[Federal Register Volume 69, Number 70 (Monday, April 12, 2004)]
[Proposed Rules]
[Pages 19292-19306]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-8071]



[[Page 19291]]

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Part III





Department of Agriculture





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Agricultural Marketing Service



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7 CFR Part 1033



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

  Federal Register / Vol. 69 , No. 70 / Monday, April 12, 2004 / 
Proposed Rules  

[[Page 19292]]


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DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Part 1033

[Docket No. AO-361-A35; DA-01-04]


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

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Proposed rule.

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SUMMARY: This document proposes to adopt as a final rule, order 
language contained in the interim final rule published in the Federal 
Register on July 26, 2002, concerning pooling provisions of the Mideast 
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 provisions which: eliminate automatic pool plant status 
for the 6-month period of March through August, eliminate milk 
shipments to a distributing plant regulated by another Federal milk 
order as pool-qualifying shipments under the Mideast order, eliminate 
the ``split plant'' feature, eliminate including diversions made by a 
pool supply plant located outside the marketing area to a second pool 
plant, and establish a ``net shipments'' provision. For the Producer 
milk provisions, this final decision would continue to adopt amendments 
which: seasonally adjust and increase the number of days that the milk 
of a producer needs to be delivered to a pool plant and establishes 
year-round diversion limits, adjusted seasonally, for producer milk for 
handlers pooled under the Mideast order.

FOR FURTHER INFORMATION CONTACT: Gino M. Tosi, Marketing Specialist, 
USDA/AMS/Dairy Programs, Order Formulation Branch, Room 2968, 1400 
Independence Avenue, SW., STOP 0231, Washington, DC 20090-6456, (202) 
690-1366, e-mail address [email protected].

SUPPLEMENTARY INFORMATION: This administrative action is governed by 
the provisions of Sections 556 and 557 of Title 5 of the United States 
Code and therefore is excluded from the requirements of Executive Order 
12866.
    These proposed amendments have been reviewed under Executive Order 
12988, Civil Justice Reform. This rule is not intended to have a 
retroactive effect. If adopted, this proposed rule will not preempt any 
state or local laws, regulations, or policies, unless they present an 
irreconcilable conflict with this rule.
    The Agricultural Marketing Agreement Act of 1937, as amended (7 
U.S.C. 601-674), provides that administrative proceedings must be 
exhausted before parties may file suit in court. Under Section 
608c(15)(A) of the Act, any handler subject to an order may request 
modification or exemption from such order by filing with the Department 
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.
    10,756 of the 11,133 dairy farmers, or 97 percent, whose milk was 
pooled under the Mideast order at the time of the hearing (October 
2001) would meet the definition of small businesses. On the processing 
side, approximately 27 of the 58 milk plants associated with the 
Mideast order during October 2001 would qualify as small businesses, 
constituting 47 percent of the total.
    Based on these criteria, the vast majority of the producers and 
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 Mideast 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 criteria established are applied in an 
equal fashion to both large and small businesses. Therefore, the 
Department has determined that 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 little or no 
impact on reporting, recordkeeping, or other compliance requirements 
because they would remain identical to the current requirements. No new 
forms are proposed and no additional reporting requirements would be 
necessary.
    This action does not require additional information collection that 
requires clearance by the Office of Management and Budget (OMB) beyond 
currently approved information collection. The primary sources of data 
used to complete the forms are routinely used in most business 
transactions. Forms require only a minimal amount of information, which 
can be supplied without data processing equipment or a trained 
statistical staff. Thus, the information collection and reporting 
burden is relatively small. Requiring the same reports for all handlers 
does not significantly disadvantage any handler that is smaller than 
the industry average.

Prior Documents in This Proceeding

    Notice of Hearing: Issued September 21, 2001; published September 
28, 2001 (66 FR 49571).

[[Page 19293]]

    Tentative Final Decision: Issued June 4, 2002; published June 11, 
2002 (67 FR 39871).
    Interim Final Rule: Issued July 22, 2002; published July 26, 2002 
(67 FR 48743).

Preliminary Statement

    A public hearing was held upon proposed amendments to the marketing 
agreement and the order regulating the handling of milk in the Mideast 
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 part 
900), at Wadsworth, Ohio, on October 23-24, 2001, pursuant to a notice 
of hearing issued September 21, 2001, and published September 28, 2001 
(66 FR 49571).
    Upon the basis of the evidence introduced at the hearing and the 
record thereof, the Administrator, on June 4, 2002, issued a Tentative 
Final Decision containing notice of the opportunity to file written 
exceptions thereto.
    The material issues, findings, 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 the hearing relate 
to:
    1. Pooling standards of the marketing order.
    a. Standards for pool plants.
    b. Standards applicable for producer milk.
    2. Rate of partial payments to producers by handlers.
    3. Conforming changes to the order.
    4. Determining whether emergency marketing conditions exist that 
would warrant the omission of a recommended decision and the 
opportunity to file written exceptions.

Findings and Conclusions

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

1. Pooling Standards of the Order.

a. Standards for Pool Plants
    Distributing Plants. A proposal seeking to increase one of the 
distributing plant pooling standards and providing for the seasonal 
adjustment of the standard was not adopted in the tentative final 
decision and is not adopted in this final decision. Published in the 
hearing notice as Proposal 1, this proposal specifically sought to 
raise the minimum amount of the total quantity of fluid milk products 
physically received by a distributing plant and disposed of as route 
disposition, or transferred in the form of packaged fluid milk 
products, by 5 percentage points (from 30 to 35 percent) for the months 
of May through July, and by 10 percentage points (from 30 to 40 
percent) for the months of August through April.
    Supply Plants. Several amendments to the supply plant pooling 
provisions of the Mideast order are adopted on a permanent basis by 
this final decision. According to the tentative decision, certain 
inadequacies of the supply plant pooling provisions, together with 
unneeded features contained in the current provision, are resulting in 
disorderly marketing conditions and unwarranted erosion of the blend 
price received by those producers who are providing milk to satisfy the 
fluid milk demands of the Mideast marketing area. Specifically, the 
following amendments to the supply plant pooling standards, previously 
adopted on an interim basis, are adopted on a permanent basis by this 
final decision: (1) Eliminate automatic pool plant status during the 6-
month period of March through August for certain supply plants; (2) 
eliminate the volume of milk shipments made by supply plants to 
distributing plants regulated by another Federal milk marketing order 
as a qualifying shipment for the purpose of meeting the Mideast supply 
plant shipping standard; (3) eliminate the feature of providing for a 
``split plant''; (4) exclude from receipts diversions made by a pool 
plant to a second pool plant from the calculation of the diversion 
limitation established for pool plants; and (5) provide a ``net 
shipment'' standard for supply plant deliveries to the order's 
distributing plants for the purpose of meeting the Mideast supply plant 
shipping standard. These amendments to the pool plant pooling standards 
were largely represented by, and in testimony related to, Proposal 2 
and Proposal 5.
    A proposal, Proposal 8, that would, in part, establish a 6-month 
re-pooling delay whenever a pool supply plant elects not to meet the 
supply plant pooling standards for the month, was not adopted in the 
interim rule and is not adopted in this final decision. However, this 
final decision adopts on a permanent basis that portion of the proposal 
that would have August as the beginning month for meeting the pool 
supply plant shipping standard. The adoption of this feature of 
Proposal 8 makes it identical to the adoption of the same feature in 
Proposal 2.
    Four proposals seeking to modify the pooling standards for pool 
plants of the Mideast order were considered in this proceeding. The 
record evidence makes clear that the proponents of these four 
proposals, described and discussed further below, are of the opinion 
that the current pooling provisions of the order are not accurately 
identifying those producers and the milk of those producers 
consistently serving the fluid needs of the marketing area. Part of the 
pooling standards of the Mideast order are contained in the Pool plant 
provision of the order. Published in the hearing notice as Proposals 1, 
2, 5, and 8, these proposals offered various changes to specific 
components of the current pooling standards for supply plants and 
distributing plants.
    Proposals 1, 2, and 5 were proposed by Dairy Farmers of America 
(DFA), Continental Farms Cooperative, Inc., Michigan Milk Producers, 
Inc., and Prairie Farms Cooperative, Inc. Hereinafter, this decision 
will refer collectively to these proponents as the ``Cooperatives.'' 
These organizations are cooperatives owned by dairy-farmer members that 
supply a significant portion of the milk needs of the Mideast marketing 
area and whose milk is pooled on the Mideast order.
    Proposal 8 was proposed by Dean Dairy Products Company, Schneider's 
Dairy Inc., Turner Dairy Farms, Inc., Marburger Farm Dairy, Inc., 
Fike's Dairy, Inc., United Dairy, Inc., Carl Colteryahn Dairy, Inc., 
Smith Dairy Products Company, Superior Dairy, Goshen Dairy, and Reiter 
Dairy. Hereinafter, this decision will refer collectively to these 
organizations as the ``Handlers.'' These organizations receive milk 
from dairy farmers and cooperatives and distribute fluid milk and other 
dairy products within the marketing area. They are regulated under the 
terms of the order.
    Proposal 1, offered by the Cooperatives, seeks to amend the pool 
plant definition by increasing the minimum amount of milk that would, 
in part, cause a distributing plant to become pooled on the Mideast 
order. Proposal 1 would provide that 35 percent or more of the total 
quantity of fluid milk products physically received at a distributing 
plant be disposed of as route disposition or transferred in the form of 
packaged fluid milk products to other distributing plants for the 
months of May through July. Proposal 1 would also increase this same 
minimum standard to 40 percent for the months of August through April. 
The order currently provides a minimum standard of 30 percent and, 
unlike the proposal, makes no seasonal adjustments. Proposal 1 does not 
seek to change this provision's current exclusion of

[[Page 19294]]

concentrated milk received from another plant for other than Class I 
use.
    Proposal 2, offered by the Cooperatives, seeks to amend three 
features of the supply plant provision of the order as follows: Change 
certain details that currently provide for the automatic pooling of 
supply plants; not consider milk shipments from a Mideast supply plant 
to a distributing plant regulated by another Federal milk order as a 
qualifying shipment in meeting the performance standards for becoming a 
pool plant on the Mideast order; and count on a ``net receipts'' basis 
all supply plant shipments, including milk that is transferred or 
diverted and physically received by distributing plants regulated by 
the order. The ``net receipts'' criteria would exclude from a supply 
plant's qualifying shipment any transfers or diversions of bulk fluid 
milk products made by a distributing plant receiving a qualifying 
shipment. In this regard, the concept of a ``net receipt'' is similar 
to what is also commonly referred to as a ``net shipment.'' The 
difference between the two terms is that a ``net receipt,'' as 
presented in this proceeding, applies to distributing plants receiving 
milk. The term ``net shipment,'' as referred to in the record of this 
proceeding, applies to supply plants shipping milk to distributing 
plants. The intended use of these terms is clear, and herein after, 
this tentative final decision will refer to this feature of Proposal 2 
as ``net shipments'' because the proposed change would amend how the 
order applies pooling performance standards to supply plants shipping 
milk to distributing plants. The Mideast order currently has no ``net 
shipment'' provision.
    The order currently provides automatic pool plant status during the 
months of March through August, provided the supply plant met the 
applicable performance standards for pool supply plants during each of 
the immediately preceding months of September through February. 
Additionally, the order currently considers shipments of milk to a 
distributing plant regulated by another Federal order as qualifying 
shipments in meeting the performance standards of the Mideast order.
    Proposal 8, offered by the Handlers, seeks to change the months in 
which the pool plant standard is applicable for supply plant shipments 
to distributing plants from September through February to August 
through February. In this regard, Proposal 8 is similar to Proposal 2. 
However, Proposal 8 also seeks to provide that in the event a supply 
plant opts not to be a pool plant during the month, the plant will not 
be eligible to regain pool plant status for a period of six months.
    Proposal 5, offered by the Cooperatives, seeks to eliminate what is 
often referred to as the ``split plant'' provision. This provision 
provides for designating a portion of a pool plant as a nonpool plant, 
provided that the nonpool portion of the plant is physically separate 
and operated separately from the regulated or pool side of the plant.
    A DFA witness, representing the Cooperatives, testified that 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 for milk to clear the market when not used in Class I, said 
the Cooperatives. The witness noted that marketwide pooling allows 
qualified producers to equitably share in the returns from the market 
and 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 Cooperatives' witness was of the opinion that the new Class I 
pricing structure, implemented under Federal order reform, together 
with the pooling provisions found in each order, resulted in changes in 
the marketplace for milk pooled on Federal milk orders, including the 
Mideast order. The link between performance and pooling, said the 
witness, was altered by these reforms and needs review. The 
Cooperatives noted that many entities, including DFA, moved quickly to 
take advantage of these changes in order rules. The witness indicated 
that as a participant in a competitive dairy economy, one must make 
pooling decisions that aim to increase returns or risk their 
competitive position.
    The Cooperatives' witness was of the opinion that the principles 
underlying the economic models that formulated the Class I price 
surface established during Federal order reform assumed that supplies 
of milk associated with a demand point were aggregated into a single 
market and were actually shipped from the counties that were located in 
the population centers where demand points were fixed. There were no 
provisions in the mathematical equations for those models allowing for 
milk to be associated with a market if it did not actually ship to or 
supply the market, said the witness. The current pooling practices, say 
the Cooperatives, clearly exploit the price surface, and if we are to 
retain it, pooling standards need to be restructured to parallel the 
model.
    Pooling standards are universal in their intention, stressed the 
Cooperatives, requiring a measure of commitment to a market marked by 
the ability and willingness to supply the Class I fluid needs of that 
market. The witness noted that pooling standards are individualized in 
their application and each market requires standards that work for the 
conditions that apply in that individual market. The witness quoted the 
Final Decision of milk order reform: ``The pooling provisions for the 
consolidated orders provide a reasonable balance between encouraging 
handlers to supply milk for fluid use and ensuring orderly marketing by 
providing a reasonable means for producers with a common marketing area 
to establish an association within the fluid market.''
    The Cooperatives' witness also relied on, and drew heavily from, 
the order reform Final Decision detailing the primary criteria used to 
form the boundaries of the consolidated orders, including the 
consolidated Mideast order. The Cooperatives' witness emphasized the 
first and most important criteria of Federal order consolidation as the 
area of overlapping route distribution of Class I milk. Also taken from 
the Final Decision, the Cooperatives' witness noted that, ``The pooling 
of milk produced within the same procurement area under the same order 
facilitates the uniform pricing of producer milk,'' concluding that 
milk procurement areas were also considered as a criteria in 
establishing the consolidated marketing area boundaries. The witness 
also noted other criteria used, including the number of handlers within 
a market, naturally occurring boundaries, cooperative association 
service areas, features or regulatory provisions common to existing 
orders, and milk utilization in common dairy products.
    The Cooperatives' witness continued to rely on, and drew heavily 
from, the Final Decision of milk order reform by relating the 
decision's geographical description of the Mideast order and how the 
aforementioned criteria were applied to form the boundaries of the 
Mideast marketing area. In this regard, the witness indicated that the 
consolidated Mideast marketing area was the result of combining the 
pre-reform orders of the Ohio Valley, Eastern Ohio-Western 
Pennsylvania, Southern Michigan, and Indiana Federal milk orders, plus 
Zone 2 of the Michigan Upper Peninsula Federal milk

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order, and most of the then unregulated counties in Michigan, Indiana, 
and Ohio. The witness stressed that the order reform Final Decision 
concluded that nearly all milk produced within the area would be pooled 
on the consolidated Mideast order.
    The Cooperatives' witness was of the opinion that ``open pooling'' 
is not appropriate for the Mideast order. When milk shares in a pool's 
proceeds but does not service the Class I needs of the market or help 
to balance the market, the witness indicated, there is cause for 
concern. The witness emphasized that the cost of providing service to 
the Class I market always falls back on the local milk supply. To allow 
the pooling of milk which does not provide such services to the Class I 
needs of the market only lowers returns of those dairy farmers whose 
milk is actually supplying the local Class I market, concluded the 
witness.
    The Cooperatives' witness presented evidence which reviewed the 
various Federal order performance standards, concluding that while all 
the standards differ, they nevertheless address the importance of 
performance to the market by serving the Class I needs of the market as 
a condition for milk to be pooled and receive the order's blend price.
    According to the Cooperatives' witness, a new phenomenon is 
occurring in the area of performance standards. Several entities have 
solicited milk located in the marketing area in order to pool milk 
located outside of the marketing area, said the witness. Their 
deliveries of this local supply to distributing plants, said the 
Cooperatives' witness, provide the opportunity to pool much more milk 
located outside the marketing area. This practice, the Cooperatives' 
witness said, does not bring any new milk to be actually received at 
pool plants, and the milk located outside of the marketing area is not 
available and does not demonstrate any consistent or actual service to 
meeting the fluid milk needs of the market.
    This practice of pooling milk located far outside the Mideast 
marketing area, said the Cooperatives' witness, is accomplished through 
a feature of current pool plant performance standards which allows a 
supply plant to use direct deliveries from farms to satisfy up to 90 
percent of its performance standard by diversions. This standard, said 
the witness, is a good standard for milk located inside the marketing 
area, but is not an appropriate standard for milk supplies located 
outside of the area.
    The use of direct deliveries from inside the marketing area to 
qualify supply plants and milk supplies located far outside the 
marketing area should be greatly limited if allowed at all, said the 
Cooperatives' witness. The witness stated that allowing direct shipped 
milk from the farm to qualify a supply plant was intended to provide 
economic efficiency in moving milk, for example, thereby saving the 
reload in and pump-over costs for the sole purpose of meeting a pooling 
standard. However, this feature is now being used to qualify milk 
supplies physically located far outside of the Mideast. This, 
emphasized the witness, runs counter to the initial intent of the 
provision and has resulted in disorderly marketing conditions.
    The Cooperatives' witness provided evidence indicating that the 
Mideast order has the second largest volume of Class I use in the 
Federal Order system. According to the witness, the performance 
standards for the Mideast order should assure meeting this demand by 
specifying a performance standard that results in actual serving of the 
market's Class I needs as a condition to receive the order's blend 
price.
    Along this theme, the Cooperatives' witness relied on data showing 
that the volume of Class I and II milk used in the Mideast changed 
little in the (then) 21 months since implementation of Federal order 
reform. However, noted the witness, the amount of reserve milk, 
represented by Class III and IV use, had grown dramatically. The 
witness concluded from the data that it is difficult to justify the 
need to have pooling standards which have allowed pooling some 250 
percent of additional milk on the Mideast order when that milk does not 
service the Class I needs of the market. The witness indicated that 
additional milk pooled on the order was produced in states far from the 
marketing area, including the States of Illinois, Iowa, Kansas, 
Minnesota, New York, North Dakota, South Dakota, and Wisconsin.
    The witness also faulted the Mideast order's lack of having a 
performance standard for pool supply plants during the months of March 
through August as another way to pool milk on the Mideast order from 
other marketing areas that have lower blend prices. The evidence for 
this observation, said the Cooperatives' witness, is exhibited by data 
indicating that producers located in Wisconsin and South Dakota began 
pooling large volumes of their milk beginning in March 2000. The 
Cooperatives' witness, relying on the same statistics, observed that 
the volume of milk pooled on the order during this 21-month time 
period, but produced on farms located far outside the marketing area, 
increased by 395.66 percent, or by 430,222,762 pounds.
    The tentative final decision inadvertently listed comments filed in 
brief by Land O' Lakes (LOL) as testimony given at the hearing in 
regards to Proposal 1. This final decision clarifies that LOL was in 
strong support of ``performance oriented'' pooling standards, along 
with the adoption of Proposal 1. This support was articulated in their 
post-hearing brief, and not in testimony given at the hearing.
    Additional support for Proposals 1 and 2 was offered by Prairie 
Farms Dairy, Inc. (Prairie Farms). Prairie Farms operates three pool 
distributing plants regulated by the Mideast order. Their milk is 
supplied by their 176 producer members located in Indiana, Michigan, 
and Ohio.
    The Prairie Farms witness stated that certain provisions of the 
Mideast order have made it too easy to pool milk without the milk 
actually servicing the Class I needs of the market. Federal orders 
should not be written so restrictively that pooling any milk supplies 
beyond normal basic Class I needs is impossible, said the Prairie Farms 
witness. However, continued the witness, orders should not be written 
so liberally that pooling milk becomes an end unto itself rather than a 
standard that assures milk is actually serving the fluid needs of the 
market. As the Mideast milk order regulations are currently written, 
added the witness, the pooling of milk far beyond the day-to-day needs 
of the market can and does occur.
    According to the Prairie Farms witness, Class I use by Mideast 
order distributing plants has been relatively stable since 
implementation of order reform, but the amount of Class III and Class 
IV milk pooled on the order has increased markedly. The witness 
indicated the additional quantities of milk pooled on the order only 
lower the returns to its members and others who actually do serve the 
Class I needs of the market every day.
    A witness from Foremost Farms who appeared on behalf of the Mideast 
Milk Marketing Agency (MEMA), testified in support of Proposals 1 and 
2. The MEMA is a new organization resulting from the union of three 
previous milk marketing agencies that served milk processors by 
arranging for milk supplies in the pre-reform milk orders consolidated 
to form the current Mideast milk marketing area. The MEMA witness 
indicated that the needs of their customers and variations in

[[Page 19296]]

production cause them to have an occasional need to secure additional 
volumes of milk, citing the opening of schools as an example of when 
additional milk supplies are needed. The witness also indicated that 
the supply and demand situation in spring months shows increased 
production and decreased Class I demands that generally begin in late 
April and continue through mid-July. During this time of the year, the 
MEMA witness indicated, they assume responsibility to sell milk not 
required by their customers. Most often these sales are to 
manufacturing plants located in the marketing area and to plants 
located as far away as Wisconsin and Minnesota, the witness said. 
Often, noted the witness, such sales are below the minimum class prices 
of the order and the costs of disposing of surplus milk are borne by 
MEMA members.
    The MEMA witness noted that sufficient raw milk is secured through 
its member cooperatives and other suppliers within the marketing area 
to service its customers on a year-round basis, with the fall months 
being the only exception. In light of this supply and demand situation, 
the witness could find no reason why the Mideast marketing order should 
provide for the pooling of two to three times the milk supply actually 
needed to serve the Class I needs of the market.
    A witness appearing on behalf of the Michigan Milk Producers 
Association (MMPA) also testified in support of Proposals 1 and 2. MMPA 
is a dairy farmer owned-and-operated cooperative engaged exclusively in 
the marketing of milk and dairy products on behalf of 2,600 of their 
member dairy farmers in Michigan, Ohio, northern Indiana, and northeast 
Wisconsin.
    The MMPA witness testified that each of the five predecessor orders 
merged into the consolidated Mideast order had more demanding pool 
plant qualification standards. The witness stressed that pooling 
provisions are not intended to create barriers to pooling. However, the 
witness indicated, it is reasonable to expect that a market with a 
fluid demand as large as the Mideast warrants a higher level of 
performance than in markets with lower Class I use.
    The MMPA witness stated that adequate supplies of milk exist within 
the order to satisfy the requirements of at least the Michigan portion 
of the marketing area. The witness noted that during the past 24 
months, Class I sales in Michigan had declined 7 percent. Also, the 
witness noted that milk production in Michigan has been increasing and 
indicated that local supplies have increased 7 percent since 1998. The 
MMPA witness was of the opinion that with declining fluid sales and 
increasing milk production, pooling standards that result in pooling 
additional quantities of milk supplies cannot be justified.
    The MMPA witness noted that nearly all of the increased volume of 
milk pooled on the Mideast order since order reform was used at Class 
III or IV manufacturing plants, which the witness concluded has only 
served to lower producer pay prices. In their opinion, this occurred 
because the current performance standards required for pool 
qualification are too lenient. These performance standards have 
resulted in an inequitable distribution of proceeds from this market's 
pool, stressed MMPA, while the proceeds from the fluid market were 
improperly shared with producers who did not service the Class I needs 
of the market. The MMPA witness was of the strong opinion that this 
situation should be treated as an emergency by the Department and a 
Recommended Decision should therefore be omitted.
    In addition to supporting the testimony given by the DFA witness on 
behalf of the Cooperatives regarding Proposal 2, the MMPA witness 
offered a modification to Proposal 2. The MMPA modification would 
specifically limit the practice of using pooled milk located inside of 
the marketing area to qualify milk of a plant located outside of the 
marketing area for pooling its milk receipts on the order. According to 
the witness, a one-time delivery of the milk of a producer located 
outside the marketing area qualifies a ``distant'' producer as a 
producer under the Mideast order and, in turn, qualifies the milk of a 
``distant'' producer to thereafter be diverted to nonpool plants. Most 
often, stressed the witness, these plants are also located at a great 
distance from the marketing area and this milk need never meet the 
order's performance standards. The MMPA witness concluded that the 
pooling standards should not allow such milk to be part of the Mideast 
pool. The witness stressed that eliminating the ability to pool milk in 
this manner would not affect the efficiencies afforded by direct-
shipped milk from farms located within the marketing area. The MMPA 
witness added it would also prohibit an abuse of pooling principles 
that never intended to qualify milk for pooling under the order without 
an actual relationship to the order's supply plants in supplying the 
Class I needs of the market.
    A witness from Dean Foods (Dean) testified in support of a portion 
of Proposal 2. They supported eliminating the feature of the current 
pool supply provision which does not establish a performance standard 
during the months of March through August. They were also in agreement 
with other witnesses that the Department should treat this proceeding 
on an emergency basis. The Dean witness reasoned that the economic 
damage to the producers whose milk actually serves the Class I needs of 
the market should be resolved as soon as possible.
    A witness appeared on behalf of Suiza Foods (Suiza) in general 
support of Proposals 1 and 2. The witness reasoned that once 
performance becomes a monthly requirement to pool milk, both processors 
and producers will be better able to plan deliveries based upon the 
need for milk during the fall months when milk supplies are generally 
less plentiful. The witness also stated that August should be the 
initial month when higher performance standards should apply because of 
increased demand caused by the opening of schools occurring at the same 
time as generally declining overall milk supplies.
    The Suiza witness also was of the opinion that the adoption of a 
net shipment provision for supply plants should also be applicable for 
plants operated by a cooperative association--another type of pool 
plant provided for in the Mideast order. In their post-hearing brief, 
Suiza emphasized that in the interest of fairness and equitable 
regulatory treatment, providing a net shipment provision applicable to 
this type of pool plant would be appropriate. According to Suiza, not 
providing for a net shipment feature for supply plants operated by a 
cooperative association would merely change the incentives for 
cooperatives that operate supply plants to become a pool plant under 
this provision applicable for cooperative associations. Although not a 
part of the direct testimony by the proponents of Proposal 2, or its 
supporters, all parties agreed that a net shipment provision should 
also be provided for plants operated by cooperative associations.
    A witness representing Scioto County Cooperative Milk Producers 
Association (Scioto) testified in support of Proposals 1 and 2. Scioto 
has dairy farmer members in southern Ohio and northern Kentucky whose 
milk is pooled on the Mideast order.
    The Scioto witness noted that during the period of 2000-2001, the 
amount of producer milk pooled on the Mideast market increased by 
nearly 42 percent. Virtually all of this increase can be attributed to 
producers in States not included as part of the Mideast marketing area, 
while the amount of the

[[Page 19297]]

Class I use in the Mideast order remained relatively constant, 
maintained the witness. In light of the increased amount of milk pooled 
on the Mideast order, Scioto indicated their support for proposals 
which would establish higher pooling standards. Scioto indicated this 
would also ensure that the revenue generated by Class I sales are 
properly shared with those producers and pool plants which actually 
perform service to the Class I market.
    The Scioto witness also indicated support for the addition of 
August as a month when additional shipments should be made to 
distributing plants. However, Scioto opposed establishing performance 
standards for the remaining months which currently have none. The 
witness concurred that the hot days of August have a significant impact 
on milk production and noted more schools are starting as early as 
middle August. Scioto said that this combined effect makes it more 
difficult to meet the fluid needs of the market and concluded that 
supply plant standards should be established to assure those needs.
    Opposition to a part of Proposal 2 was offered by the Scioto 
witness. The witness stated that a provision for specifying ``net 
shipments'' for supply plant deliveries to pool distributing plants 
should not be adopted. The witness was of the opinion that performance 
standards should only require supply plants to ship milk when needed by 
the market and that performance standards should provide the 
flexibility to retain milk at local supply plants during the flush 
season when milk supplies are more plentiful.
    Opposition to a portion of Proposal 2 by LOL was provided in their 
post-hearing brief. LOL indicated they do not support establishing a 
``net shipments'' provision because it would effectively raise the 
supply plant shipping standards above the indicated pool supply plant 
performance standard. The LOL brief indicated that virtually all 
distributing plants have some transfers or diversions resulting from 
decreased demand on weekends and holidays for Class I milk. According 
to LOL, this should be considered so that supply plants are not 
penalized by being viewed as not performing in supplying the fluid 
market during such situations.
    Proposal 8, offered by the Handlers, seeks, in part, to change the 
months during which pool supply plant shipping standards would be 
applicable--to begin in August and continue through to February. 
Proposal 8 also seeks to establish a 6-month re-pooling delay whenever 
a pool supply plant elects to not meet the pool plant standards for the 
month. According to the Handlers, a 6-month delay in being able to 
return to the order as a pool plant would eliminate the ability of 
handlers to participate in the pool only when it was advantageous and 
to not participate in the pool when it was not.
    A witness from Dean Foods, appearing on behalf of the Handlers, 
testified that the current pool supply plant provisions permitting 
handlers to pool and de-pool milk causes market instability. The 
witness noted the occurrence of a class-price inversion (when the blend 
price is lower than the Class III price) as an example of when supply 
plants have the economic incentive to opt out of pooling their milk 
supplies. Nevertheless, the Dean witness was of the opinion that a 6-
month re-pooling delay would serve to assure consistent and reliable 
association of milk with the marketing area and in meeting the market's 
Class I demands.
    Opposition to Proposal 8 was raised by DFA. DFA was of the opinion 
that class-price inversions are a function of the order providing 
advanced pricing to handlers for Class I and II milk. The witness 
indicated advanced pricing is a needed and good provision of Federal 
milk marketing orders. However, if the Class I sector of the market 
were not provided advanced pricing, reasoned the DFA witness, depooling 
might never occur. Nevertheless, noted the DFA witness, there should be 
no reason why Class III and IV handlers should ever have to equalize 
class-use values with the blend price by paying this difference into 
the pool for the benefit of Class I handlers simply because of price 
inversion. Imposing a 6-month re-pooling delay may cause Class III and 
IV handlers to pay into the pool only to retain pool status, but doing 
so can result in causing financial damage to the reserve and balancing 
sectors of the market, maintained the DFA witness.
    Proposal 5, offered by the Cooperatives, seeks to eliminate what is 
commonly referred to as the ``split plant'' provision from the Mideast 
order. A split plant designates a portion of the plant as the ``pool'' 
side and another portion of the plant as the ``nonpool'' side.
    According to the Cooperatives, this provision was initially used to 
accommodate a plant's use of both Grade A and Grade B milk while 
providing for diversion from the pool plant side of the plant to the 
nonpool side for use in manufactured products. This designation was 
provided, said the witness, for orders with lower Class I differentials 
and low Class I use. However, the witness noted that its purpose seems 
to have been broadened to also afford a supply plant to gain economic 
efficiencies by avoiding incurring costs for transporting milk solely 
to meet pool standards.
    The Cooperatives' witness argued that the split plant provision 
continues to have validity in low Class I use and low Class I 
differential orders, but does not have a legitimate role to play in a 
higher differential, higher utilization order like the Mideast. This 
provision, said the witness, serves no purpose for the Mideast order, 
stressing that none of the Mideast's predecessor orders provided for it 
and that no plant located within the Mideast marketing area makes use 
of the provision. Rather, it has only become a tool to pool distant 
milk on the market which is not serving the Class I milk needs of the 
market, maintained the witness.
    Citing data provided by the Mideast Market Administrator, the 
Cooperatives observed that increasing volumes of milk pooled from 
distant areas began in June 2000. The amount of distant milk pooled 
then was about 16 million pounds and grew dramatically to some 480.5 
million pounds by June 2001. The total pounds of milk pooled through 
split plants ranged from 69 to 179 million pounds for the months of 
January through August 2001, noted the witness. The witness indicated 
that this statistic represents a significant percentage of the total 
milk pooled on the order. Diversions of distant milk by pool 
distributing plants, added the witness, were similarly significant. 
However, the witness stressed that actual physical deliveries used to 
qualify the additional volumes of milk pooled through split plants were 
as little as 50,000 pounds. These statistics, said the Cooperatives' 
witness, clearly prove that the current pooling standards are allowing 
milk to be pooled without demonstrating reasonable relationship, or 
providing actual service, to the market's fluid needs. According to the 
witness, using split plants to pool milk in this way can only be viewed 
as an abuse of an accommodation not intended when originally adopted 
for the Mideast order.
    Scenarios were presented by the Cooperatives' witness as examples 
for illustrating the harm being caused by the split plant provision. 
One example depicted how milk currently being pooled on the order, but 
located far from the marketing area, would not likely seek to be on the 
Mideast order without a split plant provision. According to the 
Cooperatives' witness, this is because the cost of transportation would 
exceed the gain of receiving the Mideast's blend

[[Page 19298]]

price. Another example demonstrated the negative impacts of split 
plants to the Mideast market because of the lack of diversion limits.
    According to the Cooperatives' witness, the pool side of the split 
plant is being used to establish an ``outpost'' that serves no other 
purpose than to qualify milk for pooling from other marketing areas 
where blend prices are lower. By meeting the minimal one-day delivery 
standard for becoming a producer on the order, the milk of producers 
located far from the marketing area, but whose milk is actually 
delivered to an ``outpost'' pool plant nearer their farms, may qualify 
milk for pooling on the Mideast order. Further, stressed the witness, 
the milk of these producers can thereafter be diverted to manufacturing 
plants nearer their farms without ever again being delivered to pool 
plants located in marketing area. This milk can hardly be viewed as 
servicing the market, the Cooperatives' witness asserted. Additionally, 
concluded the witness, the daily, weekly, and seasonal supplying of 
fluid milk, and meeting the balancing needs of the market are 
consistently being borne by the local producers who are only having 
their blend price diluted from the pooling of milk that does not 
consistently provide these services.
    A witness representing Suiza testified in support of Proposal 5. 
This witness stressed that the split plant provision did not exist in 
all marketing orders prior to order reform and is not used today for 
the purpose for which it was originally intended. The Suiza witness 
concluded that the split plant provision is clearly not needed nor 
justifiable under the Mideast order.
    MMPA also testified in support of Proposal 5. The witness similarly 
observed that pooling milk through the split plant provision only 
serves to depress prices for producers who actually supply the market. 
The witness maintained that a principle responsibility of the Federal 
milk order program is to preserve the proceeds from the fluid market 
for those producers who demonstrate an ability and willingness to serve 
that market. Since the split plant provision does not serve this end, 
concluded the witness, it should be eliminated from the order.
    The witness representing Scioto expressed doubt that adopting 
Proposal 5 would solve the pooling problem presented by split plants. 
In this regard, the witness proposed a limit on the maximum amount of 
producer milk that could be associated with a pool supply plant during 
the months when no performance standard is applicable. The witness 
offered that 110 percent of the daily average producer receipts, pooled 
during the months specifying a performance standard, is a reasonable 
alternative performance standard for such months. According to the 
Scioto witness, amending the split plant feature in this way would 
recognize normally higher production levels during the spring and 
summer months as compared to generally lower production levels during 
the fall and winter months. It would still allow supply plants from 
outside the marketing area to participate in the Class I returns of the 
market for the entire year, noted the witness, but would prevent plants 
from abusing the market by only pooling milk during the spring and 
summer months with milk that does not service the market.
    Post-hearing briefs submitted by LOL expressed opposition to the 
adoption of Proposal 5. The split plant provision, indicated LOL, has 
historically recognized commingled Grade A and Grade B milk in 
procurement areas and has provided a way for Grade A milk to be 
diverted to the non-pool plant for manufacturing uses. Removing this 
pooling feature, concluded LOL in their brief, would result in the need 
for full plant accountability, including determining milk shrinkage and 
overage, in the manufacturing (nonpool) portion of a plant. LOL is of 
the opinion that this would be very burdensome and would result in the 
need for costly record keeping by both handlers and the Market 
Administrator's office, while providing no benefit to producers or 
handlers.
    As specified in the tentative final decision, the record contains 
testimony clearly indicating general support for increasing and 
seasonally adjusting the distributing plant pooling standard offered by 
Proposal 1. The proposal would increase minimum standards for 
triggering pool plant status for a distributing plant and therefore 
become regulated under the terms of the Mideast milk marketing order. 
Beyond statements indicating general support for the adoption of 
Proposal 1, the record contains little, if any, evidence that indicates 
why this pooling standard should be increased. To the extent that 
excess milk is being pooled on the order through distributing plants, 
this decision attributes the pooling of excess milk to inadequacies in 
other pooling standards of the order. Specifically, the record reveals 
that the lack of diversion limits during certain times of the year 
provides the ability for distributing plants to pool milk on the 
Mideast order (the issue of diversions and diversion limits are 
discussed later in this decision) far beyond the legitimate reserve 
supply of milk for the plant. Therefore, in the absence of other 
evidence, and as specified in the tentative final decision, the record 
does not support a finding that distributing plants should meet a 
higher standard by increasing the amount of milk receipts disposed of 
as route disposition, or transferred in the form of packaged fluid milk 
products, as a condition for designation as a pool plant.
    The record of this proceeding strongly supports the conclusion of 
the tentative final decision that the various features of the Mideast 
order's supply plant pooling standards were either inadequate or 
unnecessary. Because the order currently contains inadequate pooling 
standards for supply plants, much more milk is able to be pooled on the 
order than can be considered properly associated with the Mideast 
market. This milk does not demonstrate a reasonable level of 
performance necessary to conclude that it provides a regular and 
reliable service in satisfying the Class I milk demands of the Mideast 
marketing area. Therefore such milk should not be pooled on the order.
    The pooling standards of all milk marketing orders, including the 
Mideast 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 for sharing in the Class I proceeds. Pooling standards of the 
Mideast order are represented in the Pool Plant, Producer, and the 
Producer milk definitions of the order. Taken as a whole, these 
definitions set forth the criteria for pooling. The pooling standards 
for the Mideast order are based on performance, specifying standards 
that, if met, qualify a producer, the milk of a producer, or a plant to 
enjoy 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. It is primarily the Class I use of milk that adds additional 
revenue, and it is reasonable to expect that only those producers who 
consistently supply the market's fluid needs should be the ones to 
share in the distribution of pool proceeds. Pool plant standards, 
specifically standards that provide for the pooling of milk through 
supply plants, also need to be reflective of the supply and demand 
conditions of the marketing area. This is important because pooling 
this milk ensures the receipt of the market's blend price.

[[Page 19299]]

    Similarly, supply plant pooling standards should provide for those 
features and accommodations that are reflective of the needs of 
proprietary handlers and cooperatives in providing the market with milk 
and dairy products. When a pooling feature's use deviates from its 
intended purpose, and its use results in pooling milk that is not 
serving the fluid needs of the market, it is appropriate to re-examine 
the need for continuing to provide for that feature as a necessary 
component of the pooling standards of the order. One of the objectives 
of pooling standards is to ensure an adequate supply of fluid milk for 
the marketing area. A feature which results in pooling milk on the 
order that does not provide such service should be considered as 
unnecessary for that marketing area. Similarly, another objective of 
pooling standards is for the proper identification of the milk of those 
producers who are providing service in meeting the Class I needs of the 
market. If a pooling provision does not reasonably accomplish this end, 
the proceeds that accrue to the marketwide pool from fluid milk sales 
are not properly shared with the appropriate producers. The result is 
the lowering of returns to those producers whose milk is serving the 
fluid market.
    As noted in the tentative final decision, the record provides 
sufficient evidence to conclude that several features of the supply 
plant definition are not being used for the reasons they were 
originally intended. Other shortcomings of the Mideast order's pooling 
standards, specifically as they relate to producer milk, also 
contribute to inappropriately pooling the milk of producers who are not 
a legitimate part of the Mideast marketing area. Here too, the impact 
is an unwarranted association of milk on the order. Milk is classed at 
lower prices--a decrease in the relative Class I utilization of the 
market--which results in a lower blend price to those producers who do 
supply the Class I needs of the market.
    The tentative final decision and this final decision find that the 
milk of some producers is benefitting from the blend price of the 
Mideast order while not reasonably demonstrating a service to the Class 
I needs of the Mideast marketing area. This finding is attributable to 
faulty pooling standards. The pooling provisions provided in the Final 
Decision of milk order reform, implemented on January 1, 2000, 
established pooling standards and pooling features that envisioned the 
needs of the market participants resulting from the consolidation of 
those pre-reform orders. The reform Final Decision, as it related to 
the Mideast marketing area, did not intend or envision that the pooling 
standards adopted would result in the sharing of Class I revenues with 
those persons, or the milk of those persons, who do not provide a 
reasonable measure of service in providing the Class I needs of the 
market. The reform Final Decision examined and discussed the various 
pooling standards and features of the pre-reform orders for their 
applicability in a new, larger, consolidated milk order. The pooling 
standards and features adopted for the Mideast order were designed to 
reflect and retain those standards and features of the pre-reform 
orders so as to not cause a significant change, and indeed to provide 
for, the continued pooling of milk that had been pooled by those market 
participants. As noted in the tentative final decision, the record of 
this proceeding reveals that the combination of the standards and 
features adopted for pool plants, especially those that apply to pool 
supply plants, are not the appropriate or reasonable standards for a 
much larger milk marketing area.
    Accordingly, the tentative final decision and this final decision 
find basic agreement in the evidence presented by the proponents of 
Proposal 2 and Proposal 5, and those entities who expressed their 
support for adopting these proposals, that certain pool plant 
provisions should be eliminated from the Mideast order. These include: 
(1) The provision of the order that currently provides for automatic 
pool plant status during the 6-month period of March through August for 
certain pool supply plants; (2) the provision that currently counts 
supply plant shipments to distributing plants regulated by another 
Federal milk marketing order as a qualifying shipment for meeting 
supply plant performance standards of the Mideast order; and (3) the 
provision of the order that provides for ``split plant'' recognition.
    Supply plant deliveries of milk to a distributing plant regulated 
by another Federal milk marketing order should no longer be considered 
as a qualifying shipment for meeting the supply plant performance 
standards of the Mideast order. While such milk is providing some 
servicing of the fluid needs of another marketing area, such milk 
provides no service to the Class I needs of the Mideast order. Pooling 
standards for the Mideast marketing area, in part, provide for 
determining those producers and the milk of those producers who are 
serving the Class I needs of the Mideast marketing area and thereby 
receive the blend price of the Mideast order. It is reasonable, in 
light of this objective, to conclude that serving the fluid needs of 
another market provides no service to the Mideast market. Accordingly, 
such milk should not be considered as a qualifying shipment for meeting 
the supply plant performance standard of the Mideast order.
    In their exceptions to the tentative final decision, LOL reiterated 
their opposition to the elimination of milk shipments to a distributing 
plant regulated by another Federal milk order as pool-qualifying 
shipments under the Mideast order. They asserted that not allowing 
shipments to distributing plants located outside the Mideast marketing 
area to be considered as a qualifying shipment for pooling purposes is 
discriminatory to producers and restricts access to the proceeds of the 
Mideast marketwide pool.
    The modification of Proposal 2, offered by MMPA, intended to 
provide a pooling standard that assists in the proper identification of 
the milk of those producers who actually provide a service to the 
order's Class I market, and previously adopted on an interim basis, is 
adopted by this final decision. The proposed amendatory language has 
been modified by the Department and is presented below. Safeguards are 
added to the supply plant provision allowing that up to 90 percent of a 
supply plant's qualifying shipments to distributing plants be directly 
from farms of producers by diversion. The intent of this pooling 
feature for supply plants was to provide flexibility and offer 
efficiency in transporting milk, and thereby be less burdensome, for 
those market participants of the pre-reform orders who would continue 
to be pooled on the larger consolidated Mideast order. This feature was 
not intended to be used as a mechanism to pool milk on the order that 
was not providing a reasonable measure of service in supplying the 
Class I needs of the Mideast marketing area.
    As noted in the tentative final decision, the intent of the 
modification of Proposal 2 by MMPA sought reasonable safeguards so that 
milk pooled by handlers from sources distant from the marketing area, 
resulting from the pooling of milk from within the marketing area, 
would end. The reasons for modifying Proposal 2 are well supported by 
evidence contained in the record of this proceeding. Currently, plants 
located far from the marketing area can use diversion of near-in milk 
for up to 90 percent of the distant plant's qualifying deliveries. 
Supply plants qualified in this manner do not provide milk to the 
marketing area that can be shown to be a service in meeting the Class I 
needs of the Mideast marketing area. Therefore, both the

[[Page 19300]]

tentative final decision and this final decision find that there is no 
reasonable basis to conclude that such milk should be pooled on the 
order and thereby receive the order's blend price. This modification 
would establish that supplemental milk supplies actually perform a 
reasonable measure of service in supplying the fluid needs of the 
Mideast marketing area.
    Finally, this decision adopts a ``net shipment'' provision, a 
feature of Proposal 2. As intended by the proponents, a net shipment 
feature would not include transfers or diversions of bulk fluid milk 
products of a supply plant's qualifying shipments to a distributing 
plant by any amount of bulk milk transfers or diversions made from the 
distributing plant. Providing such a feature for the pooling standards 
for the Mideast order supply plants is reasonable, notwithstanding the 
objections to its adoption by Scioto and LOL. It is true that 
distributing plants have some transfers and diversions resulting from 
variations in demand stemming from weekend days and holidays. However, 
the current supply plant performance standard is below the Mideast 
market's Class I use of milk, even with the pooling of milk 
inappropriately associated with the market due to faulty pooling 
standards. This decision finds it unlikely that transfers and 
diversions by distributing plants on such occasions would involve a 
sufficient volume of milk to cause a supply plant to lose pool status. 
Additionally, given other changes to the order's pooling standards 
adopted in this final decision (discussed below), placing a limit on 
diversions that can be made by any pool plant to a nonpool plant should 
provide the necessary safeguards that would make it even more unlikely 
that a supply plant would lose its pool status. As indicated in the 
tentative final decision, this final decision finds that adoption of a 
net shipment feature in the pooling standards for Mideast supply plants 
will aid in properly identifying the milk of those producers who 
actually supply milk to meet the fluid needs of the market.
    As noted in the tentative final decision, a brief submitted by 
Suiza emphasized the need for providing a net shipment provision for a 
supply plant operated by a cooperative association. The brief indicated 
that it would provide for fair and equitable regulatory treatment of 
two similar types of supply plants. The tentative final decision agreed 
with the need to apply the same net shipment provision to supply plants 
operated by a cooperative association. The tentative final decision 
also noted that both supply plant and cooperative supply plant 
performance standards were, for all intents and purposes, identical. 
Subsequently, the tentative final decision concluded it reasonable to 
adopt the same standard in considering the actual, or net, shipments 
made to distributing plants by a plant operated by a cooperative 
association.
    In their exceptions to the tentative final decision, DFA, MMPA, and 
Prairie Farms indicated opposition to net shipment provisions for 
supply plants operated by cooperative associations as provided for in 
Sec.  1033.7(d) of the order. Opponents argued that adoption of this 
standard would, in effect, apply more rigorous performance standards to 
cooperative supply plants qualified under Sec.  1033.7(d) than to 
supply plants qualified under Sec.  1033.7(c) of the order. Opponents 
noted that net shipments for a cooperative supply plant qualified under 
Sec.  1033.7(d) would be applicable to the total volume of milk pooled 
by the entire cooperative, while net shipments for a supply plant 
qualified under Sec.  1033.7(c) would be based only on the total volume 
of milk pooled at the plant. DFA, MMPA, and Prairie Farms described the 
net shipments provision adopted on an interim basis as critical for 
supply plants qualified solely on that plant's volume of milk receipts. 
However, for cooperative supply plants that qualify on the basis of the 
cooperative's entire supply of milk receipts, the net shipments 
provision should not be provided for in the final decision.
    The Department agrees with the exceptions to the tentative decision 
by DFA, MMPA, and Prairie Farms to exclude supply plants qualified 
under Sec.  1033.7(d) from the net shipments provision. A supply plant 
operated by a cooperative association qualified under Sec.  1033.7(d) 
qualifies their milk for pooling by shipping a percentage of all the 
milk of the entire cooperative to pool distributing plants. In 
contrast, supply plants qualified under Sec.  1033.7(c) need only ship 
a percentage of the milk physically received at the plant to a pool 
distributing plant. Consequently, it is reasonable to conclude that a 
net shipment provision is not necessary for determining if a 
cooperative supply plant under Sec.  1033.7(d) has to meet the 
performance standard. Accordingly, this final decision does not adopt a 
net shipments provision for cooperative supply plants under Sec.  
1033.7(d).
    Providing a 6-month re-pooling delay whenever a supply plant opts 
not to meet the pooling standards for the month would not tend to 
provide for orderly marketing conditions in the Mideast marketing area. 
As noted in the tentative final decision, the record indicates that 
handler interests seek every assurance for a steady and reliable milk 
supply as the order can reasonably provide. Providing pooling standards 
that may cause a supply plant to consider the longer-term implications 
of dropping off the pool may also tend to ensure the desired outcome of 
assuring reliable deliveries of milk to fluid handlers. However, the 
need for a provision to prohibit a supply plant from rejoining the pool 
through proper performance after a 6-month delay is not supported by 
the record and is not adopted in this final decision.
    Milk marketing orders are instruments for promoting stability in 
the marketing relationship between producers and handlers. In this 
regard, and considering the marketing conditions of the Mideast 
marketing area, promoting stability in this manner is not appropriate 
or needed. As noted in the tentative decision, the record indicates 
that fluid milk handlers have not had significant difficulties in 
securing milk supplies since the implementation of milk order reform. 
To the extent that handlers fear the potential disruption to the market 
that may arise from depooling, that fear to date is only speculative.
    The most important evidence provided on the record that provides 
any justification for adopting a 6-month re-pooling delay rests on the 
possible occurrence of a class-price inversion. Handlers see the issue 
of opting off-and-on the pool as rushing to join the pool to secure the 
advantages of price protection and dropping from the pool when prices 
for Class III and IV milk are higher than the order's blend price. 
Further, handlers worry that during such times, their ability to obtain 
needed milk supplies is diminished. The DFA witness is of the opinion 
that penalizing supply plants, often cooperative owned, may cause 
financial damage to be borne by the manufacturing sectors of the 
market. Additionally, DFA does not endorse the notion that producers 
should incur any penalty because of price outcomes which, they 
conclude, are the result of the order program providing for the advance 
pricing of Class I and II milk that serves the interest of handlers.
    The tentative decision and this final decision make no finding on 
whether advance pricing is a cause or contributor to class-price 
inversions. Additionally, neither the tentative decision or this final 
decision make any findings regarding the damage that may result to 
cooperatively owned manufacturers by being prevented from rejoining the 
pool. These are both far beyond the scope of

[[Page 19301]]

this proceeding. However, the tentative decision and this final 
decision do find that the amendments to the pooling standards adopted 
by this final decision, taken as a whole, strengthen the effectiveness 
of the order for the benefit of both producers and handlers, will 
provide for more orderly marketing conditions, and provide for a more 
consistent supply of milk to Class I handlers.
b. Standards for producer milk
    Minimum Deliveries to Pool Plants--The Touch Base Standard. The 
proposal seeking to change certain standards and features of the 
Producer milk provision of the order, specified in the tentative final 
decision, is also adopted in this final decision. The following 
amendments include:
    (1) Increasing the number of days of milk production of a producer 
to be delivered to a pool plant before the milk of the producer is 
eligible for diversion during each of the months of August through 
November, or ``touch base'' is increased to 2-days' milk production. In 
this regard, August is an addition to the touch base period. 
Additionally, the amended touch base provision establishes a 2-day 
touch base standard for new producers coming on the Mideast market 
during each of the months of December through July. The 2-days' milk 
production touch base standard will be applicable only if the producer 
has not been part of the Mideast market during each of the previous 
months of August through November. Adoption of a 2-day touch base 
standard therefore concludes that the higher standards of either 3 or 4 
days, supported by handlers and Scioto, is not adopted.
    (2) Establishing diversion limits for all pool handlers in each 
month of the year. Additionally, diversion limits will be seasonally 
adjusted. For each of the months of August through February, the 
diversion limit shall be 60 percent. For each of the months of March 
through July, the diversion limit shall be 70 percent.
    (3) Eliminating the ability of a pool plant to increase diversions 
to nonpool plants by diverting milk to a second pool plant.
    Proposal 7, which sought to add the months of August and March to 
the current diversion limit standard of 60 percent for each of the 
months of September through February, was not adopted in the tentative 
final decision and is not adopted in this final decision.
    Proposals 3, 7, and 9 seek to modify the order's standards for 
determining the eligibility to pool the milk of a producer on the 
order. The standards for determining this are described in the Producer 
milk provision of the order. These three proposals are similar in the 
changes proposed and the specific details of each proposal are 
discussed in greater detail below. As explained earlier in this 
decision, the collective references of the proponents as the 
``Cooperatives'' and ``Handlers'' continues. Proposal 3 was offered by 
the Cooperatives, Proposal 9 by the Handlers, and Proposal 7 by the 
Independent Dairy Producers of Akron (IDPA), an association of dairy 
farmers whose milk is pooled on the Mideast order.
    A proposal, published in the hearing notice as Proposal 6, did not 
receive testimony at the hearing and is considered by this decision to 
be abandoned. This proposal called for providing year-round diversion 
limits as did Proposal 3, but offered slightly differing seasonal 
adjustments. No further reference will be made in this proceeding to 
Proposal 6.
    Published in the hearing notice as Proposal 3, the Cooperatives 
seek changes in the number of days the milk of a dairy farmer must be 
physically received at a pool plant, and in what months the standards 
should apply (commonly referred to as a ``touch base'' provision), 
before being eligible for diversion to nonpool plants. Additionally, 
Proposal 3 would establish diversion limits for producer milk in months 
where no limit is currently provided by the order and would seasonally 
adjust these limits.
    (1) Touch base. Proposal 3 would change the touch base feature of 
the Producer milk provision by raising the current standard from one 
day's milk production to two days' milk production of a producer in 
each of the months of August through November. Additionally, Proposal 3 
also includes a proviso that, in the event a handler did not cause at 
least two days' milk production of a producer to touch base during each 
of the months of August through November, at least two days' production 
would need to touch base in each of the months of December through July 
before milk is eligible for diversion to nonpool plants. Proposal 7, 
proposed by the IDPA, seeks a 4-day touch base provision only for each 
of the months of August through March.
    (2) Diversion limits Proposals 3 and 9 seek diversion limits that 
would be applicable year round but differ on the level proposed for the 
spring and summer months. Under Proposal 3, a 60 percent limit would be 
applicable in each of the months of August through February, and a 70 
percent limit would be applicable in each of the months of March 
through July. Alternatively, Proposal 9 would specify a 60 percent 
limit in each of the months of August through February, but an 80 
percent limit for each of the months of March through July. Proposal 7 
seeks only to change the months in which a diversion limit would be 
provided from the current 60 percent during each of the months 
September through February and have the 60 percent limit be applicable 
during each of the months of March through August.
    The witness representing the Cooperatives testified that the 
current provisions of the Mideast order do not adequately define the 
potential amount of milk that can be pooled on the order and attributed 
this shortcoming, in part, to the lack of adequate diversion limits. 
The witness also indicated that establishing a limit on the amount of 
producer milk that a pool plant can divert to a nonpool plant where 
none are now specified would correct these deficiencies of the order's 
pooling standards. The witness also cited the current touch base 
standard as contributing to the improper pooling of the milk of 
producers not actually serving the Class I needs of the market. The new 
2-day touch base standard offered by Proposal 3, indicated the witness, 
would need to be met before additional milk would be eligible for 
diversion to nonpool plants.
    Continental Dairy Products (Continental), a cooperative of dairy 
farmers with members whose milk is marketed and pooled on the Mideast 
order, indicated their support for amending the touch base standard as 
well as providing year-round diversion limits on producer milk. They 
noted that producer blend prices in the Mideast marketing area have 
been reduced by as much as $8 million in a single month because of 
inappropriate pooling standards. The pooling standards in the Mideast 
order do not currently require a physical and economic association with 
the marketing area, noted the witness, and therefore an enormous amount 
of milk has been pooled on the Mideast order.
    A witness from Prairie Farms, representing the positions of the 
Cooperatives, testified in support of Proposal 3. The witness testified 
that increasing the touch base provision would ensure that enough milk 
would be available to cover the day-to-day fluid needs of the market 
along with providing for adequate milk reserves. At the same time, said 
the witness, the proposal would reduce the ability to pool milk on the 
order that is not serving the markets fluid needs. The witness noted 
that their dairy farmer

[[Page 19302]]

members have been financially harmed by the unwarranted additional 
supplies of milk being pooled on the order. The Cooperatives' witness 
stressed that pooling additional volumes of milk only serves to lower 
returns to Mideast producers and supplemental suppliers who are 
actually serving the fluid needs of the market every day.
    A witness appearing on behalf of MEMA also testified in support of 
Proposal 3. The MEMA witness related that in responding to changes in 
customer needs, in addition to variations in production, their need to 
secure additional volumes of milk for the fall months actually begins 
in August and continues through November. This, noted the witness, is 
because as schools return to session the demand for milk tends to 
increase.
    A witness appearing on behalf of MMPA testified in support of 
Proposal 3. The MMPA witness offered that increasing the touch base 
standard to 2-days' production better reflects the higher fluid needs 
of the market that exist during specific months of the year. The 
increase in demand for fluid milk attributed to school openings was 
also offered by the witness as an example of such increased demand 
beginning in August.
    MMPA also indicated support for the proviso in Proposal 3 that 
would establish a two-day touch base standard for each of the months of 
December through July for producer milk which did not meet the touch 
base standard in the proceeding months of August through November. 
According to the witness, this feature of the touch base standard 
supports the concept that pooling standards be performance oriented and 
more accurately identify the milk of those producers which actually 
service the fluid needs of the market.
    A witness from Dean also testified in general support of Proposal 
3. However, Dean offered a modification to Proposal 3 by endorsing a 3-
day touch base standard for producer milk. The witness provided an 
analysis on the effects of ``non-historic'' milk pooled on the Mideast 
order over the period of January 2001 through August 2001. This 
analysis concluded that the Mideast's Producer Price Differential (PPD) 
had been reduced by an average of 55 cents per hundredweight during 
this 8-month time period. The witness stressed that this loss of 
revenue is being borne by the producers who actually and regularly 
supply the fluid needs of the market. Accordingly, indicated the Dean 
witness, the pooling provision standards regarding producer milk need 
changing.
    A witness appearing on behalf of Suiza expressed similar general 
support for Proposal 3 and endorsed the Dean modification calling for a 
3-day touch base standard. Suiza was of the opinion that without a 
meaningful touch base standard, individual producer-suppliers do not 
actually have to perform by physically delivering milk to the Mideast 
market as a condition for pooling. Meaningful touch base provisions, 
noted Suiza, also provide handlers with reasonable assurance of 
performance while simultaneously ensuring that the milk of dairy 
farmers that actually serves the market is protected against lower 
returns caused by pooling unneeded milk. Additionally, the Suiza 
witness testified in support of specifying August as a month when lower 
diversion limits should be applicable. The witness also cited the 
opening of schools and the stresses on production from summer as 
reflections of increasing demand for Class I milk occurring during a 
time of generally lower milk production.
    A witness representing Scioto expressed general support for 
Proposal 3 but offered a 4-day touch base standard for each of the 
months of August through November and a 2-day touch base standard for 
each of the months of December and January.
    Testifying in support of Proposal 7, the IDPA witness stressed that 
increasing the touch base standard to 4 days' production should be 
applicable for each of the months of August through March and providing 
a 60 percent diversion limit for each of these same months would be 
beneficial to Mideast producers. The witness indicated that a physical 
delivery of milk to the order's pool plants is a key indicator of milk 
being a legitimate part of the market. The witness expressed support of 
the need for an emergency decision because their returns are being 
lowered by pooling milk that should not be considered as part of the 
Mideast market.
    Proposal 9, offered by the Handlers, seeks to limit the amount of 
milk that could be diverted from a pool plant to a nonpool plant. The 
proposal would set a 60 percent limit during each of the months of 
August through February and an 80 percent limit during each of the 
months of March through July. This proposal was abandoned by its 
proponents. Instead, the proponents agreed to support Proposal 3 
offered by the Cooperatives. While the Handlers indicated support for 
Proposal 3, they were of the opinion that adopting a 3-day touch base 
standard instead of a 2-day touch base standard would be best. They 
indicated a 3-day touch base standard would contribute to a more 
accurate identification of the milk of producers that actually supply 
the fluid milk needs of the Mideast marketing area.
    The witness representing Scioto testified in support of Proposal 9. 
Proposal 9 limits diversions to a percentage of the milk physically 
received at a plant, noted the witness. The concept of allowing 
diversions based on milk physically received is logical, said the 
witness, and is preferred by most of the dairy industry. The witness 
was also of the opinion that August should be included as a month that 
provides for a lower level of diversions to nonpool plants. The 
combination of schools opening in the middle of August together with 
the typically hot days of the summer season, cited the witness, has 
negative impact on milk production and therefore the order should have 
lower limits on the amount of milk that can divert to nonpool plants. 
Diversion limits of 60 percent during each of the months of August 
through February and 80 percent during each of the months of March 
through July would also assure consumers and fluid milk processing 
plants that their needs will be met, concluded the Scioto witness.
    All milk marketing orders, including the Mideast, provide some 
standard for identifying those producers who supply the market with 
milk. To qualify as a producer on most orders, including the Mideast, a 
producer can be associated with a market by making a delivery to a 
market's pool plant. Additionally, other standards need to be met 
before the milk of that producer is eligible to be diverted to a 
nonpool plant and have that diverted milk pooled and priced under the 
terms of the order. Currently, the Mideast order's standard is that one 
day's production of milk of a producer be delivered to a pool plant 
before that plant can divert the milk of the producer to a nonpool 
plant.
    The touch base standard of an order establishes an initial 
association by the producer and the milk of the producer with the 
market. Markets that exhibit a higher percentage of milk in fluid use 
generally have touch base standards specifying more frequent physical 
milk deliveries to pool plants. In this way, the touch base provision 
serves to maintain the integrity of the order's performance standards. 
When a touch base standard is too low, the potential for disorderly 
marketing conditions arises on two fronts. First, pool plants are less 
assured of milk supplies. Second, and most important for the Mideast 
marketing area, an inadequate touch base standard provides the means

[[Page 19303]]

for the milk of producers, not providing a service in meeting the fluid 
needs of the market, to be pooled on the order. This reduces the 
order's blend price paid to producers who are providing service to the 
Class I market.
    As specified in the tentative final decision, the record of this 
proceeding indicated various opinions about what the proper touch base 
standard for the Mideast order should be and when it should be 
applicable. These opinions ranged from 2 days' to as much as 4 days' 
milk production of a producer. All agree that August would be a more 
appropriate beginning month for its applicability. The more compelling 
observation is that all participants in this proceeding recognized the 
need for, and supported increasing, the touch base standard. The issue 
for the Department is reduced to deciding which standard best serves 
the needs of the Mideast order.
    On the basis of the evidence, both the tentative final decision and 
this final decision support adopting a 2-day touch base standard and 
having this standard be applicable beginning in August. While a higher 
standard would tend to further maintain the integrity of the order's 
performance standards, adopting a higher touch base standard may result 
in the uneconomic movement of milk solely for the milk of producers to 
meet a pooling standard. Additionally, the Mideast order currently 
provides that the Market Administrator may adjust the touch base 
standard in the same way the order provides for the Market 
Administrator to adjust the performance standards for supply plants and 
the diversion limits for all pool plants. Other changes adopted in this 
final decision will also serve to more accurately identify the milk of 
producers who should be pooled on the order. Together with the Market 
Administrator's authority to administratively change the touch base 
standard, sufficient safeguards are provided to accomplish both needs.
    Provisions for diverting milk are a desirable and needed feature of 
an order because they facilitate the orderly and efficient disposition 
of the market's milk not used for fluid use. When producer milk is not 
needed by the market for Class I use, its movement to nonpool plants 
for manufacturing, without loss of producer milk status, should be 
provided for. Preventing or minimizing the inefficient movement of milk 
solely for pooling purposes need also be reasonably accommodated. 
However, it is just as necessary to safeguard against excessive milk 
supplies becoming associated with the market through the diversion 
process.
    A diversion limit establishes the amount of producer milk that may 
be associated with the integral milk supply of a pool plant. With 
regard to the pooling issues of the Mideast order, it is the lack of 
diversion limits to nonpool plants that significantly contributes to 
the pooling of milk on the order that does not provide service to the 
Class I market. Such milk is not a legitimate part of the reserve 
supply of the plant.
     Milk diverted to nonpool plants is milk not physically received at 
a pool plant. However, it is included as a part of the total producer 
milk receipts of the diverting plant. While diverted milk is not 
physically received at the diverting plant, it is nevertheless an 
integral part of the milk supply of that plant. If such milk is not 
part of the integral supply of the diverting plant, then that milk 
should not be associated with the diverting plant. Therefore, such milk 
should not be pooled.
    Associating more milk than is actually part of the legitimate 
reserve supply of the diverting plant unnecessarily reduces the 
potential blend price paid to dairy farmers. Additionally, pooling milk 
far in excess of reasonable needs of the market due to the lack of 
diversion limits only provides for the association of milk with the 
market by what is often described as ``paper-pooling'' and not by 
actual service in meeting the Class I needs of the market. Without a 
diversion limit, the order's ability to provide effective performance 
standards and orderly marketing is weakened.
    The lack of a diversion limit standard applicable to pool plants 
opens the door for pooling much more milk and, in theory, an infinite 
amount of milk on the market. While the potential size of the pool 
should be established by the order's pooling standards, the lack of 
diversion limits renders the potential size of the pool as undefined. 
With respect to the marketing conditions of the Mideast marketing area 
evidenced by the record, this decision finds that the lack of year-
round diversion limits on producer milk has caused more milk to be 
pooled on the order than can reasonably be considered as properly 
associated with the market.
    The lack of a diversion limit standard applicable for diversions to 
nonpool plants has also resulted in the pooling of milk that does not 
provide a service in meeting the Class I needs of the Mideast marketing 
area. Proposal 7 offers reasonable diversion limit standards that would 
be adjusted seasonally to reflect the changing supply and demand 
conditions of the Mideast marketing area. Therefore, a 60 percent 
diversion limit standard for each of the months of August through 
February and a 70 percent diversion limit standard for each of the 
months of March through July is adopted. To the extent that these 
diversion limit standards may warrant adjustments, the order already 
provides the Market Administrator with authority to adjust these 
diversion standards as marketing conditions may warrant.
    As mentioned above, the Mideast order currently provides for the 
diversion of milk from a pool plant to a second pool plant. However, 
the order does not consider such diversions in the total diversion 
limit established for pool plants. It is through this shortcoming of 
the order's pooling standards that the intent to only pool the milk of 
producers who are consistently serving the Class I demands of the 
market are circumvented. In this regard, a pool plant is able to 
increase its milk diversions to a nonpool plant through diversions to a 
second pool plant. The amendment provided below in the Producer milk 
definition of the order provides the necessary technical correction 
that will include diversions to other pool plants in the manner no 
differently than diversions to nonpool plants.
    As specified in the tentative decision, several changes to the 
pooling standards contained in the Producer milk definition of the 
order were needed to maintain the integrity of the other amendments 
made in this decision affecting the performance standards for supply 
plants. As indicated earlier, the record indicates that certain pooling 
provisions of the Mideast order are either inadequate or unnecessary. 
With respect to the pooling standards of the order as they are 
contained in the Producer milk provision, the tentative decision and 
this final decision find that certain features of the provision are 
inadequate. These include:
    (1) The touch base standard currently requiring one-days' milk 
production of a producer be delivered to a pool plant is not providing 
a sufficient standard in identifying those producers and the milk of 
those producers who are serving the fluid needs of the market.
    (2) The lack of year-round diversion limits for all pool plants has 
resulted in the ability to pool far more milk than can be reasonably 
part of the reserve supply of the plants pooling such milk. The lack of 
a diversion limit for each and every month of the year has left the 
potential size of the marketwide pool undefined. This inadequacy of the 
Mideast order has resulted, too, in pooling the milk of producers who 
are not providing a service to the Class I needs of the market. This 
inadequacy contributes to the unnecessary erosion

[[Page 19304]]

of the order's blend price caused by pooling additional volumes of milk 
used in lower priced classes which, in turn, reduces the market's Class 
I utilization percentage of milk.
    (3) The lack of limiting the ability of a pool plant to divert milk 
to a second pool plant in the same manner as diverted milk to a nonpool 
plant contributes and magnifies the impact of pooling the milk of 
producers who provide no service to the Class I needs of the market. 
The receipt of a lower blend price to those producers who are serving 
the Class I needs of the market is found to be unwarranted and 
contributes to disorderly marketing conditions in the Mideast marketing 
area.

2. Rate of Partial Payment

    Proposal 4, seeking to increase the rate of partial payment for 
milk, was not recommended for adoption in the tentative decision and is 
not adopted in this final decision. This proposal, offered by DFA, 
would increase the rate of partial payment to producers and cooperative 
associations for milk delivered during the first 15 days of a month to 
110 percent of the previous month's lowest class price.
    The intent of this proposal, according to the DFA witness, is to 
improve the cash flow of dairy farmers pooled on the Mideast order. 
According to DFA, a partial payment that more closely equals the final 
payment for milk would more accurately reflect the true value of the 
milk delivered to handlers during the first 15 days of the month. The 
DFA witness testified that the partial payment rate, as a share of the 
total payment for milk, has widened since the formation of the 
consolidated Mideast marketing area. The witness stressed that 
producers need a more consistent cash flow than they are currently 
experiencing and adopting a higher partial payment rate would meet this 
need.
    The DFA witness provided data and an analysis they maintain 
indicates that since the implementation of order reform on January 1, 
2000, the amount of the partial payment received by producers relative 
to the total payment for milk each month has been reduced when compared 
to the pre-reform orders. The analysis consisted of approximating a 
weighted average blend price as a proxy for a comparable order from the 
pre-reform orders' information. The witness indicated that data for a 
36-month period, from January 1997 through December 1999, was compared 
to the current Mideast order data of 17 months--the number of months 
then available for which data existed.
    Since the current Mideast order provides 4 classes of milk use, the 
DFA witness indicated they used the pre-reform order's Class III-A 
price as a proxy for the lowest class price so that a comparison could 
be made between the pre-reform and post-reform partial payment 
relationships to the total price for the month. The result of this 
analysis, concluded the DFA witness, clearly indicates that by using 
the lowest class price of the previous month as the rate of partial 
payment, the relationship between the partial and total payment for 
milk during the month has widened since the implementation of order 
reform.
    Three other witnesses testified in support of amending the partial 
payment provision. These witnesses included an Ohio dairy farmer, a 
representative of MMPA, and Scioto. All three witnesses testified that 
their cash flow, or the cash flow of their members, has deteriorated 
since the implementation of order reform.
    As specified in the tentative decision, opposition by handler 
interests for increasing the rate of partial payment was significant. 
However, handler interests did not counter the expressed need for 
improvement in producers' cash flow positions. Rather, handler 
interests focused on presenting the impact to milk processors if a 
higher partial payment rate was adopted.
    A representative of Leprino Foods (Leprino), a national cheese-
processing firm which purchases and pools milk on the Mideast order, 
testified that disparity between the partial and final payments is a 
combination of a failure to blend the pool's higher use values into the 
partial payment and using the lowest class price of the previous month. 
The witness argued that increasing the rate of partial payment would 
merely transfer the burden of producers' cash flow concerns to 
processors. The Leprino witness was also of the opinion that increasing 
the rate of partial payment would violate minimum pricing principles 
used by Federal milk orders. In this regard, the witness noted that 
Class III and IV products compete for sales in a national market, 
unlike milk used in Class I products. The witness maintained that the 
resulting differences in the rate of partial payment between orders 
would cause disparate economic positions for handlers competing for 
sales in areas where the rate of partial payment is lower.
    A witness representing the Handlers also testified in opposition to 
increasing the rate of partial payment. The witness provided an 
analysis that evaluated the financial impact on handlers based on the 
economic principle of the time value of money. In the analysis, the 
Handlers' witness presented the financial impacts to handlers that 
would likely result by advancing or delaying the partial payment. 
Notwithstanding the desire or need of producers to improve their cash 
flow positions, the witness was of the opinion that the cash flow 
problem of producers would better be addressed through adoption of 
other proposals under consideration in this proceeding.
    Because of initial confusion in the data presented at the hearing 
regarding appropriate historical prices and the months for which they 
were applicable, the Department reconstructed noticed data that 
recreated the intended analysis presented by witnesses. The 
Department's reconstruction relied, in part, on the partial payment 
provisions of the pre-reform orders. The Department used the previous 
month's Class III price of the pre-reform orders as the lowest class 
price because the Class III price was used then to set the rate of 
partial payment. In this regard, comparing partial payment relationship 
outcomes using actual historical provisions provided for comparing pre- 
and post-reform partial payment relationships as to the total payment 
for milk in a month.
    Even with the limited amount of data available since the 
implementation of order reform, the Department's comparison of pre- and 
post-reform partial payment relationships to total payments does appear 
to support the observations made by the DFA witness. However, this 
initial observation alone is not sufficient basis for changing the rate 
of the partial payment. Some significant differences in certain key 
assumptions were made by the proponents of Proposal 4 from those 
assumptions used by the Department in comparing pre- and post-reform 
time periods.
    Also of concern is the limitations inherent in comparing a 36-month 
period to one of only 17 months. Additionally, the 36-month time period 
shows price trends rising and falling, while the 17-month time shows a 
period of generally an upward trend in prices. This may suggest that 
there has not yet been a sufficient period of elapsed time to infer the 
impact of downward trends in prices and the possible effect on the 
relationship between the partial and final payments to producers.
    With regard to Leprino's concern about uniformity of partial 
payment rates between orders, the current milk orders have a variety of 
partial payment rates. Several orders use a partial payment rate based 
on a percent of the previous month's blend price, and the

[[Page 19305]]

Florida order, for example, provides for two partial payments. 
Additionally, the Western and Arizona-Las Vegas orders, both of which 
pool significant volumes of milk used in cheese, provide for partial 
payment rates of 120 and 130 percent, respectively, of the previous 
month's lowest class price.
    There may be times when the rate of partial payment exceeds the 
balance due for the month. In this regard, handler interests point to 
this outcome as requiring them to pay more for milk for part of the 
month than its actual value for the month. It is appropriate to note 
that this exact outcome occurred several times during the pre-reform 
36-month period used by DFA. Thus, it is determined that the concerns 
of handlers in this regard are unpersuasive.
    The DFA witness noted that deductions authorized by producers are 
normally made in the final payments for milk. There could be times when 
the amount deducted from the final payment exceeds the amount of the 
final payment. If the deductions are high enough for this to happen, it 
would be reasonable to conclude that producers desiring to even out 
their cash flow would opt to allow a portion of their deductions to be 
made with receipt of the partial payment, as the order allows.
    The partial payment provision in Federal orders is a minimum 
requirement placed on handlers to pay producers for milk delivered. It 
is important to note that cooperatives and handlers are not restricted 
to paying only one partial payment at the rate specified in the order; 
partial payments for milk can be made more often. Additionally, 
cooperatives and handlers are also at liberty to negotiate agreements 
for more frequent billings for milk and in payments for milk above the 
minimum established by the order. As made evident by the record, more 
flexible partial payment options are available to both producers and 
handlers than relying solely on changing the minimum payment provision.
    As the Leprino witness noted, DFA's proposal does not incorporate 
or blend the higher-valued uses of milk in their analysis. In response 
to this observation, the Department compared the relationships between 
the partial and total payment using 90 percent of the previous month's 
Mideast blend price. Interestingly, if the desired objective is to more 
closely approximate the partial payment rate using the 36-month period 
before order reform, a 90 percent rate of the previous month's blend 
price seems to accomplish this. Nevertheless, the same limitations and 
concerns mentioned above prevent a finding that the Mideast order's 
rate for partial payment should be increased.
    Both the tentative final decision and this final decision find 
general agreement with the Handlers' opinion that the cash flow 
concerns of producers would be better served by the adoption of other 
proposals considered in this proceeding. Other amendments adopted in 
this final decision affecting the pooling of milk in the Mideast order 
will likely end the unnecessary erosion in the blend price received by 
Mideast producers. Higher expected blend prices will result from more 
accurately identifying those producers and the milk of those producers 
who actually serve the Class I needs of the market. Similarly, the 
relationship between the partial payment and the total price received 
by producers may change by the adoption of these pooling standard 
amendments. Accordingly, a finding that the rate of partial payment to 
producers by handlers should be increased is not supported by the 
evidence contained in the record of this proceeding.

3. Conforming Changes

    One conforming change is made to the pool plant definition of the 
order. Words to implement the consolidated order were needed when the 
order first became effective on January 1, 2000. Since the order has 
become effective such wording is no longer needed to effectuate the 
implementation of the order. The removal of the wording presented below 
is self explanatory.

4. Emergency Marketing Conditions

    Evidence presented at the hearing established that the pooling 
standards of the Mideast order are inadequate and result in the erosion 
of the blend price received by producers who are serving the Class I 
needs of the market and should be changed on an emergency basis. The 
unwarranted erosion of such producers' blend price stems from improper 
performance standards as they relate to pool supply plants and the lack 
of diversion limits for pool plant diversions to pool and nonpool 
plants. These shortcomings of the pooling provisions have allowed milk 
to be pooled on the order that does not provide a reasonable or 
consistent service to meeting the needs of the Class I market as a 
standard for enjoying the pricing benefits arising from Class I sales 
in the Mideast marketing area. Consequently, it was determined that 
emergency marketing conditions existed, and the issuance of a 
recommended decision was omitted.

Rulings on Proposed Findings and Conclusions

    Briefs and proposed findings and conclusions were filed on behalf 
of certain interested parties. These briefs 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 Mideast order was first issued. 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 interim order, as 
hereby proposed to be amended, will regulate the handling of milk in 
the same manner as, and will be applicable only to persons in the 
respective classes of industrial and commercial activity specified in a 
marketing agreement upon which a hearing has been held.

Rulings on Exceptions

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

[[Page 19306]]

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 Mideast marketing area was 
approved by producers and published in the Federal Register on July 26, 
2002 (67 FR 48743), 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

    October 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 
July 26, 2002 (67 FR 48743), regulating the handling of milk in the 
Mideast 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 1033

    Milk marketing orders.

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

Order Amending the Order Regulating the Handling of Milk in the Mideast 
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 Mideast marketing area. The 
hearing was held pursuant to the provisions of the Agricultural 
Marketing Agreement Act of 1937, as amended (7 U.S.C. 601-674), and the 
applicable rules of practice and procedure (7 CFR Part 900).
    Upon the basis of the evidence introduced at such hearing and the 
record thereof, it is found that:
    (1) The said order as hereby amended, and all of the terms and 
conditions thereof, will tend to effectuate the declared policy of the 
Act;
    (2) The parity prices of milk, as determined pursuant to Section 2 
of the Act, are not reasonable in view of the price of feeds, available 
supplies of feeds, and other economic conditions which affect market 
supply and demand for milk in the aforesaid marketing area. The minimum 
prices specified in the order as hereby amended are such prices as will 
reflect the aforesaid factors, insure a sufficient quantity of pure and 
wholesome milk, and be in the public interest; and
    (3) The said order as hereby amended regulates the handling of milk 
in the same manner as, and is applicable only to persons in the 
respective classes of industrial or commercial activity specified in, a 
marketing agreement upon which a hearing has been held.

Order Relative to Handling

    It is therefore ordered, that on and after the effective date 
hereof, the handling of milk in the Mideast 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 July 22, 2002, and published in the 
Federal Register on July 26, 2002 (67 FR 48743), are adopted with one 
minor change and shall be the terms and provisions of this order. The 
revision to the order follows.

PART 1033--MILK IN THE MIDEAST MARKETING AREA

    1. The authority citation for 7 CFR Part 1033 continues to read as 
follows:

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

    2. Section 1033.7 is amended by revising paragraph (d)(2) to read 
as follows:


Sec.  1033.7  Pool plant.

* * * * *
    (d) * * *
    (2) The 30 percent delivery requirement may be met for the current 
month or it may be met on the basis of deliveries during the preceding 
12-month period ending with the current month.
* * * * *

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

    The parties hereto, in order to effectuate the declared policy 
of the Act, and in accordance with the rules of practice and 
procedure effective thereunder (7 CFR part 900), desire to enter 
into this marketing agreement and do hereby agree that the 
provisions referred to in paragraph I hereof as augmented by the 
provisions specified in paragraph II hereof, shall be and are the 
provisions of this marketing agreement as if set out in full herein.
    I. The findings and determinations, order relative to handling, 
and the provisions of Sec. Sec.  1033.1 to 1033.86 all inclusive, of 
the order regulating the handling of milk in the Mideast marketing 
area (7 CFR 1033 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 ----, ----, -------- 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. 04-8071 Filed 4-9-04; 8:45 am]
BILLING CODE 3410-02-P