orders have a variety of 
partial payment rates. Several orders use a partial payment rate based 
on a percentage of the previous month's blend price, and the Florida 
order, for example, provides for two partial payments. Additionally, 
the Western and Arizona-Las Vegas orders, both of which pool 
significant volumes of milk used in cheese, provide for partial payment 
rates of 120 and 130 percent, respectively, of the previous month's 
lowest class price.
    There may be times when the partial payment rate exceeds the 
balance due for the month. In this regard, handler interests point to 
this outcome as requiring them to pay more for milk for part of the 
month than its actual total value for the month. It is appropriate to 
note that this exact outcome occurred several times during the pre-
reform 36-month period used by DFA. This decision finds the concerns of 
handlers in this regard as unpersuasive.
    Deductions authorized by producers are more often made in the final 
payments for milk. There could be times when the amount deducted from 
the final payment exceeds the amount of the final payment. If the 
deductions are high enough for this to happen, it would be reasonable 
to conclude that producers desiring to smooth their cash flow would opt 
to allow a larger portion of their deductions to be made with receipt 
of the partial payment, as the order allows.
    The partial payment provision in Federal orders is a minimum 
requirement placed on handlers to pay producers for milk delivered. It 
is notable that cooperatives and handlers are not restricted to paying 
only one partial payment at the rate specified in the order; partial 
payments for milk can be made more often. Additionally, cooperatives 
and handlers are also at liberty to negotiate agreements for more 
frequent billings for milk and payments for milk above the minimum 
established by the order. As made evident by the record, more flexible 
partial payment options are available to both producers and handlers 
than relying solely on changing the minimum payment provisions.
    As the Leprino witness noted, DFA's proposal does not incorporate 
or blend the higher-valued uses of milk in their analysis. In response 
to this observation, the Department compared the relationships between 
the partial and total payment using various percentages of the Central 
order's previous month's blend price. Interestingly, if the desired 
objective is to more closely approximate the partial payment rate using 
the 36-month period before order reform, the proponents' 105 percent 
rate of the previous month's lowest class price does seem to best 
accomplish this. Nevertheless, the same limitations and concerns 
mentioned above prevent a finding that the Central order's rate for 
partial payment should be increased.
    This decision finds that the cash flow concerns of producers may be 
better served by the adoption of other proposals considered in this 
proceeding. Other amendments adopted in this decision affecting the 
pooling of milk in the Central order will likely reduce the erosion in 
the blend price received by Central producers. It is expected that 
higher blend prices will result from more accurately identifying those 
producers and the milk of those producers who actually serve the Class 
I needs of the market. Similarly, the relationship between the partial 
payment and the total price received by producers may change by the 
adoption of these pooling standard amendments. Accordingly, a finding 
that the rate of partial payment to producers by handlers should be 
increased is not supported by the evidence contained in the record of 
this proceeding.

4. Determination of Emergency Marketing Conditions

    Evidence presented at the hearing establishes that the pooling 
standards of the Central order are inadequate and result in the erosion 
of the blend price received by producers who are serving the Class I 
needs of the market and should be changed on an emergency basis. The 
unwarranted erosion of such producers' blend prices stems from improper 
performance standards as they relate to pool supply plants and the lack 
of limits for pool plant diversions to pool and nonpool plants. These 
shortcomings of the pooling provisions have allowed milk that does not 
provide a reasonable or consistent service to meeting the needs of the 
Class I market to be pooled on the Central order. Consequently, it is 
determined that emergency marketing conditions exist and the issuance 
of a recommended decision is therefore being omitted. The record 
clearly establishes a basis as noted above for amending the order on

[[Page 69925]]

an interim basis and the opportunity to file written exceptions to the 
proposed amended order remains.
    Evidence presented at the hearing also establishes that California 
milk pooled simultaneously on the California State-operated order and 
the Central Federal order, a practice commonly referred to as double 
dipping, renders the Central Federal milk order unable to establish 
prices that are uniform to producers and to handlers and also has 
contributed to the unwarranted erosion of milk prices to Central 
producers.
    In view of this situation, an interim final rule amending the order 
will be issued as soon as the procedures are completed to determine the 
approval of producers.

Rulings on Proposed Findings and Conclusions

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

General Findings

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

Interim Marketing Agreement and Interim Order Amending the Order

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

Determination of Producer Approval and Representative Period

    The month of November 2001 is hereby determined to be the 
representative period for the purpose of ascertaining whether the 
issuance of the order, as amended and as hereby proposed to be amended, 
regulating the handling of milk in the Central marketing area is 
approved or favored by producers, as defined under the terms of the 
order as hereby proposed to be amended, who during such representative 
period were engaged in the production of milk for sale within the 
aforesaid marketing area.
    The agent of the Department to conduct such referendum is hereby 
designated to be Donald R. Nicholson, Ph.D.

List of Subjects in 7 CFR Part 1032

    Milk marketing orders.

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

Interim Order Amending the Order Regulating the Handling of Milk in the 
Central Marketing Area

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

Findings and Determinations

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

Order Relative to Handling

    It is therefore ordered, that on and after the effective date 
hereof, the handling of milk in the Central marketing area shall be in 
conformity to and in compliance with the terms and conditions of the 
order, as amended, and as hereby amended, as follows:
    The authority citation for 7 CFR part 1032 continues to read as 
follows:

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

PART 1032--MILK IN THE CENTRAL MARKETING AREA

    1. Section 1032.7 is amended by:
    (a) Revising the introductory text of paragraph (c),
    (b) Revising paragraph (c)(1),
    (c) Revising paragraph (c)(2),

[[Page 69926]]

    (d) Removing paragraph (c)(4) and redesignating paragraph (c)(5) as 
paragraph (c)(4); and
    (e) Adding a new paragraph (c)(5).
    The revisions read as follows:


Sec.  1032.7  Pool plant.

* * * * *
    (c) A supply plant from which the quantity of bulk fluid milk 
products shipped to (and physically unloaded into) plants described in 
paragraph (c)(1) of this section is not less than 20 percent during the 
months of August through February and 15 percent in all other months of 
the grade A milk received from dairy farmers (except dairy farmers 
described in Sec.  1032.12(b)) and from handlers described in Sec.  
1000.9(c), including milk diverted pursuant to Sec.  1032.13, subject 
to the following conditions:
    (1) Qualifying shipments may be made to plants described in 
paragraphs (a) or (b) of this section;
    (2) The operator of a pool plant located in the marketing area may 
include as qualifying shipments milk delivered directly from producer's 
farms pursuant to Sec.  1000.9(c) or Sec.  1032.13(c). Handlers may not 
use shipments pursuant to Sec.  1000.9(c) or Sec.  1032.13(c) to 
qualify plants located outside the marketing area;
* * * * *
    (5) Shipments used in determining qualifying percentages shall be 
milk transferred or diverted to and physically received by pool 
distributing plants, less any transfers or diversions of bulk fluid 
milk products from such pool distributing plants.
* * * * *
    2. Section 1032.13 is amended by:
    (a) Revising paragraph (d)(2)
    (b) Redesignating paragraphs (d)(3), (d)(4), and (d)(5), as (d)(4), 
(d)(5), and (d)(6), respectively.
    (c) Adding a new paragraph (d)(3)
    (d) Adding a new paragraph (e).
    The revision and additions read as follows:


Sec.  1032.13  Producer milk.

* * * * *
    (d) * * *
    (2) Of the quantity of producer milk received during the month 
(including diversions, but excluding the quantity of producer milk 
received from a handler described in Sec.  1000.9(c)) the handler 
diverts to nonpool plants not more than 80 percent during the months of 
August through February, and not more than 85 percent during the months 
of March through July, provided that not less than 20 percent of such 
receipts in the months of August through February and 15 percent of the 
remaining months' receipts are delivered to plants described in Sec.  
1032.7(a) and (b);
    (3) Receipts used in determining qualifying percentages shall be 
milk transferred to or diverted to or physically received by a plant 
described in Sec.  1032.7(a), (b) or (e) less any transfer or diversion 
of bulk fluid milk products from such plants.
* * * * *
    (e) Producer milk shall not include milk of a producer that is 
subject to inclusion and participation in a marketwide equalization 
pool under a milk classification and pricing program imposed under the 
authority of a State government maintaining marketwide pooling of 
returns.
* * * * *

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

    The parties hereto, in order to effectuate the declared policy 
of the Act, and in accordance with the rules of practice and 
procedure effective thereunder (7 CFR Part 900), desire to enter 
into this marketing agreement and do hereby agree that the 
provisions referred to in paragraph I hereof as augmented by the 
provisions specified in paragraph II hereof, shall be and are the 
provisions of this marketing agreement as if set out in full herein.
    I. The findings and determinations, order relative to handling, 
and the provisions of Sec. Sec.  1032.1 to 1032.86, all inclusive, 
of the order regulating the handling of milk in the Central 
marketing area (7 CFR PART 1032) which is annexed hereto; and
    II. The following provisions: Record of milk handled and 
authorization to correct typographical errors.
    (a) Record of milk handled. The undersigned certifies that he/
she handled during the month of ---------- 2001, ------ 
hundredweight of milk covered by this marketing agreement.
    (b) Authorization to correct typographical errors. The 
undersigned hereby authorizes the Deputy Administrator, or Acting 
Deputy Administrator, Dairy Programs, Agricultural Marketing 
Service, to correct any typographical errors which may have been 
made in this marketing agreement.
    Effective date. This marketing agreement shall become effective 
upon the execution of a counterpart hereof by the 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. 02-29030 Filed 11-18-02; 8:45 am]
BILLING CODE 3410-02-P