[Federal Register Volume 68, Number 159 (Monday, August 18, 2003)]
[Proposed Rules]
[Pages 49375-49390]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-20689]


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

  Federal Register / Vol. 68, No. 159 / Monday, August 18, 2003 / 
Proposed Rules  

[[Page 49375]]



DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Parts 1124 and 1135

[Docket No. AO-368-A30, AO-380-A18; DA-01-08]


Milk in the Pacific Northwest and Western Marketing Areas; 
Tentative Decision on Proposed Amendments and Opportunity To File 
Written Exceptions to Tentative Marketing Agreement and to Order

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Proposed rule.

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

SUMMARY: This tentative decision adopts, on an interim final and 
emergency basis, provisions that amend certain features of the Pacific 
Northwest and Western milk marketing orders. Specifically, the ability 
to simultaneously pool the same milk on either the Pacific Northwest or 
the Western orders and on a State-operated order that has marketwide 
pooling is eliminated. For the Western order, the Pool plant provision 
is amended to establish a ``net shipments'' provision for milk 
deliveries to distributing plants and the Producer milk provision is 
amended to establish a net diversions provision. Additionally, the 
Proprietary bulk tank handler provision of the Western order is 
removed. Public comments on these actions, the other pooling and 
related provisions not adopted, and the marketwide service payment 
provision not adopted by this tentative decision are requested. This 
decision requires determination of whether producers approve the 
issuance of the amended orders on an interim basis.

DATES: Comments are due on or before October 17, 2003.

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

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

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

Regulatory Flexibility Act and Paperwork Reduction Act

    In accordance with the Regulatory Flexibility Act (5 U.S.C. 601 et 
seq.), the Agricultural Marketing Service has considered the economic 
impact of this action on small entities and has certified that this 
proposed rule will not have a significant economic impact on a 
substantial number of small entities. For the purpose of the Regulatory 
Flexibility Act, a dairy farm is considered a ``small business'' if it 
has an annual gross revenue of less than $750,000, and a dairy products 
manufacturer is a ``small business'' if it has fewer than 500 
employees.
    For the purposes of determining which dairy farms are ``small 
businesses,'' the $750,000 per year criterion was used to establish a 
production guideline of 500,000 pounds per month. Although this 
guideline does not factor in additional monies that may be received by 
dairy producers, it should be an inclusive standard for most ``small'' 
dairy farmers. For purposes of determining a handler's size, if the 
plant is part of a larger company operating multiple plants that 
collectively exceed the 500-employee limit, the plant will be 
considered a large business even if the local plant has fewer than 500 
employees.
    In the Western Federal milk order, 551 of the 791 dairy producers 
(farmers), or almost 70 percent, whose milk was pooled under the order 
at the time of the hearing, April 2002, would meet the definition of 
small businesses. On the processing side, 5 of the 12 milk plants 
associated with the Western milk order during April 2002 would qualify 
as ``small businesses,'' constituting about 42 percent of the total.
    In the Pacific Northwest Federal milk order, 805 of the 1,164 dairy 
producers (farmers), or about 69 percent, whose milk was pooled under 
the Pacific Northwest Federal milk order at the time of the hearing, 
April 2002, would meet the definition of small businesses. On the 
processing side, 9 of the 20 milk plants associated with the Pacific 
Northwest milk order during April 2002, would qualify as ``small 
businesses,'' constituting about 45 percent of the total.
    Based on these criteria, more than 69 percent of the producers in 
both orders 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 Pacific Northwest and Western milk marketing area and are 
not associated with other marketwide pools concerning the same milk. 
Criteria for pooling are established

[[Page 49376]]

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 established 
criteria are applied in an identical fashion to both large and small 
businesses and do not have any different economic impact on small 
entities as opposed to large entities. Therefore, the proposed 
amendments will not have a significant economic impact on a substantial 
number of small entities.
    A review of reporting requirements was completed under the 
Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35). It was 
determined that these proposed amendments would have no impact on 
reporting, recordkeeping, or other compliance requirements because they 
would remain identical to the current requirements. No new forms are 
proposed and no additional reporting requirements would be necessary.
    This notice does not require additional information collection that 
requires clearance by the Office of Management and Budget (OMB) beyond 
currently approved information collection. The primary sources of data 
used to complete the forms are routinely used in most business 
transactions. Forms require only a minimal amount of information which 
can be supplied without data processing equipment or a trained 
statistical staff. Thus, the information collection and reporting 
burden is relatively small. Requiring the same reports for all handlers 
does not significantly disadvantage any handler that is smaller than 
the industry average.
    Interested parties are invited to submit comments on the probable 
regulatory and informational impact of this proposed rule on small 
entities. Also, parties may suggest modifications of this proposal for 
the purpose of tailoring their applicability to small businesses.
    Prior documents in this proceeding:
    Notice of Hearing: Issued February 26, 2002; published March 4, 
2002 (67 FR 9622).
    Correction of Notice of Hearing: Issued March 14, 2002; published 
March 19, 2002 (67 FR 12488).

Preliminary Statement

    Notice is hereby given of the filing with the Hearing Clerk of this 
tentative final decision with respect to proposed amendments to the 
tentative marketing agreements and the orders regulating the handling 
of milk in the Pacific Northwest and Western marketing areas. This 
notice is issued pursuant to the provisions of the Agricultural 
Marketing Agreement Act and the applicable rules of practice and 
procedure governing the formulation of marketing agreements and 
marketing orders (7 CFR Part 900).
    Interested parties may file written exceptions to this decision 
with the Hearing Clerk, U.S. Department of Agriculture, Room 1083-STOP 
9200, 1400 Independence Avenue, SW, Washington, DC 20250-9200, by the 
October 17, 2003. Six (6) copies of the exceptions should be filed. All 
written submissions made pursuant to this notice will be made available 
for public inspection at the office of the Hearing Clerk during regular 
business hours (7 CFR 1.27(b)).
    The hearing notice specifically invited interested persons to 
present evidence concerning the probable regulatory and informational 
impact of the proposals on small businesses. While no evidence was 
received that specifically addressed these issues, some of the evidence 
encompassed entities of various sizes.
    The proposed amendments set forth below are based on the record of 
a public hearing held at Salt Lake City, Utah, on April 16-19, 2002, 
pursuant to a notice of hearing issued February 26, 2002, and published 
March 4, 2002, (67 FR 9622) and a correction of notice of hearing 
issued March 14, 2002, and published March 19, 2002 (67 FR 12488).
    The material issues on the record of the hearing relate to:
    1. Simultaneous pooling of milk on a Federal and a State-operated 
milk order.
    2. Pooling Standards of the Western Order.
    a. Supply plant performance standards.
    b. Cooperative supply plant performance standards.
    c. Standards for Producer milk.
    d. Proprietary bulk tank handler provision.
    e. Establishing pooling standards for ``State-units.''
    3. Marketwide Service Payments.
    4. Pooling provision clarifications.
    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

    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

    Two proposals, published in the hearing notice as Proposals 1 and 
10, seeking to exclude the same milk from being simultaneously pooled 
on the Pacific Northwest and Western orders and any State-operated 
order which provides for marketwide pooling, should be adopted 
immediately. The practice of pooling milk on a Federal order and 
simultaneously pooling the same milk on a State-operated order has come 
to be referred to as ``double dipping''. The Pacific Northwest and 
Western orders do not currently prohibit milk to be simultaneously 
pooled on the order and a State-operated order that provides for 
marketwide pooling. Proposals 1 and 10 were offered by Northwest Dairy 
Association (NDA), a cooperative association that markets the milk of 
their dairy-farmer members in the Pacific Northwest and Western milk 
marketing areas.
    A witness appearing on behalf of NDA, testified that double dipping 
not only creates disorderly conditions in California, it also results 
in competitive inequities in Federal milk order areas. The NDA witness 
explained that once minimal pool qualification standards are met, milk 
pooled via this manner rarely is delivered to a Federal order marketing 
area.
    The NDA witness provided evidence indicating that in 2001, over 
$4.5 million was diverted from the Western Order pool and the producer 
blend price was reduced by an average of 10 cents per hundredweight 
(cwt) through double dipping. The witness was of the opinion that milk 
pooled through double dipping provided no service or delivery of milk 
from California yet the California milk receives the benefit of the 
Western order's blend price.
    The NDA witness testified that there was no evidence of double 
dipping presently occurring on the Pacific Northwest order. However, 
the witness was of the opinion that the Pacific Northwest order would 
be targeted. The witness drew this conclusion on the premise that as 
soon as the double dipping loophole is closed in other orders, 
California milk will be pooled on orders that do not yet prohibit the 
practice.
    Two witnesses, one representing Gossner Foods, Inc. (Gossner), an 
ultra high temperature (UHT) fluid milk processor located in Utah, and 
the second, Utah Dairymen's Association (UDA), a cooperative located in 
Utah, also provided testimony in support of Proposal 10. The witnesses 
concurred that by eliminating double dipping,

[[Page 49377]]

producers pooled on the order would benefit financially and enhance 
their ability to stay in business.
    A witness representing River Valley Milk Producers Inc. (River 
Valley), a dairy farmer cooperative located in Southwestern Idaho, 
testified in support of eliminating double dipping. The witness was of 
the opinion that producers from outside of the marketing area should 
meet pooling standards by demonstrating actual performance in supplying 
the Western marketing area as a condition for pooling their milk and 
receiving the blend price. However, the witness stressed that producer 
milk which already participates in a State marketwide pool should be 
prohibited from participating in a Federal order pool.
    The Commissioner of the Utah Department of Agriculture and Food 
testified in support of eliminating double dipping on the Western milk 
order. The witness testified that increasing volumes of California milk 
are diluting the Class I utilization of the market and lowering the 
blend price paid to producers. The witness found this to be patently 
unfair and stressed that double dipping lowers the income of Utah dairy 
farmers.
    Three dairy farmers from Utah testified in support of prohibiting 
double dipping. These witnesses stated that double dipping on the 
Western order has had a significant negative impact on their pay 
prices. They maintained that it is unfair and wrong for dairy farmers 
to have their milk price reduced as a result of California milk being 
pooled on the order. One dairy farmer witness also added that the loose 
pooling provisions of the Western Order have resulted in unwarranted 
financial gain to those who do not supply the Class I milk market of 
the Western marketing area. This witness indicated that this 
contributed to the financial ruin of a quarter of Western Order dairy 
farmers over the past four years.
    There was no direct opposition to eliminating or preventing double 
dipping. However, a witness testifying on behalf of the Dairy Farmers 
of America (DFA), a dairy farmer cooperative that markets the milk of 
their members in both orders and in most other Federal milk orders 
offered their own proposals. These proposals were published in the 
hearing notice as Proposals 2, 3, 4, 5, 6, 7, 8, and 9, and are 
offered, said the witness, to address broader pooling standards and 
concerns rather than focusing on the single pooling issue of double 
dipping. These proposals are discussed later in this decision.
    For nearly 70 years, the Federal government has operated the milk 
marketing order program. The law authorizing the use of milk marketing 
orders, the Agricultural Marketing Agreement Act of 1937 (AMAA), as 
amended, provides authority for milk marketing orders as an instrument 
which dairy farmers may voluntarily opt to use to achieve objectives 
consistent with the AMAA and that are in the public interest. An 
objective of the AMAA, as it relates to milk, was the stabilization of 
market conditions in the dairy industry. The declaration of the AMAA is 
specific: ``the disruption of the orderly exchange of commodities in 
interstate commerce impairs the purchasing power of farmers and 
destroys the value of agricultural assets which support the national 
credit structure and that these conditions affect transactions in 
agricultural commodities with a national public interest, and burden 
and obstruct the normal channels of interstate commerce.''
    The AMAA provides authority for employing several methods to 
achieve more stable marketing conditions. Among these is classified 
pricing which entails pricing milk according to its use by charging 
processors differing 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 provided for in the AMAA were 
employed in establishing prices under Federal milk orders, some 
important market stabilization goals were achieved. The most often 
recognized goal was the near elimination of ruinous pricing practices 
of handlers competing with each other on the basis of the price they 
paid dairy farmers for milk and in price concessions made by dairy 
farmers. The need for processors to compete with each other on the 
price they paid for milk was significantly reduced because all 
processors are charged the same minimum amount for milk, and processors 
had assurance that their competitors were paying the same value-
adjusted minimum price.
    The AMAA also authorizes the establishment of uniform prices to 
producers as a method to achieve stable marketing conditions. 
Marketwide pooling has been adopted in all Federal orders because of 
its superior features of providing equity to both processors and 
producers, thereby helping to prevent disorderly marketing conditions. 
A marketwide pool, using the mechanism of a producer settlement fund to 
equalize on the use-value of milk pooled on an order, meets that 
objective of the AMAA of ensuring uniform prices to producers supplying 
a market.
    The California State milk order program clearly has objectives 
similar to those of the AMAA. Exhibits presented at the hearing 
indicate that the California State order program has a long history in 
the development and evolution of a classified pricing plan and in 
providing equity in pricing to handlers and producers. Important as 
classified pricing has been in setting minimum prices, the issue of 
equitable returns to producers for milk could not be satisfied by only 
the use of a classified pricing plan. Some California plants had higher 
Class I fluid milk use than did others and some plants processed little 
or no fluid milk products. As with the Federal order system, producers 
who were fortunate enough to be located nearer Class I processors had 
been receiving a much larger return for their milk than producers 
shipping to plants with lower Class I use or to plants whose main 
business was the manufacturing of dairy products. Over time, disparate 
price differences grew between producers located in the same production 
area of the state which, in turn, led to disorderly marketing 
conditions and practices. These included producers who became 
increasingly willing to make price concessions with handlers by 
accepting lower prices and in paying higher charges for services such 
as hauling. Contracts between producers and handlers were the norm, but 
the contracts were not long-term (rarely more than a single month) and 
could not provide a stable marketing relationship from which the dairy 
farmers could plan their operations.
    In 1967, the California State legislature passed and enacted the 
Gonsalves Milk Pooling Act. The law provided the authority for the 
California Agriculture Secretary to develop and implement a pooling 
plan, which was implemented in 1968. The California pooling plan 
provides for the operation of a State-wide pool for all milk that is 
produced in the State and delivered to California pool plants. It uses 
an equalization fund that equalizes prices among all handlers and sets 
minimum prices to be paid to all producers pooled on the State order. 
While the pooling plan details vary somewhat from pooling details under 
the Federal order program, the California pooling

[[Page 49378]]

objectives are basically identical to those of the Federal program.
    It is clear from this review of the Federal and California State 
programs that the orderly marketing of milk is intended in both 
systems. Both plans provide a stable marketing relationship between 
handlers and dairy farmers and both serve the public interest. It would 
be incorrect to conclude that the Federal and California milk order 
programs have differing purposes when the means, mechanisms, and goals 
are so nearly identical. In fact, the Federal order program has 
precedent in recognizing that the California State milk order program 
has marketwide pooling. Under milk order provisions in effect prior to 
milk order reform, and under Sec.  1000.76(c), a provision currently 
applicable to all Federal milk marketing orders, the Department has 
consistently recognized California as a State government program with 
marketwide pooling.
    Since the 1960's the Federal milk order program recognized the harm 
and disorder that resulted to both producers and handlers when the same 
milk of a producer was simultaneously pooled on more than one Federal 
order. When this occurs, producers do not receive uniform minimum 
prices, and handlers receive unfair competitive advantages. The need to 
prevent ``double pooling'' became critically important as distribution 
areas expanded and orders merged. The issue of California milk, already 
pooled under its State-operated program and able to simultaneously be 
pooled under a Federal order, has essentially the same undesirable 
outcomes that Federal orders once experienced and subsequently 
corrected. It is clear that the Pacific Northwest and Western orders 
should be amended to prevent the ability of milk to be pooled on more 
than one order when both orders employ marketwide pooling.
    There are other State-operated milk order programs that provide for 
marketwide pooling. For example, New York operates a milk order program 
for the western region of that State. A key feature explaining why this 
State-operated program has operated for years alongside the Federal 
milk order program is the exclusion of milk from the State pool when 
the same milk is already pooled under a Federal order. Because of the 
impossibility of the same milk being pooled simultaneously, the Federal 
order program has had no reason to specifically address double dipping 
or double pooling issues, the disorderly marketing conditions that 
arise from such practice, or the primacy of one regulatory program over 
another. The other states with marketwide pooling similarly do not 
double-pool Federal order milk.
    The record testimony and evidence show milk pooled on the Western 
order originates from locations distant from the area. However, this 
decision acknowledges that with the advent of the economic incentives 
for California milk to be pooled on the Western order and, at the same 
time, enjoy the benefits of being pooled under California's State-
operated milk order program, more milk has come to be pooled on the 
order that has no legitimate association with the integral milk 
supplies of Western order pool plants. The association at present has 
been made possible only through what some market participants describe 
as a regulatory loophole. The record also supports concluding that the 
Pacific Northwest order should be similarly amended to preclude the 
ability to simultaneously pool the same milk on the order if the same 
milk is already pooled on a State-operated order that provides for 
marketwide pooling.
    California milk should only be eligible for pooling on the Pacific 
Northwest and Western orders when it is not pooled on the California 
State order and when it meets the Pacific Northwest and Western order 
pooling standards. It is the ability of milk from California to 
``double dip'' that is a source of disorderly marketing conditions for 
the Western order and should be preempted in the case of the Pacific 
Northwest order.
    Proposals 1 and 10 offer a reasonable solution for prohibiting the 
same milk to draw pool funds from Federal and State marketwide pools 
simultaneously. It is consistent with the current prohibition against 
the same milk pooling simultaneously in more than one Federal order 
pool. Adoption of Proposals 1 and 10 will not establish any barrier to 
the pooling of milk from any source that actually demonstrates 
performance in supplying the Pacific Northwest and Western market's 
Class I needs. In this regard, adoption of Proposals 1 and 10 
specifically prohibit the practice of double dipping which two other 
proposals (Proposals 2 and 9), discussed below, do not.
    The amendatory language provided below has been modified by the 
Department but nevertheless accomplishes the intent of Proposals 1 and 
10. As published in the hearing notice, amendatory language was 
proposed for the Producer definition of the Pacific Northwest and 
Western milk orders. The amendments adopted in this tentative decision 
to prohibit double dipping has been made in each respective order's 
Producer milk definition. This change is made because milk marketing 
orders do not regulate producers in their capacity as producers. 
Additionally, the amendatory language adopted is consistent with that 
adopted in other milk orders where the practice of double dipping has 
been eliminated.

2. Pooling Standards of the Western Order

    Testimony summaries regarding the pooling standards for the Western 
order are provided individually. The discussion of all pooling 
standards and the decision's findings and conclusions regarding pooling 
standards is presented immediately after testimony summary for d below.
a. Supply Plant Performance Standards
    An inadequacy of the supply plant pooling provision contributes to 
the inappropriate pooling of milk and the unwarranted erosion of the 
blend price received by those producers who are regularly and 
consistently serving the fluid demands of the Western marketing area. 
Proposal 3, offered by DFA, seeking adoption of a ``net shipments'' 
standard for supply plant deliveries to the order's distributing plants 
for the purpose of meeting the shipping standard, should be adopted 
immediately. A net shipments standard would exclude from a supply 
plant's qualifying shipments any transfer or diversion of bulk fluid 
milk products made by the distributing plant receiving the shipment.
    The Western marketing order currently provides automatic pool plant 
status during the 6-month period of March through August for supply 
plants provided they were pool plants during each of the immediately 
preceding months of September through February. The current order does 
not provide for a net shipments method in determining if the supply 
plant performance standard has been met.
    A witness appearing on behalf of DFA testified that a net shipments 
provision for pooling purposes would better ensure that milk physically 
received and retained at a distributing plant for Class I use would be 
a superior method of determining if the supply plant performance 
standard is being met. According to the witness, this feature would 
deter a supply plant from physically shipping milk into the facilities 
of a distributing plant only to have the milk reloaded and moved to 
another plant for uses other than Class I. The witness added that a net 
shipments provision also would ensure that milk being pooled was

[[Page 49379]]

demonstrating a service in meeting the Class I needs of the market.
    A witness appearing on behalf of NDA testified in opposition to 
adopting Proposal 3. The witness was of the opinion that the net 
shipments provision for supply plants was designed and intended to 
reduce the amount of milk that could be pooled on the Western order. 
The witness explained that no other Federal milk order contained a net 
shipments provision because pool supply plants and other reserve plants 
provide a benefit by balancing the needs of the fluid market and 
pooling milk in a way that prevent disorderly marketing conditions from 
arising.
    A witness representing Gossner opposed the establishment of a net 
shipment provision for the Western order. Additionally a witness 
representing Glanbia Foods, Inc. (Glanbia), and another witness 
representing Davisco Foods International (Davisco), offered testimony 
in opposition to the adoption of a net shipments provision for the 
Western order. Glanbia is a handler that operates two cheese plants 
located in the Western marketing area, and Davisco is a handler that 
operates proprietary cheese plants located in Idaho and in Minnesota. 
The Glanbia witness testified that a net shipments provision would 
preclude many producers located in Idaho from being pooled on the 
Western order when their milk is not needed for fluid use even though 
it is available and stands ready and able to supply the Class I needs 
of the marketing area. The Gossner witness indicated that market 
alternatives for pooling milk within the Western region were already 
very limited and the adoption of this proposal could entirely eliminate 
them. The Davisco witness testified that a net shipments provision 
would limit their ability to pool their producers and viewed this as 
essentially erecting barriers to market entry on the Western order.
    A witness representing KDK, Inc. (KDK), a fluid processing plant 
located in Draper, Utah, also presented testimony in opposition to 
adopting a net shipments provision. The witness indicated that their 
plant transfers milk to exempt plants and, on occasion, to producer-
handlers. The witness was of the opinion that adoption of a net 
shipments provision would result in milk currently associated with 
their plant no longer being able to be pooled because their supplier 
would be unable to meet the shipping standard.
b. Cooperative Supply Plant Performance Standards
    A proposal, published in the hearing notice as Proposal 4, seeking 
to increase the cooperative supply plant pooling standard should not be 
adopted. Proposal 4, offered by DFA, seeks to increase the cooperative 
supply plant performance standard that specifies the percentage of 
cooperative producer milk that needs to be physically received by a 
distributing plant of the Western order to 50 percent in order for the 
cooperative supply plant to qualify as a pool plant of the order.
    The Western order currently provides for a cooperative association 
that operates a plant as a unique type of supply plant. The cooperative 
association's plant must be located within the marketing area and at 
least 35 percent of the milk which the cooperative association handles 
is physically received at a Western order distributing plant during the 
month or the immediately preceding 12-month period.
    In offering Proposal 4, the DFA witness testified that while no 
plants currently utilize the cooperative supply plant provision, some 
cooperatively-owned manufacturing plants may seek such status if DFA's 
other proposal to decrease the diversion limit standard, (discussed 
later in this decision) is adopted. The witness maintained that 
increasing the cooperative supply plant shipping standard is intended 
to ensure that plants opting for this type of pool plant status would 
be demonstrating adequate performance in supplying the Class I needs of 
the Western marketing area.
    Opposition to Proposal 4 was offered by witnesses representing 
Glanbia, Gossner, and Davisco. The Glanbia witness was of the opinion 
that the proposal was designed to prevent market entry and 
participation by dairy farmers who may be attracted to the Western 
market. The Gossner witness stated that producers should have as many 
options as possible in marketing their milk because it brings about 
increased competition and may also bring better milk prices. The 
Davisco witness asserted that Proposal 4 would only decrease 
opportunities for Idaho milk from becoming pooled on the Western order. 
This would, the witness said, pressure Idaho producers to find other 
means by which to pool their milk on the Western order.
    The NDA witness also testified in opposition to Proposal 4. The 
witness was of the opinion that increasing the cooperative supply plant 
performance standard would create competitive inequities and may even 
create new disorderly marketing conditions. The witness indicated that 
to be able to utilize the cooperative supply plant provision, Class I 
sales would need to be increased and to accomplish this, a cooperative 
would likely need to engage in price cutting tactics to win sales from 
competitors. The witness predicted that an outcome such as this would 
be disorderly.
c. Standards for Producer Milk
    A proposal, published in the hearing notice as Proposal 6, seeking 
to lower the diversion limit standard for producer milk should not be 
adopted. This proposal was offered by DFA. Specifically, Proposal 6 
seeks to reduce the diversion limit for producer milk to nonpool plants 
to 70 percent of total receipts. The Western order currently provides a 
diversion limit standard for producer milk of 90 percent of total milk 
receipts. The DFA witness was of the opinion that the pooling of milk 
which does not demonstrate a service in supplying the needs of the 
Class I market is inconsistent with Federal order policy. Returns to 
producers who regularly supply the Class I market are unnecessarily 
reduced when milk is pooled that cannot demonstrate such service, the 
witness asserted.
    The DFA witness also testified that milk which does not actually 
supply the Class I needs of the market, but shares in the revenue 
generated from fluid milk sales, is an indicator of faulty pooling 
provisions. The witness asserted that if the current pooling standards 
are not amended, local dairy farmers who are actually supplying the 
local Class I market will continue to receive lower returns.
    The DFA witness testified that the Western order's current 
diversion limit standard of 90 percent is inadequate because it allows 
milk to be pooled on the order than can not demonstrate a regular and 
consistent service in meeting the needs of the fluid market. According 
to the witness, it is appropriate to lower the limit on the amount of 
producer milk that pool plants can divert to nonpool plants.
    The Commissioner of the Utah Department of Agriculture and Food 
testified in support of Proposal 6. The witness reasoned that by 
lowering the diversion limit standard, prices paid to Utah dairy 
farmers would increase. Lowering the diversion limit standard would 
increase the relative Class I use of milk pooled on the order, 
explained the witness. It would also allow Utah family dairy farms to 
compete fairly, and be compensated more equitably for the service they 
provide, the witness

[[Page 49380]]

said. If the diversion limit standard is not lowered, cautioned the 
witness, dairy farms in Utah will continue to be endangered and result 
in harming Utah's rural communities.
    A witness representing UDA, testified in support of Proposal 6. 
This witness stated that reducing the diversion limit standard from 90 
to 70 percent would result in similar diversion limit standards in 
effect in other Federal milk orders such as the Arizona-Las Vegas, 
Mideast, Appalachian, Central and Southwest orders. The UDA witness 
added that lowering the diversion limit standard also would remedy some 
of the financial damage borne by Utah and Idaho milk producers 
resulting from the reform of Federal milk marketing orders in 2000.
    A witness representing River Valley also testified in support of 
lowering the Western order's diversion limit standard. The witness, 
however, supported lowering the standard to 80 percent, not the 70 
percent proposed by DFA. The witness expressed concern about the 
consequences of easily pooling large volumes of milk on the Western 
order. The witness provided evidence showing that the amount of milk 
pooled on a daily basis increased by more than 5.5 million pounds 
between October and November 2001--a 58 percent increase. The witness 
hypothesized that an 80 percent diversion limit would continue to allow 
handlers the ability to efficiently divert milk to nonpool plants while 
also providing a smoother regulatory transition for regulated handlers.
    Seven Utah dairy farmers provided testimony supporting the lowering 
of the diversion limit standard. The witnesses were of the opinion that 
the pooling standards adopted as part of Federal milk order reform 
created loopholes that have caused some handlers and producers to be 
financially rewarded without the need to demonstrate actual shipments 
of milk for the Class I market. As a result, the witnesses said, dairy 
farmers have observed that their blend price is lower than it otherwise 
would be. These witness asserted that dairy farmers should not be 
permitted to collect money from their fellow dairy farmers if they do 
not demonstrate performance in supplying the fluid needs of the market.
    The witness representing Gossner testified in opposition to 
Proposal 6. The witness was of the opinion that great disruption would 
occur to their business operation if the diversion limit standard is 
lowered. The witness explained that a large portion of their Class I 
sales are contracts with governmental agencies. The contracts they hold 
are bid annually, the witness said, and the loss of a contract would 
make it very difficult for them to meet the proposed pooling standards.
    The Gossner witness also asserted that DFA holds a virtual monopoly 
in supplying the Class I market in Utah and Southern Idaho. In this 
regard, the witness advocated the view that dairy farmers are best 
served when they have more than one buyer for their milk and that 
Gossner is trying to provide producers an alternative Class I market 
for their milk. The witness stated that producers would benefit by 
maintaining a 90 percent diversion limit standard because it leaves 
Gossner with the flexibility to add producers for pooling as needed and 
maintain the flexibility to react to changing marketing conditions.
    A witness representing Glanbia also testified against lowering the 
diversion limit standard. The witness was of the opinion that the 
proposed change was an unwarranted attempt to disassociate much of 
Idaho's historically pooled milk supply because it is not needed for 
fluid use. If diversion limits are decreased, the witness said, a large 
portion of their producer milk would not be pooled. If a producer 
wished to remain pooled, the witness explained, they would be forced to 
join a cooperative whose supply is large enough to meet the proposed 
standards. If adopted, the witness concluded, the new diversion limit 
standard would inhibit a producer's ability to choose how to market 
their milk and remain pooled on the order.
    The witness representing Magic Valley Milk Producer Association, 
Inc. (Magic Valley), testified in opposition to Proposal 6. Magic 
Valley is a milk marketing cooperative located in Idaho that has 
producer members in both Idaho and Utah. The witness was of the opinion 
that adoption of Proposal 6 would severely hinder Magic Valley's 
ability to pool the milk of their producers thereby placing them at a 
competitive disadvantage in their ability to market the milk of their 
members at competitive prices. For example, the witness explained, with 
the 90 percent diversion limit standard in effect from January 2001 to 
March 2002, the monthly volume of milk pooled on the order averaged 
396,900,356 pounds. If a 70 percent standard had been in effect over 
that same time period, the witness contrasted, the monthly average 
volume of milk that could have been pooled would have been 285,410,615 
pounds. The witness concluded from this example that on average, about 
111,489,741 pounds would no longer have been able to be pooled.
    The witness representing Davisco, also testified in opposition to 
lowering the diversion limit standard. The witness was of the opinion 
that disorderly marketing in the Western market already exists and 
attributed the disorder to the pooling standards adopted as part of 
Federal milk order reform. Since January 1, 2000, the witness 
emphasized, Davisco had been unable to pool two-thirds of their 
producers. The witness concluded that their inability to pool all of 
their producers would be remedied by raising the diversion limit 
standard to 95 percent or by suspending the diversion limit standard 
altogether.
    The witness representing NDA also testified in opposition to 
lowering the diversion standard. Not only would there be less milk that 
could be pooled, the witness noted, but the current Western order 
already pools far less than the total milk production that occurs 
within the marketing area. The witness concluded from this observation 
that lowering the diversion limit standard would only make it more 
difficult for producers to pool their milk on the order. The witness 
was of the opinion this would give rise to disorderly marketing 
conditions in a number of forms including the use of ``price 
incentives'' serving to undercut the published Class I price, the 
potential expansion or creation of new bottling operations which could 
be used to ``raid'' the retail market, the ``paper-pooling'' of milk on 
other Federal milk orders, and being charged a fee for the benefit of 
being pooled on the order.
    The NDA witness estimated that if Proposal 6 is adopted, 
approximately 150 million pounds, or about 38 percent of the monthly 
average volume of milk pooled in 2001 would no longer be pooled. This 
occurrence, according to the witness, would bring an immediate shift in 
the balance of economic power within the Western order. This result, 
together with the forms of disorderly conditions previously described 
cited above, the witness asserted, also would result in political 
reaction, Congressional review, and waning political support for the 
Federal milk order program.
    The NDA witness asserted that the practice of buying and selling 
pooling rights is an important indicator and cause of disorderly 
marketing conditions. The witness explained that this is because a 
person selling pooling rights can gain competitive advantages not 
available to others thus compounding disorderly marketing conditions. 
Finally, the witness concluded, no justification exists for lowering 
the diversion limit standard of

[[Page 49381]]

the Western order, adding that perhaps the standard should be raised.
    A proposal, published in the hearing notice as Proposal 7, seeking 
to establish a ``netting'' provision for diverted milk from a pool 
distributing plant by the amount of any transfers out of that plant, 
should be adopted immediately. This proposal was offered by DFA. The 
Western order does not currently contain this provision as a feature of 
how the order defines producer milk.
    The DFA witness testified that by adopting a ``netting'' provision, 
a distributing plant's ability to divert milk would be based on the 
actual amount of milk retained by the distributing plant. According to 
the witness, this feature would deter a plant from physically receiving 
milk into the facility only to have milk reloaded and moved to another 
plant for uses other than Class I. The witness added that the provision 
would ensure that milk being pooled was demonstrating a service in 
meeting the Class I needs of the market.
    Many witnesses testified in opposition to Proposal 7. A witness 
representing NDA was of the opinion that if adopted, the provision 
would reduce the ability to pool milk by limiting the ability of a 
plant to maximize the use of its pooling base. Witnesses representing 
Davisco, Glanbia, Gossner and Magic Valley all concurred that adoption 
of DFA's proposal would have a dramatic negative impact on their 
ability to pool the milk of their producers. The witnesses were all of 
the opinion that Proposal 7's only real purpose was to prevent many 
Idaho producers from having their milk pooled on the Western order.
d. Proprietary Bulk Tank Handler Provision
    A proposal, published in the hearing notice as Proposal 5, seeking 
to eliminate the Proprietary bulk tank handler (PBTH) provision of the 
Western order, should be adopted immediately. The proposal was offered 
by DFA. The PBTH provision is a pooling provision and feature of only 
the Western order. It provides for a person who operates a plant that 
produces Class II, III, and IV milk products, and who operates a truck 
that picks up the milk of a producer, to be a regulated handler of the 
order.
    According to the DFA witness, PBTH's are able to pool large volumes 
of milk that do not actually service the Class I market. The witness 
testified that PBTH milk is received into a plant to qualify it for 
pooling and is subsequently pumped back out of the plant to be 
delivered to a manufacturing plant. The witness emphasized that milk 
pooled through a PBTH in this manner never services the Class I market.
    The DFA witness testified, however, that their major concern with 
the PBTH provision was that some entities are purchasing milk below the 
order's minimum prices from PBTH's. The witness asserted that this 
results in inequity among handlers in the minimum prices they pay for 
milk and undermines the key pricing principle of the Federal milk order 
system of uniform prices to handlers. The witness testified that in 
removing the PBTH provision handlers currently using the provision 
could be able to pool their milk by utilizing other provisions that are 
contained in the order.
    In brief, DFA asserted that the record evidence clearly 
demonstrated that large volumes of milk are pooled on the order through 
the PBTH provision, but demonstrates only minimal service to the Class 
I market. DFA noted that under the current diversion limit standard, a 
PBTH can pool 20 loads of milk for every one load used in actual Class 
I production. More importantly, DFA stressed that this one load of milk 
is sold at less than minimum class prices.
    The DFA brief maintained that pooling milk is not an entitlement. 
Instead, milk must demonstrate actual performance to the Class I 
market. DFA concluded that because the order contains other provisions 
that are more performance based through which a PBTH could qualify for 
pooling, the PBTH provision should be removed.
    A witness representing River Valley testified in support of 
eliminating the PBTH provision. The witness viewed the provision as a 
loophole in the Western order's pooling provisions that allows 
manufacturing plants to qualify milk for pooling on the order that does 
not demonstrate any reasonable service in supplying the Class I needs 
of the market. The witness asserted that PBTH's have used financial 
incentives to solicit producers located near distributing plants to 
become patrons and then use those nearby producers to qualify all the 
milk of a PBTH. Because the producers were already delivering milk to 
the distributing plant, the witness emphasized, no actual new milk is 
being made available to service fluid demand, but the amount of milk 
that can be pooled is significantly increased. The witness noted that 
this milk is being used in Class II, III, and IV uses. The witness 
characterized pooling milk in this way as fostering disorderly 
marketing conditions which justifies removing the PBTH provision from 
the Western order.
    A witness representing NDA testified in opposition to Proposal 5. 
The NDA witness said that the PBTH provision is provided as a more 
efficient way for some handlers to operate their plants. The witness is 
of the opinion that the goal of Proposal 5 is to make it more difficult 
for some producers to be pooled. According to the witness, 
accomplishing this end should not be a reason for its removal from the 
order. If there are problems with the PBTH provision it should be 
modified, not eliminated, the witness stressed.
    A brief filed by NDA also expressed opposition to removing the PBTH 
provision. NDA agreed that all pool plants should be accountable to the 
pool at minimum class prices and that different wholesale prices for 
milk between handlers can create disorderly marketing conditions. 
Nevertheless, NDA also held there would be no guarantee that uniformity 
of pricing between handlers would actually be achieved by eliminating 
the provision. NDA stressed that it is a handler's need to pool milk 
that is the catalyst for selling milk below class prices.
    Eliminating the PBTH provision would, maintained NDA, agitate the 
problem and cause handlers to seek other ways to pool milk. Rather than 
its elimination, the NDA witness advocated modification of the 
provision to address its shortcomings.
    Two witnesses representing Glanbia and Davisco also testified in 
opposition to Proposal 5. These witnesses stated that if adopted, the 
proposal would create market disorder and discontent for some Idaho 
producers who would no longer be able to pool their milk on the Western 
order. The Davisco witness asserted that Federal order reform adopted 
performance standards that could not accommodate pooling the milk 
supply of the consolidated Western order, even though this milk supply 
stood willing and available to serve the Class I needs of the market. 
Under the current standards, Davisco is able to pool less than half of 
the producers they did prior to milk order reform, the witness said. 
The Davisco witness estimated that if the PBTH provision is removed, 
they would be able to pool less than 5 percent of their milk supply.
    The Davisco witness emphasized that their milk stands ready to 
supply the Class I market, but is has never been needed for the fluid 
market. In this regard, the witness was of the opinion that producers 
should not be penalized by not having the ability to pool their milk 
simply because it is not needed for Class I use.

[[Page 49382]]

    The Glanbia witness was of the opinion that eliminating the PBTH 
provision would inhibit the ability and freedom of dairy farmer to 
choose how to market their milk. The witness thought this may also 
force producers to join a cooperative to assure that their milk would 
be pooled on the order, an outcome consistent with lowering the 
diversion limit standard. A brief submitted by Glanbia and Davisco 
continued stressing their opposition to Proposal 5. Their brief 
maintained, among other things, that elimination of the PBTH provision 
would prevent many producers, who stand willing to service the Class I 
market, from being able to pool their milk on the Western order.
    A witness representing Stoker Wholesale, Inc., a pool distributing 
plant located in Idaho, testified against eliminating the PBTH 
provision. The witness indicated that if adopted, the proposal would 
jeopardize their ability to remain competitive with other processors in 
the marketing area. The Stoker witness indicated that their main 
concern was that the removal of the PBTH provision would allow a 
dominant cooperative to gain too much market power. In this regard, the 
witness foreshadowed that Stoker might be forced to purchase milk from 
a dominant cooperative and along with paying the order's minimum class 
prices, would also be forced to pay other charges dictated by the 
cooperative. Such an outcome would be devastating to Stoker and hinder 
their ability to compete in the Western marketing area, concluded the 
witness.
    Two Idaho dairy farmers testified in opposition to Proposal 5. The 
farmers were of the opinion that if the PBTH provision was eliminated, 
farmers would have to pool their milk through a cooperative. One 
witness testified that this would eliminate the number of outlets 
available to farmer's to market their milk and put the market's milk 
supply in the hands of fewer entities. The witness also noted that 
while the fewer entities controlling the milk supply could raise their 
prices, it would also result in higher retail costs to consumers. The 
witnesses were also of the opinion that the low milk prices they are 
facing arise from complicated economic and political factors and are 
not caused by dairy farmers having the opportunity to pool their own 
milk.
    A proposal, published in the hearing notice as Proposal 11, seeking 
to reach a balance of assuring handler equity while retaining the PBTH 
provision should not be adopted. Proposal 11 was offered by Meadow Gold 
Dairies (Meadow Gold). Meadow Gold is a dairy processor regulated in 
the Western order. Because this decision eliminates the PBTH provision 
from the Western order, amending the provision is rendered moot.
    Two companion proposals to Proposal 11, also offered by Meadow 
Gold, published in the hearing notice as Proposals 12 and 13, should 
not be adopted. Proposals 12 and 13 offer language for the Western 
order to address payment obligation changes which would arise from 
modifying the PBTH provision. Because the PBTH provision is eliminated 
from the order, the need for these proposals are also rendered moot.
    Similarly, another proposal, published in the hearing notice as 
Proposal 14, offered by the Market Administrator to provide additional 
clarity to the PBTH definition, is not adopted. The need to provide 
additional clarity to a provision that is being eliminated is also 
rendered moot.
    A witness representing Meadow Gold viewed Proposals 11 and 13 as a 
remedy to the alternative to removing the PBTH provision and Proposal 
12 as ensuring that pool plants must pay PBTH's at least the order's 
minimum class prices. According to the Meadow Gold witness, their major 
concern with the PBTH provision is that plants buying from a PBTH are 
not required to pay minimum class prices. Proposals 11 and 13 would 
ensure that milk is considered producer milk at the pool plant and that 
the pool plant is responsible for accounting to the pool and paying 
producers, the witness said. This would give the MA authority to verify 
payment to the Producer-Settlement Fund and to the producers supplying 
the PBTH, the witness said.
    The witness maintained that the AMAA provides authority for the 
Secretary to ensure that handlers are paying minimum class prices for 
their milk purchases. The witness indicated that Meadow Gold would not 
object to removing the PBTH provision if the Department determined that 
the problems arising from the provision would be more appropriately 
remedied by its removal from the order.
    A witness representing NDA, testified that while NDA understood the 
current problems regarding the PBTH provision, they had yet to 
determine their position on Proposals 11 through 13. However, in their 
post-hearing brief, NDA expressed support of Proposals 11, 12 and 13. 
They acknowledged that Proposals 11 and 13 are presented as a 
``package'' and viewed Proposal 12 as an alternative. NDA asserted that 
they had no preference as to which approach should be adopted and 
expressed confidence in the Department for rendering its decision on 
how best to address the PBTH issue.
    A witness representing DFA testified that while they support 
evidence presented in support of Proposals 11 through 13, DFA believed 
that removal of the PBTH provision was a more appropriate course of 
action.
    Witnesses representing Glanbia, Davisco, and Stoker testified in 
opposition to Proposal 11. The witnesses stated that they could not 
support this proposal because it would essentially regulate 
transactions between one type of handler to another while leaving other 
similar transactions such as bulk transfers, packaged milk transfers, 
custom bottling, tolling arrangements, and pooling fees untouched. The 
Davisco witness was also of the opinion that the AMAA does not grant 
the Secretary authority to regulate handler-to-handler transactions. 
The Stoker witness opposed Proposals 11 through 13 for the same reasons 
given in opposing the removal of the PBTH provision.
    The witness representing NDA supported Proposal 14, stating that 
they were of the opinion that the Market Administrator's proposal would 
assist in the interpretation and administration of the order.
    The pooling standards of all milk marketing orders 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 the 
milk of those producers who are reasonably associated with the market 
as a condition for receiving the order's blend price. The pooling 
standards of the Western order are represented in the Pool Plant, 
Producer, Proprietary bulk tank handler, and the Producer milk 
provisions of the order. Taken as a whole, these provisions are 
intended to ensure that an adequate supply of milk is available to meet 
the Class I needs of the market. In addition, these provisions provide 
the criteria for identifying those producers whose milk is reasonably 
associated with the market and thereby share in the marketwide 
distribution of proceeds arising primarily from Class I sales. Pooling 
standards of the Western order are based on performance, specifying 
standards that, if met, qualify a producer, the milk of a producer, or 
a plant to share in the benefits arising from the classified pricing of 
milk.
    Pooling standards that are performance-based provide the only 
viable method for determining those eligible to share in the marketwide 
pool. This is because it is the added value from the Class I use of 
milk that adds

[[Page 49383]]

additional income, and it is reasonable to expect that only those 
producers who consistently bear the costs of supplying the market's 
fluid needs should be the ones to share in the distribution of pool 
proceeds. Pooling standards are also needed to identify the milk of 
those producers who are providing service in meeting the Class I needs 
of the market. If the pooling provisions do not reasonably accomplish 
these aims, the proceeds that accrue to the marketwide pool from fluid 
milk sales are not properly shared with the appropriate producers. The 
result is the unwarranted lowering of returns to those producers who 
actually incur the costs of servicing and supplying the fluid needs of 
the market.
    Similarly, pooling standards should provide for those features and 
accommodations that reflect the needs of proprietary handlers and 
cooperatives in providing the market with milk and dairy products. When 
the use of a pooling feature provision deviates from its intended 
purpose and gives rise to conditions that are contrary to the 
objectives of classified pricing and marketwide pooling as articulated 
in the AMAA, it is appropriate to re-examine the need for continuing to 
provide that feature as a necessary component of the pooling standards 
of the order. Because one of the objectives of classified pricing is 
assuring that all similarly situated handlers regulated under the terms 
of an order pay the same classified use-value, a pooling feature which 
can be used to circumvent this objective should be considered as 
inappropriate for inclusion in the order.
    The Final Decision of Federal milk order reform examined and 
discussed the various pooling standards and features of the pre-reform 
orders for their applicability in new and larger consolidated milk 
orders. The pooling standards and features adopted for the consolidated 
Western Order were designed to reflect and retain those standards and 
features of the pre-reform orders so as not to cause a significant 
change and indeed to provide for the continued pooling of milk that had 
been pooled by those market participants.
    The record provides evidence to conclude that a performance 
standard feature for supply plants is needed. Additionally, a pooling 
feature in defining producer milk is also needed to provide an 
appropriate limit on diversions by distributing plants. The lack of 
adequately defining how much milk a distributing plant can divert 
contributes to the inappropriate pooling of milk through the diversion 
process. Some milk being pooled under the Western order by diversion is 
not an integral reserve supply of the distributing plant diverting 
milk. These inadequacies inappropriately pool milk classified at lower-
valued uses which results in an unwarranted lowering of the blend price 
to those producers whose milk actually and consistently demonstrates 
service to the Class I needs of the market.
    The record evidence also provides strong evidence that the 
Proprietary bulk tank handler provision gives rise to disorderly 
marketing conditions because the order is unable to establish minimum 
prices that are uniform among regulated handlers, a requirement of 
Section 608c(5) of the AMAA. The record clearly reveals that this 
pooling feature of the Western order is being used as a means to pool 
milk that could not otherwise be pooled and allows for the sale of milk 
for Class I use below the order's minimum Class I price. While this 
provision served its purpose in the pre-reform Southwest Idaho-Eastern 
Oregon order, its purpose and usefulness for the larger consolidated 
Western order can no longer be justified.
    This decision finds that some milk is being pooled and is receiving 
the benefit of the Western order blend price without demonstrating 
actual and consistent service in supplying the Class I needs of the 
Western milk marketing area. This finding is attributed to inadequate 
pooling standard features needed to accomplish the intent of the 
order's pooling standards. The pooling provisions provided in the Final 
Decision of milk order reform established pooling standards and pooling 
features that envisioned the needs of the market participants resulting 
from the consolidation of two pre-reform milk marketing areas to form 
the current Western milk marketing area. The milk order reform Final 
Decision did not intend or envision that the pooling standards and 
pooling features adopted would result in the sharing of Class I 
revenues with those persons, or the milk of those persons, who would 
not be demonstrating a measure of service in fulfilling the Class I 
needs of the Western marketing area. The reform Final Decision also did 
not envision that the PBTH provision, carried into the consolidated 
Western order from the pre-reform Southwestern Idaho-Eastern Oregon 
order, would enable entities to sell milk for fluid use below the 
order's minimum Class I price.
    The Final Decision of milk order reform examined and discussed 
various pooling standards and features of the pre-reform orders for 
applicability in a new, larger consolidated milk order. The pooling 
standards and features adopted for the Western order were intended to 
reflect and retain those standards and features of the pre-reform 
orders so as to not cause a significant change, and indeed to provide 
for the continued pooling of milk that had been pooled by market 
participants. The 35 percent shipping standard for supply plants 
adopted as part of milk order reform was slightly higher than that of 
the Southwestern Idaho-Eastern Oregon order and was slightly lower than 
that provided for in the Great Basin order. Nevertheless, the adopted 
35 percent standard was intended to result in no milk losing its 
association in the larger consolidated order due to a change in a 
regulatory provision.
    With regard to producer milk, the Final Decision of milk order 
reform established a limit for producer milk diversions to nonpool 
plants at 90 percent. This standard is identical to the diversion limit 
then applicable in the Southwestern Idaho-Eastern Oregon order, but is 
higher than the applicable standards of 75 percent for cooperatives and 
70 percent for proprietary handlers in the Great Basin order. The 90 
percent standard was determined to be appropriate for the consolidated 
Western order because it would permit all milk then associated with the 
market that was not needed at pool plants to continue to be pooled and 
priced under the order. The 90 percent standard was also adopted 
because it was envisioned that it would provide handlers more 
flexibility to efficiently move milk and not preclude most producers 
associated with either the Great Basin or Southwestern Idaho-Eastern 
Oregon orders from having their milk pooled in the new consolidated 
order.
    This decision agrees with DFA and those who expressed support for 
adopting Proposals 3 and 7. The record reveals that because the Western 
order does not account for milk deliveries from supply plants to 
distributing plants on a net basis, more milk is being pooled on the 
order through the diversion process than can be considered a integral 
reserve supply of distributing plants. The act of physically receiving 
milk certainly demonstrates performance in supplying the fluid needs of 
the market. However, by pumping the same amount, or some portion of the 
milk physically received out of a distributing plant for other than 
Class I use, undermines the intent and importance of the performance 
standard. In practice, the unloading and reloading of milk creates an 
artificial base for pooling additional milk that cannot otherwise meet 
the specified performance standards.

[[Page 49384]]

    Similarly, a netting provision on producer milk diverted from 
distributing plants is also needed to properly identify the milk of 
those producers that actually supply the marketing area's fluid needs. 
A ``net diversions'' provision is warranted for inclusion as part of 
the Producer milk definition of the order because the current diversion 
limit standard of the order does not properly limit the amount of milk 
that can be pooled by distributing plants. The diversion limit standard 
as it relates to supply plants is based on receipts. For supply plants, 
diverted milk is a component of the total receipts of the plant. For 
distributing plants, however, the pooling basis is determined by the 
amount of milk physically received. If a supply plant delivery no 
longer becomes a pool-qualifying shipment because shipments are 
determined on a net basis, then that milk should not be considered as 
physically received by the distributing plant and should therefore not 
be included as part of the basis for calculating the amount of milk 
that can be diverted from the distributing plant.
    This decision finds that the adoption of Proposals 3 and 7 is 
warranted. Milk deliveries to distributing plants will be limited to 
milk transferred or diverted and physically received by distributing 
pool plants, less any transfers or diversions of bulk fluid milk 
products from the distributing plant. Relying on net shipments and net 
diversions for determining pool qualifying deliveries to distributing 
plants strengthens the principle of performance in supplying the Class 
I needs of the market as a condition for pooling diverted milk. 
Determining shipments and diversions on a net basis should also more 
appropriately identify the milk of those producers that should share in 
the distribution of Class I revenue by receipt of the order's blend 
price.
    The record evidence does not support increasing the cooperative 
supply plant performance standard above the current 35 percent of 
receipts as sought in Proposal 4. The proposal is presented on the 
assumption that this decision would lower the diversion limit standard 
to 70 percent, and that in doing so, may cause entities to seek this 
special pool plant status. This proposal is rejected on the basis that 
the record does not reveal why this standard should be different from 
the ``regular'' supply plant standard. Additionally, speculation of how 
entities may choose to pool milk on the order is not, in the context of 
proposing a change in this performance standard, an appropriate basis 
upon which to make a change.
    Providing for the diversion of milk is a desirable and needed 
feature of an order because it facilitates the orderly and efficient 
disposition of milk not needed for fluid use. When producer milk is not 
needed by the market for Class I use, some provision should be made for 
milk to be diverted to nonpool plants for use in manufactured products 
and still be pooled and priced under the order. Additionally, it is 
also necessary to safeguard against excessive milk supplies becoming 
associated with the market through the diversion process.
    In the context of this proceeding, milk diverted by distributing 
plants is milk not physically received at the plants. While diverted 
milk is not physically received, it is nevertheless an integral part of 
the milk supply of the diverting distributing plant. If such milk is 
not part of the integral supply of the diverting plant, then that milk 
should not be associated with the diverting plant and should not be 
pooled. Associating more milk than is actually part of the legitimate 
reserve supply of the diverting plant unnecessarily reduces the 
potential blend price paid to dairy farmers who service the market's 
Class I needs.
    Diversion limit standards that are too high can open the door for 
pooling more milk on the market. The record does not support lowering 
the diversion limit below the current 90 percent standard. As explained 
above, the lack of a netting provision for diversions by distributing 
plants has resulted in the inappropriate pooling of milk on the Western 
order. In this regard, the record evidence cannot attribute more milk 
being pooled on the order because the diversion limit standard is too 
high.
    These findings, together with the original intents of the order's 
pooling provisions, may be altered if marketing conditions warrant 
their adjustments. In this regard, the Western order provides the 
Market Administrator with the authority to make needed adjustments to 
the shipping and diversion limit standards of the order.
e. Establishing Pooling Standards for State-Units
    Two Proposals, published in the hearing notice as Proposals 2 and 
9, seeking to establish pooling units organized and reported as 
``State-units'' in the Pacific Northwest and Western milk orders 
respectively, should not be adopted. These proposals were offered by 
DFA. Specifically, the proposals would specify that milk from those 
States located outside of the States and counties that comprise the 
Western and Pacific Northwest marketing areas would be reported 
separately in units, organized by the State from which the milk 
originates. Each State-unit would need to meet the performance 
standards applicable for supply plants as a condition for being pooled 
on the orders. Neither order currently provides separate pooling 
standards for milk located outside of each respective marketing area.
    The DFA witness explained that Proposals 2 and 9 address broader 
pooling issues by establishing reasonable performance standards for 
milk located outside of market areas and do not just simply prohibit 
the practice of double dipping as discussed earlier in this decision. 
In this regard, the witness indicated that Proposals 2 and 9 are 
offered to address the pooling of large volumes of milk from locations 
distant from the Pacific Northwest and Western marketing areas. 
According to the witness, large volumes of milk are being pooled 
without meeting any reasonable measures of performance in serving the 
Class I needs of the market.
    The DFA witness testified that since the implementation of milk 
order reform, organizations like DFA have made purposeful pooling 
decisions to maximize returns and have engaged in the practice of 
double dipping to accomplish this end. Nevertheless, the witness 
acknowledged that the practice of double dipping is unfair and should 
be corrected. The witness continued to explain that the impact of 
double dipping on an order's blend price paled in comparison to the 
blend price impact caused by inadequate pooling provisions that do not 
properly stress the importance of demonstrating performance in 
regularly and consistently supplying the Class I needs of a marketing 
area. Additionally, the witness expressed the opinion that the 
relationship between the Class I pricing surface and the pooling 
provisions was fundamentally changed as part of milk order reform. 
Specifically, the witness noted, the movement to a nationally 
coordinated Class I pricing structure that makes adjustments to the 
Class I differential level by county accounts for the changed 
relationship.
    The DFA witness stressed that while the new Class I price structure 
has a relationship to the blend price paid to producers, the connection 
between milk value and the distance of milk from the market are not 
adequately linked. The disconnect is further aggravated by the adoption 
of faulty pooling standards that run counter to three key criteria used 
during milk order reform in establishing the Class I price structure, 
the witness asserted. The three key criteria include, the witness said, 
sending appropriate marketing signals,

[[Page 49385]]

recognizing the value of milk at location, and recognizing handler 
equity with regard to raw product costs. The witness expressed the 
opinion that these outcomes were not anticipated by the Department.
    The DFA witness drew from the Final Decision on milk order reform 
which detailed how milk marketing orders should pool milk and for 
identifying those producers whose milk should be eligible for pooling 
in the consolidated orders. In this regard, the witness particularly 
noted the Department's rejection of ``open pooling'' and that pooling 
provisions be performance oriented. According to the witness, the lack 
of pooling provisions that are sufficiently performance oriented result 
in volumes of ``distant'' milk pooled on orders that do not and would 
not ever perform any reasonable and consistent servicing of the Class I 
needs of a market in a manner similar to ``local'' milk. The witness 
asserted that inadequate performance standards have lowered producer 
blend prices and have caused the type of disorderly marketing 
conditions intended to be avoided by the Class I price structure 
criteria cited above.
    The DFA witness concluded Proposals 2 and 9 are justified because 
their adoption would more appropriately link milk value and where milk 
is located relative to a market. According to the witness, these 
proposals are also superior to the adoption of other proposals 
(Proposals 1 and 10) because those proposals are aimed solely at 
eliminating or preventing double dipping. DFA asserted that Proposals 2 
and 9 provide: (1) appropriate recognition to the concept of a 
marketing area where handlers compete for the majority of their Class I 
sales and the importance of performance as a condition for having milk 
eligible for pooling, (2) a measurable economic outcome consistent with 
Federal milk marketing order principles which do not prohibit pooling 
milk if the economics for doing so are positive, and (3) an adequate 
and reasonable safeguard for low Class I utilization markets in which 
lower diversion limits or higher performance standards for supply 
plants might otherwise cause hardship.
    A NDA witness indicated an initial lack of understanding on the 
ramifications of Proposals 2 and 9 and expected to articulate a 
position in post-hearing briefs. The witness did express 
dissatisfaction on how milk order reform addressed the location value 
of milk and its relationship to pooling provisions in general. In their 
post-hearing brief, NDA indicated that they can support adoption of 
Proposal 9. However, NDA viewed Proposal 9 as having limited 
usefulness. With regard to Proposal 2, NDA's brief concluded that a 
State-unit pooling approach for out-of-area milk was not appropriate 
for the Pacific Northwest order because it does not adequately address 
the issue of double dipping. The brief was of the opinion that other 
proposals under consideration in another rulemaking proceeding for the 
Pacific Northwest order were more appropriate for that marketing order.
    A witness representing River Valley testified in support of 
Proposal 9. The witness was of the opinion that local producer milk 
should not be used as a basis for qualifying distant milk for pooling 
on the order. The witness testified that the milk of producers from 
outside the market should be expected to meet the pooling standards of 
the order in the way local milk does as a condition for receiving the 
order's blend price.
    Opposition to Proposal 9 was presented by Glanbia and Davisco. The 
Glanbia witness viewed the proposal as being designed to build barriers 
to market entry by dairy farmers located in and out of the Western 
order milkshed who otherwise may be attracted to pool their milk on the 
Western order.
    The record does not support the adoption of performance standards 
for pooling milk on the Pacific Northwest or Western orders on the 
basis of its location or as the proponent and supporters of Proposal 2 
and 9 describe as State-units. The marketing conditions of the Pacific 
Northwest and Western orders do not exhibit the need to require 
additional performance standards for milk located outside of the 
marketing area beyond those adopted in this decision. Accordingly, all 
plants, regardless of location, may become eligible to have the milk of 
producers pooled on the Pacific Northwest and Western orders by meeting 
the performance standards specified for the various types of pool 
plants.
    It is not important who provides the milk for Class I use or from 
where this milk originates. The order boundaries of the Pacific 
Northwest and Western orders were not intended to limit or define which 
producers, which milk of those producers, or which handlers could enjoy 
the benefits of being pooled on those orders. What is important and 
fundamental to all Federal orders, including the Pacific Northwest and 
Western orders, is assuring an adequate supply of milk to meet the 
market's fluid needs, the proper identification of those producers who 
supply the market, and an equitable means of compensating those 
producers from the market's pool proceeds.
    A significant portion of the testimony received at the hearing 
implicated the current Class I price structure as an important factor 
that has caused the inappropriate pooling of milk across the Federal 
order system including the Pacific Northwest and Western orders. The 
current price structure was faulted specifically as not providing 
appropriate location adjustments for milk as had been the case prior to 
the implementation of milk order reform.
    Testimony indicated that the lack of location adjustments 
effectively undermines the pooling standards of the order. The decision 
to pool milk was once based on the economics of transporting milk--
comparing the costs of transporting milk to the benefit of receiving 
the order's blend price. Testimony indicates this factor is as 
important as the pooling standards of the order. Critics of the Class I 
pricing structure were of the opinion that placing a relative value on 
milk based on its distance from the market provides appropriate pooling 
discipline and fosters orderly marketing conditions.
    The reform of milk orders, contained in the Recommended Decision 
(63 FR 4802) and Final Decision (64 FR 16026), made purposeful changes 
to the Class I pricing structure. In this regard, a fixed adjustment 
for Class I milk prices was provided for every county location in the 
48 contiguous states to create a national Class I pricing surface for 
the system of milk marketing orders. Changing this characteristic of 
the pricing structure ensured handlers that regardless of the marketing 
order by which regulated, the applicable prices they are charged would 
be the same.
    Such changes made a more clear distinction between the value milk 
has at location and the pooling standards of any individual marketing 
order. Location adjustments were never a part of the pooling standards 
of the Pacific Northwest and Western orders or any other milk marketing 
order. Instead, location adjustments were an integral part of the 
pricing provisions of the order. However, it is acknowledged that how 
location adjustments were applied tended to strengthen the 
effectiveness of the order's pooling standards. Pooling standards have 
always established the criteria for pooling milk on the order and 
continue to do so in the consolidated milk marketing orders. With the 
Class I price surface adopted by order reform, more direct reliance is 
placed on pooling standards to identify the milk that should be pooled 
on the order.

[[Page 49386]]

    Pooling provisions of all orders are intended to define appropriate 
standards for the prevailing marketing conditions in assuring that the 
marketing area would be supplied with a sufficient supply of milk for 
fluid use and to identify those producers--and the milk of those 
producers--that actually service the Class I needs of the market. The 
issue before the Department regarding pooling is the consideration of 
amendments that will provide standards for determining reasonable 
performance measures and to more properly identify the milk that 
regularly and consistently supplies the market's Class I needs.
    As discussed earlier, the pooling standards of the consolidated 
Federal milk orders, including the Pacific Northwest and Western 
orders, were not intended to exclude any milk from being pooled on any 
order, provided the fluid needs of a marketing area are served. The 
reform of Federal milk orders rejected the concept of open pooling, and 
provided that each market would pool the milk that actually 
demonstrates a reasonable level of serving the fluid needs of the 
market as reflected in those order's pooling standards. The 
determination of the boundaries of the Pacific Northwest and Western 
marketing areas was guided by identifying the common characteristics of 
the predecessor orders that could be consolidated and to promulgate a 
marketing order containing provisions to provide for orderly marketing 
conditions. The consolidation of the pre-reform orders into the current 
Pacific Northwest and Western orders was not intended to determine 
those areas from which milk should, or should not, be obtained to serve 
the market.
    The adoption of revised pooling standards, specifically adoption of 
netting provisions for supply plant performance standards and 
diversions from distribution plants and the removal of the PBTH 
provision in this decision, should assure milk will be available for 
the market's fluid needs and properly identify the milk of those 
producers that actually demonstrates consistent service to the market's 
Class I needs. Therefore the proposal for establishing State units is 
unnecessary for the Pacific Northwest and Western orders. Additionally, 
the State-unit proposal does not adequately or specifically prohibit 
the practice of double dipping in either the Pacific Northwest or 
Western orders. Accordingly, Proposals 2 and 9 are not adopted.

3. Marketwide Service Payments

    A proposal, published in the hearing notice as Proposal 8, seeking 
to establish a marketwide service payment provision in the form of a 
transportation and assembly credit for the Western order, should not be 
adopted. Currently, the Western order does not provide for 
transportation and assembly credits or any other form of a marketwide 
service payment.
    Proposal 8, offered by DFA, specifically seeks to modify the 
Western order by establishing a transportation credit and an assembly 
credit. The transportation credit would provide $0.0032 per mile for 
each hundredweight(cwt) of milk delivered to a pool distributing plant 
when the farm supplying the plant is located over 80 miles away. The 
credit would only apply to milk picked up directly from a farm located 
within the marketing area, processed at a Class I pool plant located in 
the order, with payment being made to the milk supplying producer or 
cooperative. The assembly credit of ten cents per cwt would apply to 
milk delivered to pool distributing plants. The proposal also 
recognizes that the reporting requirements of the order would also need 
amending to properly administer the transportation and assembly credit 
provision.
    A witness appearing on behalf DFA testified that establishing a 
transportation and assembly credit is necessary to recoup costs 
associated with supplying the Western marketing area's Class I market. 
The witness argued that some producers are providing services which 
benefit the entire marketplace, but are unable to recoup the cost of 
these services from the marketplace. The DFA witness was of the opinion 
that the Federal milk marketing order system is structured to allow 
producers servicing the Class I needs of the marketing area to 
equitably share in the revenues generated in that marketing area. 
However, the DFA witness was also of the opinion that in the Western 
order, the costs of supplying the Class I market is noticeably higher 
for some, explaining that not all producers equitably share the cost of 
servicing the Class I market.
    The DFA witness stated that large supplies of milk produced in the 
Western order are, in general, located far from distributing plants. As 
such, the witness continued, the costs of transporting milk to pool 
distributing plants are higher than in other Federal orders. The 
witness explained that a transportation credit would provide producers 
a means to recoup some of the cost of transporting milk to a pool 
distributing plant when it must be shipped long distances.
    The DFA witness testified that because of weekly and monthly 
fluctuations in demand for Class I milk, supplying extra milk for Class 
I use or processing excess milk not needed for Class I use imposes 
extra costs for manufacturing plants that have the capacity to process 
this milk. The witness presented an example that detailed a DFA 
manufacturing plant's 2001 average daily processing capacity, referred 
to as ``throughput.'' The example illustrated that plant throughput was 
noticeably lower in the fall months of 2001, ranging from a low of 
795,951 pounds per day to a high of 1,269,379 pounds per day in the 
spring months. Given such significant variation, the witness said, it 
is necessary that the market have the available balancing capacity to 
accommodate such fluctuations in demand.
    The DFA witness also noted that a plant's manufacturing costs have 
a direct correlation to the plant's capacity that is idled during 
certain times of the year. During months of low Class I demand, 
explained the witness, manufacturing plants operate at full capacity 
resulting in lower per unit costs. However, during months of high fluid 
demand, the witness continued, manufacturing plants operate at less 
than full capacity but incur costs similar to when plants are operated 
at capacity. It is the costs arising from idled or unused capacity that 
is borne by a few pool manufacturing plants of the order while their 
service in balancing the Class I demand of the marketplace benefits the 
entire market, explained the witness. Therefore, concluded the witness, 
an assembly credit would help producers who are providing a service of 
marketwide benefit the means to recoup some of the costs they are 
unable to generate from the marketplace. The DFA witness estimated that 
the blend price would be reduced by approximately 2.2 cents per cwt if 
the assembly credit was adopted.
    Two Utah dairy farmers testified in support of Proposal 8. The 
farmers stated that since Federal order reform, the Class I utilization 
in Utah has dramatically decreased which in turn has had a direct 
negative impact on the blend price Utah farmers receive. The dairy 
farmers were of the opinion that the adoption of an assembly and 
transportation credit would help restore some of the lost revenue 
represented by a lower blend price.
    A witness appearing on behalf of Stoker testified in support of 
Proposal 8. Another witness appearing on behalf of

[[Page 49387]]

the Utah Farmers Union, also testified in support of Proposal 8.
    A witness appearing on behalf of NDA, testified in opposition to 
Proposal 8. The witness stated that currently only one Federal order, 
the Upper Midwest order, has an assembly credit provision, stressing 
that the marketing conditions of that order are quite different from 
the Western order. In the Upper Midwest, the witness explained, farms 
tend to be significantly smaller and it is necessary to assemble milk 
from numerous farms in order to ``assemble'' a full tanker load of 
milk. The witness contrasted this by explaining that most farms in the 
Western order are large enough that a single farm is capable of 
shipping a full tanker load of milk. The witness concluded that it was 
therefore not appropriate to provide credit for the assembly of milk 
that does not need ``assembling.''
    The NDA witness also asserted that the justification given for an 
assembly credit--the need to recover some of the balancing costs of the 
market--is itself inconsistent. Typically, the witness said, balancing 
functions are provided by manufacturing plants for processing milk when 
it is not needed at Class I plants. However, explained the witness, the 
proposed assembly credit would apply to those who deliver milk to Class 
I facilities and would not be limited to manufacturing plants that 
actually perform the balancing function. In this regard, the witness 
indicated, a credit for balancing should instead be paid to those pool 
plants that actually provide a balancing function and not to those who 
supply milk to Class I facilities.
    The witness concluded that NDA was not aware of any difficulty of 
Western order distributing plants obtaining necessary milk supplies 
where milk must be assembled into a full tanker load before delivery to 
a pool distributing plant. Money should not be drawn from the Western 
order producer-settlement fund as an assembly credit because no 
``assembly'' actually takes place, emphasized the witness.
    The NDA witness also opposed the transportation credit feature of 
Proposal 8. While there are transportation credits in three other 
Federal orders, the witness said, they function in a different manner 
than that proposed for the Western order. In the Upper Midwest order 
transportation credits only apply to transfers of milk between plants, 
stated the witness, and not to direct shipments from farms to 
distributing plants. The witness also noted that in two southern orders 
where Class I use is high, transportation credits were established to 
fund bringing milk into the marketing area to fulfill all Class I 
needs. However, the witness contrasted, Western order Class I 
utilization is relatively low and does not exhibit the need for a 
transportation credit to encourage shipments of milk to satisfy Class I 
demands.
    The NDA witness also asserted that the Western order already has a 
$0.30 difference in the level of applicable Class I differentials to 
encourage milk shipments towards population centers where most 
distributing plants are located. Accordingly, the witness maintained, 
there is no need to provide an additional incentive for moving milk to 
pool distributing plants.
    The witness also predicted that adopting a transportation credit 
would give rise to disorderly marketing conditions because it would 
provide an incentive for milk located farther away to be delivered to 
distributing plants while milk located nearer would then need to be 
shipped to manufacturing plants located farther away. The NDA witness 
concluded that there are no cost disadvantages that would be corrected 
by providing the Western order with transportation and assembly credit 
provisions.
    Two witnesses appearing on behalf of KDK and Gossner testified in 
opposition to Proposal 8. The witnesses were of the opinion that 
Western order producers should not be paying for assembly credit for a 
few pool plants that are unable to recoup their costs of balancing. 
They also stressed that it was inappropriate to establish a 
transportation credit to encourage the movement of distant milk when 
producers located nearer to pool distributing plants are willing and 
able to supply the market without a credit.
    A witness appearing on behalf of River Valley also testified in 
opposition to Proposal 8. The witness stated that the order's blend 
price should not be reduced to pay for transportation and assembly 
credits. Instead, the witness said, Class I plants should pay their 
milk suppliers a direct delivery differential in lieu of a 
transportation credit and that the level of the Class I differential 
should be increased. In that way, the witness explained, the blend 
price paid to producers would be unaffected.
    Objections by several parties were raised regarding evidence 
presented in support of some features of Proposal 8. The objecting 
parties argued that the testimony given equating balancing costs with 
assembly costs was beyond the scope of the hearing notice. The 
objectors moved that such testimony be stricken from the record. 
Objectors maintained that assembly costs and balancing costs are two 
entirely different concepts. Because the concept of balancing was not 
noticed in the hearing notice, the objectors stressed, interested 
parties were not prepared to discuss the concept of balancing. The 
objectors also maintained that in previous Federal order hearings where 
assembly credits were proposed, balancing functions and associated 
costs were never presented in a context for explaining the need for an 
assembly credit.
    The presiding Administrative Law Judge (ALJ) overruled the 
objection to strike evidence regarding balancing costs from the record. 
However, the presiding ALJ found that balancing is fundamentally 
different from assembly. Accordingly, the ALJ ruled the assembly credit 
feature of Proposal 8 as being beyond the scope of the proposal 
presented in the hearing notice.
    The record lacks sufficient evidence for the adoption of the 
transportation and assembly credit proposal. The relative low Class I 
utilization of the Western marketing area characterizes the order as a 
market in which manufacturing predominates. In this regard, the record 
makes clear that the Class I needs of the market are sufficiently 
supplied, even though certain pooling provisions lack needed features. 
In fact, the record evidence which supports the adoption of a net 
diversions feature for diverted milk by distributing plants effectively 
undercuts the argument that somehow additional compensation or 
incentive should be provided to attract milk to distributing plants 
beyond that provided by the level of the Class I differential. If 
distributing plants engage in the behavior of physically receiving milk 
and then pumping the milk out of the plant and diverting it for uses 
other than Class I, it is abundantly clear that distributing plants are 
certainly adequately supplied with milk.
    This decision finds that the evidence and testimony for the 
adoption of Proposal 8 has more to do with proponents responding to the 
Western order's improper and inadequate features of pooling provisions 
than in explaining how the ``services'' of a few are providing benefit 
for the entire market. Improper or inadequate features of pooling 
provisions do not provide justification for adopting this sort of 
mechanism by which to compensate for lower producer revenue resulting 
from improper or inadequate features of pooling provisions.
    Additionally, this decision agrees with the ALJ's determination 
that the assembly credit portion of Proposal 8 is beyond the scope of 
the hearing notice. For this reason alone the proposal warrants denial. 
As indicated by NDA,

[[Page 49388]]

the concept of ``assembly'' is far different from the concept of 
``balancing.'' This is especially so given the context of testimony 
explaining balancing and balancing costs as a reflection of unused 
manufacturing plant capacity while diminimus testimony on milk assembly 
and assembly costs was offered.

4. Pooling Provision Clarifications

    Proposals 15 and 16, seeking to clarify order language in the 
Producer and Producer milk provisions of the Western order, should be 
adopted immediately. Currently the Producer provision does not list 
Class II milk at nonpool plants as a type of utilization that a handler 
can opt to not pool without causing a producer to lose producer status. 
The current Producer milk definition does not allow a dairy farmer who 
lost producer status to again qualify milk for diversion until delivery 
of one days' milk production has been received at a pool plant.
    Proposal 15, offered by the Western order Market Administrator 
(MA), seeks to modify the Producer provision by adding Class II 
utilization of milk at a non-pool plant as a type of milk utilization a 
handler may elect to not pool without jeopardizing the producer status 
of that producer. Proposal 16, also offered by the MA, seeks to modify 
the Producer milk provision by allowing a dairy farmer to re-qualify 
for producer status in the same manner that a dairy farmer who has 
never qualified can have their milk pooled on the order.
    Witnesses appearing on behalf of DFA and NDA testified in support 
of Proposals 15 and 16. The witnesses stated that both proposals make 
necessary changes to the order that reflect current market needs. 
Furthermore, said the witnesses, the changes will assist in the 
interpretation and administration of the order. Neither proposal 
received opposition testimony.

5. Determination of Emergency Marketing Conditions

    Evidence presented at the hearing establishes that the pooling 
standards of the Western order are inadequate and have resulted in the 
unwarranted erosion of the blend price received by producers who are 
serving the Class I needs of the market and should be changed on an 
emergency basis. The unwarranted erosion of such producers' blend 
prices stems, in part, from improper performance standard features as 
they relate to pool supply plants, from inadequate features as they 
relate to producer milk diversions by distributing plants, and the PBTH 
provision. These shortcomings of the pooling provisions have allowed 
milk that does not provide consistent and reasonable service in meeting 
the needs of the Class I market to be pooled on the Western order. 
Additionally, the PBTH provision gives rise to disorderly marketing 
conditions and renders the order unable to establish prices to handlers 
that are uniform. Consequently, it is determined that emergency 
marketing conditions exist and the issuance of a recommended decision 
is therefore being omitted. The record clearly establishes a basis as 
noted above for amending the order on an interim basis and the 
opportunity to file written exceptions to the proposed amended order 
remains.
    Evidence presented at the hearing also establishes that California 
milk pooled simultaneously on the California State-operated order and a 
Federal order, a practice commonly referred to as double dipping, would 
render the Pacific Northwest milk order and does render the Western 
milk order unable to establish prices that are uniform to producers and 
to handlers and contributes to the unwarranted erosion of milk prices 
to Western producers and the erosion of milk prices that could result 
to producers supplying milk for the Pacific Northwest marketing area 
should double dipping occur in the Pacific Northwest marketing area.
    In view of this situation, an interim final rule amending the 
orders should be issued as soon as the procedures are completed to 
determine the approval of producers whose milk is pooled in both the 
Pacific Northwest and Western orders.

Rulings on Proposed Findings and Conclusions

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

General Findings

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

Interim Marketing Agreement and Interim Order Amending the Orders

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

Determination of Producer Approval and Representative Period

    The month of April 2002 is hereby determined to be the 
representative period for the purpose of ascertaining whether the 
issuance of the order, as amended and as hereby proposed to be amended, 
regulating the handling of milk in the Pacific Northwest and Western 
marketing areas is approved or favored by producers, as defined under 
the terms of the orders as hereby proposed to be amended, who during 
such representative period were engaged in the production of milk for 
sale within the aforesaid marketing areas.

[[Page 49389]]

List of Subjects in 7 CFR Part 1124 and 1135

    Milk marketing orders.

    Dated: August 8, 2003.
A.J. Yates,
Administrator, Agricultural Marketing Service.

Interim Order Amending the Orders Regulating the Handling of Milk in 
the Pacific Northwest and Western Marketing Areas

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

Findings and Determinations

    The findings and determinations hereinafter set forth supplement 
those that were made when the orders were first issued and when 
amended. The previous findings and determinations are hereby ratified 
and confirmed, except where they may conflict with those set forth 
herein.
    (a) Findings. A public hearing was held upon certain proposed 
amendments to the tentative marketing agreements and to the orders 
regulating the handling of milk in the Pacific Northwest and Western 
marketing areas. The hearing was held pursuant to the provisions of the 
Agricultural Marketing Agreement Act of 1937, as amended (7 U.S.C. 601-
674), and the applicable rules of practice and procedure (7 CFR part 
900).
    Upon the basis of the evidence introduced at such hearing and the 
record thereof, it is found that:
    (1) The said orders as hereby amended, and all of the terms and 
conditions thereof, will tend to effectuate the declared policy of the 
Act;
    (2) The parity prices of milk, as determined pursuant to Section 2 
of the Act, are not reasonable in view of the price of feeds, available 
supplies of feeds, and other economic conditions which affect market 
supply and demand for milk in the aforesaid marketing 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 orders as hereby amended regulate 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, 
the marketing agreements upon which a hearing has been held.

Order Relative to Handling

    It is therefore ordered, that on and after the effective date 
hereof, the handling of milk in the Pacific Northwest and Western 
marketing areas shall be in conformity to and in compliance with the 
terms and conditions of the orders, as amended, and as hereby amended, 
as follows:

PART 1124--MILK IN THE PACIFIC NORTHWEST MARKETING AREA

    1.The authority citation for 7 CFR part 1124 and 1135 continues to 
read as follows:

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

    2. Section 1124.13 is amended by:
    (a) Revising the introductory text; and
    (b) Adding a new paragraph (f).
    The revision and addition read as follows:


Sec.  1124.13  Producer milk.

    Except as provided for in paragraph (f) of this section, Producer 
milk means the skim milk (or skim milk equivalent of components of skim 
milk), including nonfat components, and butterfat in milk of a producer 
that is:
* * * * *
    (f) Producer milk shall not include milk of a producer that is 
subject to inclusion and participation in a marketwide equalization 
pool under a milk classification and pricing program imposed under the 
authority of a State government maintaining marketwide pooling of 
returns.

PART 1135--MILK IN THE WESTERN MARKETING AREA

    3. Section 1135.7 is amended by adding a new paragraph (c)(5).
    The addition reads as follows:


Sec.  1135.7  Pool plant.

* * * * *
    (c) * * *
    (5) Shipments used in determining qualifying percentages shall be 
milk transferred or diverted to and physically received by distributing 
pool plants, less any transfers of bulk fluid milk products from such 
distributing pool plants.
* * * * *


Sec.  1135.11  [Removed]

    4. Section 1135.11 is removed.
    5. Section 1135.13 is amended by:
    (a) Revising the introductory text.
    (b) Revising paragraph (d)(1);
    (c) Redesignating paragraph (d)(3) through (d)(6) as (d)(4) through 
(d)(7);
    (d) Adding a new paragraph (d)(3); and
    (e) Adding a new paragraph (e).
    The revisions and additions read as follows:


Sec.  1135.13  Producer milk.

    Except as provided for in paragraph (e) of this section, Producer 
milk means the skim milk (or skim milk equivalent of components of skim 
milk), including nonfat components, and butterfat in milk of a producer 
that is:
* * * * *
    (d) * * *
    (1) Milk of a dairy farmer shall not be eligible for diversion 
unless at least one day's milk production of such dairy farmer has been 
physically received as producer milk at a pool plant and the dairy 
farmer has continuously retained producer status since that time. If a 
dairy farmer loses producer status under the order in this part (except 
as a result of a temporary loss of Grade A approval), the dairy 
farmer's milk shall not be eligible for diversion unless one day's milk 
production has been physically received as producer milk at a pool 
plant during the month;
* * * * *
    (3) Receipts used in determining qualifying percentages shall be 
milk transferred to, diverted to, or delivered from farms of producers 
pursuant to Sec.  1000.9(c) and physically received by plants described 
in Sec.  1135.7(a) or (b), less any transfers of diversions of bulk 
fluid milk products from such pool distributing plants.
* * * * *
    (e) Producer milk shall not include milk of a producer that is 
subject to inclusion and participation in a marketwide equalization 
pool under a milk classification and pricing program imposed under the 
authority of a State government maintaining marketwide pooling of 
returns.
    6. Section 1135.12 is amended by:
    (a) Revising paragraph (b)(5).
    The revision reads as follows:


Sec.  1135.12  Producer.

* * * * *
    (b) * * *
    (5) A dairy farmer whose milk was received at a nonpool plant 
during the month from the same farm (except a nonpool plant that has no 
utilization of milk products in any class other than Class II, Class 
III, or Class IV) as other than producer milk under the order in this 
part or any other Federal order. Such a dairy farmer shall be known as 
a dairy farmer for other markets.
* * * * *

Marketing Agreement Regulating the Handling of Milk in Certain 
Marketing Areas

    The parties hereto, in order to effectuate the declared policy 
of the Act, and in accordance with the rules of practice and 
procedure effective thereunder (7 CFR part

[[Page 49390]]

900), desire to enter into this marketing agreement and do hereby 
agree that the provisions referred to in paragraph I hereof as 
augmented by the provisions specified in paragraph II hereof, shall 
be and are the provisions of this marketing agreement as if set out 
in full herein.
    I. The findings and determinations, order relative to handling, 
and the provisions of Sec. Sec. ------\1\ to ------, all inclusive, 
of the order regulating the handling of milk in the (---- Name of 
order --------) marketing area (7 CFR PART --\2\) which is annexed 
hereto; and
---------------------------------------------------------------------------

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

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

    \3\ Applicable section number.
---------------------------------------------------------------------------

    (a) Record of milk handled. The undersigned certifies that he/
she handled during the month of ------\4\ 2002, ------\5\ 
hundredweight of milk covered by this marketing agreement.
---------------------------------------------------------------------------

    \4\ Appropriate representative period for the order.
    \5\ Hundredweight poundage of milk.
---------------------------------------------------------------------------

    (b) Authorization to correct typographical errors. The 
undersigned hereby authorizes the Deputy Administrator, or Acting 
Deputy Administrator, Dairy Programs, Agricultural Marketing 
Service, to correct any typographical errors which may have been 
made in this marketing agreement.
    Sec. ------------\6\ Effective date. This marketing agreement 
shall become effective upon the execution of a counterpart hereof by 
the Secretary in accordance with Section 900.14(a) of the aforesaid 
rules of practice and procedure.
---------------------------------------------------------------------------

    \6\ Applicable section number.
---------------------------------------------------------------------------

    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. 03-20689 Filed 8-15-03; 8:45 am]
BILLING CODE 3410-02-P