[Federal Register Volume 69, Number 69 (Friday, April 9, 2004)]
[Proposed Rules]
[Pages 18834-18841]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-8070]


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

  Federal Register / Vol. 69, No. 69 / Friday, April 9, 2004 / Proposed 
Rules  

[[Page 18834]]



DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Part 1124

[Docket No. AO-368-A29; DA-01-06]


Milk in the Pacific Northwest Marketing Area; Decision on 
Proposed Amendments to Marketing Agreement and to Order

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Proposed rule.

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

SUMMARY: This document proposes to adopt as a final rule, order 
language contained in the interim final rule published in the Federal 
Register on Tuesday, November 19, 2002, concerning pooling provisions 
of the Pacific Northwest Federal milk order. This document also sets 
forth the final decision of the Department and is subject to approval 
by producers. Specifically, this final decision would adopt amendments 
that would continue to amend the Pool plant provision; which 
established a ``cooperative pool manufacturing plant'' provision and 
established system pooling for cooperative manufacturing plants. 
Additionally, this final decision would adopt a previously amended 
Producer milk provision which established a standard for the number of 
days during the month that the milk of a producer would need to be 
delivered to a pool plant in order for the rest of the milk of that 
producer to be eligible to be diverted to nonpool plants. A year-round 
diversion limit of 80 percent of total receipts for pool plants 
previously established and authority granted to the market 
administrator to adjust the touch-base standard is adopted on a 
permanent basis.

FOR FURTHER INFORMATION CONTACT: Gino M. Tosi, Marketing Specialist, 
Order Formulation and Enforcement Branch, USDA/AMS/Dairy Programs, Stop 
0231--Room 2971, 1400 Independence Avenue, SW., Washington, DC 20250-
0231, (202) 690-1366, e-mail address: [email protected].

SUPPLEMENTARY INFORMATION: This administrative action is governed by 
the provisions of Sections 556 and 557 of Title 5 of the United States 
Code and, therefore, is excluded from the requirements of Executive 
Order 12866.
    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 Department 
of Agriculture (Department) a petition stating that the order, any 
provision of the order, or any obligation imposed in connection with 
the order is not in accordance with the law. A handler is afforded the 
opportunity for a hearing on the petition. After a hearing, the 
Department would rule on the petition. The Act provides that the 
district court of the United States in any district in which the 
handler is an inhabitant, or has its principal place of business, has 
jurisdiction in equity to review the Department's ruling on the 
petition, provided a bill in equity is filed not later than 20 days 
after the date of the entry of the ruling.

Regulatory Flexibility Analysis 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.
    At the time of the hearing, May 2002, there were 972 producers 
pooled on, and 86 handlers regulated by, the Pacific Northwest order. 
Based on these criteria, 596 producers or 61 percent of producers and 
49 handlers or 57 percent of handlers would be considered small 
businesses. The adoption of the proposed pooling standards service to 
revise established criteria that determine those producers, producer 
milk, and plants that have a reasonable association with, and are 
consistently serving the fluid needs of, the Pacific Northwest 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 that determine those that are eligible 
to share in the revenue which arises from the classified pricing of 
milk. Criteria for pooling are established without regard to the size 
of any dairy industry organization or entity. The criteria established 
are applied in an equal fashion to both large and small businesses. 
Therefore, the proposed amendments will not have a significant economic 
impact on a substantial number of small entities.
    A review of reporting requirements was completed under the 
Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35). It was 
determined that these proposed amendments would have no impact on 
reporting, record keeping, 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.

[[Page 18835]]

    This action does not require additional information collection that 
requires clearance by the Office of Management and Budget (OMB) beyond 
currently approved information collection. The primary sources of data 
used to complete the forms are routinely used in most business 
transactions. Forms require only a minimal amount of information, which 
can be supplied without data processing equipment or a trained 
statistical staff. Thus, the information collection and reporting 
burden is relatively small. Requiring the same reports from all 
handlers does not significantly disadvantage any handler that is 
smaller than the industry average.
    Prior documents in this proceeding:
    Notice of Hearing: Issued November 14, 2001; published November 19, 
2001 (66 FR 57889).
    Tentative Final Decision: Issued August 30, 2002; published 
September 6, 2002 (67 FR 56942).
    Interim Final Rule: Issued November 8, 2002; published November 19, 
2002 (67 FR 69668).

Preliminary Statement

    A public hearing was held to consider proposed amendments to the 
marketing agreement and the order regulating the handling of milk in 
the Pacific Northwest marketing area. The hearing was held, pursuant to 
the provisions of the Agricultural Marketing Agreement Act of 1937, as 
amended (7 U.S.C. 601-674), and the applicable rules of practice and 
procedure governing the formulation of marketing agreements and 
marketing orders (7 CFR 900) at Seattle, Washington, on December 4, 
2001, pursuant to a notice of hearing issued November 14, 2001, and 
published November 19, 2001 (66 FR 57889). Upon the basis of the 
evidence introduced at the hearing and the record thereof, the 
Administrator, on August 30, 2002, issued a tentative final decision 
containing notice of the opportunity to file written exception thereto.
    The material issues, finding, conclusions, and rulings of the 
tentative final decision are hereby approved and adopted and are set 
forth herein. The material issues on the record of hearing relate to:
    1. Standards for Producer Milk.
    2. Standards for Pool Plants.
    3. Determining if emergency marketing conditions exist that would 
warrant the omission of a recommended decision and the opportunity to 
file written exceptions.

Findings and Conclusions

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

1. Standards for Producer Milk--The Touch Base Standard

    A proposal seeking to change certain standards and features of the 
Producer milk provision of the order was adopted in the tentative final 
decision and is adopted in this final decision. The changes include: 
(1) Establish a year-round standard for the number of days in each 
month that a dairy farmer's milk production needs to be delivered to a 
pool plant in order for the rest of the milk of that dairy farmer to be 
eligible for diversion to nonpool plants. This standard is often 
referred to as a ``touch-base'' provision. A 3-day touch-base standard 
is adopted in this decision. (2) Set a limit on the amount of milk that 
can be diverted from pool plants to nonpool plants in each month of the 
year. A diversion limit of 99 percent had been applicable in each of 
the months of March through August, while a diversion limit of 80 
percent had been applicable for each of the months of September through 
February. The adopted year-round diversion limit is 80 percent of all 
milk receipts, including diversions, and continues the current 
diversion limits that were adjusted by the Market Administrator. (3) 
Provide authority to the Market Administrator to adjust the touch-base 
standard.
    Proposal 2, offered by Northwest Milk Marketing Federation (NMMF), 
Northwest Dairy Association (NDA), and Tillamook County Creamery 
Association (TCCA), seeks to modify the order's pooling standards by 
establishing a 6-day touch-base standard during the month in order for 
the rest of the milk of a dairy farmer to be eligible to be diverted to 
nonpool plants and by establishing an 80 percent year-round limit on 
the amount of milk received by a pool plant that can be diverted to 
nonpool plants. NMMF, NDA, and TCCA are organizations owned by dairy-
farmer members that supply a significant portion of the milk needs of 
the Pacific Northwest marketing area and whose milk is pooled on the 
Pacific Northwest order.
    NDA, a proponent of Proposal 2, testified that pooling standards 
must be changed in order to prevent what they described as 
``artificial'' pooling or ``pool loading'' that has been occurring in 
the Pacific Northwest order since the implementation of Federal order 
reform. The NDA witness noted that when milk is pooled on the order but 
never physically received, service to the Class I market is not 
demonstrated. To allow the pooling of milk which does not provide 
service to the Class I needs of the market only lowers returns to dairy 
farmers whose milk is actually supplying the local Class I market. The 
witness asserted that this occurs because the order's pooling standards 
are inadequate.
    According to the NDA witness, pooling provisions that were once 
applicable in Federal orders more accurately identified the milk of 
producers serving the Class I market. These provisions included a 
touch-base standard that specified the minimum number of days during 
the month that a dairy farmer's milk needed to be received at a pool 
plant in order to be eligible to divert to nonpool plants the rest of 
the milk of that dairy farmer. In addition, the witness noted that the 
``dairy farmers for other markets'' provision, that was applicable 
prior to order reform, provided that a dairy farmer would not be 
considered a producer on the order unless all of the farmer's milk was 
pooled on the order during the month. Also, the witness noted, milk was 
valued and priced by its relative location to the market prior to order 
reform. Milk farther from plants in the marketing area would have a 
lower value than milk located nearer to plants located in the marketing 
area, stressed the witness.
    The NDA witness testified that provisions prior to Federal order 
reform deterred milk that did not serve the Order's Class I market from 
being pooled on the Pacific Northwest order. The witness explained that 
milk located outside of the marketing area and pooled on the order 
received the Pacific Northwest blend price minus the applicable 
location adjustment specified in the order. This measure, the witness 
said, made it unprofitable for milk located far from the marketing area 
to be pooled on the Pacific Northwest order. However, the witness 
emphasized that Federal order reform adopted a Class I price surface 
that does not provide for location adjustments in determining a 
relative value for milk to the market. According to the witness, the 
newly adopted Class I price surface establishes fixed values for milk 
regardless of its use for fluid or manufactured products. The witness 
characterized that this change effectively created a ``backward 
incentive'' to move milk from one order's bottling plant to a 
manufacturing plant located farther away in another marketing order.
    The NDA witness referred to a Cornell University economic model 
that was used in formulating the current Class I

[[Page 18836]]

price surface. The model, according to the witness, produced a price 
surface map that valued milk in the east higher than milk in the west, 
inferring that milk should move from west to east. The witness asserted 
that when establishing the new Class I price surface, the Department 
did not take into account the variable price surface used by the model 
for manufactured products. The witness noted that while the Class I 
differential at Salt Lake City, Utah, is the same as in Seattle, 
Washington ($1.90 per hundredweight), the Pacific Northwest order blend 
price is often higher than the Western order blend price. According to 
the witness, the combined effect of fixed Class I differential values 
and blend price differences causes milk from Utah to move west to the 
Pacific Northwest, instead of moving east as predicted in the Cornell 
model.
    The witness concluded that this movement of milk has resulted in 
disorderly market conditions in the Pacific Northwest and Western 
orders because the price surface provides an inappropriate incentive to 
move milk to manufacturing plants in the Pacific Northwest order where 
a higher Class I value prevails, rather than to bottling plants in the 
Western order where a lower Class I value prevails. The witness 
testified that the pooling provisions of the Pacific Northwest order 
need revision to correct disorderly market conditions.
    NMMF's witness, testifying in support of Proposal 2, stated that 
the proposal is designed to correct unintended consequences generated 
by Federal order reform regarding the manner in which the producer 
location value of milk is determined. The witness testified that prior 
to order reform, location adjustments also acted as an effective means 
of identifying the producers who consistently served the Class I needs 
of the market. The witness testified that Federal order reform also 
established a new Class I price structure that reflected supply and 
demand conditions for fluid milk in every county of the United States. 
The witness asserted that this new structure uses the same Class I 
pricing locations to adjust pool draws on all milk regardless of how 
that milk is utilized.
    According to the NMMF witness, under the new pricing system, milk 
that is diverted from plants in the marketing area and delivered 
hundreds of miles away can be valued at the same price as milk at the 
plant from which the milk was diverted. Value is then adjusted, the 
witness said, by differences in the level of the Class I differentials 
where the milk is actually delivered. According to the witness, this 
demonstrates a lack of economic consistency.
    The NMMF witness also testified that millions of dollars have been 
transferred from dairy farmers who actually supply the fluid needs of 
the Pacific Northwest order to dairy farmers located in Southern Idaho 
and Utah who do not supply the local Class I market. Also, data was 
presented by the witness to demonstrate that when the milk of producers 
distant to the market is pooled on the Pacific Northwest order but 
never physically received at a Pacific Northwest pool plant, the milk 
of those distant producers receives a share of the Class I proceeds 
without the producers ever actually supplying milk to meet the Class I 
needs of the market.
    According to the NMMF witness, the 80 percent diversion limit 
recommended in Proposal 2 would permanently continue the Market 
Administrator's February 2001 temporary revision to the marketing 
order. According to the witness, the 80 percent diversion limit has 
been operating well and should become the order's adopted standard for 
producer milk.
    The NMMF witness also spoke on the merits of instituting a 6-day 
touch-base standard. The witness was of the opinion that producer milk 
standards should be linked to the order's supply plant performance 
standard of 20 percent. According to the witness, 6 days of a dairy 
farmer's milk production per month is equal to 20 percent of monthly 
production and is consistent with the 20 percent performance standard 
applicable for pool supply plants.
    Exceptions to the tentative final decision from NMMF expressed 
overall satisfaction with the decision in its ability to correctly 
identify those producers who demonstrate service to the Pacific 
Northwest Class I market. However, NMMF continued to express its 
support for the adoption of a 6-day touch-base standard, instead of the 
3-day touch-base standards that were adopted in the tentative final 
decision. NMMF maintained that a 6-day touch-base standard would 
require all producers to deliver the same percentage of milk to Pacific 
Northwest pool plants.
    Dairy Farmers of America (DFA), a supporter of Proposal 2, 
testified about changes in the marketplace resulting from the new Class 
I price surface implemented under Federal order reform. It was DFA's 
opinion that the pooling of milk not serving the Class I market is 
inconsistent with Federal order policy. Returns to producers who 
regularly supply the Class I market are unnecessarily reduced when milk 
that does not service the Class I market is pooled, said the witness.
    The DFA witness also testified that milk not actually supplying the 
Class I needs of the market but sharing in the revenue generated from 
fluid milk sales is an indicator of faulty pooling provisions. The 
witness asserted that if the current pooling standards are not amended, 
local dairy farmers who are actually supplying the local Class I market 
will continue to receive lower returns.
    The DFA witness testified that the Pacific Northwest order's 
current diversion limit standard of 99 percent for certain months is 
inadequate because of the potential volume of milk that could be pooled 
on the order. According to the witness, it is this shortcoming of the 
current pooling provisions that has allowed milk which performs no 
reasonable service in meeting fluid milk demands to be pooled on the 
Pacific Northwest order. In this regard, DFA thought it was appropriate 
to set a limit on the amount of producer milk that pool plants can 
divert to nonpool plants consistent with the Market Administrator's 
temporary revision. The DFA witness indicated that a year-round 
diversion limit of 80 percent would be reasonable in light of the 
marketing area's Class I use of milk. The witness also supported the 6-
day touch-base provision of Proposal 2 because it would better identify 
the milk of those producers that actually serve the Class I needs of 
the market.
    Two Washington State dairy farmers also testified in support of 
Proposal 2. One dairy farmer asserted that Proposal 2 would correct 
what the witness described as a loophole in the Pacific Northwest 
pooling provisions that allows milk which does not serve the fluid 
market to be pooled on the Pacific Northwest order. The witness 
maintained that current provisions are contributing to the loss of 
millions of dollars to Washington State dairy farmers. The witness also 
stated that adopting Proposal 2 would provide for restoring the orderly 
marketing of milk in the Pacific Northwest and promote trust in the 
Federal milk order program. A second dairy farmer testified that 
disorderly marketing conditions are demonstrated when the blend price 
is reduced through what the witness described as manipulation of the 
order's pooling standards.

2. Standards for Pool Plants---Cooperative Pool Manufacturing Plant

    Several amendments to the Pool plant provision of the Pacific 
Northwest order were adopted in the tentative final

[[Page 18837]]

decision and are adopted in this final decision. Certain inadequacies 
and unneeded features of the Pool plant provision contributed to 
disorderly marketing conditions and unwarranted erosion of the blend 
price received by those producers who actually supply milk to satisfy 
the fluid demands of the Pacific Northwest marketing area. 
Specifically, the following changes to the Pool plant provision were 
adopted in the tentative final decision and are adopted in this final 
decision: (1) Eliminate a supply plant feature applicable to 
cooperative supply plants; (2) establish a ``cooperative manufacturing 
plant'' provision; and (3) provide for two or more cooperative 
manufacturing plants to operate as a ``system'' for the purpose of 
meeting applicable performance standards.
    A cooperative manufacturing plant is a type of pool supply plant 
and will be defined as a manufacturing plant, operated by a cooperative 
association or a wholly owned subsidiary, that delivers at least 20 
percent of producer-member milk shipments either directly from farms or 
supply plants owned by the same cooperative association and is located 
within the marketing area. A cooperative manufacturing plant will have 
the same performance standards applicable to a supply plant specifying 
that 20 percent of total milk receipts must be supplied to a pool 
distributing plant in order to pool all other physical receipts and 
diversions of milk.
    The Pacific Northwest marketing order Pool plant provision 
contained a feature applicable for supply plants operated by a 
cooperative association to include deliveries to distributing plants 
directly from the farms of their producer members as qualifying 
shipments for pooling.
    Proposal 1, offered by NMMF, NDA, and TCCA seeks to establish a 
``cooperative manufacturing plant'' provision as a type of pool supply 
plant, and also to provide that two or more cooperative manufacturing 
plants may operate as a ``system'' of supply plants for the purpose of 
meeting pooling performance standards. According to the witnesses, the 
proposal eliminates the need for the current provision for cooperative 
associations that operate supply plants.
    A witness for NMMF testified that the adoption of a provision 
providing for a cooperative manufacturing plant as a type of supply 
plant is predicated on the adoption of a touch-base standard contained 
in Proposal 2. According to the witness, if a touch-base standard is 
adopted, certain accommodations for cooperative manufacturing plants 
should be provided to prevent the inefficient movement of milk. A 
provision for a ``system'' of cooperative manufacturing plants should 
be made, noted the witness, so that the system of plants could qualify 
to have their combined milk receipts pooled when a single plant of the 
system meets all of the performance standards for the system of plants. 
The witness noted that providing this flexibility in the movement of 
milk will enable cooperative manufacturing plants to minimize 
transportation costs while still meeting the established touch-base 
standard. The witness noted that a similar provision for cooperative 
manufacturing plants is currently a feature of the Arizona-Las Vegas 
and Western milk marketing orders and would be beneficial for the 
Pacific Northwest order.
    The NMMF witness predicted that the adoption of a cooperative 
manufacturing plant provision would encourage all supply plants in the 
Pacific Northwest to change their pooling status to this new type of 
pool supply plant because all supply plants in the Pacific Northwest 
are owned by cooperative associations. According to the witness, the 
proposed changes contained in Proposals 1 and 2 would serve to deter 
supply plants located far from the Pacific Northwest marketing area 
from inappropriately pooling milk on the Pacific Northwest order 
because these changes eliminate the ability to pool milk that is not 
physically received at the plants which actually provide milk to 
satisfy the marketing area's Class I demands.
    A witness appearing on behalf of NDA, also a proponent of Proposal 
1, agreed with the NMMF witness' conclusion that pooling provisions 
should ensure that only milk which actually performs in supplying the 
market's Class I needs would prevent the ``artificial'' pooling of 
milk. The witness stressed that NDA does not object to milk located 
outside of the order that regularly serves the fluid needs of the 
market receiving the order's blend price.
    The adoption of the proposed cooperative manufacturing plant 
provision, according to the NDA witness, would provide producers who 
regularly serve the fluid needs of the market more flexibility in 
meeting the touch-base standard contained in Proposal 2. The witness 
was in agreement with NMMF that the proposal would prevent the 
inappropriate pooling of milk that is located at plants far from the 
marketing area that does not actually supply the fluid needs of the 
market. The NDA witness asserted that these changes to the order would 
ensure that only milk actually available to meet the market's fluid 
needs would be pooled.
    A witness representing the TCCA also testified in support of 
Proposal 1. The witness presented an analysis on the loss of income to 
dairy farmers in Tillamook County, Oregon, due to the pooling of milk 
on the order that does not actually serve the Class I needs of the 
market. The impact of inappropriate pooling standards to Pacific 
Northwest dairy farmers, according to the witness' calculations, showed 
an average monthly decrease in revenue of $755 per farm. The witness 
testified that the adoption of Proposal 1 would correct the disorderly 
marketing conditions in the Pacific Northwest order by only allowing 
milk that actually serves the fluid needs of the market to receive the 
order's blend price.
    The witness representing DFA testified in support of Proposal 1. 
According to the witness, two primary benefits of the Federal order 
program are allowing producers to benefit from the orderly marketing of 
milk and the marketwide distribution of revenue that results mostly 
from Class I milk sales. Orderly marketing influences milk to move to 
the highest value use when needed and to clear the market when not used 
in Class I, noted the witness. The witness testified that marketwide 
pooling allows qualified producers to equitably share in the returns 
from the market in a manner that provides incentives for supplying the 
market in the most efficient manner. The witness insisted that the 
pooling of milk which does not service the Class I market is 
inconsistent with Federal order policy.
    The DFA witness asserted that Proposal 1 properly addresses the 
problem associated with what the witness described as the near ``open 
pooling'' of milk on the Pacific Northwest order. Specifically, the 
witness testified that the proposal would establish appropriate pooling 
performance standards for producer milk and handlers that are 
consistent with the objectives of the Federal milk order program.
    Two members of the Washington State Dairy Federation also testified 
in support of Proposal 1. One witness indicated that when milk not 
serving the fluid needs of the Pacific Northwest market is pooled, 
returns that should be received by producers serving the Class I needs 
of the market are ``siphoned'' away. Another witness testified that 
dairy producers in Washington have lost millions of dollars in revenue 
as a result of the ``loopholes'' in the order's pooling provisions. The 
adoption of Proposal 1 would, according to the witness, make

[[Page 18838]]

needed changes to the pooling standards and re-establish orderly 
marketing conditions for the Pacific Northwest marketing area.
    All milk marketing orders, including the Pacific Northwest, provide 
standards for identifying producers and the milk of producers that 
supply the market's Class I needs. The pooling standards of an order 
serve to assure that an adequate supply of fluid milk is delivered to 
the market. Pooling standards also act to identify the milk of those 
producers that actually meets this need. Some milk orders have touch-
base standards to determine which dairy farmers and the milk of those 
dairy farmers who perform in the market by delivering a certain amount 
of production to pool plants. When such standards are met, the milk not 
needed to meet fluid demands becomes eligible to be diverted to a 
nonpool plant but still be pooled and priced by the order.
    It is largely the revenue from Class I sales that provides 
additional returns to milk being pooled which is reflected in the 
order's blend price. Accordingly, the Federal order system consistently 
has stressed actual performance in meeting pooling standards designed 
to ensure an adequate supply of Class I milk for the market as a 
condition for receiving the order's blend price.
    The pooling standards of an order are designed to identify those 
producers and the milk of those producers that demonstrate service to 
the Class I market. A touch-base standard serves to identify the 
producers and the milk of those producers who actually supply milk to 
the market in a specified minimum amount. Markets that exhibit a higher 
percentage of milk in fluid use typically have touch-base standards 
specifying more frequent physical milk deliveries to pool plants than 
in markets where Class I use is lower. When a touch-base standard is 
too low, the potential for disorderly marketing conditions arise on two 
fronts. First, pool plants are less assured of milk supplies. Second, 
and most germane to the Pacific Northwest marketing area, the lack of a 
touch-base standard provides a way for the milk of producers not 
serving the fluid needs of the market to be pooled on the order while 
not actually supplying milk to the market's pool plants. This reduces 
the blend price paid to producers who are actually incurring the costs 
of supplying the Class I needs of the market.
    A significant portion of the testimony received at the hearing 
placed blame on the current Class I price structure as the root cause 
of the inappropriate pooling of milk on the Pacific Northwest order. 
The current price structure was faulted specifically as not providing 
location adjustments for milk as had been the case prior to the 
implementation of milk order reform.
    Testimony indicated that the lack of location adjustments 
effectively undermines the pooling standards of the order. The decision 
to pool milk was once based on the economics of transporting milk--
comparing the costs of transporting milk to the benefit of receiving 
the order's blend price. Testimony indicates this factor is as 
important as the pooling standards of the order. Hearing participants 
were of the opinion that placing a relative value on milk based on its 
distance from the market provided appropriate pooling discipline and 
fostered orderly marketing conditions. Some participants indicated 
disappointment by asserting that the Department did not offer a 
recommended decision in order reform from which to provide comments on 
the Class I pricing structure.
    The reform of milk orders, contained in the recommended decision 
(63 FR 4802) and final decision (64 FR 16026), made purposeful changes 
to the Class I pricing structure. In this regard, a fixed adjustment 
for Class I milk prices was provided for every county location in the 
48 contiguous states to create a national Class I pricing surface for 
the system of milk marketing orders. Changing this characteristic of 
the pricing structure ensured handlers that regardless of the marketing 
order by which regulated, the applicable prices would be the same.
    Such change made a more clear distinction between the value milk 
has at a location from the pooling standards of any individual 
marketing order. Location adjustments were never a part of the pooling 
standards of the Pacific Northwest order or any other milk marketing 
order. Instead, location adjustments were an integral part of the 
pricing provisions of the order. However, it should be noted that 
location adjustments tended to strengthen the effectiveness of the 
order's pooling standards. Location adjustments determined the relative 
value of milk to the market. The pooling standards established the 
criteria for pooling milk on the order. With the Class I price surface 
adopted by order reform, more direct reliance is placed on pooling 
standards to identify the milk that should be pooled on the order.
    Pooling provisions of all orders, including the Pacific Northwest, 
are intended to define appropriate standards for the prevailing 
marketing conditions in assuring that the marketing area would be 
supplied with a sufficient supply of milk for fluid use and to identify 
those producers--and the milk of those producers--that actually service 
the Class I needs of the market. Taken as a whole, the pooling 
provisions of milk orders, including the Pacific Northwest order, are 
contained in the Pool plant, Producer, and Producer milk provisions. 
The intent of these pooling provisions prior to reform and after reform 
has not changed.
    The issue before the Department is to consider amendments to 
standards of the order that currently allow milk to be pooled on the 
Pacific Northeast order without such milk being regularly and 
consistently supplied to pool plants within the marketing area in order 
to supply the market's Class I needs. On the basis of the record, the 
pooling standards of the order need to be reconsidered.
    It is the pooling standards of the order that identifies those 
producers who are relied upon to supply the Class I needs of the 
marketing area. As specified in the tentative final decision, the 
record evidence indicates that milk is being pooled on the Pacific 
Northwest order which does not demonstrate any reasonable association 
with the market and which is not actually received at pool plants that 
supply the Class I demands of the market. Instead, the milk being 
pooled is physically retained at plants located in another marketing 
area for manufacturing lower valued Class III or Class IV dairy 
products. This is causing producers who actually supply the market to 
receive a lower blend price.
    On the basis of the record evidence, together with analysis 
performed by the Department, the tentative final decision and this 
final decision find reason to support adopting a 3-day touch-base 
standard. Analysis was performed using officially noticed Market 
Administrator data from June 2001 through April 2002. This time period 
was selected because of the change in Commodity Credit Corporation 
(CCC) purchase prices for butter and nonfat dry milk that occurred on 
May 31, 2001, as part of the price support program. This change in the 
CCC support purchase prices has caused the price gap between Class III 
and Class IV milk to be significantly reduced. This change in CCC 
purchase prices has had a noticeable effect on the total value of the 
marketwide pool for both the Pacific Northwest and Western orders.
    Hypothetical blend prices were computed for the Pacific Northwest 
order marketing area, absent the Class III and Class IV milk physically 
located in areas within the Western Order milk marketing area. Milk 
from this area had not historically been pooled on the Pacific 
Northwest. Additionally, blend

[[Page 18839]]

prices were computed for the Western Order that assumed the Class III 
and Class IV milk pooled on the Pacific Northwest Order would instead 
be pooled on the Western order. The results indicated that the blend 
prices received by dairy farmers pooled in the Pacific Northwest would 
increase, while the blend prices received by dairy farmers pooled on 
the Western order would decrease.
    Analysis of the newly derived blend price differences was performed 
to determine how many days of a dairy farmers' production could seek to 
be received at a pool plant in the Pacific Northwest so that the costs 
of shipping milk to the market would not exceed the benefits of being 
pooled. The results of this analysis ranged from a low of 1 day's milk 
production in the month of February 2002 to a high of 5 day's milk 
production in June 2001.
    On average the milk of a dairy farmer could be received at a pool 
plant in the Pacific Northwest order 3 days per month to adequately 
demonstrate that the milk of a producer is actually providing a 
reasonable and consistent service in meeting the fluid needs of the 
marketing area.
    Providing a higher (3-day) touch-base standard requires milk 
located outside the marketing area to demonstrate its availability to 
service the Class I needs of the Pacific Northwest marketing area. 
While this standard should continue to assure an adequate supply of 
Class I milk, it also will serve as a safeguard against the unwarranted 
erosion of blend prices caused by the pooling of milk which could not 
reasonably be determined as bearing the cost associated with serving 
the fluid needs of the market.
    The establishment of a touch-base standard also reinforces the 
integrity of the order's other performance standards. Together with 
providing for a cooperative manufacturing plant and their system 
pooling, reasonable assurance is provided that milk which does not 
regularly service the fluid needs of the market will not receive the 
Pacific Northwest order's blend price. Additionally, this decision 
provides authority for the Market Administrator to adjust the touch-
base standard in the same way the order currently provides authority 
for the Market Administrator to adjust the performance standards for 
supply plants and diversion limits for all pool 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 by the market for Class I use, some provision should be made for 
milk to be diverted to nonpool plants for use in manufactured products 
but still be pooled and priced under the order. However, it is just as 
necessary to safeguard against excessive milk supplies becoming 
associated with the market through the diversion process.
    Milk diverted to nonpool plants is milk not physically received at 
a pool plant. However, it is included as a part of the total producer 
milk receipts of the diverting plant. While diverted milk is not 
physically received by the diverting plant, it is nevertheless an 
integral part of the milk supply of that plant. If such milk is not 
part of the integral supply of the diverting plant, then that milk 
should not be associated with the diverting plant and should not be 
pooled.
    A diversion limit establishes the amount of producer milk that may 
be associated with the integral milk supply of a pool plant. With 
regard to the pooling issues of the Pacific Northwest order, the record 
reveals that high diversion limits contributed to the pooling of large 
volumes of milk on the order that may not have serviced to the Class I 
market needs. Therefore, lowering the order's diversion limit standard 
would be appropriate.
    Associating more milk than is actually part of the legitimate 
reserve supply of the diverting plant unnecessarily reduces 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 limit standards that are too high can open the door for 
pooling more milk on the market, as seen with the 99 percent diversion 
limit that had been applicable for the months of March through August 
prior to the adjustments made by the Market Administrator in February 
2001. With respect to the marketing conditions of the Pacific Northwest 
marketing area evidenced by the record, the tentative final decision 
and this final decision find good reason to continue with the diversion 
limits on producer milk set by the Market Administrator at 80 percent 
of total receipts as the order's diversion limit standard for every 
month of the year.
    Therefore, an 80 percent diversion limit standard for producer milk 
in each month of the year is adopted in this final decision. To the 
extent that this diversion limit standard may warrant future 
adjustments, the order already provides the Market Administrator 
authority to adjust these diversion standards as marketing conditions 
may warrant.
    The tentative final decision and this final decision find that 
several changes to the pooling standards contained in the Producer milk 
definition of the order are needed to reinforce the integrity of the 
other changes made in this decision that affect supply plants. As 
indicated earlier, the record indicates that the pooling provisions of 
the Pacific Northwest order were inadequate. This tentative final 
decision and this final decision find that the absence of a touch-base 
standard result in the inability to adequately and properly identify 
the milk of those producers who should be pooled. The lack of a touch-
base standard together with a 99 percent diversion limit applicable in 
the months of March through August resulted in the pooling of more milk 
than could reasonably be considered as actually serving the market's 
Class I needs. These inadequacies of the Pacific Northwest order 
resulted in pooling milk which can not demonstrate actual service in 
supplying the Class I needs of the market. Such inadequacies contribute 
to the unnecessary erosion of the order's blend price to those 
producers who do demonstrate such service.
    Lastly, the tentative final decision and this final decision find 
agreement with the proponents of Proposal 1 that a cooperative 
manufacturing plant provision will provide flexibility in qualifying 
milk to be pooled. Allowing cooperative manufacturing plants the option 
to function as part of a pooling system will assist producers and 
handlers in transporting milk in the most cost-efficient manner. This 
provision gives the cooperatives operating manufacturing plants the 
ability to supply milk to distributing plants from a plant of the 
system located nearer a distributing plant without causing disruption 
to the market. System pooling allows cooperative manufacturing plants 
to make more cost-effective decisions in transporting milk while still 
satisfying the Class I demands of the order without disruption.

3. Emergency Marketing Conditions

    Evidence presented at the hearing establishes that the pooling 
standards of the Pacific Northwest order are inadequate and were 
resulting in a significant present and ongoing erosion of the blend 
price received by producers who actually demonstrate performance by 
supplying the Class I needs of the market. This unwarranted erosion of 
blend prices stemmed from the lack of a reasonable and effective 
standard to ensure that the milk of the producer being pooled was 
actually being

[[Page 18840]]

delivered to pool plants that supply milk to meet the Class I needs of 
the market. The erosion of the blend price received by producers was 
also compounded by an unnecessarily high diversion limit standard for 
the months of March through August. These shortcomings had allowed milk 
that had not provided a reasonable expectation of or demonstration of 
service in meeting the Class I needs of the marketing area to be pooled 
on the order. Consequently, it was determined that emergency marketing 
conditions exist in the Pacific Northwest marketing area, and the 
issuance of a recommended decision was therefore omitted.

Rulings on Proposed Findings and Conclusions

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

General Findings

    The findings and determinations hereinafter set forth supplement 
those that were made when the Pacific Northwest 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.

Rulings on Exceptions

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

Marketing Agreement and Order

    Annexed hereto and made a part hereof is one document: A Marketing 
Agreement regulating the handling of milk. The order amending the order 
regulating the handling of milk in the Pacific Northwest marketing area 
was approved by producers and published in the Federal Register on 
November 19, 2002 (67 FR 69668), as an Interim Final Rule. Both of 
these documents have been decided upon as the detailed and appropriate 
means of effectuating the foregoing conclusions.
    It is hereby ordered that this entire final decision and the 
Marketing Agreement annexed hereto be published in the Federal 
Register.

Determination of Producer Approval and Representative Period

    December 2003, is hereby determined to be the representative period 
for the purpose of ascertaining whether the issuance of the order, as 
amended in the Interim Final Rule published in the Federal Register on 
November 19, 2002 (67 FR 69668), regulating the handling of milk in the 
Pacific Northwest marketing area is approved or favored by producers, 
as defined under the terms of the order (as amended and as hereby 
proposed to be amended) who during such representative period were 
engaged in the production of milk for sale within the aforesaid 
marketing area.

List of Subjects in 7 CFR Part 1124

    Milk Marketing order.

    Dated: April 5, 2004.
A.J. Yates,
Administrator, Agricultural Marketing Service.

Order Amending the Order Regulating the Handling of Milk in the Pacific 
Northwest Marketing Area

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

Findings and Determinations

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

Order Relative to Handling

    It is therefore ordered, that on and after the effective date 
hereof, the handling of milk in the Pacific Northwest marketing area 
shall be in conformity to and in compliance with the terms and 
conditions of the order, as amended, and as hereby amended, as follows:
    The provisions of the order amending the order contained in the 
interim amendment of the order issued by the Administrator, 
Agricultural Marketing Service, on November 8, 2002, and published in 
the Federal Register on November 19, 2002 (67 FR 69668), are

[[Page 18841]]

adopted without change and shall be and are the terms and provisions of 
this order.
    [This marketing agreement will not appear in the Code of Federal 
Regulations]

Marketing Agreement Regulating the Handling of Milk in Certain 
Marketing Areas

    The parties hereto, in order to effectuate the declared policy of 
the Act, and in accordance with the rules of practice and procedure 
effective thereunder (7 CFR part 900), desire to enter into this 
marketing agreement and do hereby agree that the provisions referred to 
in paragraph I hereof as augmented by the provisions specified in 
paragraph II hereof, shall be and are the provisions of this marketing 
agreement as if set out in full herein.
    I. The findings and determinations, order relative to handling, and 
the provisions of Sec. Sec.  1124.1 to 1124.86 all inclusive, of the 
order regulating the handling of milk in the Pacific Northwest 
marketing area (7 CFR part 1124) which is annexed hereto; and
    II. The following provisions: Record of milk handled and 
authorization to correct typographical errors.
    (a) Record of milk handled. The undersigned certifies that he/she 
handled during the month of December 2003, ---------- hundredweight of 
milk covered by this marketing agreement.
    (b) Authorization to correct typographical errors. The undersigned 
hereby authorizes the Deputy Administrator, or Acting Deputy 
Administrator, Dairy Programs, Agricultural Marketing Service, to 
correct any typographical errors which may have been made in this 
marketing agreement.
    Effective date. This marketing agreement shall become effective 
upon the execution of a counterpart hereof by the Department in 
accordance with Section 900.14(a) of the aforesaid rules of practice 
and procedure.
    In Witness Whereof, The contracting handlers, acting under the 
provisions of the Act, for the purposes and subject to the limitations 
herein contained and not otherwise, have hereunto set their respective 
hands and seals.

Signature By (Name)

(Title)----------------------------------------------------------------

(Address)--------------------------------------------------------------

(Seal)

Attest

[FR Doc. 04-8070 Filed 4-8-04; 8:45 am]
BILLING CODE 3410-02-P