[Federal Register Volume 69, Number 58 (Thursday, March 25, 2004)]
[Proposed Rules]
[Pages 15562-15583]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-6459]



[[Page 15561]]

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Part IV





Department of Agriculture





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Agricultural Marketing Service



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7 CFR Part 1001



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

  Federal Register / Vol. 69, No. 58 / Thursday, March 25, 2004 / 
Proposed Rules  

[[Page 15562]]


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DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Part 1001

[Docket No. AO-14-A70; DA-02-01]


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

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Proposed rule; recommended decision.

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SUMMARY: This decision recommends changes to the Northeast Federal milk 
marketing order based on the record of a public hearing held September 
10-13, 2002, in Alexandria, Virginia, to consider proposals to amend 
certain pooling and related provisions. Specifically, this decision 
recommends amendments that would establish year-round supply plant 
performance standards, exclude milk received by supply plants from 
producers not eligible to be pooled on the Northeast order from supply 
plant performance standards, remove the split-plant provision, 
establish a one-day touch base standard, establish explicit diversion 
limits for pool plants, prohibit the ability to pool the same milk on 
the milk order and a marketwide pool administered by another government 
entity, and grant authority to the market administrator to adjust the 
touch-base and diversion limit standards as market conditions warrant. 
Additional amendments that would amend reporting and payment date 
provisions are also recommended for adoption.

DATES: Comments must be submitted on or before May 24, 2004.

ADDRESSES: Comments (six copies) should be filed with the Hearing 
Clerk, United States Department of Agriculture, STOP 9200--Room 1083, 
1400 Independence Avenue, SW., Washington, DC 20250-9200, and you may 
also send your comments by the electronic process available at the 
Federal eRulemaking portal at http://www.regulations.gov.

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

SUPPLEMENTARY INFORMATION: This administrative action is governed by 
the provisions of Sections 556 and 557 of Title 5 of the United States 
Code and, therefore, is excluded from the requirements of Executive 
Order 12866.
    The amendments to the rules proposed herein have been reviewed 
under Executive Order 12988, Civil Justice Reform. They are not 
intended to have a retroactive effect. If adopted, the proposed 
amendments would not preempt any state or local laws, regulations, or 
policies, unless they present an irreconcilable conflict with this 
rule.
    The Agricultural Marketing Agreement Act of 1937, as amended (7 
U.S.C. 601-674), provides that administrative proceedings must be 
exhausted before parties may file suit in court. Under section 
608c(15)(A) of the Act, any handler subject to an order may request 
modification or exemption from such order by filing with the Secretary 
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 Secretary 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 
Secretary'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 September, 2002, there were 16,715 producers pooled on and 143 
handlers regulated by the Northeast order. Based on these criteria, 97 
percent of the producers and 71 percent of the handlers would be 
considered small businesses. The adoption of the amended pooling 
standards serve to revise and establish criteria that ensure the 
pooling of producers, producer milk, and plants that have a reasonable 
association with--and are consistently serving--the fluid milk needs of 
the Northeast milk marketing area. Criteria for pooling milk are 
established on the basis of performance standards that are considered 
adequate to meet the Class I fluid needs of the market and 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 amendments to the reporting and payment date provisions 
serve to streamline and simplify handler payments to the market 
administrator. The criteria established in the amended pooling 
standards and reporting and payment date provisions are applied in an 
equal fashion to both large and small businesses. Therefore, the 
Department has determined that 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 approved forms are routinely used in most business 
transactions. The forms require only a minimal amount of information 
which can be supplied without data processing equipment or a trained 
statistical staff. Thus, the information collection and reporting 
burden is relatively small. Requiring the same reports for all handlers 
does not significantly

[[Page 15563]]

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 July 26, 2002; published August 1, 2002 
(67 FR 49887).
    Supplemental Notice of Hearing: Issued August 14, 2002; published 
August 16, 2002 (67 FR 53522).

Preliminary Statement

    Notice is hereby given of the filing with the Hearing Clerk of this 
recommended decision with respect to proposed amendments to the 
tentative marketing agreement and the order regulating the handling of 
milk in the Northeast marketing area. This notice is issued pursuant to 
the provisions of the Agricultural Marketing Agreement Act and the 
applicable rules of practice and procedure governing the formulation of 
marketing agreements and marketing orders (7 CFR Part 900).
    Interested parties may file written exceptions to this decision 
with the Hearing Clerk, U.S. Department of Agriculture, STOP 9200--Room 
1081, 1400 Independence Avenue, SW., Washington DC 20250-9200, by May 
24, 2004. Six copies of the exceptions should be filed. All written 
submissions made pursuant to this notice will be made available for 
public inspection at the Office of the Hearing Clerk during regular 
business hours (7 CFR 1.27(b)).
    The proposed amendments set forth below are based on the record of 
a public hearing held at Alexandria, Virginia, on September 10-13, 
2002, pursuant to a Notice of Hearing issued July 26, 2002, and 
published on August 1, 2002, (67 FR 49887), and a Supplemental Notice 
of Hearing issued August 14, 2002, and published on August 16, 2002, 
(67 FR 53522).
    The material issues on the record of hearing relate to:
    1. Reporting and Payment Dates.
    2. Pooling standards of the marketing order:
    a. Performance standards for Supply Plants.
    b. Unit Pooling Standards for Distributing Plants.
    c. Standards for Producer Milk.
    3. Marketwide Service Payments.
    4. Conforming changes to the order.

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. Reporting and Payment Dates

    Several changes to the reporting and payment date provisions of the 
Northeast marketing order should be adopted. Specific recommended 
changes include: (1) Changing the submission date of monthly handler 
reports to on or before the 10th day of the month; (2) Announcing the 
producer price differential (PPD) and statistical uniform price on or 
before the 14th day of the month, but allowing the market administrator 
additional days if the 14th falls on a Saturday, Sunday, or national 
holiday; (3) Making payments to the producer settlement fund (PSF) no 
later than two days after the announcement of the PPD; (4) Modifying 
the date which payments from the PSF are to be disbursed to handlers to 
the day after the due date required for payment into the PSF; (5) 
Requiring partial payments to producers be made no later than the last 
day of the month; and (6) Requiring final payments to producers be made 
no later than the day after the required date of payment to handlers 
from the PSF. The following table summarizes the recommended changes:

----------------------------------------------------------------------------------------------------------------
                                                                    Recommended for
                                          Current provision             adoption            Reason for change
----------------------------------------------------------------------------------------------------------------
Proposal 1:
    Submission of monthly handler      Due on or before the     Due on or before the     Allows handlers one
     reports to Market Administrator.   9th day of the month.    10th day of the month.   more day to submit
                                                                                          reports to Market
                                                                                          Administrator.
    Date of PPD and statistical        Announced on or before   Announced on or before   Maintains the time the
     uniform price announcement.        the 13th day of the      the 14th day of the      Market Administrator
                                        month.                   month, and up to two     has to announce the
                                                                 additional public        PPD and statistical
                                                                 business days            uniform price and if
                                                                 thereafter if the 14th   the 14th falls on a
                                                                 falls on a weekend or    weekend or national
                                                                 national holiday.        holiday allows
                                                                                          additional days.
    Handler payments to the PSF......  Payment must be made no  Payment must be made no  A conforming change
                                        later than the 15th of   later than two days      made necessary by the
                                        the month, unless the    after the announcement   proposed extension in
                                        15th falls on a          of the PPD and           the date for filing
                                        weekend or holiday,      statistical uniform      Market Administrator
                                        where the payment can    price, unless the due    reports and the
                                        be delayed until the     date falls on a          computation of the PPD
                                        next business day.       weekend or holiday,      and statistical
                                                                 then the payment can     uniform price.
                                                                 be delayed until the
                                                                 next business day.
    Date when partial payments are to  Payment must be          Payment must be          A conforming change
     be disbursed to producers.         received by each         received by each         reducing the number of
                                        producer on or before    producer on or before    days between partial
                                        the 26th of the month.   the last day of the      and final payments to
                                                                 month unless the day     producers.
                                                                 falls on a weekend or
                                                                 holiday, then the
                                                                 payment can be delayed.
    Date when final payments are to    Payment must be          Payment must be          A conforming change
     be disbursed to producers.         received by each         received the following   that adds flexibility
                                        producer no later than   month by each producer   to the relationship
                                        the day after the 16th   no later than the day    between the date of
                                        day of the following     after the required       payment to handlers
                                        month.                   payment date from the    from the PSF and final
                                                                 PSF unless the day       payment to producers.
                                                                 falls on a weekend or
                                                                 holiday, then the
                                                                 payment can be delayed.

[[Page 15564]]

 
Proposal 4:
    Date on which payments from the    Market Administrator     Market Administrator     Helps to assure that
     PSF are disbursed to handlers.     must pay each handler    must pay each handler    producers receive full
                                        the amount owed, if      the the amount owed,     payment in event of
                                        any, from the PSF no     if any, no later then    late payments to the
                                        later than the 16th      the day after handler    PSF.
                                        after the end of each    payments to the PSF
                                        month.                   are received unless
                                                                 the day falls on a
                                                                 weekend or holiday,
                                                                 then the payment can
                                                                 be delayed.
----------------------------------------------------------------------------------------------------------------

    Currently, a handler's report on milk receipts and utilization is 
due to the Market Administrator on or before the 9th day of the month. 
Submission of this report triggers a sequence of other reporting and 
payment dates. These include: announcement of the PPD and statistical 
uniform price on or before the 13th day of the month; handler 
obligations to the PSF, due no later than the 15th day of the month but 
subject to a delay to the next business day if the day falls on a 
weekend or holiday; disbursement of funds from the PSF to handlers, due 
no later than the 16th day after the end of each month but also delayed 
subject to a weekend or holiday; partial payments from handlers to 
producers and cooperative associations, due on or before the 26th day 
of the month and again delayed due to a weekend or holiday; and final 
payments to producers and cooperative associations, made no later than 
the day after payment to handlers from the PSF.
    Proposal 1, submitted by New York State Dairy Foods, Inc. (NYSDF), 
Proposal 4, submitted by the Northeast Market Administrator, the 
Association of Dairy Cooperatives in the Northeast (ADCNE) and NYSDF, 
and Proposal 12, submitted by the Northeast Market Administrator, are 
recommended for adoption. All three proposals seek to modify various 
reporting and payment provisions of the order. NYSDF is a trade 
association representing milk handlers and processors in the Northeast 
marketing area. ADCNE represents a number of dairy farmer cooperatives 
whose milk is pooled on the Northeast order. Their members include 
Agri-Mark, Inc. (Agri-Mark), Dairy Farmers of America, Inc. (DFA), 
Dairylea Cooperative Inc. (Dairylea), Land O' Lakes, Inc. (LOL), 
Maryland and Virginia Milk Producers Cooperative, Inc. (MVMP), O-AT-KA 
Cooperative, Inc. (O-AT-KA), St. Albans Cooperative Creamery, Inc. (St. 
Albans), and Upstate Farms Cooperative, Inc. (Upstate). Worcester 
Creameries, Elmhurst Dairy, Mountainside Farms, and Steuben Foods also 
testified in support of Proposal 1.
    Proposal 1 would require monthly handler reports to be received by 
the Market Administrator on or before the 10th day of the month. This, 
in turn, triggers a sequence of other reporting deadline and payment 
date provisions that would be similarly changed. These include: (1) 
Announcement of the PPD and statistical uniform price a day later--from 
the 13th to the 14th day of the month. If the 14th day of the month 
falls on a Saturday, Sunday, or national holiday, the Market 
Administrator would have up to two additional public business days to 
announce the PPD and the statistical uniform price; (2) Handler 
payments to the PSF be made no later than two days after the 
announcement of the PPD unless the due date falls on a weekend or 
holiday, then the payment can be delayed until the next business day; 
(3) Partial payments to producers be made on or before the last day of 
the month unless the due date falls on a weekend or holiday, then the 
payment can be delayed until the next business day; and (4) Final 
payments to producers be received no later than the day after the 
required date of payment from the PSF unless the due date falls on a 
weekend or holiday, then the payment can be delayed until the next 
business day. Proposal 4 would modify the day which payments from the 
PSF are to be disbursed to handlers from the 16th of the month to the 
day after the due date required for payment into the PSF. Proposal 12 
seeks to make a technical correction to the order provision relating to 
payments to producers and cooperatives which will make the provisions 
identical to other Federal orders by changing ``pool plant operator'' 
to ``handler'' throughout the provisions of the order.
    A witness appearing on behalf of NYSDF testified in support of 
Proposal 1, stating that its adoption is necessary to correct 
unnecessarily burdensome regulations that have resulted from the 
reporting and payment date provisions adopted as part of Federal order 
reform. According to the witness, the amendments incorporated in 
Proposal 1 would essentially restore the reporting and payment dates 
specified in the former New York-New Jersey milk marketing order. The 
witness indicated that giving an additional day for submitting handler 
reports to the Market Administrator would lessen the difficulties milk 
handlers are currently experiencing in meeting the current reporting 
deadline. The witness explained that milk suppliers have experienced 
considerable difficulties in furnishing milk component and billing data 
in time for meeting the currently established reporting deadline. This 
situation is compounded, the witness explained, when handlers must 
account for the co-mingling of tanker loads of milk between cooperative 
and independent milk producers. Often, the witness stated, reports to 
the Market Administrator contain erroneous and estimated data because 
the reporting handler did not receive the correct data in time.
    The NYSDF witness also cited testimony from the Northeast Market 
Administrator that one third of handler reports are often filed late. 
Moving the reporting date from the 9th to the 10th of the month would 
give milk suppliers and buyers an additional day to complete their 
work, thereby greatly reducing the number of late reports to the Market 
Administrator, the witness concluded.
    The second proposed change in reporting dates contained in Proposal 
1 would maintain the time the Market Administrator has to announce the 
PPD and statistical uniform price, and up to two additional public 
business days thereafter if the 14th falls on a weekend or national 
holiday. According to the NYSDF witness, this portion of the proposal 
is consistent with the proposed one-day extension for submission of 
handler reports to the Market Administrator, and would extend to the 
Market Administrator sufficient time to make the necessary price 
computations without undue pressure brought about by weekends or 
holidays. The witness also noted that while this proposal could give 
the Market Administrator up to two additional public business days for 
making the price computations, it would not require that the additional 
time be used. If the Market Administrator finds it feasible, a price

[[Page 15565]]

announcement could come earlier, the witness stated.
    The third change in reporting dates offered by the NYSDF witness 
would require handler payments to the PSF be made no later than two 
days after the announcement of the PPD. According to the witness, this 
portion of the proposal is intended primarily as a conforming change 
made necessary by the one-day proposed extension in the date for filing 
Market Administrator reports, and the computation of the PPD and 
statistical uniform price. Currently, handler payments to the PSF must 
be made no later than the 15th of the month, unless the 15th falls on a 
weekend or national holiday, where the payment can be delayed until the 
following business day, the witness noted. The witness expressed 
concern that compliance with the current handler payment deadline was 
difficult, and the proposed change would better accomodate the flow of 
money from handlers to the PSF. The witness was of the opinion that 
this portion of the proposal would provide a more consistent time 
interval to gather the Market Administrator classifications on milk 
transfers at pool reporting time, giving handlers a more consistent 
time frame in which to make necessary money transfers, for example, and 
improve concurrent billings for milk that was transferred or diverted.
    The NYSDF witness testified that Proposal 1 would also require 
final payments to dairy farmers be disbursed no later than the day 
after the required payment date to handlers from the PSF. The primary 
purpose of this portion of the proposal, the witness explained, is to 
have the date of final payment to dairy farmers conform with other 
proposed date changes for the computation of the statistical uniform 
price and when payments are made into and out of the PSF. The witness 
stressed that no change in the requirement for ``day-earlier'' payment 
to cooperatives was proposed, as currently set forth in the provisions 
of the order, and the final payment to producers would still be due the 
day after payments from the PSF are made by the Market Administrator. 
Accordingly, the witness noted, dates of final payment could move a day 
or two later, but only if the date of payment from the PSF were 
extended by the same number of days. This sequence in the relationship 
of ``date of final payment'' to the ``date of payment from the producer 
settlement fund'' should be continued, the witness said.
    The NYSDF witness testified that the last feature of Proposal 1 
modifies the date that partial payments are received by producers to 
``on or before the last day of the month'', instead of the current 
``26th day of the month''. The witness presented evidence which 
demonstrated that a longer spread in days between partial and final 
payment exists now than prior to Federal order reform. The witness 
testified that making partial payments due ``on or before the last day 
of the month'' would conform more closely with the dates previously set 
in the respective pre-reform orders and create better ``spacing'' 
between required pay dates.
    The NYSDF witness was of the opinion that adoption of Proposal 1 
also would accommodate ``tolled'' bulk milk purchased by milk 
distributors for processing and packaging into Class I products at pool 
distributing plants. The witness described ``tolling'' as a situation 
where a plant is paid to process raw milk, but the processing plant 
does not take ownership of the milk or incur a payment obligation to 
producers. The witness noted that the Northeast order requires that 
tolled milk be purchased on the basis of the PPD and component prices 
rather than on the basis of Class I skim value and butterfat prices, 
therefore, the Market Administrator must ``credit'' the handler who 
processes cooperative receipts, together with a Market Administrator 
assessment on the tolled milk. The tolling processor must then prepare 
a billing to the distributor of the tolled milk at the difference 
between the Class I cost of the skim and butterfat, and also a 
cooperative credit from the Market Administrator, including the 
associated Market Administrator fee, the witness stated. The NYSDF 
witness noted that doing this requires having detailed component values 
as well as knowing the final PPD. The billing involved is made after 
the PPD announcement and the billing by the Market Administrator of the 
handler's pool obligation, the witness said.
    In their post-hearing brief, NYSDF emphasized that Proposal 1 takes 
the existing payment structure and applies it to the date that the 
Market Administrator announces the PPD and statistical uniform price. 
NYSDF asserted that Proposal 1 does not set the payment date to the PSF 
as the 16th of the month. Rather, they noted, handlers could be making 
payment earlier than the 16th of the month if the PPD is announced 
before the 14th day of the month. NYSDF was of the opinion that as a 
whole, Proposal 1 would allow the Market Administrator to receive more 
timely and accurate handler reports and permit earlier price 
announcements and earlier payments to and from the PSF. NYSDF concluded 
that both dairy farmers and handlers would benefit from more accurate 
information that would flow naturally from adoption of Proposal 1.
    NYSDF's post-hearing brief concluded that adoption of Proposal 1 
would still have producers in the Northeast marketing area receiving a 
partial payment for milk 5 days earlier than was the case prior to 
Federal order reform.
    A witness appearing on behalf of Marcus Dairy (Marcus) testified in 
support of Proposal 1. Marcus is a distributing plant which receives 
approximately 60 percent of its milk supply from independent dairy 
farmers, with the remainder supplied by cooperatives. The witness 
indicated support for moving the handler reporting date from the 9th to 
the 10th day of the month, noting that an extra day would help in 
receiving more accurate information from cooperatives and eliminate the 
need to estimate data so that reports can be submitted on time. The 
witness also testified that the proposal should be accompanied by the 
proposed change to the Market Administrator PPD announcement date from 
the 13th to the 14th of the month, while providing the flexibility for 
the Market Administrator to make announcements later in the event that 
the 14th falls on a holiday or weekend. These modifications would also 
require a similar change in the date when payment to the PSF is due, 
the witness noted. In light of this, the Marcus witness expressed 
support for requiring payments to the PSF be made not more than two 
days after the PPD announcement and that final payments to dairy 
farmers be received no later than the day after the required date of 
payment by the Market Administrator. Marcus also supported moving the 
date of partial payment from the ``26th of the month'' to ``on or 
before the 30th of the month.'' The witness was of the opinion that 
adjusting these payment date provisions would improve the cash flow of 
dairy farmers.
    A witness appearing on behalf of ADCNE testified in opposition to 
Proposal 1. The witness said that dairy farmers, and those persons who 
provide services to dairy farmers, are faced with meeting deadlines 
that are sometimes difficult or inconvenient. The witness expressed the 
opinion that businesses which rely on information from other businesses 
do not necessarily have any ability to force those other businesses to 
change just because they provide needed information. Accordingly, the 
witness said, ADCNE does not view the current reporting dates as 
unreasonable or in need of change. Instead, the ADCNE witness suggested 
that those involved work together to resolve

[[Page 15566]]

producer payment issues instead of seeking a regulatory change that 
would result in delay of payments to dairy farmers. Delaying producer 
payment dates will unnecessarily impose financial costs to dairy 
farmers in the Northeast, the ADCNE witness concluded.
    In their post-hearing brief, NYSDF responded to ADCNE's views by 
indicating that no amount of overtime worked by employees of NYSDF can 
create reports when other entities fail to get needed report 
information to handlers in a timely manner. NYSDF's brief also noted 
that many of their members are small businesses subject to Regulatory 
Flexibility Act analysis and relief as necessary, and that undertaking 
expensive overtime in order to fill out reports when they do not have 
all the necessary information needed from various entities negates the 
intent of the Regulatory Flexibility Act.
    The Northeast Market Administrator testified in support of Proposal 
4, which seeks to move the date on which payments from the PSF are 
dispersed to handlers from the 16th day after the end of the month, to 
no later than the day after handler payments to the PSF are received. 
The Market Administrator explained that a problem arises when late 
payments to the PSF result in insufficient funds to make payments out 
of the PSF when both payments to and from the PSF fall on the same day. 
When this happens, order provisions provide for a pro-rata reduction in 
payments to handlers who can, in turn, reduce payments to dairy 
farmers, the Market Administrator noted. According to the Market 
Administrator, Proposal 4 would allow one extra day for payments from 
the PSF, and cause dairy farmers to receive their payments one day 
later three or four times a year. However, dairy farmers would always 
be assured of receiving the full amount owed, the Market Administrator 
added.
    A witness representing ADCNE also testified in support of Proposal 
4. Under current provisions, the ADCNE witness said, the date for 
payments to the PSF, the 16th of the month, can sometimes fall on the 
same day that payments from the PSF are to be made. In their post-
hearing brief, ADCNE asserted the adoption of Proposal 4 was necessary 
for the proper administration of the PSF.
    The Northeast Market Administrator also testified in support of 
Proposal 12. This proposal seeks to make a technical correction to the 
order provisions relating to payments to producers and cooperative 
associations and would make the Northeast order's Payments to producers 
and to cooperative associations provision identical to other Federal 
orders. The Market Administrator explained that the Proposal would 
simply amend references to ``pool plant operator'' as ``handler.''
    Reporting and payment date provisions of the pre-reform New 
England, New York-New Jersey, and Mid-Atlantic orders served the 
different needs and marketing conditions of their respective marketing 
areas. Provisions adopted under Federal order reform established 
reporting and payment dates that were reflective of the three 
consolidated orders, while recognizing the need to establish dates that 
would be conducive to the marketing conditions of the larger 
consolidated Northeast order. The reporting and payment date 
requirements adopted for the consolidated Northeast order were intended 
to reasonably accommodate historical patterns and practices while 
recognizing that fixed dates also needed to be specified. For example, 
handler reports to the Market Administrator were due as soon as the 8th 
of the month, or as late as the 10th of the month. When the three pre-
reform orders were consolidated to form the Northeast order, the new 
handler reporting date was set for the 9th of the month. This was also 
the case for the date for the Market Administrator's announcement of 
the PPD and statistical uniform price. In the pre-reform New England 
and Mid-Atlantic orders the announcement was on the 13th of the month, 
while in the pre-reform New York/New Jersey order the announcement was 
on the 14th of the month. Current provisions in the consolidated 
Northeast order require the announcement by the 13th of the month.
    Changing all reporting and payment dates by first delaying the 
deadline for handler reports to the Market Administrator from the 9th 
of the month to the 10th of the month is supported by the hearing 
record and is recommended for adoption. Allowing handlers one 
additional day to submit their report of milk receipts and utilization 
to the Market Administrator should reduce the number of late reports 
and lessen the number of inaccuracies and estimations contained 
therein.
    Changing the handler reporting date deadline by one day should also 
be accompanied by changing the date the Market Administrator is to 
announce the PPD and statistical uniform price and adjusting all other 
payment dates. Also recommended for adoption is the feature of Proposal 
1 which specifies that the Market Administrator can make the PPD and 
statistical uniform price announcement up to two public business days 
later if the 14th falls on a weekend or national holiday.
    The portion of Proposal 1 which would specify handler payments to 
the PSF be made no later than two days after the PPD and statistical 
uniform price announcement is also recommended for adoption with a 
specification of two business days. This portion of Proposal 1 is a 
change made necessary by the proposed one-day extension in the date for 
filing handler reports and the computation and announcement of the PPD 
and statistical uniform price. The recommended adoption of this portion 
of Proposal 1 also adds a measure of flexibility to the payment date 
provisions by making the date of handler payments to the PSF dependant 
on the date the Market Administrator announces the PPD and statistical 
uniform price. It also will provide the opportunity for handlers to 
make payments to the PSF earlier than the 16th of the month if the 
Market Administrator announcement of the PPD comes before the 14th of 
the month.
    Payments to handlers from the PSF also require a conforming change 
as a result of the recommended changes for announcement of the PPD and 
statistical uniform price and dates for payment to the PSF. Evidence 
presented at the hearing demonstrated that sometimes payment to and 
from the PSF can fall on the same day and can lead to reduced payments 
to dairy farmers because payments are pro-rated. Amending the date that 
payments are made from the PSF to handlers from ``the day after the 
16th day of the month'', to the day after handler payments to the PSF 
are received will better assure handlers of receiving their full 
payment each month from the PSF.
    Prompt and complete payments to dairy farmers are dependant on 
timely and full payments from the PSF to milk handlers. However, final 
payments to dairy farmers should be made no later than the day after 
the required payment date from the PSF by the Market Administrator.
    On the basis of the rationale presented above, the date partial 
payments are made to dairy farmers should be amended to ``on or before 
the last day of the month'', instead of the ``26th of the month'', as 
currently provided.

2. Pooling Standards

    Summaries of testimony regarding the pooling standards of the 
Northeast order are provided individually. The discussion of all 
pooling standards and the decision's findings and conclusions regarding 
pooling standards is presented

[[Page 15567]]

immediately after testimony summary for ``c''. below.
a. Performance Standards for Supply Plants
    Certain amendments to the Pool plant provision of the Northeast 
order should be adopted. Specifically, the recommendations include: (1) 
Establishing a supply plant performance standard of 10 percent of total 
milk receipts for each of the months of January through August and 
December, and 20 percent of total milk receipts for each of the months 
of September through November; (2) Removing the ``split plant'' 
feature; and (3) excluding milk received from producers not eligible to 
be pooled on the Northeast order from the total volume of milk used to 
determine the amount of milk that a supply plant needs to deliver to a 
distributing plant to become pooled. These recommended changes are 
represented in certain features of Proposals 2, 5, and 8.
    Proposal 10, which advocates lowering performance standards, is not 
recommended for adoption. Furthermore, Proposal 9, which would credit 
route distribution from the plant and transfers in the form of packaged 
fluid milk products against the supply plant performance standards, is 
not recommended for adoption.
    Currently, supply plants in the Northeast order need to ship at 
least 10 percent of their total milk receipts in the months of August 
and December and 20 percent of their total milk receipts in each of the 
months of September through November to pool distributing plants in 
order to qualify the supply plant and all of its milk receipts for 
pooling. A supply plant which meets the performance standard in each of 
the months of August through December is automatically considered a 
pool plant for each of the months of January through July. Supply 
plants which do not qualify as a pool plant in each of the months of 
August through December need to ship at least 10 percent of their total 
milk receipts to distributing plants during each of the months of 
January through July in order to qualify the supply plant and all of 
its milk receipts for pooling in each of those months.
    The order also currently provides a ``split-plant'' feature to 
accommodate a supply plant that has both pool and nonpool facilities. 
This feature was adopted during Federal order reform to provide for 
more uniform supply plant provisions within the Federal milk order 
system. It was not a feature contained in any of the three pre-reform 
orders consolidated to form the Northeast order.
    Proposal 2, submitted by NYSDF, seeks to amend the Pool plant 
provision of the order by: (1) Increasing the supply plant performance 
standards by 5 percentage points, to 15 percent for the months of 
August and December, and by 5 percentage points to 25 percent for each 
of the months of September through November; and (2) Removing the 
split-plant provision. In their post-hearing brief NYSDF slightly 
modified the months applicable for the proposed increased standards to 
specify a performance standard of 15 percent in the month of August and 
25 percent for each of the months of September through December.
    A witness representing NYSDF testified that after implementation of 
Federal milk order reform, milk supplies pooled on the Northeast order 
during the fall months have decreased. During these months, the NYSDF 
witness said, milk was shipped to areas outside of the order and it was 
difficult for Northeast order fluid milk handlers to acquire an 
adequate supply of milk to meet the needs of their customers. Although 
there was not as significant a shortage in the first half of 2002 as 
there was in 2000 and 2001, the witness predicted that the situation 
would change substantially beginning in late 2002 and during 2003.
    The NYSDF witness characterized milk shortages in the fall months 
for the Northeast marketing area as a long-term problem which requires 
long-term action. In this regard, the witness stressed, Proposal 2 is 
designed to increase the amount of milk available to fluid milk 
handlers during the fall months. The witness said the proposed increase 
is similar to provisions previously contained in the pre-reform Middle 
Atlantic and New England milk orders and is identical to the 
adjustments made to supply plant performance standards by the Market 
Administrator in 2000 and 2001 for the months of August through 
November.
    The NYSDF witness testified that supply plant performance standards 
applicable in the pre-reform orders consolidated to form the current 
Northeast milk order enabled cooperatives to pool the milk of their 
members separately from the milk of independent producers and small 
cooperatives who also supplied fluid milk plants. After implementation 
of Federal order reform, the witness said, the new pooling provisions 
have allowed cooperatives to pool not only the milk of their members, 
but also the milk of other smaller cooperatives and independent 
producers. The current pooling provisions, the witness emphasized, are 
being used in a way that allow large cooperatives to guarantee 
themselves a higher volume of milk pooled as Class I. In their post-
hearing brief, NYSDF added that this arrangement has resulted in an 
increased market share of total Class I sales by larger cooperatives 
while the total volume of milk available to Class I handlers has 
remained unchanged.
    Data presented by the NYSDF witness showed that cooperatives now 
account for over 80 percent of all milk pooled on the Northeast order. 
The witness noted that cooperatives have guaranteed non-members an 
outlet to pool their milk, and on average, pool in excess of 100 
million pounds of non-member milk each month. The witness concluded 
that because cooperatives pool such a large amount of milk, 
cooperatives should not have difficulty meeting the proposed five 
percentage point performance standard increase for supply plants.
    The NYSDF witness emphasized that their greatest concern regarding 
supply plant performance standards is the issue of ``guaranteed'' 
pooling of non-member milk supplies and the lack of diversion limit 
standards. The witness was of the opinion that this has enabled milk to 
be pooled on the order without bearing any responsibility for serving 
the Class I market or being made available as a reserve supply to the 
market. The witness was of the opinion that inappropriate pooling has 
resulted in the erosion of blend prices paid to producers who do 
regularly supply the Class I needs of the market.
    The NYSDF witness further testified that the split-plant feature 
for supply plants should be removed because the feature does not serve 
the purpose for which it is intended. The witness maintained that the 
split-plant provision was created to allow a supply plant to have 
separate facilities to receive and process Grade B milk. Currently, the 
witness said, no handlers located in the Northeast order are using the 
split-plant feature. However, if a supply plant chooses to rely on the 
feature, it would be able to pool a substantial amount of additional 
milk simply by diverting milk to the non-pool side of the plant during 
those months when no performance standards or diversion limits are 
provided by the order, the witness cautioned.
    In conclusion, the NYSDF witness said, it is the Class I market 
that generates additional revenues which accrue to all producers whose 
milk is pooled on the Northeast marketing area. Accordingly, the 
witness maintained, entities that seek to have their milk pooled on the 
order should bear some responsibility in actually supplying the Class I 
needs of the market. The witness

[[Page 15568]]

said that Proposal 2 is intended to end what NYSDF characterized as 
``abusive'' pool-riding methods and to ensure that entities benefitting 
from revenue generated by Class I sales have demonstrated service in 
supplying the Class I market.
    A witness appearing on behalf of Marcus also testified in support 
of Proposal 2. According to the witness, Marcus Dairy experienced milk 
supply shortages during some months since implementation of the 
consolidated Northeast milk order. The witness stated that adoption of 
Proposal 2 would help alleviate supply shortfalls for the Class I 
market during the fall months when the milk is most needed.
    A witness representing the ADCNE testified in opposition to that 
portion of Proposal 2 which would raise the supply plant performance 
standards for the months of August through December. However, the 
witness supported the proposal on the need to remove the split-plant 
feature. The witness was of the opinion that increasing supply plant 
performance standards was unwarranted and could cause disorderly 
marketing conditions in the region because some handlers would be 
forced to depool a portion of the milk of their producers. The witness 
stressed that the Market Administrator already has the authority to 
adjust these standards and that this should continue as the way to make 
future changes as marketing conditions warrant.
    Furthermore, the ADCNE witness emphasized, Proposal 2 does not 
specify some level of performance by supply plants during the ``free-
ride'' months of January through July.\1\ According to the witness, 
Proposal 2 also does not limit the ability of producers located far 
from the Northeast marketing area to be pooled on the order without 
maintaining a reasonable association to the market, nor does it ensure 
that Class I distributors will receive additional milk when needed.
---------------------------------------------------------------------------

    \1\ The dairy industry term known as a ``free-ride'' period is 
often used to describe those time periods when no performance 
standard is specified.
---------------------------------------------------------------------------

    In their post-hearing brief, ADCNE stressed that no evidence was 
presented at the hearing that would warrant a permanent change in 
performance standards. ADCNE reiterated their opinion that the current 
authority provided to the Market Administrator to make adjustments to 
the performance standards was the most appropriate method for the 
orderly marketing of milk in the Northeast.
    Proposal 5, submitted by ADCNE, also seeks to amend the Pool plant 
provision of the order. Specifically the proposal would: (1) Require 
supply plants to deliver at least 10 percent of their total milk 
receipts to a distributing plant during each of the months of January 
through August and December; (2) Grant authority to the Market 
Administrator to impose additional shipping requirements on handlers 
receiving marketwide service payments; and (3) Eliminate the split-
plant provision.
    The ADCNE witness testified that current order provisions have 
unintentionally provided the opportunity for milk to be pooled and 
priced under the terms of the Northeast order without demonstrating a 
reasonable level of service in supplying the Class I needs of the 
market. Pooling such milk could result in a lower blend price for all 
producers who do regularly supply the fluid needs of the market, the 
witness specified. The witness stressed that Proposal 5 is not meant to 
eliminate the ability to pool the milk of producers located far from 
the Northeast marketing area. Instead, the witness explained, Proposal 
5 would assure that all milk pooled on the Northeast order demonstrates 
a consistent service to supplying distributing plants and consequently 
bears some of the burden of incurring the additional costs of supplying 
the Class I needs of the market. According to the witness, there are 
two aspects of the Pool plant provision of the Northeast marketing 
order that have enabled what the witness described as ``opportunistic 
pooling'': the split-plant feature and the current level of supply 
plant performance standards.
    The ADCNE witness explained that supply plants qualified as split-
plants can engage in opportunistic pooling by receiving milk on the 
pool side of the plant and then diverting the milk to the nonpool side 
of the plant. Under current provisions, during the months of August and 
December a supply plant could divert nine loads of milk to its nonpool 
side for every one load of milk it receives on its pool side, the 
witness explained. In addition, the witness continued, during the 
months of September through November, the supply plant could divert 
eight loads of milk for every two loads it receives at the pool side of 
the plant. According to the witness, once the plant meets the 
performance standards in each of the months of August through December, 
the plant is automatically qualified as a pool plant in the months of 
January through July and can divert an unlimited amount of milk.
    Under current supply plant performance standards, the ADCNE witness 
said, a pool plant located far from the marketing area could 
potentially pool all of the milk located near it during the spring 
months by shipping a small amount of its milk supply to a Northeast 
order pool plant during the fall months. The lack of a monthly touch-
base standard, the witness also asserted, has facilitated the pooling 
of milk located far from the marketing area by allowing producers to 
qualify all of their milk for pooling by delivering a minimal amount of 
milk to a Northeast order pool plant. During January through July when 
no performance standards for supply plants are stipulated, the witness 
noted, a plant has the ability to pool all the milk of every producer 
who had delivered to the plant throughout the year. According to the 
witness, theoretically 100 percent of the pool plant's milk receipts 
could be pooled on the Northeast order.
    The ADCNE witness presented data estimating the impact of pooling 
distant milk on the Northeast order blend price. The witness estimated 
that for the period of January 2001 through July 2002, the blend price 
was reduced by an average of 16 cents per hundredweight. The witness 
was of the opinion that if Proposal 5 is adopted, most of the lost 
blend price value would be restored.
    The ADCNE witness testified that the free-ride feature is no longer 
being used for its intended purpose of allowing producers that had been 
historically pooled on the Northeast Order to remain pooled. Instead, 
the witness stated, the free-ride feature has created the ability to 
pool milk on the order that was never intended to be pooled. The 
witness maintained that supply plants that currently meet the 
performance standards in September through November would not be 
disadvantaged with the new year-round monthly performance standards 
because the proposed standards for the months of January through July 
are lower than those specified for the fall months.
    A witness testifying on behalf of NYSDF testified in opposition to 
Proposal 5. While NYSDF agreed that the order's lack of performance 
standards for all months has created opportunities for distant milk to 
be pooled on the order, a free-ride feature is important for 
maintaining orderly marketing conditions. The NYSDF witness said that 
providing for months without performance standards ensures that the 
market's reserves have the ability to be pooled on the order during 
months of abundant supply.
    At the hearing, NYSDF offered a modification to Proposal 5, 
proposing that the performance standard during the months of January 
through July only apply to supply plants located outside

[[Page 15569]]

of the states that comprise the Northeast order. The justification for 
this modification, the witness said, is that during the spring months 
when additional milk is not usually needed by distributing plants, it 
prevents the uneconomic movement of milk by supply plants located 
within the marketing area. The NYSDF modification would make Proposal 5 
similar to amendments recently adopted by the Mideast order, the 
witness noted.
    Proposal 8, submitted by Friendship Dairies (Friendship), a 
partially regulated handler on the Northeast order, seeks to amend the 
order's Pool plant provision by excluding milk received by supply 
plants from producers who would not be eligible to be pooled under the 
Northeast order from the total volume of milk used to determine the 
amount of milk a supply plant would need to deliver to distributing 
plants in order to satisfy the supply plant performance standards.
    The Producer provision of the Northeast order describes those 
producers who would not be eligible for pooling on the Northeast order. 
They include: an entity that operates their own farm and plant at their 
sole enterprise and risk, commonly referred to as a producer handler; a 
dairy farmer whose milk is received at an exempt plant excluding 
producer milk diverted to the exempt plant; a dairy farmer designated 
as a producer under another Federal order; a dairy farmer whose milk is 
reported as diverted to a plant fully regulated under another Federal 
order that is assigned to Class I; or a ``dairy farmer for other 
markets,'' which is a dairy farmer whose milk during certain months of 
the year is received by a pooling handler and that pooling handler 
caused the milk from such dairy farmer to be delivered to any plant as 
other than producer milk or delivered to any other Federal milk order.
    A witness appearing for Friendship testified that the current 
method used in determining if a supply plant has met a performance 
standard is examining the total amount of milk received at the plant 
and the amount of those receipts shipped to distributing plants. As a 
supply plant procures additional milk to offset the milk it transfers 
or diverts to distributing plants, the additional milk receipts become 
included in the plant's total milk receipts, the witness said. This 
increases the quantity of milk that must be transferred or diverted by 
the supply plant to distributing plants to meet the performance 
standard for pooling purposes, the witness explained. Basing the supply 
plant qualification percentage exclusively on the supply plant's 
producer milk supply, the witness concluded, would reduce the amount of 
milk that Friendship would have to ship every month to pool 
distributing plants in order to be pooled under the terms of the order. 
Friendship testified that they must include milk received from 
cooperatives that has already been qualified for pooling by the 
cooperative in the total receipts used to determine the amount of milk 
they must ship to meet supply plant performance requirements. The 
Friendship witness noted that adoption of Proposal 8 would address this 
by excluding pre-qualified cooperative milk from the volume of receipts 
upon which a supply plant must make shipments in order to be designated 
as a pool supply plant.
    The Friendship witness also noted that excluding milk received from 
producers not eligible to be pooled on the Northeast order from the 
performance standards for supply plants has been adopted in the pooling 
provisions of other Federal orders. The witness clarified that in these 
other Federal orders where a similar provision is present, the supply 
plant performance standard is based on the amount of milk produced by 
dairy farmers that is pooled through association with the supply plant, 
regardless of whether or not it was diverted from the plant.
    A witness appearing for ADCNE expressed opposition to Proposal 8 
noting that it would liberalize supply plant performance standards. 
According to the witness, the intent of supply plant pooling provisions 
are to qualify both the plant and the operator of the plant. It is 
meaningless to qualify a supply plant, the witness noted, in which the 
operator does not control the milk of a group of dairy farmers. A 
cheese plant operator would never incur the costs to ship milk from the 
plant to a distributing plant, the witness offered by example, unless 
the plant intended to pool a group of dairy farmers and draw from the 
pool.
    ADCNE further noted opposition to Proposal 8 in their post-hearing 
brief by emphasizing that the operator of a supply plant has an option 
of whether or not to be pooled. According to ADCNE, the operator of a 
plant can acquire and maintain their own producer milk supply and can 
pool the plant by meeting the pooling standards of the order, or choose 
nonpool status and purchase milk supplies from other pool or non-pool 
handlers.
    A proposal, published in the hearing notice as Proposal 9, also 
submitted by Friendship, seeking to amend the Pool plant provision, 
should not be adopted. The proposal would credit route distribution 
from the plant and transfers in the form of packaged fluid milk 
products to distributing plants to the total shipments from a supply 
plant in determining if the supply plant has met the performance 
standard of the order. Currently, route distribution is not credited 
against the total milk receipts in determining if a plant has met the 
supply plant performance standard.
    The Friendship witness stated that Proposal 9 is meant to address 
only Class I products packaged at the Friendship plant and not Class I 
products purchased from other plants which they subsequently 
distribute. To exclude the possibility of a partially regulated 
distributing plant becoming fully regulated by the adoption of Proposal 
9, the Friendship witness modified their proposal at the hearing to 
only include route distribution and transfers of packaged fluid milk in 
qualifying supply plants whose milk utilization is at least 50 percent 
in Class II, Class III or Class IV products.
    The Friendship witness testified that their plant has unique 
characteristics--they produce non-fat dry milk (a Class IV product) and 
cultured buttermilk (a Class I product). It is the production of 
buttermilk, the witness noted, that causes their plant to be designated 
as a partially-regulated distributing plant under the consolidated 
Northeast order. The witness testified that their plant could not meet 
the supply plant performance standards if the amount of milk 
distributed on routes in the form of packaged fluid milk products 
counted towards pool qualification.
    The Friendship witness maintained that the Northeast order's 
pooling provisions are unfair because, in their view, buttermilk 
satisfies an established Class I demand, but is still factored into 
determining if a supply plant has met the order's performance standards 
by shipping milk to a distributing plant. The Friendship witness 
asserted that currently the only way to qualify their plant is to 
fulfill someone else's need for Class I milk without receiving any 
credit for its own contribution to the Class I market.
    The witness stressed that Proposal 9 is not intended to qualify 
previously partially-regulated distributing plants which are not 
currently fully regulated on the Northeast order. The witness saw the 
potential to have a supply plant who also distributes Class I products 
to meet the supply plant performance standards under a liberal reading 
of Proposal 9. To address this unintended occurrence, the witness 
modified Proposal 9 to apply only to supply plants that process at 
least 50 percent of their total physical milk receipts into products 
other than Class I. With this modification, the

[[Page 15570]]

witness noted, the possibility of distributing plants becoming pooled 
as supply plants is eliminated.
    A witness appearing on behalf of ADCNE testified in opposition to 
Proposal 9. The witness said that the proposal does not specify that 
the plant's route distribution be located within the Northeast 
marketing area and could have the possible unintended consequence of 
pooling partially regulated distributing plants on the order with route 
distribution greater than the supply plant performance standard of 10 
or 20 percent. Additionally, the ADCNE witness testified that purchases 
and transfers of Class I products into and out of manufacturing plants 
could occur which would only serve to circumvent the intent of the 
Federal order provisions of requiring a supply plant to actually supply 
the Class I market as a condition for pooling its milk supply. The 
ADCNE witness was of the opinion that Proposal 9 combines the 
characteristics of two different pooling provisions for the benefit of 
a few supply plants that may have Class I sales and only serves to 
confuse the pooling provisions of the order.
    Additionally, ADCNE noted in their post-hearing brief that such a 
change could allow nonpool manufacturing plants, currently without 
their own producer supply, a means of ``gaming'' the system by 
transferring packaged product into and then back out of the plant for 
the sole purpose of meeting the supply plant performance standard. Such 
a change would be de-stabilizing to the market, lead to disorderly 
marketing conditions, and make procurement efforts by Class I 
processors more difficult and costly, noted ADCNE.
    Proposal 10, also submitted by Friendship, proposed to lower the 
supply plant performance standards by 5 percentage points to a new 
standard of 5 percent in each of the months of August and December; and 
by 10 percentage points to a new level of 10 percent in each of the 
months of September through November. Proposal 10 is not recommended 
for adoption.
    According to the Friendship witness, the objective of the Federal 
milk marketing order program is the equitable sharing of Class I 
revenue amongst all producers who supply the marketing area. This 
objective is defeated, the witness said, when performance standards 
result in the exclusion of some producers from the orders marketwide 
pool. According to the witness, producers without access to a Class I 
outlet have to ``buy'' market access from those producers who dominate 
the market's Class I milk supply, or move milk not needed for Class I 
use over long distances for the sole purpose of meeting a performance 
standard, which only results in the displacement of milk supplying 
other Class I plants, and in unwarranted additional transportation 
costs to those producers seeking to pool their milk on the order.
    The Friendship witness also testified that the current supply plant 
performance standard of 10 percent in the months of August and December 
and 20 percent in each of the months of September through November were 
chosen in an arbitrary manner to create a ``performance hurdle'' that a 
plant must leap to participate as a pool supply plant on the Northeast 
order. Reducing these performance standards by 5 percentage points to 5 
percent for each of the months of August and December, and by 10 
percentage points to 10 percent in each of the months of September 
through November would assure sufficient performance in supplying the 
Class I market without causing unnecessary milk shipments solely to 
meet the pooling standards of the order, the witness said.
b. Unit Pooling Standards for Distributing Plants
    A proposal, published in the supplemental hearing notice as 
Proposal 14, is recommended for adoption. Specifically, Proposal 14 
seeks to amend the Pool plant unit pooling feature by specifying that a 
plant of the pool plant unit which is not a distributing plant process 
at least 60 percent of its total producer milk receipts (including milk 
received from cooperative handlers) into Class I or Class II products, 
and the plant be physically located in the Northeast marketing area. 
Accordingly, the non-distributing plant of the pooling unit would be 
permitted to process up to 40 percent of its total producer milk 
receipts into Class III or IV products. Proposal 14 was offered by 
NYSDF. A witness representing the H.P. Hood Company (H.P. Hood), a 
fully regulated milk handler who pools milk on the Northeast order, 
testified on behalf of NYSDF.
    The unit pooling provision of the Northeast order currently allows 
for two or more plants located in the marketing area and operated by 
the same handler to qualify for pooling as a ``unit'' by meeting the 
total and in-area route disposition standard as if they were a single 
distributing plant. To qualify as a pooling unit, at least one plant of 
the unit must qualify as a pool distributing plant on its own standing, 
and the other plant(s) of the unit must process only Class I or II milk 
products. The pooling unit must also meet the total route distribution 
standard of 25 percent, and 25 percent of its route distribution must 
be within the marketing area.
    The NYSDF witness testified that adoption of Proposal 14 would 
allow H.P. Hood and other similarly situated unit-pool handlers greater 
flexibility in how they pool their milk on the Northeast order. 
According to the witness, present unit pooling standards unduly 
restrict milk use at the non-distributing plant(s) of the unit to Class 
I or II products. The witness indicated that adoption of Proposal 14 
would also aid cooperatives and other plants in how they pool milk 
because a pooling unit would be expanded to include milk balancing 
operations that produce Class III and Class IV milk products to be the 
non-distributing plant(s) of the pooling unit. The disparity in current 
provisions, the NYSDF witness stressed, is that the primary plant of a 
pooling unit can still produce a limited amount of Class III or IV 
products, while the non-distributing plant(s) in the unit cannot. 
According to the NYSDF witness, Proposal 14 adds flexibility to current 
provisions by allowing the non-distributing plant(s) in the unit to 
process up to 40 percent of total producer receipts into Class III or 
IV milk products.
    No testimony was received in opposition to the adoption of Proposal 
14.
c. Standards for Producer Milk
    Several amendments to the Producer milk provision of the Northeast 
order, contained in certain features of both Proposals 3 and 6, should 
be adopted. Specifically, the following changes to the Producer milk 
provision are recommended for adoption: (1) Establishing an explicit 
standard that one-day's milk production of a dairy farmer be received 
at a pool plant before the milk of the dairy farmer is eligible for 
diversion to non-pool plants; (2) Clarifying that a producer may touch-
base anytime during the month; (3) Eliminating the ability to 
simultaneously pool the same milk on the Northeast order and on a 
marketwide equalization pool operated by another government entity; (4) 
Establishing an explicit diversion limit standard for producer milk of 
90 percent in each of the months of January through August and 
December, and of 80 percent in each of the months of September through 
November (Milk in excess of the diversion limits will not be considered 
as producer milk and the pool plant must designate to the Market 
Administrator which deliveries are to be

[[Page 15571]]

de-pooled. Furthermore, milk diverted in excess of the diversion limit 
standards will not result in a loss of producer status under the 
order); and (5) Granting authority to the Market Administrator to 
adjust the touch-base standard and the diversion limit standard as 
market conditions warrant.
    The current Producer milk provision of the Northeast order 
considers milk of a dairy farmer to be producer milk when the dairy 
farmer has delivered milk to a pool plant. This event is commonly 
referred to as ``touching-base.'' Once an initial delivery is made, all 
the milk of a producer is eligible to be diverted to nonpool plants and 
continues to be priced under the terms of the order. While there are no 
specific year-round diversion limits for distributing plants, a 
diversion limit for supply plants is functionally set at 100 percent 
minus the applicable performance standard specified for supply plants. 
Therefore, in the months of August and December, a supply plant can 
divert no more than 90 percent of its total milk receipts to nonpool 
plants. During each of the months of September through November, a 
supply plant can currently divert no more than 80 percent of its total 
milk receipts to nonpool plants. During each of the months of January 
through July, no diversion limits for supply plants are specified. 
Additionally, the Northeast order currently does not limit the ability 
to simultaneously pool the same milk of a producer on the order and on 
a marketwide equalization pool operated by another government entity.
    Proposal 3, offered by NYSDF, seeks to modify the Producer milk 
provision of the order by: (1) Establishing a two-day touch-base 
standard in each of the months of August through December; (2) Setting 
an explicit limit on the amount of producer milk that can be diverted 
from any type of pool plant to nonpool plants at 60 percent of total 
receipts in each of the months of August through December, and 75 
percent in each of the months of January through July; (3) Clarifying 
that any milk diverted in excess of the diversion limits will not be 
considered producer milk; and (4) Providing authority to the Market 
Administrator to adjust diversion limit standards.
    A witness appearing on behalf of NYSDF was of the opinion that 
current pooling provisions of the Northeast order are inadequate and 
have resulted in milk being pooled on the order that does not 
demonstrate regular and consistent performance in supplying the Class I 
needs of the market. The witness explained that after a pool plant 
receives the milk of a producer, the plant can then divert unlimited 
quantities of that producer's milk. The diverted milk need never again 
be physically received at a pool plant and need not ever be made 
available for satisfying the market's Class I needs, the witness said, 
yet such milk would continue to be pooled and receive the blend price 
of the Northeast order. Consequently, the witness stated, Northeast 
order producers are receiving an otherwise lower blend price because of 
the increased quantity of milk being pooled at lower valued uses. The 
witness characterized pooling milk in this way as ``artificial 
pooling.''
    NYSDF offered a modification to Proposal 3 in their post-hearing 
brief. The NYSDF modification proposed that diversion limit standards 
for supply plants should be 100 percent minus the proposed supply plant 
performance standards. Therefore, NYSDF wrote, the diversion limit in 
August would be 85 percent, 75 percent in each of the months of 
September through November, and 90 percent in the month of December.
    The NYSDF witness testified that milk in excess of the proposed 
diversion limit standards should not be pooled because the order would 
be pooling the excess reserves of another market to the detriment of 
those pooled producers whose milk regularly and consistently serves the 
Northeast Class I market. According to the witness, during some months 
when milk production is plentiful, total pool milk receipts from as 
many as 800 producers located far from the marketing area have exceeded 
100 million pounds. The NYSDF witness was of the opinion that the milk 
of these producers was not only unneeded to supply the Northeast order 
fluid needs but a vast majority of the distant milk was never 
physically received on a regular or consistent basis at a Northeast 
pool plant.
    The NYSDF witness testified that milk diverted in excess of the 
specified diversion limits should not be considered as producer milk, 
and therefore, should not be pooled on the order. The witness also 
emphasized that the Market Administrator should be given the authority 
to adjust diversion limits and the touch-base standard as market 
conditions warrant.
    The NYSDF witness is of the opinion that the two-day touch-base 
standard offered in Proposal 3 is reasonable and would eliminate the 
ability to artificially pool milk on the order by requiring a producer 
to deliver at least two-days' milk production to a pool plant in each 
of the pool-qualifying months before the milk of that producer would be 
eligible for diversion to nonpool plants. The higher touch-base 
standard in the months of August through December would also more fully 
assure fluid handlers an adequate supply of milk to meet the needs of 
their customers when milk supplies are less abundant, the witness 
added.
    A witness appearing on behalf of ADCNE testified in opposition to 
Proposal 3. The witness said that implementation of a two-day touch-
base standard would result in disorderly market conditions because the 
cost to producers in meeting this pooling standard could increase 
significantly. The witness presented testimony describing the vast 
geographic area and other characteristics of the Northeast order that 
would give rise to increased costs to producers. The witness explained 
that because most Northeast order producers are not located near a 
Class I handler, a higher touch-base standard would result in the 
uneconomic movement of milk and in higher overall transportation costs. 
The witness also suggested that higher transportation costs could 
prevent some producers from being able to pool their milk on the order.
    The ADCNE witness also expressed opposition to the portion of 
Proposal 3 that would lower diversion limit standards. The witness did 
agree that the current lack of specific diversion limits could cause 
harm in the orderly marketing of milk. In ADCNE's opinion, the proposed 
diversion limits for the months of August through December are too 
restrictive and could result in disorderly marketing conditions. 
Rather, ADCNE was of the opinion that establishing performance 
standards for supply plants in each of the months of January through 
July was a more appropriate alternative than making restrictive changes 
to the order's diversion limit standards.
    Proposal 6, offered by ADCNE, also seeks to amend the Producer milk 
definition of the Northeast order. Specifically, the proposal seeks to: 
(1) Establish year-round diversion limit standards of 80 percent in 
each of the months of September through November, and 90 percent in 
each of the months of January through August and December; (2) Clarify 
that a producer can touch-base anytime during the month to make their 
milk eligible for diversion to nonpool plants; (3) Clarify that over-
diverted milk will not result in a dairy farmer losing producer status 
on the order; (4) Eliminate the ability to simultaneously pool the same 
milk on the Northeast order and on a marketwide equalization pool 
operated by another government entity; and (5) Provide authority to the 
Market

[[Page 15572]]

Administrator to adjust diversion limit standards applicable to those 
handlers who receive marketwide service payments when warranted.
    A witness appearing on behalf of ADCNE testified that the pooling 
provisions of the Northeast order need to be considered on an emergency 
basis to correct loopholes that could lead to further erosion of blend 
prices and disorderly market conditions. The witness also testified 
that the lack of specific year-round diversion limit standards for 
distributing plants needs to be corrected because the absence of such 
standards currently allows distributing plants the ability to pool 
large quantities of milk during the spring months when milk supplies 
are plentiful through the diversion process. According to the witness, 
the only functional restrictions on diversions from a distributing 
plant during those months are economic considerations and the amount of 
milk that a distributing plant can physically receive. Theoretically, 
the witness explained, a single distributing plant could pool all of 
the milk in the Northeast Order because no diversion limit is 
specified. The witness stressed that if diversion limit standards are 
not established for every month, an increase in the amount of milk 
pooled on the order could result in significantly lower blend prices 
paid to producers.
    The ADCNE witness also explained that a producer should not lose 
producer status under the dairy farmer for other markets provision of 
the Northeast order in the event that a handler over-diverts the milk 
of a producer. In this regard, the witness explained that Proposal 6 
would allow for pooling the milk of producers in the following month in 
the event that milk of a dairy farmer is over-diverted in the current 
month.
    The ADCNE witness also testified that while no entities are 
currently engaging in the practice of simultaneously pooling the same 
milk on the Northeast order and on a marketwide equalization pool 
operated by another government entity (commonly referred to as 
``double-dipping''), the opportunity for it exists, especially with the 
Western New York State Milk Marketing Order that shares a common 
milkshed with the Northeast order marketing area. The ADCNE witness 
stipulated that eliminating the ability to double-dip would have no 
effect on milk priced by State-operated programs that provide for 
marketwide pooling of milk pricing premiums such as the Pennsylvania 
Milk Marketing Board, the Maine Milk Commission, or the Virginia Milk 
Commission.
    The pooling standards of all milk marketing orders, including the 
Northeast order, are intended to ensure that an adequate supply of milk 
is supplied to meet the Class I needs of the market and to provide the 
criteria for identifying those who are reasonably associated with the 
market as a condition for receiving the order's blend price. The 
pooling standards of the Northeast order are represented in the Pool 
Plant, Producer, and the Producer milk provisions of the order. Taken 
as a whole, these provisions are intended to ensure that an adequate 
supply of milk is supplied to meet the Class I needs of the market. In 
addition, these provisions provide the criteria for identifying those 
producers and plants whose milk is reasonably associated with the 
market by supplying the Class I needs and thereby sharing in the 
marketwide distribution of proceeds arising primarily from Class I 
sales. Pooling standards of the Northeast order are based on 
performance, specifying standards that, if met, qualify a producer, the 
milk of a producer, or a plant to share in the benefits arising from 
the classified pricing of milk.
    Pooling standards that are performance-based provide the only 
viable method for determining those eligible to share in the marketwide 
pool. This is because it is the additional revenue from the Class I use 
of milk that adds additional income, and it is reasonable to expect 
that only those producers who consistently bear the costs of supplying 
the market's fluid needs should be the ones to share in the 
distribution of pool proceeds. Pool plant standards therefore are 
needed to identify the milk of those producers who are providing 
service in meeting the Class I needs of the market. This is important 
because producers whose milk is pooled receive the market's blend 
price. 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 and can 
result in an unwarranted lowering of returns to those producers who 
actually incur the costs of supplying the fluid needs of the market.
    Similarly, pooling standards for distributing and supply plants 
should also provide for those features and accommodations that reflect 
the needs of proprietary handlers and cooperatives in providing the 
market with fluid milk and dairy products. When a pooling feature can 
result in pooling milk which would not reasonably demonstrate serving 
the fluid needs of the market, it is appropriate to re-examine the need 
for continuing to provide that feature as a necessary component of the 
pooling standards of the order. The pooling standards of an order serve 
to ensure an adequate supply of fluid milk for the market and the 
proper identification of those producers whose milk does serve the 
fluid needs of the market, a feature which can diminish these aims 
should be considered as unnecessary.
    The record provides sufficient evidence to conclude that features 
of the Pool plant provision are not appropriate given the prevailing 
marketing conditions of the Northeast order. The hearing record reveals 
that the lack of supply plant performance standards in every month and 
the lack of explicit diversion limit standards for all pool plants in 
every month of the year has allowed producers from areas located far 
from the marketing area to participate in the distribution of proceeds 
from the marketwide pooling of milk without demonstration of a 
reasonable level of consistent and regular service in meeting the Class 
I needs of the market. Current performance standards have allowed these 
producers to receive the Northeast order's blend price by simply making 
a one-time delivery of milk to a pool plant and thereafter, divert 
unlimited quantities of milk to nonpool plants located nearer their 
farms and far from the marketing area. Such milk pooled by diversion 
cannot reasonably be considered a reserve supply for the marketing 
order area because it is never again physically received by pool plants 
regulated by the Northeast order. Furthermore, such milk pooled by way 
of diversion is not consistently demonstrating performance to serving 
the market's Class I needs. The pooling of milk through the diversion 
process evidenced by the record increases the total amount of milk 
pooled on the order and lowers the blend prices paid to all producers, 
especially to those producers who consistently deliver milk to the 
order's pool plants.
    The record provides evidence to conclude that performance standards 
for supply plants should be specified for every month. The performance 
standards proposed by the ADCNE are reasonable in light of the 
prevailing marketing conditions reflected in the Northeast marketing 
area. The concerns of NYSDF, who represented the interests of the many 
distributing plants regulated under the terms of the order, make clear 
that since the Northeast milk marketing area was created and 
implemented as part of Federal milk order reform in January 2000, the 
need arose at least twice for the Market Administrator to raise the 
performance

[[Page 15573]]

standards for supply plants. This was done so that distributing plant 
bottlers would be assured of sufficient milk supplies to meet fluid 
demands.
    In this regard, this decision can only conclude that authority 
provided to the Market Administrator to make the needed adjustments to 
the performance standards as marketing conditions warrant function well 
and as intended. The temporary increase in supply plant performance 
standards brought forth the milk supply needed to satisfy the needs of 
distributing plants. Accordingly, this decision sees no compelling 
reason to adopt the higher supply plant performance standards offered 
by NYSDF. To the extent that the needs of distributing plants have 
necessitated the need to increase the availability of supply to meet 
fluid needs, the order provisions have done so. It is reasonable to 
conclude, therefore, that the order will continue to react as needed to 
changing marketing conditions into the future.
    Handlers and producers are better served by eliminating the ability 
of a supply plant to automatically be a pool plant if the supply plant 
had been a pool plant in some prior period as the order currently 
provides. The granting of automatic pool plant status to a plant does 
not provide the certainty needed by distributing plants for the order 
to assure them an adequate supply of milk for Class I uses. Together 
with other pooling standard inadequacies, it provides an avenue through 
which more milk can be pooled on the Northeast order than can be 
considered as part of the legitimate milk supply of the pool plant 
where automatic pool plant status has been granted. The opportunity to 
pool milk in this way only serves to increase the volume of milk pooled 
(at lowered valued uses) without that milk either being committed to, 
or demonstrating, serving the Class I needs of the market as a 
condition for receiving the order's blend price. Therefore, the supply 
plant performance standards should be amended to specify performance to 
the market in every month of the year. The performance standards of 10 
percent in each of the months of January through August and December, 
and 20 percent in each of the months of September through November 
should be adopted.
    The pool plant feature contained in the Northeast order for split-
plants should be removed. No similar provision was contained in the 
three pre-reform orders consolidated to form the Northeast order. The 
split-plant provision was included in the consolidated Northeast order 
in an effort to provide for the uniformity of provisions throughout the 
reformed Federal milk order system. The provision was established with 
the intent to allow handlers the ability to process Grade A milk in the 
pool side of the plant and process Grade B milk in the nonpool side of 
the plant.
    It is clear from the record that handlers in the Northeast 
marketing area are not utilizing this feature of the pool plant 
provision and no milk is being pooled on the order in this manner. 
However, if utilized, the feature can be used as a mechanism for 
pooling milk on the order that would not need to demonstrate a 
consistent service to the Class I market. This feature could be used as 
a loophole through which deliveries of milk to the pool side of a 
split-plant can then be diverted to the nonpool side of the plant. The 
diverted milk would never then need to serve the market's Class I 
needs. The split-plant feature can unintentionally provide the 
opportunity for milk to become pooled on the Northeast order without 
that milk demonstrating a reasonable level of service in meeting the 
market's fluid needs but would share in the revenue generated from 
Class I sales.
    The removal of the split-plant feature is broadly supported by the 
hearing participants. Since the split-plant feature is not currently 
utilized by any Northeast handler, no producers currently serving the 
Northeast market would be adversely affected by its removal from the 
terms of the order.
    The hearing record supports the adoption of certain features of 
Proposal 8 offered by Friendship. In simple terms the proposal calls 
for excluding milk received by a supply plant from two sources--milk 
received from sources not eligible for pooling (for example, milk 
received from a producer handler or from a dairy farmer for other 
markets) and from a cooperative association--from the total volume of 
milk receipts at the supply plant. By excluding such milk receipts from 
the total actual receipts, the proposal essentially lowers the intended 
performance standards for supply plants.
    As discussed above, the record reveals concern by distributing 
plants that the pooling standards of the Northeast order need to 
specify higher performance standards for supply plants and the need for 
explicit diversion limits and touch-base standards for producer milk. 
While the higher performance standards called for in the NYSDF proposal 
are not recommended for adoption, the adoption of certain features of 
Proposal 8 would essentially reduce the amount of milk that supply 
plants ship to distributing plants so that the Class I needs of the 
market can be satisfied. The current performance standards for supply 
plants are sufficiently liberal, especially in light of the more than 
40 percent Class I use of milk in the Northeast marketing area.
    The part of Proposal 8 that excludes milk received from producers 
not eligible for pooling is recommended for adoption since that milk is 
not eligible to be pooled on the Northeast order. It is reasonable to 
exclude such receipts for the purposes of determining if the supply 
plant has met the intended performance standards because milk not 
eligible for pooling should not be used as a factor for qualification.
    The portion of Proposal 8 that is not recommended for adoption 
specifically excludes supply plant milk receipts from cooperatives as a 
factor for qualification. This feature should not be adopted because it 
is viewed as having more to do with a supply plant's ability to draw 
money from the PSF than it does with demonstrating a reasonable 
standard of performance in supplying the Class I needs of the market as 
a condition for participation in the marketwide pool.
    As discussed above, the hearing record supports concluding that the 
Northeast order is not adequately identifying the milk of those 
producers that are actually supplying the Class I needs of the market 
on a regular and consistent basis. In this regard, it is clear that 
certain changes to the Producer milk provision of the order should be 
recommended for adoption.
    The current touch-base standard of the Northeast order does not 
provide detail sufficient to specify the quantity of milk a producer 
must deliver to pool plants. Currently the order only indicates that if 
a producer delivers milk to a Northeast order pool plant, the milk of 
that producer becomes eligible for diversion to nonpool plants. 
Generally, milk marketing orders that exhibit lower fluid demands 
require fewer physical deliveries to a pool plant, while markets with 
higher fluid demands typically specify more frequent deliveries. A 
touch-base standard that is too high can result in higher 
transportation costs to producers and cause uneconomic shipments of 
milk for the sole purpose of meeting a pooling standard. If the 
standard is too low, fluid handlers may be less assured of an adequate 
supply of fluid milk to meet the demands of the Class I market.
    The hearing record supports concluding that the touch-base standard 
of the Producer milk provision, together with generally inadequate 
diversion limit standards for all pool plants, contributes to the 
pooling of milk on the order which does not demonstrate a

[[Page 15574]]

reasonable level of service in supplying the Class I needs of the 
market. There are competing proposals and views on how the order should 
rely on both the touch-base standard and diversion limit standards so 
that, together with the performance standards, the Class I needs of the 
market are satisfied and the order has appropriately identified the 
milk of those producers whose milk actually demonstrates service in 
meeting the Class I needs of the market.
    The ADCNE proposals place much more weight on the need for explicit 
diversion limit standards in each and every month that are applicable 
to both supply and distributing plants than on a two-day touch-base 
standard proposed by NYSDF. The ADCNE and NYSDF both acknowledge the 
need for explicit diversion limit standards for all pool plants, 
although their respective positions of what those standards should be 
differ only as to what are the most appropriate levels for the 
Northeast order.
    This decision recommends adopting a one-day touch-base standard in 
the initial pool qualifying month. A touch-base standard that would 
require more frequent deliveries is not warranted because it would 
result in higher transportation costs to producers and cause uneconomic 
shipments of milk for the sole purpose of meeting a pooling standard. A 
one-day touch-base standard, together with other recommended changes 
contained in this decision, should adequately contribute in identifying 
the milk of those producers who regularly supply the market's Class I 
needs and therefore can be pooled under the terms of the order. The 
position of the ADCNE that the milk of a producer could touch-base 
anytime during the initial qualifying month is reasonable and should be 
adopted for the purpose of clarifying when meeting this standard should 
occur.
    Granting authority to the Market Administrator to adjust the touch-
base standard should also be adopted as a key component of the 
recommended one-day touch base standard. While this feature of the 
touch-base standard was not included in those proposals amending the 
Producer milk provision of the Northeast order, the record is specific 
that this was intended. It is also consistent with the authority 
already granted to the Market Administrator to adjust the performance 
standards of the order for supply plants.
    Providing for the diversion of milk is a desirable and needed 
feature of an order because it facilitates the orderly and efficient 
disposition of milk not needed for fluid use. When producer milk is not 
needed for Class I use, some provision should be made for milk to be 
diverted to nonpool plants for use in manufactured products. However, 
it is essential that limits be established 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 
and supply 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 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 can unnecessarily 
reduce the blend price paid to dairy farmers who service the market's 
Class I needs.
    Without reasonable diversion limits, the order's ability to provide 
for effective performance standards and orderly marketing is weakened. 
Diversion limits that are set too high can open the door for pooling 
much more milk on the market then can be reasonably associated with the 
reserve supply for the market. The record reveals that unlimited 
diversion limits for distributing plants in the Northeast order could 
have contributed to the pooling of large volumes of milk that have not 
demonstrated performance to the Class I market. The same is also 
revealed in the record by the lack of explicit diversion limit 
standards for supply plants in every month.
    This decision recommends adopting diversion limit standards for all 
pool plants as proposed by ADCNE. Specifically, a diversion limit 
standard of 90 percent in each of the months of January through August 
and December, and 80 percent in each of the months of September through 
November should be adopted. Milk diverted in excess of the standards 
should not be considered producer milk and the pool plant must 
designate to the Market Administrator which deliveries will be 
depooled. If the pool plant fails to make a designation, the Market 
Administrator can depool all of that month's diversions to nonpool 
plants. As also proposed by ADCNE, this decision can find no reason to 
cause the loss of producer status under the order in the event a 
producer's milk is caused to be over diverted. Accordingly, the proviso 
that a producer will not lose producer status under the order in the 
event that the milk of a producer is over diverted should be adopted.
    To the extent that these diversion limits may warrant future 
adjustments, this decision recommends granting explicit authority to 
the Market Administrator to adjust the diversion limit standards when 
needed. In practice, such authority has already been given to the 
Market Administrator in that current supply plant diversion limits are 
functionally set at 100 percent minus the applicable performance 
standard. In past actions undertaken by the Market Administrator to 
change supply plant performance standards, the applicable diversion 
limit was also functionally changed as higher performance standards 
adopted temporarily also changed supply plant diversion limits. 
Therefore, providing authority to change the order's diversion limit 
standards in the way presented in this decision merely serves to 
clarify an authority already granted to the Market Administrator.
    Since the 1960's, the Federal milk order program has recognized the 
harm and disorder that results to both producers and handlers when the 
same milk of a producer is simultaneously pooled on more than one 
Federal order, commonly referred to as ``double-dipping''. In the past, 
this situation caused disparate prices between producers while handlers 
were not assured of uniform prices, which gave rise to competitive 
equity issues.
    The need to prevent ``double-dipping'' became critically important 
as distribution areas expanded and orders merged. The issue of 
``double-dipping'' on a marketwide equalization pool operated by 
another government entity and a Federal order can, for all intents and 
purposes, have the same undesirable outcomes that Federal orders once 
experienced and subsequently corrected. While ``double-dipping'' is not 
presently occurring in the Northeast order, it is clear that the 
Northeast order should be amended to prevent the ability to pool the 
same milk on both a Federal order and a marketwide equalization pool 
operated by another government entity. This action is consistent with 
other recent Federal order amendatory actions regarding simultaneous 
pooling on a Federal order and on another government operated program.
    The hearing record does not support the adoption of Proposal 9, 
which seeks to exclude a supply plant's route distribution of packaged 
fluid milk products from the total volume of milk that it would need to 
deliver to a distributing plant for the purpose of meeting the order's 
performance standards. As implied in the name, a supply plant is a 
supplier of bulk milk

[[Page 15575]]

to distributing plants. Supply plant performance standards are 
intended, in part, to ensure that distributing plants are supplied with 
enough fluid milk to meet their needs. A plant's route sales in the 
marketing area are used to determine the pool status of fully or 
partially regulated distributing plants, not of supply plants.
    The hearing record also supports the adoption of Proposal 14 
because it serves to provide milk processors in the Northeast with the 
more orderly marketing of unit-pooled milk without compromising the 
order's intent to ensure that the Class I needs of the marketing area 
are satisfied. Unit pooling serves to provide a degree of regulatory 
flexibility for handlers by recognizing specialization of plant 
operations and to minimize the uneconomical and inefficient movement of 
milk for the sole purpose of retaining pool status.
    If a plant has combined Class I and II receipts of 60 percent or 
more, including milk received from cooperative handlers and milk 
diverted from the plant, and is physically located in the Northeast 
marketing area, it is reasonable to conclude that the unit's plant does 
contribute in making milk available on a regular and consistent basis 
for meeting the fluid needs of the order. Therefore, its adoption is 
recommended provided all other standards and conditions for unit 
pooling are met. This should provide for greater flexibility in the 
types of products a pooling unit may produce such as Class III or Class 
IV dairy products, in a unit pooled plant. Additionally, providing for 
the secondary unit-pooled facility to be located within the Northeast 
marketing area, as well as being primarily involved in producing Class 
I or Class II milk products, retains safeguards that would prevent the 
pooling of milk that may be located far from the marketing area which 
would not demonstrate the standards of performance in servicing the 
Class I needs of the market.
    A proposal published in the hearing notice as Proposal 11, seeking 
to amend the dairy farmer for other markets feature of the Producer 
provision, was withdrawn at the hearing by the proponent. No further 
reference to this proposal will be made.

3. Marketwide Service Payments

    A proposal, published in the hearing notice as Proposal 7, seeking 
to establish a 6-cent per hundredweight (cwt) marketwide service 
payment in the form of a market ``balancing'' credit to handlers should 
not be adopted. As proposed, a balancing credit would be provided if 
the handler pools at least a million pounds of milk per month, provided 
less than 65 percent of such pooled milk is shipped to distributing 
plants for Class I use or represents at least three percent of the 
total volume of milk pooled on the Northeast order.
    In the context of this proceeding, ``balancing'' refers to those 
actions performed by handlers that add or remove milk from their supply 
to accommodate the fluctuating needs of Class I. The Northeast order 
does not currently contain a marketwide service payment provision.
    Proposal 7 was offered by ADCNE and has received additional support 
or endorsement in writing from the National Milk Producers Federation 
(NMPF) and the New York State Farm Bureau Federation.
    A form of a marketwide service payment was available to certain 
cooperative handlers in the pre-reform New York-New Jersey milk 
marketing order. That order was combined with the Middle Atlantic and 
New England orders to form the consolidated Northeast order. The 
service payment of the New York-New Jersey order consisted of two 
components: a cooperative service payment and a balancing payment. The 
balancing component was far smaller than the proposed six cents per cwt 
credit under consideration in this proceeding. The cooperative service 
payment could total up to three cents per cwt. An additional ``up to'' 
one cent was provided for balancing. By comparison, the marketwide 
service payment proposal considered in this proceeding is dedicated 
entirely to compensating eligible handlers for balancing functions.
    The ADCNE's rationale for balancing payments rests on the argument 
that the Northeast order has a large number of independent milk 
producers (dairy farmers who are not members of a cooperative) who 
avoid incurring the costs of operating and maintaining facilities that 
provide outlets for milk when not needed for fluid use. In this regard, 
they assert that the independent producers essentially receive a higher 
blend price for their milk because they avoid the costs of balancing 
which are largely absorbed by dairy farmer cooperatives that own 
manufacturing plants. As a matter of equity, ADCNE is of the opinion 
that the entire market, rather than only cooperatives, should share in 
bearing the costs that arise from providing these market balancing 
operations and facilities.
    In post hearing briefs, support for Proposal 7 was completely 
withdrawn by Agrimark, a major participant and member of ADCNE who 
provided testimony at the hearing in favor of adopting a marketwide 
service payment for balancing. In addition, LOL, also a member of 
ADCNE, indicated their change to a neutral and uncommitted position for 
the adoption of a balancing credit.
    Testimony advancing the adoption of Proposal 7 was provided by 
representatives of three members of ADCNE. The majority of their 
testimony relied on research conducted by USDA's Rural Cooperative 
Business Service (RCBS) which examined market balancing activities in 
the Northeast milk marketing area. The research was performed at the 
request of ADCNE.
    An RCBS witness, who participated in conducting the market 
balancing research, provided testimony concerning the study's 
methodology, underlying assumptions, and findings. The witness 
emphasized that the research performed and testimony given was offered 
as a service to the industry and interested parties and is not in 
support of, or opposition to, any proposal under consideration in the 
proceeding.
    The RCBS witness testified that the study provides a framework that 
can be used to estimate the costs associated with balancing the Class I 
needs of the Northeast marketing area by examining the costs associated 
with unused milk manufacturing capacity at butter-powder plants located 
within the marketing area. According to the witness, unused milk 
manufacturing capacity results from increases or decreases in the 
demand for fluid milk by Class I handlers given the available milk 
supply associated with the marketing area. The witness explained that 
the study also estimates changes in costs associated with different 
hypothetical levels of idled butter-powder plant capacity when 
subjected to seasonal variations in milk supplies that cause 
fluctuations in the amount of milk manufactured at butter-powder 
plants. The witness indicated that the plant capacity data originated 
from cooperatives that operated butter-powder plants in the pre-reform 
orders consolidated to form the Northeast marketing area.
    The RCBS witness explained that the study results are theoretical 
and do not represent actual or existing conditions in the Northeast 
marketing area. According to the witness, the balancing study employed 
a comparative static methodology. For the purposes of the study, the 
witness explained, the research defined the necessary reserve milk 
supply requirements of the market as the amount of milk required to 
meet

[[Page 15576]]

daily operating fluctuations among distributing plants (operating 
reserves) and seasonal fluctuations (seasonal reserves). According to 
the witness, during periods of abundant milk supply in the Northeast 
marketing area, such reserve milk is used for Class IV manufacturing 
purposes, specifically for the manufacture of nonfat dry milk (NFDM).
    According to the RCBS witness, the study suggests that seasonal 
variations in the demand for fluid milk cause variations in the supply 
of milk that would otherwise be used in manufacturing. As a result, 
milk available for the manufacturing of NFDM fluctuates inversely with 
the milk supplies needed to meet fluid milk demand, the witness noted. 
The witness said that as demand for milk for fluid use increases, 
supplies of milk for manufacturing tend to decline. According to the 
witness, changes in Class I (fluid) demand change the amount of unused 
butter-powder plant capacity and that such unused capacity has 
associated costs.
    The RCBS witness explained that the balancing study was conducted 
using two different scenarios. The witness said the first scenario 
assumes an operating reserve of milk needed to balance the regions' 
needs at 10 percent of total fluid demand. The second scenario assumes, 
according to the witness, an operating reserve of 20 percent. The 
witness testified that operating costs were compared under these two 
differing scenarios while other factors were held constant. The witness 
noted that while the study focuses on estimating costs and changes in 
estimated costs, the study did not address methods by which to recover 
or offset costs typically associated with balancing services and 
operations. The witness indicated that cost recovery methods might 
include some form of marketwide service payments formalized under the 
term of a milk marketing order, ``give-up'' charges (a charge by a 
supplier for making milk available, for example, to a distributing 
plant), balancing or diversion fees (a charge for accepting milk at a 
balancing facility when not needed by a Class I bottler), ``over-
order'' premiums (a price charged for milk above those minimum prices 
set under the terms of a milk marketing order), or by pricing formulae 
included in the classified prices established under a milk marketing 
order.
    A witness for Dairylea, a farmer-owned agricultural marketing and 
service organization, testified in support of Proposal 7. The witness 
described the Northeast marketing area as a milk ``megamarket'' 
characterized by high population and milk production density that 
requires marketwide service payments for balancing the market's fluid 
needs. The witness asserted that the Class I needs of the Northeast 
market are so large and unique among Federal milk orders that without 
compensation for the costs incurred for balancing, such activities 
might not otherwise be provided. The witness asserted that there is no 
other viable market mechanism through which excess milk supplies can be 
adequately disposed of other than through the butter-powder balancing 
facilities of the region's six largest cooperative handlers. The 
witness did note, however, that all manufacturing handlers operating in 
the Northeast marketing area also perform balancing functions by simply 
procuring milk from the area's producers.
    The Dairylea witness characterized the Northeast as a unique milk-
producing region because nearly 25 percent of farmers supplying the 
market are independent producers and not members of cooperatives. The 
witness characterized the Northeast's independent producers as largely 
serving the needs of Class I handlers and as generally not involved in 
providing balancing facilities and services for the market. 
Additionally, the witness testified that the marketing area contains 
nearly 40 percent of all dairy farmer cooperatives in the United 
States. In comparing outlets for milk, the witness testified that the 
Northeast marketing area is represented by 32 proprietary handlers and 
259 milk plants.
    The witness for Dairylea was of the opinion that the unique 
characteristics and size of the marketing area together with the sheer 
volume of milk required to supply the fluid needs of the marketing area 
make it imperative that marketwide service payments be provided to 
compensate the largest cooperative handlers for the costs that they 
incur for balancing the market. According to the witness, without 
cooperatives performing this service, some milk production in the 
marketing area would not clear the market. The witness did note that 
some milk produced within the boundaries of the Northeast marketing 
area is not pooled on the order because it is delivered south to other 
marketing areas where it receives a higher blend price. The witness 
similarly acknowledged that milk produced west of the marketing area is 
delivered to the Northeast marketing area butter-powder plants because 
being pooled on the Northeast order often commands a higher blend 
price.
    The Dairylea witness also acknowledged that other plants located 
within the Northeast marketing area (some 184 nonpool plants, many of 
which are proprietary) also perform significant balancing functions. 
While the witness was of the opinion that no single nonpool plant could 
individually provide significant market balancing services, taken as a 
whole, these plants do provide and perform balancing functions.
    The Dairylea witness testified that the members of ADCNE had 
advanced a conceptually similar marketwide service payment proposal for 
balancing during the Federal milk order reform effort. The witness 
testified that Federal order reform provided public debate and analysis 
on the need for a marketwide service payment for balancing. The witness 
explained that USDA rejected that marketwide service payment proposal 
in the reform's recommended decision of 1998 and in its final decision 
in 1999 because the proposed balancing credit level sought had not been 
adequately explained.
    A second ADCNE witness, representing Agrimark, testified that the 
Food Security Act of 1985 (commonly referred to as the 1985 Farm Bill) 
provided authority for Federal milk marketing orders to allow handlers 
to collect for services rendered that are of benefit to all the 
market's participants. The witness asserted that the disposal of 
surplus milk (milk not needed for fluid use) and the procurement of 
supplemental milk supplies for fluid handlers are specifically 
identified in the provisions of the 1985 Farm Bill as being of 
marketwide benefit. The Agrimark witness also asserted that payments 
for reimbursing handlers who provide services of marketwide benefit may 
be made from the total sums payable by all handlers for milk--the costs 
are paid from the total value of milk pooled before the computation of 
the blend price.
    In the opinion of the Agrimark witness, such payments would be made 
on a uniform basis by all pool participants and thereby all would 
equitably share in the cost associated with balancing. According to the 
witness, because independent producers do not operate balancing 
facilities or perform balancing functions, they have avoided the burden 
of incurring balancing costs while receiving the benefit of the blend 
price.
    Testimony of the Agrimark witness reinforced the opinion of the 
Dairylea witness that cooperatives perform the bulk of market balancing 
functions in the Northeast marketing area throughout the year. As an 
example, the witness

[[Page 15577]]

cited data originating from the Market Administrator's office 
illustrating that during 2001, cooperative-supplied milk satisfied 
market shortfalls during those months when milk production was at its 
lowest in the region. In addition, the witness noted that cooperatives 
accommodated surplus milk diversions from the Class I market when milk 
production in the area was higher. The witness stressed that the volume 
of deliveries to Class I bottlers by cooperatives varied inversely with 
the delivery volumes by independent milk producers.
    According to the Agrimark witness, during November 2001, receipts 
by the Class I handlers from cooperative suppliers were more than 
double the level of receipts from independent producers. In contrast, 
the witness testified that receipts by Class I handlers from 
cooperative suppliers reached their low point during July 2001, a 
period of the year when overall milk production in the Northeast was 
highest. According to the witness, milk deliveries by cooperatives 
during November to the Class I market were 29 percent above those for 
July. This data clearly shows, the witness asserted, that milk supplied 
by cooperatives provided a larger share of market balancing than did 
independent producer milk.
    Relying on data supplied by the Market Administrator, the Agrimark 
witness testified there are approximately 4,000 independent producers 
who pool their milk on the Northeast order. The witness indicated that 
these producers account for approximately 6 billion pounds of milk per 
year pooled on the order. Of this milk volume, the witness asserted, 
some 80 percent is supplied for fluid uses in a market whose total 
Class I use is only 45 percent of the total volume of milk pooled. The 
witness testified that while independent producer milk is not refused 
by distributing plants from their producers during slack demand months 
of the year, cooperative-producer milk is sometimes diverted from Class 
I use by distributing plants for use in manufacturing. According to the 
witness, this further demonstrates that it is cooperatives who own 
manufacturing plants that provide the majority of balancing services 
for the market.
    The witness was of the opinion that cooperative producers are 
receiving a lower price because cooperatives have absorbed the costs 
associated with market balancing and as such, balancing costs are not 
equitably shared among all the market's producers. In addition, the 
witness expressed the opinion that milk supplied by cooperatives is 
more likely to be the milk that is diverted away from Class I use than 
is milk supplied by independent producers. Diversions tend to be made, 
according to the witness, to cooperatives that operate butter-powder 
plants. The witness testified that all costs and risks of operating 
such balancing plants accrue only to the cooperatives, while such costs 
and risks are essentially avoided by independent producers.
    The Agrimark witness testified that excess manufacturing plant 
capacity occurring during high fluid demand months causes losses for 
large cooperative handlers that operate balancing plants. According to 
the witness, Agrimark may be reaching a point where it can no longer 
operate their balancing plants because of excessive operating costs 
arising from idled plant processing capacity. High operating costs 
occur, according to the witness, because there is insufficient milk 
volume for the plants to operate profitably at certain times of the 
year.
    The witness for Agrimark testified that revenue from the 
manufacture and distribution of Class IV products and sales of Class I 
and II products essentially subsidize the balancing operations and 
activities of cooperatives. In the opinion of the witness, these 
subsidies are required because the balancing costs they incur are not 
recoverable from the marketplace. The Agrimark witness also provided 
information relating to one of their specific plants for comparison 
with the RCBS study in order to validate the RCBS study cost estimates. 
For example, the witness indicated that a butter-powder plant, owned 
and operated by Agrimark, was built in 1919 and has been refurbished on 
a number of occasions. The witness indicated that while their plant 
costs and the cost estimates in the RCBS study differ on a number of 
factors, the RCBS study nevertheless can be relied upon in its totality 
as an accurate reflection of Agrimark's own plant costs.
    A third ADCNE witness appearing on behalf of LOL testified that 
marketwide service payments are needed for the Northeast milk order to 
keep balancing plants operating, thus benefitting all market 
participants. According to the LOL witness, only cooperatives incur the 
brunt of balancing costs and bear the burden of receiving lower blend 
prices than would be the case if balancing costs were more equitably 
shared by all producers who pool milk on the Northeast order. Members 
of cooperatives are therefore at a disadvantage in the marketplace as 
compared to independent producers who do not pay for balancing through 
cooperative membership dues or reduced revenues, the LOL witness 
concluded.
    The LOL witness testified that the ADCNE cooperatives provided 
balancing services for as much as 21.8 million pounds of milk per day 
during peak milk production months during 2001. The witness testified 
that this evidence was based on a survey that LOL conducted using data 
received from ADCNE member butter-powder plants for the months of May 
and November of that year. In addition, the LOL witness noted, as did 
the Agrimark witness, that the Market Administrator's data indicates 
that 80 percent of independent producer milk is delivered directly to 
distributing plants for Class I use even though milk supplied by 
cooperatives represented the bulk of reserve milk pooled on the 
Northeast order.
    Relying on Market Administrator data and the methodology for 
estimating balancing costs from the RCBS study, the LOL witness 
asserted that to properly balance the Northeast marketing area, the 
cooperatives operating butter-powder plants must operate with a 20 
percent operating reserve of milk during all seasons. According to the 
witness, during months of high fluid milk demand, draws on milk 
supplies from butter-powder plants for delivery to the Class I market 
resulted in unused butter-powder capacity of as much as 11.5 million 
pounds in a single month. Accordingly, the witness asserted, the 
cooperative's butter-powder plants should receive compensation for the 
cost of maintaining this available but unused processing capacity. 
According to the witness, the existence of such capacity benefits all 
producers and handlers participating in the Northeast marketing area 
and provides a needed alternative outlet for milk.
    The LOL witness noted that the balancing cost estimation developed 
in the RCBS study suggests that four modern, efficient, optimally 
located, three-million pounds per day butter-powder plants would 
efficiently balance the Northeast market even though there are seven 
actual plants located in the marketing area. Nevertheless, the LOL 
witness was of the opinion that the RCBS study of four theoretical 
manufacturing plants is an appropriate proxy for all butter-powder 
plants currently operating in the Northeast region. The witness 
asserted that LOL's own data and analysis validates the RCBS study's 
methodology. According to the witness, because the theory so accurately 
reflects actual marketing conditions, the operators of the seven 
butter-powder plants have a sound basis

[[Page 15578]]

to justify a marketwide service payment for unrecovered costs incurred 
by balancing the market.
    Testimony offered in opposition to the marketwide service payment 
proposal and the need in general for a balancing credit was advanced by 
representatives of NYSDF, representatives from the International Dairy 
Foods Association (IDFA), several proprietary handlers including 
Friendship Dairy, Queensboro Farms, Marcus Dairy, and Worcester 
Creameries, Dean Foods, H.P. Hood, and two independent dairy farmers. 
Representatives for the proprietary handlers testified and all 
maintained that if a balancing credit feature were adopted, they would 
not be eligible to receive the proposed marketwide service payments 
even though they too incur costs for performing market balancing 
functions. These witnesses also testified that if Proposal 7 were 
adopted, they would be placed at a competitive disadvantage in 
procuring milk when compared to large cooperative handlers because they 
would need to pay a higher effective price for milk. In this regard, 
the witnesses indicated that as small businesses they would be treated 
unfairly. Each of the proprietary handlers pointedly observed that the 
benefit of marketwide service payments would accrue only to the large-
scale butter-powder processors located in the Northeast marketing area.
    A witness for Queensboro Farms testified that as an operator of a 
supply plant, the company provides balancing services for the market 
that are similar to those performed by large-scale NFDM plants and 
accordingly should receive compensation for providing balancing 
services if a balancing credit for the order is adopted. However, the 
witness emphasized and asserted that the proposal unfairly excludes 
proprietary handlers on the basis of the milk volume eligibility 
criteria. The witness said that as a matter of fairness and competitive 
equity, no handler should receive a balancing credit if it is made 
available only to the largest handlers.
    Witnesses appearing on behalf of Marcus Dairy and Worcester 
Creameries provided testimony supporting the Queensboro Farms witness. 
The witness for Marcus Dairy noted that the company's cost of sourcing 
milk would be higher, thus the prices paid to farmers by them would be 
lower than prices paid by the largest cooperative handlers who would be 
eligible to receive a marketwide service payment. However, because 
Marcus Dairy is a small business entity, it would not be eligible for 
receiving a payment. Similarly, witnesses for Worcester Creameries and 
Friendship Dairy, both proprietary handlers and small businesses, 
provided supporting testimony concluding that adoption of a balancing 
credit, limited to criteria that only a large cooperative could meet, 
would needlessly harm them by increasing their milk procurement costs.
    A witness testifying on behalf of NYSDF noted that every handler in 
the Northeast marketing area performs some market balancing functions 
and therefore should be eligible to receive a credit if the decision is 
to adopt a balancing credit feature for the Northeast milk order. The 
witness asserted that if the largest handlers received marketwide 
service payments, then smaller handlers would face relatively higher 
costs and would therefore be placed at a competitive disadvantage in 
the price they pay for a supply of milk.
    A consultant witness for NYSDF testified that adoption of Proposal 
7 would serve to unduly enhance the power of larger cooperatives at the 
expense of smaller cooperatives. The witness asserted that smaller 
cooperatives pooling milk on the Northeast order whose monthly milk 
receipts are not sufficient to meet the proposed criteria for receiving 
a balancing credit might be forced to affiliate with a larger 
cooperative eligible to receive marketwide balancing credits. The 
witness speculated that although smaller cooperatives might receive 
partial benefit from the credits through affiliation, they also might 
be absorbed into a larger cooperative's milk marketing operations as 
the price for receiving this benefit. This witness was also of the 
opinion that the members of ADCNE have failed to reveal or consider 
that handlers are charged over-order premiums, give-up fees, or other 
variously named charges that are essentially already compensating for 
balancing costs.
    A witness appearing on behalf of Dean Foods testified that surplus 
milk from the Northeast marketing area could at times be shipped to the 
fluid milk deficit markets of the Southeast and Florida marketing 
areas. According to the witness, satisfying the demand for fluid milk 
of the southern marketing areas could serve the same balancing function 
for the Northeast market's producers seeking compensation to recover 
costs arising from operating butter-powder plants.
    Two independent dairy farmers, one from western New York State and 
another from Pennsylvania, testified that dairy farmers already pay for 
balancing as part of the expenses deducted from their milk checks by 
handlers. The dairy farmers testified that while no specific fee is 
explicitly itemized as a market balancing charge, they viewed the 
deduction as a cost they pay for balancing. They testified that they 
and other producers have been informed by their cooperative handlers, 
who market their milk, that the cost of balancing is a component of the 
handling charges that are deducted from their milk checks.
    A witness representing IDFA testified in opposition to Proposal 7. 
The witness noted that the costs of balancing the Northeast milk market 
are already recovered through revenues received in over-order premiums 
charged for milk diverted from Class IV to Class I use. In addition, 
the witness pointed out that the Class IV product pricing formula make 
allowance factors include balancing costs in determining the Class IV 
milk price. In this regard, the IDFA witness viewed Proposal 7 as 
requiring handlers to essentially pay anew for a function already 
accounted for in market prices.
    In addition, the IDFA witness expressed the opinion that 
consideration of a marketwide service payment proposal to compensate 
certain handlers for market balancing services should be heard on a 
national basis instead of on a limited basis for only the Northeast 
milk order. The IDFA witness stated that adopting Proposal 7 would have 
multi-regional impacts and perhaps national impacts.
    The IDFA witness noted that USDA had previously rejected proposals 
for marketwide service payments for balancing advanced by ADCNE 
cooperatives for the Northeast order as part of Federal milk order 
reform. According to the IDFA witness, USDA rejected these proposals, 
in part, because the make allowances for Class IV products already 
included a factor for balancing cost recovery and that the resulting 
Class IV prices would be at market-clearing levels. The witness 
concluded that this negates the need for additional compensation for 
costs already compensated.
    The Agricultural Marketing Agreement Act of 1937 (AMAA), as 
amended, provides authority for milk marketing orders to contain 
provisions for marketwide service payments. In this context, a 
marketwide service payment is a charge to all producers of milk, 
irrespective of the use classification of such milk, that is deducted 
before computing the order's statistical uniform price. The AMAA 
specifically identifies the types of services that may be of marketwide 
benefit. They include, but are not

[[Page 15579]]

limited to: (1) Providing facilities to furnish additional supplies of 
milk needed by handlers and to handle and dispose of milk supplies in 
excess of quantities needed by handlers; (2) handling on specific days 
quantities of milk that exceed quantities needed by handlers; and (3) 
transporting milk from one location to another for the purpose of 
fulfilling requirements for milk of a higher use classification or for 
providing a market outlet for milk of any use classification.
    A current example of Federal milk marketing orders that provides 
for marketwide service payments is the transportation funds for 
qualified handlers in the Southeast and Appalachian milk marketing 
orders. In these marketing orders, handlers pay an assessment on 
producer milk assigned to Class I each month into separate 
transportation credit balancing funds maintained and operated by the 
Market Administrator for each order. These funds, originally 
established in four pre-reform milk orders, were carried into these two 
consolidated milk marketing orders as a result of the need to import 
milk into the southeastern regions of the country from other areas 
during certain times of the year. The provisions provide payments from 
the funds to handlers who import supplemental milk for fluid use during 
the generally low milk production months of July through December. The 
provisions restrict the payments to milk received from other plants or 
farms located outside of the marketing areas.
    Another example of marketwide service payment provision includes 
the transportation credits and assembly credits employed in the Upper 
Midwest milk marketing order. Unlike the marketwide service payments of 
the Appalachian and Southeast orders, the Upper Midwest order's 
marketwide service payment provides credits to handlers for their total 
class use value before the blend price is calculated. Because the 
credits reduce the total dollar value of the pool, it results in a 
lower blend price to all producers.
    In the pre-reform New York-New Jersey milk marketing order, a 
payment was available to certain cooperative handlers in the form of a 
cooperative service payment and a balancing payment. These provisions 
predate the AMAA's amendment by the 1985 Farm Bill. Under the pre-
reform New York-New Jersey order, qualified cooperatives could receive 
up to three cents per cwt on the amount of milk pooled on the order in 
the form of a cooperative service payment. Plus, there was a component 
for a balancing payment that could have been up to one cent per cwt 
provided a cooperative association operated a manufacturing facility. 
By comparison, the marketwide service payment proposal considered in 
this proceeding is dedicated entirely to compensating eligible handlers 
for balancing functions and the rate of compensation at six cents per 
cwt is much higher.
    From testimony by proponents and opponents, as well as in the data 
supplied for the record by the Market Administrator, it is evident that 
the Northeast order has certain unique characteristics and marketing 
conditions. The Northeast marketing area is the single largest 
marketing area for Class I milk. Approximately 75 percent of the milk 
pooled on the order is from members of cooperatives with the remainder 
supplied by independent producers. In this regard, the Northeast 
marketing area has the largest base of independent producers that pool 
milk on the order relative to the other 10 Federal milk marketing 
orders. The marketing area's independent producers tend to be the 
predominant suppliers of the Class I needs of the marketing area as 
revealed by evidence showing that some 80 percent of independent milk 
supplies are pooled by a Class I handler in comparison to cooperative 
milk supplies. Cooperative milk supplies for the Northeast marketing 
area supply the vast majority of the marketing area's milk used in 
Class III and Class IV dairy products.
    The Northeast's market structure also is unique given the large use 
of milk for Class II products such as ice cream, sour cream, yogurt, 
and cottage cheese. The marketing area can also be characterized as 
unique by the relatively large number of proprietary handlers, many of 
them manufacturing entities, located in the marketing area. These 
handlers provide dairy farmers with alternative outlets for their milk. 
None of the handlers individually provide balancing services on the 
scale offered at the plants owned and operated by the large cooperative 
members of the ADCNE. However, taken as a whole, these plants do 
provide real and important balancing services that are similar to those 
provided by the member cooperatives of ADCNE.
    The basis of the argument advanced by the proponents of Proposal 7 
is that without marketwide service payments, balancing functions are 
unprofitable and cost recovery is not otherwise supported by market 
forces. The underpinning of identifying costs relies on the theoretical 
results of a RCBS study that examined the costs of balancing incurred 
by cooperatives that operate butter-powder plants in the Northeast by 
placing a value on unused plant processing capacity. The optimal cost 
structure for balancing the Northeast marketing area is presented by 
the proponents as an accurate reflection of the existing structure of 
the regional milk market. However, actual costs, together with the 
profitability or lack of profitability of these butter-powder plants, 
are never adequately addressed. Profitability is important to the issue 
as it can speak directly to whether or not a marketwide service payment 
can be justified. This is important because it is the position of the 
proponents that balancing activities might not otherwise be provided to 
the marketplace and because there are no other viable market mechanisms 
through which excess milk supplies can be adequately disposed of other 
than through the butter-powder balancing facilities of the region's six 
largest cooperative handlers.
    Typically, a review of the profitability would include a 
presentation and discussion of actual costs and revenues. In this 
proceeding, neither actual costs nor actual revenues generated from the 
sale of Class IV products or other methods used to generate revenue are 
addressed. The record does not contain information regarding revenues 
for Class IV products generated by the butter-powder operations or 
related joint-product production processes from some plants that 
produce NFDM.
    Regarding costs, the proponents preferred to rely on a theoretical 
cost estimating framework rather than on actual costs incurred in 
performing balancing services. Without actual revenues and costs 
available for review, it is impossible to credibly assess whether 
balancing costs are inequitably shared. Similarly, without historical 
cost and revenue data series, it is not possible to reasonably consider 
how the profitability of these operations has changed over time under 
prevailing and/or changing marketing conditions. It is therefore not 
possible on the basis of the record, to determine if there is a 
credible need to compensate cooperatives for balancing the market 
through the use of marketwide service payments.
    The record does not support recommending adoption of a marketwide 
service payment provision for balancing services for the Northeast milk 
marketing order. Arguments contained in the record in support of 
Proposal 7 have focused on the need to share the costs that are not 
recoverable from the marketplace for balancing the Class I needs of the 
Northeast marketing area more equitably with all producers who pool 
their milk on the order. Costs have been explained primarily by 
attempting to place a value on unused

[[Page 15580]]

butter-powder manufacturing plant capacity where unused plant capacity 
is caused by seasonal fluctuations in the relative demands for fluid 
milk given available milk supplies. Proponents have relied primarily on 
a theoretical framework developed in an RCBS study, and to a much more 
limited extent, actual plant replacement cost data to estimate the 
costs they incur for balancing the market. A balancing cost estimate is 
derived in the RCBS study from an analysis of competing milk uses that 
cause butter-powder plants to be operated at less than full capacity 
which, in turn, is caused by seasonal fluctuations in the demand for 
Class I milk.
    For all intents and purposes, butter-powder plants operated in the 
Northeast milk marketing area are owned and operated by members of 
ADCNE. The ADCNE member proponents argue that a significant share of 
independent producers (dairy farmers who are not members of 
cooperatives), do not bear the cost burdens that cooperative members 
(producers) bear by operating and maintaining butter-powder plants that 
provide a market outlet for cooperatives and independent milk when not 
needed for the fluid market and that such outlets provide a service 
that is of marketwide benefit. Proponents for adoption of Proposal 7 
maintain that the blend price received by independent producers is 
higher than it would otherwise be if independent producers had the 
burden of maintaining and providing services which balance the market.
    The central discussion of the proposal to establish a marketwide 
service payment by proponents is long on articulating costs associated 
with balancing. However, the discussion of the role and adequacy of 
revenues generated from providing balancing related activities or 
revenue generated in the marketplace from the sale of Class IV products 
is nearly absent. For example, proponent testimony is nearly silent 
concerning the roles of over-order premiums, give-up charges, make 
allowances already a part of the pricing formulae of the order, and 
other charges that generate revenue to offset costs incurred and 
characterized as associated with providing balancing functions. 
Nevertheless, it is clear from the testimony that producers and 
proprietary handlers pay charges and fees for either a supplemental 
supply of milk or for the removal of milk when not needed for fluid 
use. Producers and proprietary handlers have had it explained, in 
varying ways, that such charges and fees are due to costs associated 
with balancing--that is--supplying additional milk to meet fluid 
demand, or the removal of milk for surplus disposal when not needed by 
distributing plants.
    Opponents, including proprietary handlers and independent dairy 
farmers, also argue that balancing costs have already been recouped by 
the large cooperatives in various ways. The record reveals that 
proprietary handlers pay give-up charges and over order premiums to 
cooperative suppliers to obtain milk for Class I use when needed. Costs 
also are recouped by the imposition of variously-named charges and fees 
incurred by Class I handlers diverting some of their independent milk 
supply to a butter-powder plant when not needed for fluid use and in 
fees deducted from independent producer milk checks that have been 
explained in various ways to be fees charged for balancing.
    Opponents correctly note that the costs of balancing have already 
been considered and are accounted for in the Class IV product-price 
formula make allowance used in all Federal milk marketing orders for 
establishing the Class IV milk price. The Class III/IV pricing formulae 
adopted in the Class III/IV Interim Decision (65 FR 768832, published 
December 7, 2002) included a factor to offset the cost of balancing 
performed by butter-powder manufacturing plants. Official notice is 
hereby taken of the Class III/IV Final Decision (67 FR 67906, published 
November 7, 2002). The Class III/IV Final Decision that adopted product 
price formulas for all Federal milk marketing orders, including the 
Northeast order, gave specific recognition to costs associated with 
balancing in the make allowance factor in setting the Class III and 
Class IV milk price.
    Proprietary handlers also stress their opposition to adoption of 
Proposal 7 on the basis that they would be excluded from receiving a 
balancing credit, not because they do not provide balancing services, 
but because of their size. In their view, the exclusion of small 
businesses would create inequity among handlers in the price they pay 
for a milk supply because small handlers would need to pay a higher 
price for milk relative to large cooperative handlers who would be 
eligible to receive a balancing credit. Independent of the other 
reasons discussed for not recommending the adoption of a marketwide 
service payment for balancing, this decision can find no record 
evidence that adequately addresses why business size should have a 
bearing on the exclusion of small handlers who perform balancing 
function but would not be eligible for a balancing credit.
    None of the witnesses appearing on behalf of ADCNE would provide 
information for the record concerning fees charged to distributing 
plants and other commercial customers from whom cooperative handlers 
receive payments to compensate for, or to offset, balancing costs. But 
the record is clear, however, that such fees are charged in various 
ways and forms. Because balancing costs are recoverable and, in fact, 
are recovered in various ways, the record cannot support the notion 
that whatever cost burden is being borne by any financially interested 
business entity is so inequitable that it necessitates having the 
Federal government establish a provision to supervise the transfer of 
funds from one set of business entities to another.
    Conversely, the record contains evidence that investments by the 
large cooperatives in balancing facilities have taken place. For 
example, testimony by the LOL representative of ADCNE reveals that 
balancing services and plant expansion for balancing operations took 
place repeatedly at their Carlisle, PA, facility over the period of 
1984-2000, a time span during which no marketwide service payment was 
provided under the terms of then Middle Atlantic milk marketing order. 
Testimony by the Agrimark witness similarly reveals repeated investment 
in their butter-powder plant at Springfield, MA, at a time when no 
marketwide service payment was provided under the terms of the New 
England milk marketing order.
    In post hearing briefs and comments, support for Proposal 7 was 
completely withdrawn by Agrimark, one of the cooperatives comprising 
ADCNE. In addition, LOL, another cooperative member of the ADCNE, 
changed their position from support to a neutral position.
    The record contains no persuasive argument or compelling evidence 
to find that there are cost inequities that prevail between cooperative 
dairy farmers and independent dairy farmers to the extent that would 
warrant adoption of a provision providing payments from one group of 
producers to another that is supervised by government regulation. The 
applicable Class III and Class IV pricing formulae and other free 
market transactions charged by the large cooperatives with balancing 
facilities sufficiently offset balancing costs and are adequate to 
sustain existing balancing facilities and operations. Additionally, the 
Northeast order Class I price is sufficiently high to ensure that a 
sufficient supply of milk

[[Page 15581]]

for fluid use, together with the Class IV price as established under 
the order, will provide for the orderly disposal of milk when not 
needed for fluid use. The Northeast order already provides for cost 
equity in the minimum pricing mechanisms and the marketplace is 
providing the ability for transactions outside the terms of the order 
that currently do not exhibit the need for additional regulation.
    The record also does not support adoption of Proposal 7 on the 
basis of strictly theoretical costs. Offsetting costs by providing a 
balancing payment must be based on evidence of actual costs incurred 
for two reasons. First, an estimate of actual costs serves to provide 
and define a reasonable basis from which to determine a total value of 
the service being provided and corresponding rate at which 
reimbursement should be made. Secondly, it is real dollars that will be 
transferred from one group of producers to another.Accordingly, it is 
reasonable to suppose that those who will have their blend price 
reduced have an adequate and supportable explanation why, in the 
interest of producer and handler equity, their revenue will be reduced. 
In this regard, the record does not provide any indication, other than 
proponent assertions, that the revenues generated are insufficient to 
offset inequitably borne costs. Because actual costs are not provided, 
a finding cannot be made to determine whether or not the proposed 
balancing credit rate of six cents per cwt is reasonable.
    There is no evidence to suggest that milk of producers pooled on 
the Northeast order will be unable to find markets without the 
establishment of a balancing credit. The record is clear in 
demonstrating that balancing functions and services are performed by 
large cooperatives and they are able to recover costs from those they 
serviced without government intervention. The record does not reveal or 
contain evidence demonstrating disorderly marketing conditions 
occurring because balancing facilities and services are not 
sufficiently recovering their costs.
    This decision concludes that the qualification criteria of Proposal 
7 for receipt of a balancing credit would unduly disadvantage handlers 
who perform a balancing function for the market, but for no reason 
other than their size, renders them ineligible to recover balancing 
costs by receipt of a credit. These handlers would suffer adverse 
business consequences from the higher effective prices they would need 
to pay to procure a supply of milk. The record does not reveal any 
justification that explains why other handlers should be denied a 
credit for performing a similar service. Accordingly, this decision 
concludes that the eligibility criteria of Proposal 7 would have an 
adverse impact on these businesses in the Northeast marketing area.

Rulings on Proposed Findings and Conclusions

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

General Findings

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

Recommended Marketing Agreement and Order Amending the Order

    The recommended marketing agreement is not included in this 
decision because the regulatory provisions thereof would be the same as 
those contained in the order, as hereby proposed to be amended. The 
following order amending the order, as amended, regulating the handling 
of milk in the Northeast marketing area is recommended as the detailed 
and appropriate means by which the foregoing conclusions may be carried 
out.

List of Subjects in 7 CFR Part 1001

    Milk marketing orders.

    For the reasons set forth in the preamble, 7 CFR part 1001, is 
proposed to be amended as follows:

PART 1001--MILK IN THE NORTHEAST MARKETING AREA

    1. The authority citation for 7 CFR part 1001 continues to read as 
follows:

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

    2. Section 1001.7 is amended by:
    a. Revising paragraphs (c)(1) and (c)(2);
    b. Removing paragraph (c)(3);
    c. Redesignating paragraphs (c)(4) and (c)(5) as (c)(3) and (c)(4);
    d. Revising paragraphs (e)(1) and (e)(2); and
    e. Removing paragraph (h)(7).
    The revisions read as follows:


Sec.  1001.7  Pool plant.

* * * * *
    (c) * * *
    (1) In each of the months of January through August and December, 
such shipments and transfers to distributing plants must not equal less 
than 10 percent of the total quantity of milk (except the milk of a 
producer described in Sec.  1001.12(b)) that is received at the plant 
or diverted from it pursuant to Sec.  1001.13 during the month.
    (2) In each of the months of September through November, such 
shipments and transfers to distributing plants must equal not less than 
20 percent of the total quantity of milk (except the milk of a producer 
described in Sec.  1001.12(b)) that is received at the plant or 
diverted from it pursuant to Sec.  1001.13 during the month.
* * * * *
    (e) * * *
    (1) At least one of the plants in the unit qualifies as a pool 
distributing plant pursuant to paragraph (a) of this section;
    (2) Other plants in the unit must process at least 60 percent of 
monthly receipts of producer milk, including cooperative 9(c) milk, 
only as Class I or Class II products and must be located in the 
Northeast marketing area, as defined in Sec.  1001.2, in a pricing zone 
providing the same or a lower Class I price than

[[Page 15582]]

the price applicable at the distributing plant(s) included in the unit; 
and
* * * * *
    3. Section 1001.13 is amended by:
    a. Revising paragraph (d)(1)
    b. Redesignating paragraph (d)(2) as paragraph (d)(3); and
    c. Adding paragraphs (d)(2), (d)(4), (d)(5) and (e).
    The revision and additions read as follows:


Sec.  1001.13  Producer milk.

* * * * *
    (d) * * *
    (1) Milk of a dairy farmer shall not be eligible for diversion 
unless one day's milk production of such dairy farmer was physically 
received as producer milk 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 milk of the dairy farmer has been 
physically received as producer milk at a pool plant during the month;
    (2) Of the total quantity of producer milk received during the 
month (including diversion but excluding the quantity of producer milk 
received from a handler described in Sec.  1000.9(c) or which is 
diverted to another pool plant), the handler diverted to nonpool plants 
not more than 80 percent during each of the months of September through 
November and 90 percent during each of the months of January through 
August and December. In the event that a handler causes the milk of a 
producer to be over diverted, a dairy farmer will not lose producer 
status;
    (3) * * *
    (4) Any milk diverted in excess of the limits set forth in 
paragraph (d)(2) of this section shall not be producer milk. The 
diverting handler shall designate the dairy farmer deliveries that 
shall not be producer milk. If the handler fails to designate the dairy 
farmer deliveries which are ineligible, producer milk status shall be 
forfeited with respect to all milk diverted to nonpool plants by such 
handler; and
    (5) The delivery day requirement and the diversion percentages in 
paragraphs (d)(1) and (d)(2) of this section may be increased or 
decreased by the market administrator if the market administrator finds 
that such revision is necessary to assure orderly marketing and 
efficient handling of milk in the marketing area. Before making such a 
finding, the market administrator shall investigate the need for the 
revision either on the market administrator's own initiative or at the 
request of interested persons if the request is made in writing at 
least 15 days prior to the month for which the requested revision is 
desired effective. If the investigation shows that a revision might be 
appropriate, the market administrator shall issue a notice stating that 
the revision is being considered and inviting written data, views, and 
arguments. Any decision to revise an applicable percentage or delivery 
day requirement must be issued in writing at least one day before the 
effective date.
    (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 another government entity.
    4. Section 1001.30 is amended by revising the introductory text to 
read as follows:


Sec.  1001.30  Reports of receipts and utilization.

    Each handler shall report monthly so that the market 
administrator's office receives the report on or before the 10th day 
after the end of the month, in the detail and on prescribed forms, as 
follows:
* * * * *
    5. Section 1001.62 is amended by:
    a. Revising the introductory text; and
    b. Adding paragraph (h).
    The revision and addition read as follows:


Sec.  1001.62  Announcement of producer prices.

    On of before the 14th day after the end of the month, the market 
administrator shall announce the following prices and information;
* * * * *
    (h) If the 14th falls on a Saturday, Sunday, or national holiday, 
the market administrator may have up to two additional days business 
days to announce the producer price differential and the statistical 
uniform price.
    6. Section 1001.71 is amended by revising the introductory text to 
read as follows:


Sec.  1001.71  Payments to the producer settlement fund.

    Each handler shall make payment to the producer-settlement fund in 
a manner that provides receipt of the funds by the market administrator 
no later than two days after the announcement of the producer price 
differential and the statistical uniform price pursuant to Sec.  
1001.62 (except as provided for in Sec.  1000.90). Payment shall be the 
amount, if any, by which the amount specified in paragraph (a) of this 
section exceeds the amount specified in paragraph (b) of this section:
* * * * *
    7. Section 1001.72 is revised to read as follows:


Sec.  1001.72  Payments from the producer settlement fund.

    No later than the day after the due date required for payment to 
the market administrator pursuant to Sec.  1001.71 (except as provided 
in Sec.  1001.90), the market administrator shall pay to each handler 
the amount, if any, by which the amount computed pursuant to Sec.  
1001.71(b) exceeds the amount computed pursuant to Sec.  1001.71(a). 
If, at such time, the balance in the producer-settlement fund is 
insufficient to make all payments pursuant to this section, the market 
administrator shall reduce uniformly such payments and shall complete 
the payments as soon as the funds are available.
    8. Section 1001.73 is amended by revising paragraphs (a)(1), (a)(2) 
introductory text, and (e) introductory text to read as follows:


Sec.  1001.73  Payments to producers and to cooperative associations.

* * * * *
    (a) * * *
    (1) Partial payment. For each producer who has not discontinued 
shipments as of the 23rd day of the month, payment shall be made so 
that it is received by the producer on or before the last day of the 
month (except as provided for in Sec.  1000.90) for milk received 
during the first 15 days of the month at not less than the lowest 
announced class price for the preceding month, less proper deductions 
authorized in writing by the producer.
    (2) Final payment. For milk received during the month, payment 
shall be made during the following month so it is received by each 
producer no later than the day after the required date of payment by 
the market administrator, pursuant to Sec.  1001.72, in an amount 
computed as follows:
* * * * *
    (e) In making payments to producers pursuant to this section, each 
handler shall furnish each producer (except for a producer whose milk 
was received from a cooperative association handler described in Sec.  
1000.9(a) or 9(c)), a supporting statement in such form that it may be 
retained by the recipient which shall show:
* * * * *


[[Page 15583]]


    Dated: March 17, 2004.
A.J. Yates,
Administrator, Agricultural Marketing Service.
[FR Doc. 04-6459 Filed 3-24-04; 8:45 am]
BILLING CODE 3410-02-P