[Federal Register Volume 68, Number 121 (Tuesday, June 24, 2003)]
[Proposed Rules]
[Pages 37674-37687]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-15831]



[[Page 37673]]

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Part V





Department of Agriculture





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Agricultural Marketing Service



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7 CFR Part 1030



Milk in the Upper Midwest Marketing Area; Decision on Proposed 
Amendments to Marketing Agreement and to Order; Proposed Rule

  Federal Register / Vol. 68, No. 121 / Tuesday, June 24, 2003 / 
Proposed Rules  

[[Page 37674]]


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DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Part 1030

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


Milk in the Upper Midwest Marketing Area; Decision on Proposed 
Amendments to Marketing Agreement and to Order

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Proposed rule.

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SUMMARY: This document proposes to adopt as a final rule, order 
language contained in the interim final rule published in the Federal 
Register on April 22, 2002 concerning pooling provisions of the Upper 
Midwest Federal milk order. It sets forth the decision of the Secretary 
and is subject to approval by producers. Specifically, this final 
decision would continue to prohibit the ability to simultaneously pool 
the same milk on the Upper Midwest Federal milk order and a State-
operated milk order that has marketwide pooling. Additionally, the 
final decision would continue to limit the amount of milk that can be 
diverted to nonpool plants from pool distributing plants regulated 
under the order.

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

SUPPLEMENTARY INFORMATION: This administrative action is governed by 
the provisions of Sections 556 and 557 of Title 5 of the United States 
Code and therefore is excluded from the requirements of Executive Order 
12866.
    These proposed amendments have been reviewed under Executive Order 
12988, Civil Justice Reform. This rule is not intended to have a 
retroactive effect. If adopted, this proposed rule will not preempt any 
state or local laws, regulations, or policies, unless they present an 
irreconcilable conflict with this rule.
    The Agricultural Marketing Agreement Act of 1937, as amended (7 
U.S.C. 601-674), provides that administrative proceedings must be 
exhausted before parties may file suit in court. Under section 
608c(15)(A) of the Act, any handler subject to an order may request 
modification or exemption from such order by filing with the Department 
of Agriculture (USDA) 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.
    In June 2001, there were 12,748 producers pooled on, and 57 
handlers regulated by the Upper Midwest order. Based on these criteria, 
the vast majority of the producers and handlers would be considered as 
small businesses. The adoption of the proposed pooling standards 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 Upper Midwest milk 
marketing area and are not associated with other marketwide pools 
concerning the same milk. Criteria for pooling are established on the 
basis of performance levels that are considered adequate to meet the 
Class I fluid needs and, by doing so, determine those that are eligible 
to share in the revenue that arises from the classified pricing of 
milk. Criteria for pooling are established without regard to the size 
of any dairy industry organization or entity. The criteria established 
are applied in an identical fashion to both large and small businesses 
and do not have any different economic impact on small entities as 
opposed to large entities. Therefore, the 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 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 action does not require additional information collection that 
requires clearance by the Office of Management and Budget (OMB) beyond 
currently approved information collection. The primary sources of data 
used to complete the forms are routinely used in most business 
transactions. Forms require only a minimal amount of information which 
can be supplied without data processing equipment or a trained 
statistical staff. Thus, the information collection and reporting 
burden is relatively small. Requiring the same reports for all handlers 
does not significantly disadvantage any handler that is smaller than 
the industry average.
    Prior documents in this proceeding:
    Notice of Hearing: Issued June 5, 2001; published June 11, 2001 (66 
FR 31185).
    Tentative Final Decision: Issued February 8, 2002; published 
February 14, 2002 (67 FR 7040).
    Interim Final Rule: Issued April 16, 2002; published April 22, 2002 
(67 FR 19507).

Preliminary Statement

    A public hearing was held upon proposed amendments to the marketing 
agreement and the order regulating the handling of milk in the Upper 
Midwest marketing area. The hearing was held, pursuant to the 
provisions of the Agricultural Marketing Agreement Act of 1937, as 
amended (7 U.S.C. 601-674), and the applicable rules of practice (7 CFR 
part 900), at Bloomington, Minnesota, on June 26-27, 2001, pursuant to 
a notice of hearing issued June 5, 2001, and published June 11, 2001 
(66 FR 31185).

[[Page 37675]]

    Upon the basis of the evidence introduced at the hearing and the 
record thereof, the Administrator, on February 8, 2002, issued a 
Tentative Final Decision containing notice of the opportunity to file 
written exceptions thereto.
    The material issues, findings, and conclusions, rulings, and 
general findings of the tentative final decision are hereby approved 
and adopted and are set forth in full herein. The material issues on 
the record of hearing relate to:
    1. Eliminating the simultaneous pooling of milk on the order and on 
a State-operated milk order that has marketwide pooling.
    2. Allowing overbase milk from California to remain as eligible for 
pooling on the Upper Midwest Federal milk order.
    3. Changing certain pooling provisions of the order regarding 
performance standards and diversion limits.
    4. Changing the rate of partial payments to producers.
    5. Determining whether emergency marketing conditions exist that 
would warrant the omission of a recommended decision and the 
opportunity to file written exceptions.

Findings and Conclusions

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

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

    A proposal, published in the hearing notice as Proposal 1, seeking 
to prevent the simultaneous pooling of milk on the Upper Midwest order 
and on a State-operated order with marketwide pooling, previously 
adopted on an interim basis, is proposed to be adopted on a permanent 
basis by this final decision. The practice of pooling milk on a Federal 
milk order and simultaneously pooling the same milk on a State-operated 
milk order has also come to be referred to as ``double dipping.'' 
Currently, the Upper Midwest order (Order 30) only provides 
prohibitions for the simultaneous pooling of the same milk on more than 
one Federal order. The record provides evidence and support for 
eliminating the ability of milk receiving the benefits of marketwide 
pooling through a State-operated milk order from simultaneously being 
pooled on Order 30.
    Proposal 1, which sought to end the practice of double dipping, was 
proposed by Associated Milk Producers, Inc. et.al., First District 
Association, and Lakeshore Federated Cooperative. These entities are 
dairy farmer cooperatives who supply a significant portion of the milk 
needs of the Upper Midwest marketing area. Other entities who joined in 
support of this proposal included: Foremost Farms USA; Mid-West 
Dairymen's Company; Bongards' Creameries; Cady Cheese; Cass-Clay 
Creamery; Ellsworth Cooperative Creamery; Family Dairies USA; Hastings 
Cooperative Creamery; Kraft Foods; Lynn Dairy; Manitowoc Milk Producers 
Cooperative; Milwaukee Cooperative Milk Producers; Muller Pinehurst 
Dairy; Mullins Cheese; Plainview Milk Products; Swiss Valley Farms; 
Valley Queen; Weyauwega Milk Products; White Clover Dairy, Inc.; and 
Hilmar Cheese of Hilmar, California.
    A witness appearing on behalf of Associated Milk Producers, Inc. 
(AMPI), a supporter for the direct elimination of double-dipping, 
provided evidence and testimony that showed an increasing amount of 
California milk being pooled on Order 30. For the time period of 
October 2000 through May 2001, said the AMPI witness, there was an 
estimated $11.4 million negative effect on the pool, the equivalent of 
about a ten-cent ($0.10) reduction for each hundredweight of milk 
pooled on the order, as a result of pooling California milk on Order 
30. According to the AMPI witness, this estimate was calculated by 
factoring the amount of milk from California that had been pooled on 
the Upper Midwest pool from the Order's actual Producer Price 
Differential (PPD) and applying the difference to the volume of milk 
pooled on the order.
    The AMPI witness indicated the reform of the Federal milk marketing 
order system, implemented in January 2000, provided economic incentives 
for California milk to pool on Order 30. Specifically, said AMPI, the 
use of the higher of either the Class III or Class IV milk price in 
setting and moving Class I milk prices had yielded generally higher 
PPDs than existed in the Upper Midwest region prior to reform.
    The AMPI witness surmised that Order 30's pooling of California 
milk, already pooled under the State-operated milk order of California, 
resulted in obvious inequities. The witness provided estimates of 
extent and impact on Upper Midwest dairy farmers and was of the opinion 
that this situation is severe enough to conclude that the Department 
should move directly to a final decision and avoid the more lengthy 
procedure of first issuing a recommended decision and then issuing a 
final decision.
    These views and conclusions by the AMPI witness were supported in 
testimony by a witness appearing on behalf of Foremost Farms USA 
(Foremost). The Foremost witness testified that California milk pooled 
on Order 30 grew from about 10 million pounds to an average of 260 
million pounds during the 3-month period of March through May 2001. 
According to calculations by Foremost, an estimated $6 million 
reduction in value for all milk pooled on the order occurred due to the 
pooling of California milk on Order 30. This revenue, said Foremost, 
comes from Upper Midwest dairy farmers who already have the lowest PPD 
in the Federal order system. Acknowledging that tighter pooling 
provisions may serve to eliminate the double dipping issue, Foremost 
was of the opinion that tightening pooling standards would not be the 
best way to accomplish that end.
    A witness representing the Mid-West Dairymen's Company/Lakeshore 
Federated Dairy Cooperative (MDC), a dairy farmer cooperative located 
in northern Illinois and southern Wisconsin, testified in support of 
ending double dipping. This witness also spoke on behalf of Lakeshore 
Federated Dairy Cooperative, which represents over 4,000 dairy farmers 
located in Illinois, Iowa, and Wisconsin, and whose milk is pooled 
mostly on the Upper Midwest order and to a lesser extent on the Central 
and Mideast Federal milk orders. This witness indicated that Mid-West 
Dairymen's Company milk supplies the fluid market.
    The MDC witness expressed concern about equity among producers and 
equity among handlers. In this regard, the witness maintained that this 
issue should be handled on an expedited basis. The MDC witness 
indicated that the Federal order program has a long history of 
promoting equity to both

[[Page 37676]]

producers and handlers. According to MDC, classified pricing 
contributes to equity among handlers, and the marketwide pooling of 
revenue generated from classified pricing provides for equity among 
producers. Specifically noted by the MDC witness was the purposeful 
elimination of individual handler pooling as milk marketing orders have 
consolidated into larger geographic areas.
    Federal orders prohibit the pooling of the same milk of a producer 
on more than one Federal order, noted the MDC witness. Drawing money 
from one Federal order pool equitably shares revenue with those 
producers who supply the market, but drawing additional revenue from a 
second Federal order pool destroys the goal of equity among producers, 
a reason why the Federal order program prohibits double pooling, 
maintained MDC. As evidence of the impact of double dipping, MDC 
presented analysis showing that from January 2000 through April 2001, 
the Order 30 statistical uniform price per hundredweight averaged 
$10.8850, with a pool draw of 84.5 cents. Over the same 16-month 
period, said MDC, the California overbase price averaged about 21.5 
cents higher than the blend price in Order 30. Not only is the 
California overbase price higher than in Order 30, noted MDC, but a 
California dairyman pooled on Order 30 will also draw the 84.5 cents by 
being able to simultaneously pool the same milk on Order 30.
    The MDC witness testified that the California milk pooling plan 
places high importance on providing equity to producers and to handlers 
regulated by the state. The witness noted that establishing producer 
equity is a basic cornerstone of both the California and Federal milk 
order programs and that both accomplish this through marketwide 
pooling. If the Federal order program does not eliminate double 
dipping, there cannot be equity in prices received by producers in the 
Midwest or California, said the witness. Eliminating double dipping is 
desirable, said MDC, because it would not change the movement or the 
marketing of milk in any significant fashion. Milk would continue to be 
picked up at the farm and taken to the same plants as is currently 
done. According to the MDC witness, the only difference would be that 
no financial benefit would accrue to some producers who currently are 
able to double dip.
    A dairy farmer from Minnesota, who is also the Chairman of the 
First District Association, President of the Nelson Creamery 
Association, and serves on the board of the Minnesota Milk Producer's 
Association (First District), testified in support of amending the 
Upper Midwest order to prohibit double dipping. The First District 
witness testified that it is unfair and wrong for dairy farmers pooled 
on Order 30 to have their milk price intentionally diluted as a result 
of California milk being pooled on the order. This witness estimated 
that the impact on the price received by dairy farmers in the Upper 
Midwest was about 15 to 17 cents per hundredweight. The First District 
witness also thought it important to indicate that California, with its 
State-wide milk regulatory system, had chosen not to be a part of the 
Federal milk order system.
    A consultant witness with extensive experience in milk marketing 
regulations appeared on behalf of the supporters of Proposal 1. The 
witness provided detailed analysis regarding California milk movements 
and offered modified wording from that published in the hearing notice 
to end double dipping. This witness testified that Federal order 
provisions have always been tailored to prevent producers from pooling 
the same milk twice and enjoying the benefits of marketwide pooling 
from more than one order. To this end, according to the witness, a 
handler regulated on the Upper Midwest order should not be permitted to 
pool diverted milk if that milk is pooled and priced under either a 
Federal order or State order that provides for marketwide pooling.
    Important to the new consolidated orders was the rejection of 
``open pooling'' where milk from anywhere can be pooled on any 
marketing order, said the witness. The witness indicated that, in his 
opinion, the Department rejected open pooling because it did not 
provide an assurance of milk being made available for the fluid market. 
The witness also expressed the opinion that in markets with 20 percent 
or less milk used for fluid purposes, the notion of assuring an 
adequate supply of milk for fluid use becomes of questionable 
importance.
    The witness testified that the statutory requirements for milk 
marketing orders specify the uniform treatment of producers and that 
uniform treatment is fundamentally the same as the equitable treatment 
of producers. The witness said that equitable treatment includes the 
equal sharing of the proceeds of the pool among all producers pooled on 
the order. However, the witness thought the notion of equitable 
treatment would not include producers who are sharing in the proceeds 
of other marketwide pools on the same milk. To this end, the witness 
maintained that pooling milk on both the California and Order 30 
marketwide pools has resulted in the non-uniform distribution of 
proceeds to those producers who pool the same milk twice.
    The witness also presented an analysis of data from the California 
Department of Food and Agriculture as well as relied on his knowledge 
of milk receipts at plants located in the western States of Oregon, 
Nevada, and Arizona. This analysis shows, said the witness, that almost 
all of the California milk pooled on the Upper Midwest order is not 
physically received within the Order 30 area, but is instead being 
received at California plants. Because the milk is received at 
California plants, it is pooled under the California marketwide system.
    The Secretary of the Wisconsin Department of Agriculture, Trade, 
and Consumer Protection (WDATCP), accompanied by the Director of Value 
Added Agricultural Development of the WDATCP, testified in support of 
amending the Upper Midwest order to stop and prevent the double dipping 
of milk. The witnesses testified that increasing volumes of California 
milk was diluting the Class I utilization of the market and was also 
lowering the benefit to dairy farmers in Minnesota and Wisconsin who 
are pooled on Order 30.
    These Wisconsin officials were of the opinion that artificial 
regulations, not market forces, allow California milk to simultaneously 
pool under California's State order program and Order 30. The witnesses 
found this to be patently unfair and noted that it only serves to lower 
the income to Wisconsin and Minnesota dairy farmers.
    With regard to milk produced far from the order and pooled on Order 
30, these witnesses expressed minimal concern about such milk being 
able to pool on the order provided the same milk could not and would 
not enjoy the benefit of two marketwide pools. While the impact of 
pooling distant milk that cannot double dip was acknowledged to have 
the same impact in lowering returns to Minnesota and Wisconsin dairy 
farmers, these witnesses took no issue with such distant milk being 
able to pool on the Upper Midwest order. They expressed the view that 
adopting more restrictive pooling standards for the purpose of 
preventing double dipping would interfere with and supplant market 
forces, such as the economics of transportation and distribution, with 
artificial regulations.
    The President and Chief Executive Officer of Hilmar Cheese, located 
in Hilmar, California, also testified in favor of preventing California 
milk from being

[[Page 37677]]

pooled simultaneously on the California State order and the Upper 
Midwest order. Hilmar Cheese (Hilmar) produces a variety of cheeses 
which are marketed throughout the United States. The Hilmar witness 
testified that the California milk order system employs marketwide 
pooling.
    The Hilmar witness stated that dairymen in California participate 
in a marketwide pool through a regulated milk pricing and pooling 
system that includes quota milk and that is operated by the State of 
California. The Hilmar witness confirmed the testimony of the 
California State government witnesses that all Grade A milk sold to a 
pool plant in California is associated with the pool and shares in the 
revenue generated from the use of milk in all classes of use. While all 
plants that manufacture milk into manufactured products such as cheese, 
frozen products, butter, and milk powder need not be pool plants, said 
the witness, most plants opt to participate in the pool so that their 
dairy farmers can reap the benefits of marketwide pooling. 
Manufacturing plants become pool plants, said Hilmar, by making some of 
their milk receipts available for Class I and Class II uses. Producers 
are paid for their milk on the basis of the milk components they ship 
and on the proportion of their milk sales that are covered by their 
quota holdings, said this witness. Fat and solids-not-fat, said Hilmar, 
have their own separate pools, and all producers share equally in the 
revenue generated by sales in the various milk classes. The total 
revenue from solids-not-fat in all classes, including revenue from the 
Class I fluid carrier value, is first adjusted to pay for 
transportation allowances and credits, and the remaining revenue is 
reduced by the total value of milk that is quota milk, said the 
witness. The quota milk pool is determined, said Hilmar, primarily by 
the pounds of solids-not-fat quota shipped multiplied by the quota 
premium of $0.195 per pound of solids-not-fat, which is also equal to 
$1.70 per hundredweight. After deducting the value of quota milk from 
the adjusted solids-not-fat revenue in the pool, the remaining revenue 
is divided by the total pounds of solids-not-fat to obtain the overbase 
(product in excess of quota) and the base solids-not-fat price, said 
the witness. The quota solids-not-fat price, said Hilmar, is equal to 
the overbase price plus $0.195 per pound. Under the California milk 
pooling system, testified Hilmar, all dairy farmers in the pool receive 
a portion of the revenue from milk sales in all milk classes, even 
though some dairy farmers will receive more as quota holders than those 
who hold less quota or no quota.
    Because of this revenue sharing with all producers pooled under the 
California system, testified the Hilmar witness, the same dairy farmers 
should not also have the opportunity to pool the same milk on a Federal 
milk order. The witness found it odd that some producers would seek to 
capture pool revenue from other parts of the country and, at the same 
time, collect pool revenue from the California pool. Engaging in this 
sort of behavior, said the Hilmar witness, results in some undesirable 
consequences. The witness presented an analysis of a 17-month period 
(beginning with the implementation of order reform) that compared 
California milk prices with Federal order milk prices. This analysis 
revealed, according to the witness, that during the 17-month time 
period, the California overbase price averaged $11.21 per hundredweight 
(cwt), or $1.03 per cwt over the California Class 4-B (milk used in 
cheese) milk price. In the Upper Midwest order at Hennepin County 
(Minneapolis), noted the witness, milk value was only 73 cents higher 
than the order's Class III price at the reference test. The witness 
drew attention to the California overbase price averaging nearly 22 
cents above the Upper Midwest statistical blend price despite the use 
of a quota system by California. California overbase dairy farmers, 
said the witness, already benefit significantly from its diverse 
product pool, and quota holders benefit in prices received by an 
additional $1.70 per cwt of milk.
    There is an inequity to Upper Midwest producers, said Hilmar, when 
California overbase milk is pooled in both California and on the Upper 
Midwest order. Hilmar compared the producer price differential (PPD) 
for two different locations in the Upper Midwest marketing area 
(Chicago and Minneapolis) with a plant located in Glenn County, 
California (some 90 minutes north of Sacramento), where milk pooled 
under the Upper Midwest order is received. Hilmar testified that 
comparison of both the California overbase price and the Federal order 
PPD on the California milk that is pooled but not delivered to the 
Upper Midwest results in a 95-cent net higher price for the ``double-
pooled'' California milk than from California milk not pooled on Order 
30. According to the Hilmar witness, the double pooling only serves to 
augment California prices received by producers by drawing money from 
the Upper Midwest market, which already has milk prices lower than 
California's.
    In light of their analysis, said Hilmar, double dipping is not the 
type of innovation that creates real value, and double dipping only 
moves money and distorts and discourages--and ultimately damages--the 
dairy industry. Hilmar chose not to engage in this behavior.
    Additional support for eliminating double dipping was offered by a 
representative of Marigold Foods. Marigold Foods (Marigold) is a 
handler that has five regulated distributing plants located within the 
Upper Midwest order. Marigold is concerned, the witness indicated, 
about California milk being pooled on the order and reducing dollars 
paid to their local dairy farmers. According to the Marigold witness, 
California milk is not leaving the State of California and is not 
available to serve the fluid market in Order 30. Marigold indicated 
that they pay a $1.70 Class I differential on most of their milk 
purchases as well as over-order premiums to assure a supply of milk. 
However competitive the over-order premiums, Marigold indicated, they 
are not enough to assure themselves a supply of milk, noting that 
several of their suppliers have indicated a financial need to reduce 
shipments to Marigold's distributing plants. The witness attributed 
this situation to the ability of California milk to be pooled 
simultaneously on the California State order and on Order 30.
    The Marigold witness testified that the Order 30 PPD was being 
reduced by 10 to 15 cents per cwt by the pooling of California milk. 
Marigold indicated that this money was funded by the market's Class I 
fluid milk processors and that these funds should be going to the dairy 
farmers who serve, or are available to serve as needed, the Order 30 
fluid market. Marigold stressed that they already compete for a supply 
of milk with handlers who are regulated by another Federal order and 
with entities who have obtained funds from Order 30 from the pooling of 
California milk. Competing with California only intensifies an 
inequitable situation in Marigold's ability to compete for a supply of 
milk, said the witness.
    Marigold stated that it is through a regulatory loophole that 
producer milk which is not available to serve the fluid market is 
permitted to receive money from the Order 30 pool when the same milk is 
already receiving a benefit from marketwide pooling in a State-operated 
order. The witness said that this situation is unjust and contrary to 
the purposes of the legislation that authorizes Federal milk marketing 
orders for bringing forth an adequate supply of milk to meet fluid 
needs.

[[Page 37678]]

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

[[Page 37679]]

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, for all 
intents and purposes, identical to those of the Federal order program.
    It is clear from this review of the Federal and the California 
State programs that the orderly marketing of milk is intended. Both 
provide a stable marketing relationship between handlers and dairy 
farmers and both serve the public interest. It would be incorrect to 
conclude that the Federal and California milk order programs have 
differing purposes when the means, mechanisms, and goals are so nearly 
identical. In fact, and as indicated in both briefs and in comments to 
the tentative final decision by the supporters for Proposal 1, the 
Federal order program has precedent in recognizing that the California 
State milk order program has marketwide pooling. Under milk order 
provisions in effect prior to milk order reform, and under Sec.  
1000.76, a provision currently applicable to all Federal milk marketing 
orders, the Department has consistently recognized California as a 
State government with marketwide pooling.
    Since the 1960's, the Federal milk order program recognized the 
harm and disorder that resulted to both producers and handlers when the 
same milk of a producer was simultaneously pooled on more than one 
Federal order. As noted above, producers do not receive uniform minimum 
prices, and handlers receive unfair competitive advantages. The need to 
prevent ``double pooling'' became critically important as distribution 
areas expanded and orders merged. The issue of California milk, already 
pooled under its State-operated program and able to simultaneously pool 
under a Federal order, has, for all intents and purposes, the same 
undesirable outcomes that Federal orders once experienced and 
subsequently corrected. It is clear that the Upper Midwest order needs 
amending to prevent the ability to pool milk on more than one order 
when both orders employ marketwide pooling.
    There are other State-operated milk order programs that provide for 
marketwide pooling. For example, New York, as indicated in record 
testimony, operates a milk order program for the western region of that 
State. A key feature explaining why this State-operated program has 
operated for years alongside the Federal milk order program is the 
exclusion of milk from the State pool when the same milk is already 
pooled under a Federal order. Because Federal orders have prohibited 
the same milk being pooled simultaneously, the Federal order program 
has had no reason again to address specifically double dipping or 
double pooling issues, the disorderly marketing conditions that arise 
from such practice, or the primacy of one regulatory program over 
another. The other states with marketwide pooling similarly do not 
double pool Federal order milk.
    The record contains various opinions offered to explain why the 
practice of double dipping has occurred. Some offered that the Class I 
price structure changes implemented with Federal order reform resulted 
in a much higher PPD than existed under the old Upper Midwest and 
Chicago orders, providing a financial incentive. Some cited the change 
in how orders, including Order 30, zoned Class I prices and producer 
blend prices, suggesting if these zoning methods had been retained, the 
incentive for California milk to double dip on Order 30 may never have 
been an issue. Others noted that the Federal order location value of 
fluid milk in much of California is actually higher than in Order 30 
and thus implied that tighter pooling provisions would most likely 
prevent California milk from being pooled on Order 30.
    These are all interesting and valid observations that can lead to 
reasonably concluding that California milk would not seek to be pooled 
on Order 30 if not for the regulatory amendments. However, determining 
whether double dipping and its impacts are a result of the reformed 
Class I pricing structure does not lead to the conclusion that the 
price structure needs to be abandoned or severely altered. Rather, the 
issues here are whether the double dipping is a pooling problem that 
needs to be solved and whether the first proposal, with or without 
various modifications, is an effective solution to that problem. As 
noted above, the Department believes the pooling problem needs a 
pooling solution and a modification of the first proposal will 
effectively solve the problem. When equity is not provided for, the 
disorderly marketing conditions that have arisen in Order 30 become the 
same as those existing prior to Federal orders adopting provisions 
preventing the double pooling of milk.
    California milk should only be eligible for pooling on Order 30 
when it is not pooled on the California State order and it meets the 
Upper Midwest's pooling standards. A distinction needs to be made here 
between a producer and the milk of a producer. While much of the record 
testimony speaks of producers in the same vein as the milk of 
producers, it is necessary to clarify the obvious intent of all hearing 
participants that it is the milk of a producer that becomes pooled. It 
is clear from the context of the record testimony that this was 
intended.
    The Federal milk order program, including Order 30, does not 
regulate producers. Rather, the program regulates handlers--those 
entities that are the first buyers of milk from producers and who incur 
the minimum payment obligations to producers. The Federal milk order 
program has no authority to regulate producers in their capacity as 
producers and cannot, for example, preclude a producer from being 
pooled anywhere, provided the milk of the producer meets the pooling 
standards of an order. For this reason, Federal milk orders, including 
Order 30, provide separate definitions for a producer in the Producer 
definition and for the milk of a producer in the Producer milk 
definition. This distinction is also important because the record 
evidence indicates California milk delivered directly from farms to 
plants located outside the State is not pooled on the State order. If a 
California producer delivers milk directly from the farm to pool plants 
regulated by the Upper Midwest order, and if that milk satisfies the 
pooling standards of the Upper Midwest order, that milk will be pooled 
on the Upper Midwest order.
    The amendatory wording provided below, intended to eliminate double 
dipping, is at some variance from that proposed by the proponents of 
Proposal 1. The wording is different because the proposed modified 
wording of Proposal 1 would prevent double dipping on only diverted 
milk. The wording presented below would apply to any milk that 
participates in a State-operated milk order that provides for the 
marketwide pooling of milk and would not prohibit the ability of milk 
to participate in the Order 30 pool when not part of a State-operated 
milk order program providing for marketwide pooling.

2. California Overbase Milk and Pooling

    A proposal, published in the hearing notice as Proposal 3, that 
sought to exclude California quota milk from being pooled on the Upper 
Midwest order is not adopted. As California has quota and overbase 
prices for milk, this

[[Page 37680]]

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

3. Performance Standards and Diversion Limits

    A proposal offered by the Dairy Farmers of America (DFA) and the 
National Farmers Organization (NFO), published in the hearing notice as 
Proposal 4, addressed two separate issues: establishing performance 
standards for milk not traditionally associated with the Upper Midwest 
marketing area and the ability of pool distributing plants to divert an 
unlimited volume of milk to nonpool plants. The portion of the proposal 
seeking to establish diversion limits for pool distributing plants 
adopted on an interim basis is proposed to be adopted on a permanent 
basis in this final decision. The record does not support adoption of 
performance standards for milk based on the location of the producer or 
the milk of a producer. DFA is a member-owned cooperative of nearly 
17,000 farms that produce and market milk across a significant portion 
of the United States. NFO is also a member-owned cooperative that 
produces and markets milk in Order 30, the State of California, and in 
other Federal milk orders.
    Specifically, the Upper Midwest order is proposed to be amended to 
provide a diversion limit of 90 percent of producer receipts, including 
diversions, for pool distributing plants regulated under the order. In 
addition, the market administrator may adjust the diversion limit for 
pool distributing plants as marketing conditions warrant. Since supply 
plants pooling milk on the Upper Midwest order must ship 10 percent of 
receipts, including milk diverted to a pool distributing plant and 
certain other types of plants, there is no reason to impose a diversion 
limit on supply plants.
    DFA testified that two primary benefits of the Federal order 
program include allowing producers to benefit from the orderly 
marketing of milk and to share in the marketwide distribution of 
revenue that results mostly from Class I milk sales. Orderly marketing 
influences milk to move to the highest value use when needed and for 
milk to clear the market when not used in Class I, said DFA. The 
witness insisted that the pooling of distant milk that does not show a 
service to the Class I market is inconsistent with Federal order 
policy, and such milk should not be eligible to share in the revenue 
that accrues from Class I use.
    Pooling standards are universal in their intention, said DFA, 
requiring a measure of commitment to a market

[[Page 37681]]

marked by the ability and willingness to supply the Class I needs of 
that market. The witness also noted that pooling standards are 
individualized in their application and each market requires standards 
that work for the conditions that apply in that individual market. The 
witness quoted the Final Decision of milk order reform as follows: 
``the pooling provisions for the consolidated orders provide a 
reasonable balance between encouraging handlers to supply milk for 
fluid use and ensuring orderly marketing by providing a reasonable 
means for producers with a common marketing area to establish an 
association with the fluid market.''
    The DFA witness drew from the history of milk marketing and 
commented on the problems of producers in their attempts at improving 
their economic circumstances. The witness identified shortcomings of 
the marketplace resulting in the difficulty of the milk supply being 
able to service the market's fluid needs in a manner that treats all 
producers equitably. The superior negotiating position of milk buyers 
and the variations in supply and demand were examples provided by the 
witness that have always ``tripped up'' dairy farmers in their 
marketing efforts. The witness added that farmers' attempts to improve 
on past efforts always seemed to fail when one or more suppliers would 
find a way to opt out of the added cost of serving the market to obtain 
a higher return for themselves. Marketwide pooling, said the DFA 
witness, eliminated the differences in prices paid to suppliers within 
the same market and, in turn, eliminated the non-productive competitive 
drive for higher returns since everyone faced the same terms of trade. 
The witness also noted the absence of any action recommending any 
change to these fundamental features of milk orders and noted that 
every Federal order shares returns to all producers marketwide.
    The DFA witness was of the opinion that the new Class I pricing 
structure, together with the interface of the pricing surface and the 
pooling provisions found in each order, resulted in significant changes 
in the marketplace for milk. The link between performance and pooling, 
said the witness, was altered by these reforms and needs to be 
reviewed. DFA noted that many entities, including themselves, moved 
quickly to take advantage of these changes in order rules. The witness 
indicated that when in a competitive dairy economy, an entity must make 
pooling decisions that aim to increase returns, and competitors must 
attempt to do the same or risk their competitive position.
    Pooling provisions of Order 30 work well for milk produced in the 
marketing area, said DFA, but do not work well for milk produced out of 
the area. Producers need only deliver a days' production a single time 
to a pool plant to have their milk eligible for pooling. This, combined 
with no loss of producer eligibility, provided a producer does not 
deliver to another Federal order plant, makes Order 30 an attractive 
market in which to pool milk, the witness stated.
    The witness also relied on, and drew heavily from, the order reform 
Final Decision (64 FR 16026) which explained the marketing area 
boundaries of the consolidated Upper Midwest marketing area. Although 
the prior marketing order areas of the Chicago Regional and Upper 
Midwest orders did not have a considerable degree of overlapping fluid 
milk disposition, they did have an extensive overlapping procurement 
area, according to the witness. In light of this, the witness noted 
that the reform Final Decision could therefore find no justification on 
the basis of overlapping sales for increasing the consolidated 
marketing area beyond what was adopted. Rather, it is the extensive 
overlapping of a common procurement area, or milkshed, that is the most 
compelling reason for explaining the boundaries of the consolidated 
Upper Midwest marketing area.
    The witness noted, too, that there was extensive discussion early 
in the construct of the 1996 Farm Bill concerning the merits of having 
a single national Federal order. Such an outcome would have resulted in 
a single blend price across the entire country. Noting that Congress 
debated several proposals and several economic studies over this issue, 
Congress rejected the idea of a single marketing order with the premise 
of one blend price. According to the witness, open pooling, which may 
result in blend prices being equalized across a large territory, is 
counter to the intent of Congress and the legislative directive of the 
Farm Bill---to consolidate the orders into no fewer than 10 and not 
more than 14.
    The DFA witness expressed alarm about milk from distant areas 
sharing in the blend price when that milk neither serves the fluid 
market nor balances the market when extra milk is needed by fluid 
processors. The witness referenced the rejection of the concept of open 
pooling discussed in the reform Final Decision and indicated that the 
decision rejected this because open pooling provides no reasonable 
assurance that milk will be made available to satisfy the fluid needs 
of the market. The witness also noted further that proposals to create 
and fund ``stand-by'' pools were also rejected.
    DFA was of the opinion that open pooling is not appropriate for 
Order 30. Additionally, because of the distance and cost involved in 
moving milk to the market, milk needed in the fall months to 
accommodate increased demand because of increased school milk sales--or 
to provide a manufacturing outlet for milk produced in excess of fluid 
needs--would not be provided. It is irrelevant, said the witness, if 
the milk in question originates from California or any other place 
because such milk is no more burdensome than distant milk produced in 
Idaho or any other area. Under the open-pooling concept, said DFA, 
``distant'' milk able to pool alongside ``local'' deliveries only 
serves to pyramid the volume pooled.
    Prohibiting the simultaneous pooling of milk on a State-operated 
marketwide pool and the Order 30 pool (the focus of Proposal 1) said 
DFA, does not fully address the pooling problems at hand. The witness 
provided evidence and testimony that showed an increasing amount of 
``distant'' milk pooled on the Upper Midwest order which, they 
maintain, is not serving the Class I needs of the market. The witness 
submitted analysis demonstrating that when milk is pooled without being 
available for Class I use--referred to as ``paper pooled''--on Order 
30, returns to local producers who are consistently serving the fluid 
market are decreased.
    Analysis was provided by DFA to illustrate how the pooling of milk 
on Order 30 has changed by examining the amount of milk pooled on the 
order and where the milk was produced. Using October 1997 as a 
reference time period prior to the consolidation of the orders, the 
witness provided data showing that 2.4 billion pounds of milk were 
associated with the Chicago Regional and Upper Midwest markets, but 
only 1.6 billion pounds of milk were pooled because of class-price 
relationships. The 2.4 billion pounds were produced by 27,250 producers 
located in 13 States from Tennessee to Minnesota and from New Mexico to 
Michigan. The witness noted that over 93 percent of the producer milk 
was produced within the consolidated marketing area, and 91.4 percent 
of the milk pooled was produced within the States of Wisconsin and 
Minnesota. In comparison, the witness provided data subsequent to the 
implementation of order reform: During June 2001, 12,748 producers 
pooled 1.5 billion pounds of milk on consolidated Order 30, with a 
total of 84 percent of the milk pooled produced within the consolidated 
marketing area and 79 percent

[[Page 37682]]

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

[[Page 37683]]

noted that back-hauling, where a lower shipping rate can be obtained 
from a hauler who has the ability to back-haul or return with other 
freight instead of returning empty, leaves open the possibility that 
double pooled California milk could, in fact, have positive returns 
even if required to perform.
    The opponents also claimed that other loopholes in DFA's proposal 
might allow California milk to continue double pooling on Order 30. 
Class I fluid milk products, including concentrated milk which 
California plants routinely process in meeting the fluid milk standards 
of California, could be pooled on Order 30, noted the witness. For 
example, concentrated milk could be delivered to Order 30 and 
subsequently returned to California for use in that State's Class 4a or 
4b uses of milk, the witness added.
    Opponents were also of the opinion that illegal trade barriers to 
the movement of milk in Federal orders would be erected if DFA's 
proposal were adopted. Idaho milk that performs in the same manner as 
Minnesota milk should be eligible for pooling in the same way the order 
now provides for Minnesota milk, provided the same milk is not pooled 
more than once, stated opponents. Similarly, said the opponents, 
eligibility requirements in other Federal milk orders should not 
exclude milk based on its point of origin. They also stressed that 
trying to differentiate ``historical'' milk supplies from other 
``distant'' milk for pooling purposes would be difficult and an 
unreliable test for determining pooling eligibility. In this regard, 
they noted the pooling of milk received from Montana dairy farmers on 
the old Upper Midwest order, Order 68. Also, their review of historical 
data revealed that Missouri milk, for example, was long associated with 
the Texas order, but is now associated with the Southeast order. 
Changes in milk association can and do occur, opponents noted, and USDA 
should not create rigid rules as to when, where, and how such 
association may be permitted.
    A witness representing Kraft Foods (Kraft) also testified in 
opposition to DFA's proposal, depicting it as being designed to create 
a severe, detrimental, and economic disincentive to pool milk on the 
Upper Midwest market because the performance standards called for would 
increase the transportation burden borne by distant producers. They 
were of the opinion that if this proposal were adopted, it would be 
nothing more than Government imposing a discriminatory transportation 
burden on distant producers and hindering a producer's free marketing 
choices.
    Along the theme of transportation burdens, the Kraft witness also 
expressed the opinion that when producers incur disproportionately 
large transportation costs in supplying the fluid needs of the market, 
those producers would not be receiving uniform prices as required by 
law. Kraft was of the opinion that DFA's proposal is inconsistent with 
what the witness described as the AMAA's prohibition against 
consideration of a handler's use of milk as a condition of blend price 
receipt, adding also that it would create an unlawful and unauthorized 
exception in providing for uniform prices to producers. In effect, the 
Kraft witness explained that the DFA proposal would require selected 
groups of distant producers to incur transportation costs and other 
regulatory burdens not required of nearby producers under the order. 
Participation in the Upper Midwest market would only guarantee that 
distant farms would incur monetary losses, Kraft asserts. Additionally, 
said Kraft, DFA's proposal is unlawful because it conditions the 
pooling of distant producers upon utilization of their milk by a Class 
I distributing plant. In this regard, Kraft questioned the legality of 
requiring designated groups of dairy farmers to incur extraordinary 
expenses of shipping milk to Class I plants while other pooled farmers 
would be able to share in the Class I revenue without the same burden.
    Finally, Kraft expressed the opinion that DFA's proposal would, if 
adopted, violate the law because it would be erecting illegal trade 
barriers by limiting the marketing of milk products in Order 30 
depending on where the milk is located. The performance requirements 
placed on producers within Order 30, said Kraft, would be different 
from requirements for producers outside the order.
    The part of the proposal by DFA limited to the establishment of 
diversion limits for pool distributing plants adopted on an interim 
basis is proposed to be adopted on a permanent basis in this final 
decision. The record does not support the adoption of performance 
standards for pooling milk on the order on the basis of its location. 
Establishing a limit on the amount of milk that a pool distributing 
plant may divert provides for a complete set of provisions for 
identifying which producers, which producer milk, and which handlers 
should share in the benefits that accrue from the marketwide pooling of 
milk on the Upper Midwest order. By setting a limit, the integrity of 
the performance standards of the order will be improved. If Order 30 
does not limit the amount of milk that may be diverted by pool 
distributing plants, the pool is effectively undefined.
    Diversions are needed to accommodate the movement of milk properly 
associated with the market when not needed for Class I use. A diversion 
limit will also establish the amount of producer milk that may be 
associated with the integral milk supply of a pool plant. As discussed 
earlier, the diversions being considered are shipments of milk directly 
from the farm to a nonpool plant pursuant to the Producer milk 
definition provided for in Sec.  1030.13(d). The Upper Midwest order 
also allows for supply plants to deliver producer milk directly from 
the farm to another pool plant. However, since the intent of allowing a 
supply plant to ship producer milk directly from the farm to pool 
plants is to provide for more efficient movement of milk to pool 
distributing plants, milk shipments such as these are not included in 
the context of diversions as it relates to pool distributing plants and 
are, therefore, not limited in the quantity of milk a supply plant can 
direct ship to another pool plant.
    The marketing conditions of the Upper Midwest order are unique, and 
this uniqueness should be reflected in the pooling standards of this 
order. As indicated in testimony and in briefs, the Upper Midwest 
market area has about a 20 percent use of milk for fluid use, with the 
remainder of the milk used in lower-valued classes. In light of this 
relatively low share of milk volume that is needed to supply the Class 
I needs of the market, this decision finds basic agreement with those 
who expressed opposition to DFA's proposal. Specifically, the marketing 
conditions of Order 30 do not exhibit the need to require additional 
performance standards for milk located outside of the marketing area 
or, as DFA describes, milk located outside of the States that currently 
comprise the consolidated Upper Midwest Milk Marketing Area. 
Accordingly, all pool plants, regardless of location, may become 
eligible to have the milk of producers pooled on Order 30 by meeting 
the performance standards specified for the various types of pool 
plants.
    In several instances in testimony and in their post-hearing brief, 
DFA was of the opinion that ``distant'' milk does not have, and is not 
required to meet, the same performance standards as ``local'' milk. Any 
supply plant or a cooperative acting as a handler (as provided for and 
described in Sec.  1000.9(c)) would need to ship ten (10) percent of 
their reported

[[Page 37684]]

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

[[Page 37685]]

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

4. Changing the Rate of Partial Payment

    A proposal that would change the rate of the partial payment to 
producers and cooperatives for milk delivered during the first 15 days 
of the month to the lowest class price for the prior month times 103 
percent, published in the hearing notice as Proposal 5, is not adopted. 
Therefore, the partial payment rate should remain as currently provided 
for by the order--at the lowest class price for the prior month.
    Both DFA and NFO were among those who supported increasing the 
minimum partial or advance payment due producers and cooperatives from 
the prior month's lowest class price to 103 percent of the prior 
month's lowest class price. A representative of DFA testified that 
since the inception of Federal order reform, the percentage of a 
producer's pay price, as measured by dividing the statistical uniform 
price by the prior month's Class III price, has declined from 95 
percent to 91 percent in comparison to this relationship prior to 
reform. The witness presented detailed analysis supporting their 
position that the relative reduction in the partial payment is a trend 
that is having a significant negative impact on dairy farmers' cash 
flow. According to analysis presented, DFA concluded that using 103 
percent of the lowest class price of the previous month would return 
the balance between the partial payment and final payment to the same 
relative level as prior to Federal order reform. The change should not 
have significant impact on handlers required to make minimum payments, 
said the witness.
    A witness for the Wisconsin Cheese Makers Association (WCMA) 
testified in opposition to changing the rate of the minimum partial 
payment provision. The witness testified that the WCMA represents 25 
supply plants on the Upper Midwest order and that increasing the 
required minimum payment would be a burden to their member plants 
because they would need to borrow more money to meet the partial 
payment. Requiring a larger partial payment, testified the WCMA 
witness, would require increased borrowing and thus increased costs for 
the plants. The witness explained that since the partial payment is 
only a minimum payment, plants may pay more if they desire to, but not 
all plants pay more than the minimum partial payment. According to the 
witness, the reduction in the percent of the prior month's Class III 
price as a percent of the statistical uniform price is a short-term 
phenomena and that, over time, the relationship would move back to the 
higher percentage that occurred prior to Federal order reform.
    It is difficult to determine whether or not there is a trend 
occurring, as DFA maintains, that would be corrected or mitigated by 
changing the rate of the

[[Page 37686]]

partial payment. Milk prices are an outcome of supply and demand 
conditions for milk. Prices tend to increase during tighter supplies 
and fall when milk is plentiful relative to demand. The up and down 
fluctuations of milk prices does not in itself indicate a trend, nor 
does it suggest a structural flaw in how the order prices milk since 
price fluctuations are a response to changes in the quantity of milk 
supplied and in the quantity of milk demanded.
    Since Federal order reform, a 17-month period at the time of the 
hearing, the data shows two months in which the partial payment and the 
final payment were equal. However, if the partial payment rate were 
increased to 103 percent of the lowest class price, as proposed, four 
months (about 24 percent of the 17-month period) would have had a 
partial payment greater than or equal to the final payment.
    The opponents of this proposal noted that Federal order reform and 
its newer pricing system have only been in place for a short time--17 
months--suggesting that there has not been adequate time to observe 
various pricing scenarios that might occur over a more lengthy 
evaluation period. For example, there has been no significant price 
decline since the implementation of Federal order reform that would 
serve to aid in evaluating the effect of declining prices on the 
difference between the partial and final payment obligations. Class III 
and Class IV prices have been relatively stable during the beginning 
two thirds of the 17-month period, with prices beginning to show 
consistent increases during the last third of the period (December 2000 
through May 2001).
    The record testimony and post-hearing briefs supporting a change in 
the rate of partial payment assert that payments to producers and 
cooperatives, particularly by a cheese plant, are a ``pass through'' 
from the Federal order pool. A cheese plant/Class III handler receives 
the PPD from the pool (a ``pool draw'') in order to pay the order's 
minimum prices to producers. However, the majority of the payment to 
producers and cooperatives in the Upper Midwest is derived from cheese 
sales. The statistical uniform or blend price is received by producers 
in the form of a PPD calculated from the marketwide pooling of all milk 
on the order at classified prices. In a market like the Upper Midwest, 
which has a relatively low Class I differential ($1.80) and low Class I 
utilization (15-20 percent), the resulting PPD is less than in markets 
with higher Class I use and higher Class I differential values. Over 
the 17-month period of January 2000 through May 2001, the Upper Midwest 
PPD ranged from 43 cents to $1.43 and averaged $0.83 per cwt. Handlers 
did not know what the PPD would be until several days before payment 
was due to its dairy farmers. In light of this, it is not reasonable to 
establish a partial payment rate at a level that may increase the 
likelihood of requiring handlers to pay out part or all of the PPD 
prior to receiving payments from the producer settlement fund. This 
caution seems especially important in the Upper Midwest market where 
the PPD is relatively low and can be completely offset by the price 
difference between the prior month's lowest class price and the current 
month's Class III price.
    There is no compelling reason for changing the payment rate of the 
partial payment to producers. In the data presented by proponents at 
the hearing, the partial payment required by the order exceeded the 
final payment during numerous months. In most cases, the months in 
which the partial payment exceeded the final payment occurred prior to 
the implementation of Federal order reform.
    A DFA exception to the tentative final decision asserted that the 
current partial payment terms of Order 30 result in dairy farmers 
effectively financing the operations of handlers. The partial payment 
provision of the order is a minimum requirement placed on handlers to 
pay producers. The provision places no restrictions on producers or 
handlers to negotiate alternative payment arrangements that may call 
for more frequent payments. Accordingly, no persuasive argument is made 
for a higher rate frequency of payment for milk beyond that already 
provided under the terms of the order.

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 final decision.

General Findings

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

Rulings on Exceptions

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

Marketing Agreement and Order

    Annexed hereto and made a part hereof is one document: A Marketing 
Agreement regulating the handling of milk. The Order amending the order 
regulating the handling of milk in the Upper Midwest marketing area was 
approved by producers and published in the Federal Register on April 
22, 2002 (67 FR 19507) as an Interim Final Rule. Both of these 
documents have been decided upon as the detailed and appropriate means 
of effectuating the foregoing conclusions.
    It is hereby ordered, that this entire final decision and the 
Marketing Agreement annexed hereto be published in the Federal 
Register.

[[Page 37687]]

Determination of Producer Approval and Representative Period

    March 2003 is hereby determined to be the representative period for 
the purpose of ascertaining whether the issuance of the order, as 
amended in the Interim Final Rule published in the Federal Register on 
April 22, 2002 (67 FR 19507), regulating the handling of milk in the 
Upper Midwest marketing area is approved or favored by producers, as 
defined under the terms of the order (as amended and as hereby proposed 
to be amended) who during such representative period were engaged in 
the production of milk for sale within the aforesaid marketing area.

List of Subjects in 7 CFR Part 1030

    Milk marketing orders.

    Dated: June 18, 2003.
A.J. Yates,
Administrator, Agricultural Marketing Service.

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

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

Findings and Determinations

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

Order Relative to Handling

    It is therefore ordered, that on and after the effective date 
hereof, the handling of milk in the Upper Midwest marketing area shall 
be in conformity to and in compliance with the terms and conditions of 
the order, as amended, and as hereby amended, as follows:
    The provisions of the order amending the order contained in the 
interim amendment of the order issued by the Administrator, 
Agricultural Marketing Service, on April 16, 2002, and published in the 
Federal Register on April 22, 2002 (67 FR 19507), are adopted without 
change and shall be and are the terms and provisions of this order.

[This marketing agreement will not appear in the Code of Federal 
Regulations]

Marketing Agreement Regulating the Handling of Milk the Upper Midwest 
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.  1030.1 to 1030.86 all inclusive, of 
the order regulating the handling of milk in the Upper Midwest 
marketing area (7 CFR part 1030) which is annexed hereto; and
    II. The following provisions: Record of milk handled and 
authorization to correct typographical errors.
    (a) Record of milk handled. The undersigned certifies that he/
she handled during the month ( ), -------- hundredweight of milk 
covered by this marketing agreement.
    (b) Authorization to correct typographical errors. The 
undersigned hereby authorizes the Deputy Administrator, or Acting 
Deputy Administrator, Dairy Programs, Agricultural Marketing 
Service, to correct any typographical errors which may have been 
made in this marketing agreement.
    Effective date. This marketing agreement shall become effective 
upon the execution of a counterpart hereof by the Department in 
accordance with Section 900.14(a) of the aforesaid rules of practice 
and procedure.
    In Witness Whereof, The contracting handlers, acting under the 
provisions of the Act, for the purposes and subject to the 
limitations herein contained and not otherwise, have hereunto set 
their respective hands and seals.

Signature
 By (Name)-------------------------------------------------------------
 (Title)---------------------------------------------------------------
 (Address)-------------------------------------------------------------
(Seal)
Attest

[FR Doc. 03-15831 Filed 6-23-03; 8:45 am]
BILLING CODE 3410-02-P