[Federal Register Volume 70, Number 70 (Wednesday, April 13, 2005)]
[Proposed Rules]
[Pages 19636-19658]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-7295]



[[Page 19635]]

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Part III





Department of Agriculture





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Agricultural Marketing Service



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7 CFR Parts 1124 and 1131



Milk in the Pacific Northwest and Arizona-Las Vegas Marketing Areas; 
Recommended Decision and Opportunity To File Written Exceptions on 
Proposed Amendments To Tentative Marketing Agreements and Orders; 
Proposed Rule

  Federal Register / Vol. 70, No. 70 / Wednesday, April 13, 2005 / 
Proposed Rules  

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DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Parts 1124 and 1131

[Docket No. AO-368-A32, AO-271-A37; DA-03-04B]


Milk in the Pacific Northwest and Arizona-Las Vegas Marketing 
Areas; Recommended Decision and Opportunity To File Written Exceptions 
on Proposed Amendments To Tentative Marketing Agreements and Orders

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Proposed rule.

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SUMMARY: This document recommends that the producer-handler definitions 
of the Pacific Northwest and the Arizona-Las Vegas milk marketing 
orders be amended to limit producer-handler status to those entities 
with route disposition of fluid milk products of less than three 
million pounds per month.

DATES: Comments must be submitted on or before June 13, 2005.

ADDRESSES: Comments (six copies) should be filed with the Hearing 
Clerk, STOP 9200-Room 1083, United States Department of Agriculture, 
1400 Independence Avenue, SW., Washington, DC 20250-9200. You may send 
your comments by the electronic process available at Federal 
eRulemaking portal at http://www.regulations.gov or by submitting 
comments to [email protected]. Reference should be made to the 
title of action and docket number.

FOR FURTHER INFORMATION CONTACT: Jack Rower or Gino Tosi, Marketing 
Specialists, USDA/AMS/Dairy Programs, Order Formulation and Enforcement 
Branch, STOP 0231-Room 2971, 1400 Independence Avenue SW., Washington, 
DC 20250-0231, (202) 720-2357 or (202) 690-1366, e-mail address: 
[email protected] or [email protected].

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

Regulatory Flexibility Act and Paperwork Reduction Act

    In accordance with the Regulatory Flexibility Act (5 U.S.C. 601 et 
seq.), the Agricultural Marketing Service has considered the economic 
impact of this action on small entities and has certified that this 
proposed rule will not have a significant economic impact on a 
substantial number of small entities. For the purpose of the Regulatory 
Flexibility Act, a dairy farm is considered a ``small business'' if it 
has an annual gross revenue of less than $750,000, and a dairy products 
manufacturer is a ``small business'' if it has fewer than 500 
employees. For the purposes of determining which dairy farms are 
``small businesses,'' the $750,000 per year criterion was used to 
establish a milk marketing 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.
    Producer-handlers are defined as dairy farmers that process only 
their own milk production. These entities must be dairy farmers as a 
pre-condition to operating processing plants as producer-handlers. The 
size of the dairy farm determines the production level of the operation 
and is the controlling factor in the capacity of the processing plant 
and possible sales volume associated with the producer-handler entity. 
Determining whether a producer-handler is considered small or large 
business must depend on its capacity as a dairy farm, where a producer-
handler with annual gross revenue in excess of $750,000 is considered a 
large business.
    The amendments would place entities currently considered to be 
producer-handlers under the Pacific Northwest or the Arizona-Las Vegas 
on the same terms as all other fully regulated handlers of the two 
orders provided they meet the criteria for being subject to the pooling 
and pricing provisions of the two orders. Entities currently defined as 
producer-handlers under the terms of these orders will be subject to 
the pooling and pricing provisions of the orders if their route 
disposition of fluid milk products is more than 3 million pounds per 
month.
    Producer-handlers with route disposition of less than 3 million 
pounds during the month will not be subject to the pooling and pricing 
provisions of the orders. To the extent that current producer-handlers 
for each order have route disposition of fluid milk products outside of 
the marketing areas, such route disposition will be subject to the 
pooling and pricing provisions of the orders if total route disposition 
cause them to become fully regulated.
    Assuming that some current producer-handlers will have route 
disposition of fluid milk products of more than 3 million pounds during 
the month, such producer-handlers will be regulated subject to the 
pooling and pricing provisions of the orders like other handlers. Such 
producer-handlers will account to the pool for their uses of milk at 
the applicable minimum class prices and pay the difference between 
their use-value and the blend price of the order to the order's 
producer-settlement fund.
    While this may cause an economic impact on those entities with more 
than 3 million pounds of route sales who currently are considered 
producer-handlers by the two orders, the impact is offset by the 
benefit to other small businesses. With respect to dairy farmers whose 
milk is pooled on the two marketing orders, such dairy farmers who have 
not heretofore shared in the additional revenue that accrues from the 
marketwide pooling of Class I sales by producer-handlers will share in 
such revenue. This will have a positive impact on 468 small dairy 
farmers in the Pacific Northwest and Arizona--Las Vegas marketing 
areas. Additionally, all

[[Page 19637]]

handlers who dispose of more than 3 million pounds of fluid milk 
products per month will pay at least the announced Federal order Class 
I price for such use. This will have a positive impact on 18 small 
regulated handlers.
    To the extent that current producer-handlers in the Pacific 
Northwest and the Arizona-Las Vegas orders become subject to the 
pooling and pricing provisions, such will be determined in their 
capacity as handlers. Such entities will no longer have restrictions 
applicable to their business operations that were conditions for 
producer-handler status and exemption from the pooling and pricing 
provisions of the two orders. In general, this includes being able to 
buy or acquire any quantity of milk from dairy farmers or other 
handlers instead of being limited by the current constraints of the two 
orders. Additionally, the burden of balancing their milk production is 
relieved. Milk production in excess of what is needed to satisfy their 
Class I route disposition needs will receive the minimum price 
protection of the order established under the terms of the two orders. 
The burden of balancing milk supplies will be borne by all producers 
and handlers who are pooled and regulated under the terms of the two 
orders.
    During September 2003, the Pacific Northwest had 16 pool 
distributing plants, one pool supply plant, three cooperative pool 
manufacturing plants, seven partially regulated distributing plants, 
eight producer-handler plants and two exempt plants. Of the 27 
regulated handlers, 16 or 59 percent are considered large businesses. 
Of the 691 dairy farmers whose milk was pooled on the order, 241 or 35 
percent are considered large businesses. If these amendatory actions 
are not undertaken, 65 percent of the dairy farmers (450) in the 
Pacific Northwest order who are small businesses will continue to be 
adversely affected by the operations of large producer-handlers.
    For the Arizona--Las Vegas order, during September 2003 there were 
three pool distributing plants, one cooperative pool manufacturing 
plant, 18 partially regulated distributing plants, two producer-handler 
plants and three exempt plants (including an exempt plant located in 
Clark County Nevada) operated by 22 handlers. Of these plants, 15 or 68 
percent are considered large businesses. Of the 106 dairy farmers whose 
milk was pooled on the order, 88 or 83 percent are considered large 
businesses. If these amendatory actions are not undertaken, 17 percent 
of the dairy farmers in the Arizona-Las Vegas order who are small 
businesses will continue to be adversely affected by large producer-
handler operations.
    In their capacity as producers, seven producer-handlers would be 
considered as large producers as their annual marketing exceeds 6 
million pounds of milk. Record evidence indicates that for the Pacific 
Northwest marketing order at the time of the hearing, four producer-
handlers would potentially become subject to the pooling and pricing 
provisions of the order because of route disposition of more than 3 
million pounds per month. For the Arizona--Las Vegas order, one 
producer-handler would be considered a large producer because its 
annual marketing exceeds 6 million pounds of milk and potentially 
subject to the pooling and pricing provisions of the order because of 
route disposition exceeding 3 million pounds per month.
    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 minimal impact on 
reporting, recordkeeping, or other compliance requirements for entities 
currently considered producer-handlers under the Pacific Northwest and 
the Arizona-Las Vegas marketing orders because they would remain 
identical to the current requirements applicable to all other regulated 
handlers who are currently subject to the pooling and pricing 
provisions of the two orders. No new forms are proposed and no 
additional reporting requirements would be necessary.
    This notice does not require additional information collection that 
requires clearance by the Office of Management and Budget (OMB) beyond 
currently approved information collection. The primary sources of data 
used to complete the forms are routinely used in most business 
transactions. Forms require only a minimal amount of information which 
can be supplied without data processing equipment or a trained 
statistical staff. Thus, the information collection and reporting 
burden is relatively small. Requiring the same reports for all handlers 
does not significantly disadvantage any handler that is smaller than 
the industry average.
    Interested parties are invited to submit comments on the probable 
regulatory and informational impact of this proposed rule on small 
entities. Also, parties may suggest modifications of this proposal for 
the purpose of tailoring their applicability to small businesses.
    Prior documents in this proceeding: Notice of Hearing: Issued July 
31, 2003; published August 6, 2003 (68 FR 46505).
    Correction to Notice of Hearing: Issued August 20, 2003; published 
August 26, 2003 (68 FR 51202).
    Notice of Reconvened Hearing: Issued October 27, 2003; published 
October 31, 2003 (68 FR 62027).
    Notice of Reconvened Hearing: Issued December 18, 2003; published 
December 29, 2003 (68 FR 74874).

Preliminary Statement

    Notice is hereby given of the filing with the Hearing Clerk of this 
recommended decision with respect to proposed amendments to the 
tentative marketing agreements and the orders regulating the handling 
of milk in the Pacific Northwest and the Arizona-Las Vegas marketing 
areas. This notice is issued pursuant to the provisions of the 
Agricultural Marketing Agreement Act (AMAA) and the applicable rules of 
practice and procedure governing the formulation of marketing 
agreements and marketing orders (7 CFR part 900).
    Interested parties may file written exceptions to this decision 
with the Hearing Clerk, U.S. Department of Agriculture, Washington, DC 
20250, by the 60th day after publication of this decision in the 
Federal Register. Six (6) copies of the exceptions should be filed. All 
written submissions made pursuant to this notice will be made available 
for public inspection at the office of the Hearing Clerk during regular 
business hours (7 CFR 1.27(b)).
    The proposed amendments set forth below are based on the record of 
a public hearing held at Tempe, Arizona, beginning on September 23, 
2003; reconvened, and continuing at Seattle, Washington, on November 
17, 2003; and reconvened and concluding at Alexandria, Virginia, on 
January 23, 2004, pursuant to a notice of hearing issued July 31, 2003; 
published August 6, 2003 (68 FR 46505), and correction to the notice 
issued: August 23, 2003, and published August 26, 2003 (68 FR 51202); 
and notices of reconvened hearings issued October 27, 2003, and 
published October 31, 2003 (68 FR 62027); and December 18, 2003, and 
published December 29, 2003 (68 FR 74874).
    The material issues on the record of hearing relate to:
    1. The regulatory status of producer-handlers.

Findings and Conclusions

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

[[Page 19638]]

1. The Regulatory Status of Producer-Handlers

    The producer-handler provision of the Pacific Northwest and the 
Arizona-Las Vegas milk marketing orders should be amended to limit 
producer-handlers to Class I route disposition of not more than 3 
million pounds per month.
    Currently, the Pacific Northwest and the Arizona-Las Vegas milk 
marketing orders provide separate but similar definitions that describe 
and define a special category of handler known as producer-handlers. 
While there are specific differences in how each order defines and 
describes producer-handlers, both orders, as do all Federal milk 
marketing orders, exempt producer-handlers from the pooling and pricing 
provisions of the orders.
    Exemptions from the pooling and pricing provisions of the orders 
essentially means that the minimum class prices established under the 
orders that handlers must pay for milk are not applicable to producer-
handlers and producer-handlers receive no minimum price protection for 
surplus milk disposed of within either order's marketing area. 
Producer-handlers enjoy keeping the entire value of their milk 
production disposed of as fluid milk products in the marketing area to 
themselves and do not share this value with other dairy farmers whose 
milk is pooled on either of the two orders.
    However, producer-handlers are subject to strict definitions and 
limitations in their business practices. Both orders limit the ability 
of producer-handlers to buy or acquire milk that may be needed from 
dairy farmers or other handlers. Additionally, producer-handlers bear 
the entire burden of balancing their own milk production. Milk 
production in excess of what is needed to satisfy their Class I route 
disposition needs will receive whatever price they are able to obtain. 
Such milk does not receive the minimum price protection of the order.
    It is the exemption from the pooling and pricing provisions of the 
Pacific Northwest and Arizona-Las Vegas orders that is the central 
issue of this proceeding. While producer-handlers are exempt from the 
pooling and pricing provisions of the two orders, they are 
``regulated'' to the extent that producer-handlers submit reports to 
the Market Administrator who monitors producer-handler operations to 
ensure that such entities are in compliance with the conditions for 
such regulatory status. For the purposes of brevity and convenience, 
this decision will refer to those handlers who are subject to the 
pooling and pricing provisions of the orders as ``fully regulated 
handlers'' in contrast to producer-handlers.

Overview of the Proposals

    This proceeding considered three proposals seeking the application 
of each order's pooling and pricing provisions, or full regulation, of 
producer-handlers when their route disposition of fluid milk products 
in the marketing areas exceeded 3 million pounds per month. These 
proposals were published in the hearing notice as Proposals 1, 2 and 3. 
Proposal 1 is applicable to the Pacific Northwest milk marketing order. 
Proposal 3 is applicable to the Arizona-Las Vegas milk marketing order. 
Proposal 2, applicable to only the Pacific Northwest, is identical to 
Proposal 1 but also seeks to limit a producer-handler from distributing 
fluid milk products to a wholesale customer who is served by a fully 
regulated or partially regulated distributing plant in the same-sized 
package with a similar label during the month. In this regard, Proposal 
2 would make the producer-handler definition for the Pacific Northwest 
order more like the current Arizona-Las Vegas order.
    A fourth proposal, published in the hearing notice as Proposal 4, 
seeking to prevent the simultaneous pooling of the same milk on the 
Arizona-Las Vegas milk marketing order and on a state-operated order 
that provides for marketwide pooling, (commonly referred to as 
``double-dipping'') is addressed in a separate tentative final 
decision, issued December 23, 2004 and published in the Federal 
Register on December 30, 2004 (69 FR 78355).

Summary of Testimony

    Proposal 3 received testimony by a witness appearing on behalf of 
United Dairymen of Arizona (UDA). UDA is a dairy cooperative supplying 
approximately 88 percent of the milk in the Arizona-Las Vegas milk 
marketing order (Order 131). The UDA witness testified in support of 
establishing a 3-million pound limit in route disposition of fluid milk 
products for producer-handlers in the marketing area, which, if 
exceeded, would cause the producer-handler to become subject to the 
pooling and pricing provisions of the order. The witness was of the 
opinion that the current producer-handler definition contradicts the 
overall purposes of the Federal milk order program to establish uniform 
prices among all handlers and the marketwide sharing of revenue among 
all producers who supply the market.
    The UDA witness asserted that Sarah Farms is the largest producer-
handler in the Order 131 marketing area and avoids the classified 
pricing and pooling requirements applicable to all other handlers. The 
witness characterized this as the operation of an individual handler 
pool within a marketwide pool. The witness stated that UDA is aware 
that historically Federal orders have exempted producer-handler 
operations from the pricing and pooling provisions of orders because 
they were small and had little impact in the marketplace. The witness 
contrasted this historical perspective with Sarah Farms, recognized as 
the largest producer-handler in Order 131, by citing a trade journal 
article that ranked Sarah Farms as the second largest U.S. dairy farm 
with 13,000 cows in 1995.
    The witness testified that UDA estimates Sarah Farms' Class I sales 
within the Order 131 marketing area are about 12 million pounds per 
month. Because of Sarah Farms' exemption from the pooling and pricing 
provisions of the order, the witness estimated a loss in revenue to 
producers who pool milk on the order at about $11,586,589 over the 
period of January 2000 through July 2003, or about a 10-14 cents per 
hundredweight (cwt) impact on the order's blend price. In addition, the 
witness estimated lost revenue of about $3 million, or about a 10 cent 
per cwt lower blend price for the period of September 1997 through 
January 1999.
    A second witness appearing on behalf of UDA also testified in 
support of Proposal 3. This witness explained that the proposed 3 
million pound route disposition limit on producer-handlers was partly 
based on provisions of the Fluid Milk Promotion Act which requires an 
assessment for the promotion of fluid milk when a handler's sales are 
greater than 3 million pounds per month. The witness said that 
producer-handlers who have the ability to enjoy this level of route 
disposition should not be exempted from pooling and pricing provisions 
and that their continued exemption poses a serious threat to orderly 
marketing and the operation of the Federal milk order program.
    The second UDA witness claimed that in December 1994, Sarah Farms 
was considered an insignificant factor within the Order 131 marketing 
area because their monthly raw milk production was less than 5 million 
pounds, of which less than 1.3 million pounds of Class I products were 
distributed within the marketing area. Relying on Market Administrator 
statistics, the witness added that by 1996, UDA estimated that Sarah 
Farms' monthly Class I route disposition had increased to more than 6 
million

[[Page 19639]]

pounds. The witness also testified that from late 1998 until this 
proceeding, Sarah Farms had been one of only two producer-handlers 
selling Class I products in the marketing area. Relying on Market 
Administrator statistics, the witness estimated that Sarah Farms' Class 
I route sales within Order 131 had increased from about 7 million 
pounds per month to as much as 15 million pounds per month by 2002.
    A witness appearing on behalf of the Kroger Company (Kroger), a 
fully regulated handler under the Pacific Northwest milk marketing 
order (Order 124) and Order 131, testified in support of Proposals 1, 
2, and 3. The witness said that changes in marketing conditions in both 
orders necessitate changes in how the orders define producer-handlers. 
In the opinion of the witness, producer-handlers enjoy a competitive 
sales advantage by being exempted from the pooling and pricing 
provisions of both orders. The witness explained that producer-handlers 
have a sales advantage because they have the flexibility to set their 
internal raw milk price at a level well below the announced Federal 
order minimum Class I price that fully regulated handlers must pay.
    The Kroger witness also testified that regulated handlers in Orders 
124 and 131 have been forced to respond to competitive situations with 
producer-handlers in supplying retail grocery outlets. This was due in 
part to the competitive sales advantage producer-handlers have in being 
able to lower their price to retailers while still maintaining an 
adequate profit margin, the witness explained. The witness said that 
Kroger's retail outlets could not do this competitively without eroding 
their profit margins. Because of these competitive situations, the 
witness concluded that producer-handlers exceeding more than 3 million 
pounds per month in Class I sales was a reasonable estimate of when a 
producer-handler is in direct competition with fully regulated handlers 
and should therefore receive the same regulatory treatment. The same 
regulatory treatment of producer-handlers as fully regulated handlers 
above this threshold would, according to the witness, re-establish 
equity among handlers competing for Class I sales in these two 
marketing areas.
    The Kroger witness was of the opinion that the volume of producer-
handler route disposition was a key aspect of the disorderly marketing 
conditions in Orders 124 and 131. However, the witness indicated that a 
producer-handler's processing plant size alone was not necessarily an 
accurate indicator of processing plant efficiency. The witness 
testified that smaller plants can be very competitive. In this regard, 
the witness said that Kroger's largest plant was not its most efficient 
bottling plant.
    A witness appearing on behalf of Western United Dairymen (WUD), the 
largest dairy farmer association in California representing 
approximately 1,100 of California's 2,000 dairy farmers, testified in 
support of Proposals 1 and 3. The witness expressed the opinion that a 
primary reason for the exemption of producer-handlers from the pricing 
and pooling provisions of Orders 124 and 131 had been because these 
entities were customarily small businesses that operate self-
sufficiently and do not have a significant impact in the marketplace. 
The WUD witness testified that the regulatory exemption for producer-
handlers has been largely unchanged in the Federal order system for 
more than 50 years. The witness explained that there had been no 
significant demonstration of unfair advantages accruing to producer-
handlers because they are responsible for balancing their fluid milk 
needs and cannot transfer balancing costs to other pooled market 
participants.
    The WUD witness also testified that some producer-handlers were 
becoming much larger than fully regulated fluid processors in Orders 
124 and 131. The witness was of the opinion that large producer-
handlers were effectively taking greater and greater shares of the 
Class I market in both orders and caused pooled milk to be forced into 
lower-valued manufacturing uses. According to the witness, these 
outcomes are having a direct negative impact on handlers and producers 
in both orders and are generating instability in the Federal milk 
marketing order system.
    The WUD witness asserted that when producer-handler sales growth 
threatened the sales of fully regulated handlers under California's 
State-wide regulatory system, the State acted to maintain and protect 
their pooling and pricing system by placing a limit on the volumes of 
sales producer-handlers could have within the State before becoming 
fully regulated. The witness was of the opinion that the Federal order 
program also needs to act by adopting the proposed amendments to 
similarly limit the sales volume of producer-handlers.
    A witness appearing on behalf of the Alliance of Western Milk 
Producers (Alliance), an organization representing California 
cooperatives, also testified in support of Proposals 1, 2, and 3. The 
witness indicated that how the Federal order program deals with the 
producer-handler issue is of interest to California dairy farmers 
because changes in Orders 124 and 131, which border California, will 
have a direct impact on the State's milk marketing and regulatory 
program. The witness was of the opinion that producer-handlers have a 
tremendous competitive advantage in the marketplace because they are 
not subject to minimum pricing and are thereby able to avoid a pooling 
obligation to share their Class I revenue with all pooled market 
participants. The witness asserted that unless some limitation is put 
on the route sales volume of producer-handlers, it may encourage new 
producer-handlers to enter the market and further erode the equitable 
pricing principles relied on by the Federal milk order program.
    A witness appearing on behalf of Northwest Dairy Association (NDA) 
testified in support of Proposals 1 and 2. The witness provided a 
business example demonstrating how producer-handlers enjoy a pricing 
and marketing advantage by being exempt from the pooling and pricing 
provisions of Order 124. Relating past business experiences as a fully 
regulated handler known as Sunshine Dairy, the witness explained how 
business was lost to a producer-handler competitor. The witness 
attributed this loss of business to the competitive sales advantage 
enjoyed by producer-handlers resulting from their exemption from the 
pooling and pricing provisions of the order.
    The NDA witness testified that as a fully regulated handler known 
as Sunshine Dairy they had also lost a small customer who, at that 
time, was buying about 25,000 gallons of milk per week. The witness 
said that this customer grew to constitute more than 10 percent of its 
fluid milk sales volume. According to the witness, even though they had 
provided great service and products, they lost the account because the 
customer could save hundreds of thousands of dollars a year by 
procuring milk from a producer-handler. According to the witness, 
Sunshine Dairy lost this account because the producer-handler was able 
to price its milk at a level below the minimum Federal order Class I 
price. The witness also testified that the producer-handler 
subsequently lost this account to a fully regulated handler that was of 
national scope.
    The NDA witness expressed the opinion that the goal of the Federal 
Order system is to maintain order in the market. In this regard, the 
witness testified that handlers should not be exempt from the pooling 
and provisions of an order because they own their cows and produce 
their own milk supply

[[Page 19640]]

when other handlers are not exempted. The witness stressed that such an 
exemption is unfair, noting that the vast majority of dairy farmers 
should not receive smaller paychecks for the same product as producer-
handlers because they lack a processing plant.
    A witness appearing on behalf of Maverick Milk Producers 
Association (Maverick), a cooperative of dairy farmers located in 
Arizona that markets its milk in California and Arizona, testified in 
support of Proposal 3. The witness testified that all handlers who 
market their milk in Order 131 should be subject to the pooling and 
pricing provisions of the order, including producer-handlers. The 
witness inferred from Market Administrator statistics that the largest 
producer-handler in Order 131, Sarah Farms, had cost Maverick members 
in excess of $1.2 million in revenue since 1999 because Sarah Farms had 
not been subject to the pooling and pricing provisions of the order. 
The witness testified that the estimated loss of revenue to the Order 
131 pool was based on an assumption that Sarah Farms produced about 18 
million pounds of milk per month that would have been pooled as Class I 
milk.
    A former executive and co-owner of Vitamilk, an independent handler 
no longer operating as a going concern, formerly located in Seattle, 
Washington, appeared on behalf of Dairy Farmers of America (DFA) and 
testified in support of Proposals 1 and 2. This DFA witness testified 
that in seeking alternative markets for its milk products, Vitamilk 
began to compete with producer-handlers for school milk supply 
contracts through one of its wholesale distributors. However, their bid 
attempts were unsuccessful, the witness testified, because the school 
district sought fixed-price contracts for packaged fluid milk which 
they could not supply in competition with a producer-handler. While 
conceding that Vitamilk was inexperienced in bidding for school-lunch 
business, the witness asserted that the fixed price contract offered by 
the producer-handler was below the combined value of the Federal order 
Class I price plus Vitamilk's cost allocations to marketing, 
processing, distribution, overhead, distributor profit, and risk.
    This DFA witness explained that Vitamilk tried to retain other 
customers by lowering their prices in an effort to retain and gain 
sales volume even though the price represented no contribution to 
covering their indirect costs. The witness testified that prices 
offered by a local producer-handler were 11 to 12 cents per gallon 
below Vitamilk's best net price to distributors. According to the 
witness, even though Vitamilk's customers reported satisfaction with 
the company's service and other non-price attributes, the producer-
handler's ability to provide fluid milk products at a lower cost 
resulted in the loss of customer accounts. The witness asserted that 
the loss of accounts was caused largely by the producer-handler's 
ability to price Class I products below what a fully regulated Class I 
handler can price its products. In addition, the witness testified that 
in 2003, Vitamilk even attempted to sell its Class I products at prices 
below breakeven and was still unable to find a price whereby it could 
successfully recapture business lost to a producer-handler.
    A witness appearing on behalf of Shamrock Foods Company (Shamrock), 
a fully regulated handler located in Arizona and Colorado, testified in 
support of Proposal 3. The witness maintained that Shamrock is at a 
competitive disadvantage with producer-handlers because Shamrock is 
required to pay the Federal order Class I price for milk while 
producer-handlers are exempt from the pricing and pooling provisions of 
Order 131. According to the witness, the price of Class I products 
offered to wholesale customers by producer-handlers can be lower than 
what Shamrock can offer profitably and that Sarah Farms, a producer-
handler of the order, has been able to raid their customer base. 
Furthermore, the witness said that Shamrock's ability to maintain its 
policy of equitable pricing among its customers, being able to hold its 
prices fairly constant to maintain customer loyalty, and avoid bidding 
against itself for its own customers is undermined because of the 
producer-handler pricing advantage over fully regulated handlers. The 
witness said Shamrock is unable to quickly adjust their business 
practices to meet such competition because of their size and because of 
different regulatory treatment.
    The Shamrock witness was of the opinion that the producer-handler 
exemption from minimum pricing and pooling provisions threatens the 
economic viability of Order 131. For example, the witness explained 
that major customers such as Safeway, Kroger, Wal-Mart and strong 
independents like Costco, Bashas and Sam's Club buy milk on a wholesale 
basis to resell to retail consumers. The witness noted that these 
customers seek the opportunity to buy milk at prices similar to those 
offered by the producer-handler--at prices below the Federal order 
Class I price. The witness testified that if Proposal 3 or some other 
restriction limiting route disposition volume is not adopted, either 
there will have to be an expansion of producer-handler supplies by 
expanding their farms or existing fully regulated handlers will need to 
reorganize their business practices to develop their own-farm 
production and become a producer-handler to remain competitive.
    The Shamrock witness offered testimony regarding market research 
they routinely conduct through on-going surveys of retail grocery 
stores in Order 131. The witness explained that Shamrock salespersons 
do this to gather market intelligence on their competitors. According 
to the witness, Shamrock's marketing research indicated that prices for 
bottled fluid milk offered by Sarah Farms was typically six to eight 
cents a gallon below their price--equating to about 48 to 64 cents on a 
per cwt basis. The witness testified that their market research also 
revealed that Sarah Farms' production and route disposition had grown 
from approximately 8 million pounds in 1998 to nearly 17.2 million 
pounds by 2003.
    The Shamrock witness concluded that a sales volume limitation of 3 
million pounds per month for producer-handlers was reasonable because a 
3 million pound limit would represent about three percent of the total 
Class I sales in the Order 131 marketing area. In addition, the witness 
testified that a plant which processes 3 million pounds per month is an 
indicator of a very efficient plant operation. From these views, the 
witness concluded that a producer-handler with route disposition in 
excess of 3 million pounds per month is able to fully exploit economies 
of size and should therefore be treated the same as fully regulated 
handlers.
    The Shamrock Foods witness conceded that there are additional 
challenges faced by producer-handlers in terms of managing milk 
supplies and disposing of surplus milk which fully regulated handlers 
do not face. The witness also acknowledged that there are costs 
associated with managing marketing risk, including the disposal of 
surplus milk production. However, the witness was of the opinion that 
these costs are more than covered by the competitive advantages that 
exist by being exempt from the pooling and pricing provisions of the 
order. One example the witness provided was that a producer-handler can 
balance its supply by selling fluid milk products into an unregulated 
area such as California.
    A witness appearing on behalf of Shamrock Farms, which is 
affiliated with Shamrock Foods, testified in

[[Page 19641]]

support of Proposal 3. Shamrock Farms milks 6,500 cows and is located 
in Maricopa County, Arizona. The witness testified that Shamrock Farms 
has always been a pooled producer on Order 131 and its predecessor 
order. The witness asserted that Sarah Farms operates dairy farms with 
approximately 10,000 to 12,000 milking cows. While the witness conceded 
the lack of hard data to confirm this assertion, the witness arrived at 
this estimate of farm size by counting the number of milk tankers per 
day that delivered to the Sarah Farms' plant in Yuma, Arizona.
    A consultant witness appearing on behalf of Dairy Farmers of 
America (DFA), proponents of Proposals 1, 2, and 3, had prepared a 
study that analyzed and compared the value of raw milk to a large 
producer-handler with the cost of milk to fully regulated handlers and 
described the economic impact of competition between these two business 
entities. The study conducted by this witness was based on a 
proprietary database of 150 milk processing plants owned by businesses 
for which this witness' company performed accounting and other 
consulting services. According to the witness, 20 plants were selected 
as being representative of the costs for six different size classes of 
bottling plants. The witness explained that the plant cost data was 
adjusted by applying regional consumer price index (CPI) factors as 
published by the U.S. Department of Labor. According to the witness, 
this method of adjusting data, the selection of relevant plants, the 
analytic methods employed in conducting the study, and the 
interpretation of the study results were all based on Generally 
Accepted Accounting Principles (GAAP).
    The DFA consultant witness acknowledged that while the study of 
plant costs was based on actual plant data acquired from fully 
regulated handlers, the study did not include data from plants located 
in either the Order 124 or Order 131 marketing areas. The witness also 
acknowledged that the data for the smallest plants in the study were 
taken from producer-handler plants located in western Pennsylvania, an 
area not regulated by a Federal milk marketing order. The witness also 
explained that the study's actual data could not be offered for 
inspection and examination in this proceeding because individual plant 
cost and related information were proprietary, adding that this also 
explained why the data used in the study were averaged. The witness 
further testified that the selection of appropriate plants for 
inclusion in the study from all of the plants in the witness' 
proprietary database was based on professional judgment and experience.
    The DFA consultant witness explained that the analysis of the data 
derived for the Order 124 and 131 marketing areas suggests that as 
plant volumes increase per unit, processing costs decrease and that the 
highest per unit processing costs are found at the smallest plant 
sizes. At large plant sizes, the witness contrasted, a processor, 
regardless of regulatory status, can increase milk processing volume at 
a nominal additional per unit cost.
    Relating an additional example of the study's findings, the DFA 
consultant witness testified that, other things being equal, a 
hypothetical plant bottling 3 million pounds of milk per month in 2-
gallon pack containers would have per unit processing costs that were 
significantly higher than a plant producing 20 million pounds of milk 
per month in the same size container packs. In addition, the witness 
testified that the study suggests that where a large producer-handler 
and a handler subject to the pooling and pricing provisions of an order 
compete for route sales, the producer-handler will always have a price 
advantage which could be as large as the difference between the Federal 
order Class I price and the order's blend price. The witness also said 
that the examination across all types of retail outlets reveals that a 
producer-handler will always have a price advantage in competing with 
fully regulated handlers.
    The consultant witness for DFA provided a comparative cost analysis 
of servicing a warehouse store account by a fully regulated fluid milk 
plant and a large producer-handler using actual retail prices for 2-
percent milk in Phoenix, Arizona, during January through June of 2003. 
The witness testified that based on the study's data and assumptions, a 
large producer-handler can service such an account and return a 
substantial above-market premium over the producer blend price. 
However, the study reveals that the handler paying the Class I price 
for its raw milk supply will have little or no margin, the witness 
contrasted. The producer-handler's raw milk cost advantage, the witness 
said, allows it to service these stores profitably at a price that 
cannot be matched by a fully regulated handler. The witness concluded 
that producer-handlers are in a position to acquire any account they 
choose to service by offering a price which the regulated plant cannot 
meet.
    In other testimony, the DFA consultant witness provided a pro-forma 
income statement for a regulated handler in Order 124 developed using 
certain assumptions about costs, prices and income. The witness 
demonstrated through an analysis of the pro-forma income statement that 
a large producer-handler would be able to successfully compete with 
fully regulated handlers if regulated. The witness concluded from this 
analysis that a successful producer-handler would be economically 
viable even if it were subject to the order's pooling and pricing 
provisions.
    The DFA consultant witness testified that the cost data used in the 
study's pro-forma income statement example was generated using 
statistical methods based on one month's representative data for 
similar sized regulated handlers and assumed that producer-handlers and 
regulated handlers employed union labor and operated within collective 
bargaining agreements. The witness testified that based on own business 
experience, the characterization of labor costs would be representative 
of large fully regulated handler operations in Order 124 and 131 
marketing areas. In contrast, the witness indicated no direct knowledge 
of the costs of labor employed by producer-handlers in Orders 124 or 
131. The witness did conclude that use of non-union labor by producer-
handlers would provide them with a clear cost advantage over similar or 
larger size fully regulated handlers that typically employed unionized 
labor.
    The DFA consultant witness was of the professional opinion that 
current Federal order regulations provide producer-handlers with a 
significant cost advantage that cannot be matched by fully regulated 
handlers that are subject to pooling and pricing regulations. If the 
proposal to place a 3 million pound per month volume limit on a 
producer-handlers route disposition is adopted, it will eliminate what 
the witness described as an unfair economic advantage for large 
producer-handlers while serving to protect a more modest pricing 
advantage for small producer-handlers.
    In additional testimony, the consultant witness for DFA 
acknowledged the difficulty in reconciling the 150,000 pound per month 
route disposition limit established for exempt plants with the proposed 
3 million pound per month limit for producer-handlers. According to the 
witness, the difference in these two limits are for two distinctly 
different entities and can be rationalized by the Department by 
acknowledging a value commensurate with milk production risks incurred 
by a producer-handler that is not incurred by handlers who buy milk 
from dairy farmers. A handler who buys milk from

[[Page 19642]]

dairy farmers does not incur the production risks associated with 
operating a farm enterprise, the witness said. In this regard, the 
witness acknowledged that the study focused only on plant processing 
costs and not on the cost of producing milk in the farm enterprise 
function of a producer-handler.
    A witness representing Dean Foods (Dean) testified in support of 
proposals establishing a volume limit on producer-handler route 
disposition. The witness testified that while Dean Foods does not 
operate bottling plants in either Orders 124 or 131, they do operate 
fluid milk plants in many States regulated by Federal milk marketing 
orders and in areas not subject to Federal milk order regulation. The 
witness testified that where Dean faces competition from plants that do 
not pay regulated minimum prices, Dean is affected. The witness 
stressed that milk bottling plants need to have equitable raw milk 
costs for the Federal milk order system to remain valid.
    The Dean witness said that competitiveness and efficiency are not 
necessarily a function of processing plant size. On this theme, the 
witness provided an example where a small, fully regulated milk bottler 
in Bryan, Texas, successfully bid to supply a Texas state prison 
against a much larger Dean plant. The witness testified that the Bryan 
plant had processing capacity of less than 3 million pounds per month 
but was more efficient than the Dean plant and that because of its 
management structure, it could adjust more quickly to changing market 
conditions.
    A witness appearing on behalf of the National Milk Producers 
Federation (NMPF) testified in support of Proposals 1 and 3. The 
witness was of the opinion that productivity increases resulting from 
technological advances and the growth of dairy farms enable large 
producers to capture sufficient economies of scale in processing own-
farm milk and thereby compete effectively with established, fully 
regulated handlers. In light of this, the witness testified that such 
producers can disrupt the orderly marketing of milk in a market, adding 
that dairy farmers ``turned producer-handlers'' could grow across a 
market causing even greater disruption to orderly marketing in other 
Federal milk marketing orders.
    The witness asserted that NMPF's own analysis, and a plant study by 
Cornell University revealed that larger fluid milk bottling plants have 
exhibited decreasing processing costs on a per gallon basis as the size 
of processing facilities increase. The witness explained that as the 
scale of processing plants increase, average processing costs tend to 
remain fairly constant, with the lowest per unit cost levels being 
exhibited over a relatively wide range of processing capacities. The 
witness testified that the lower per unit processing cost advantages of 
larger plant sizes tend to be greatest for very large processing plants 
rather than among smaller plants. The witness said that significant 
cost and other competitive advantages attributed to economies of scale 
in fluid milk processing become evident at about the 3 million pound 
per month processing level.
    According to the NMPF witness, the exemption of producer-handlers 
from the pooling and pricing provisions of Orders 124 and 131 allows 
producer-handlers to effectively pay the equivalent of the blend price 
for milk at their plants, a price lower than the Class I price that 
fully regulated competitors pay. The witness testified that by using 
the economic concept of ``transfer pricing,'' the maximum price that a 
producer-handler ``pays'' for transferring milk from its farm 
production enterprise to its processing enterprise can be estimated 
even though the producer-handler does not actually sell raw milk to 
itself. According to the witness, transfer pricing in the context of 
the producer-handler issue, predicts that the price of milk assigned to 
milk from the producer-handler farm enterprise essentially becomes the 
price at which milk could be sold to a regulated handler--the Federal 
order blend price. Accordingly, the witness asserted that a producer-
handler's advantage in raw milk procurement for processing, as compared 
to fully regulated handlers, would be the difference between the 
Federal order Class I price and the order's blend price.
    The NMPF witness testified that their analysis reinforces the 
findings of the consultant witness for DFA regarding the magnitude of 
the pricing advantage producers-handlers enjoy over handlers who are 
subject to the pooling and pricing provisions of a Federal order. While 
noting that the DFA consultant witness' study used aggregated data that 
does result in a significant loss of information for analytical 
purposes, the witness stressed that even with this limitation it 
nevertheless remains the best data available to rely upon.
    The NMPF witness was of the opinion that the producer-handler 
exemption from an order's pooling and pricing provisions also creates 
inequity among producers because it reduces the amount of milk pooled 
as a Class I use of milk, which in turn, lowers the total revenue of 
the marketwide pool to be shared among pooled producers. According to 
the witness, this threatens orderly marketing. The witness related that 
farms with over 3 million pounds of monthly production represent about 
15 percent of the U.S. milk supply and may represent some 40 percent of 
U.S. fluid milk sales. According to the witness, the steadily 
increasing number of farms with this magnitude of monthly milk 
production suggests that large producers could exploit the producer-
handler provision and thus further erode equity to both producers and 
handlers across the entire Federal milk marketing order system.
    The NMPF witness stated that the 3 million pound per month route 
disposition limit proposed for producer-handlers as part of Proposals 1 
and 3 is also consistent with the promotion assessment exemption of the 
Fluid Milk Promotion Program. According to the witness, the promotion 
exemption limit set by Congress was based on the impact that a handler 
had in a marketing area. Below 3 million pounds per month route 
disposition, the witness said, the impact of an individual handler is 
negligible and therefore rationalizes why smaller handlers are exempt 
from fluid milk promotion assessments.
    A witness appearing on behalf of DFA testified in support of 
Proposals 1, 2, and 3. The witness viewed the exemption of producer-
handlers from the pooling and pricing provisions of Federal orders as a 
loophole that threatens the economic viability of the Federal milk 
order system and the economic well-being of pooled producers. This 
witness, like the NMPF witness, testified that a growing interest by 
large dairy farmers in becoming producer-handlers is a major factor in 
DFA's interest in seeking to amend the producer-handler definition in 
Order 124 and 131. The witness testified that the exemption from the 
pooling and pricing provisions of these orders provides producer-
handlers with a competitive advantage over fully regulated handlers by 
effectively permitting producer-handlers to purchase milk at an 
internal price at or below the Federal order blend price while fully 
regulated handlers must pay the usually higher Class I price for milk. 
According to this DFA witness, the difference between the Class I price 
and the Federal order blend price represents a significant windfall 
generated solely by the regulatory exemptions accorded to producer-
handlers.
    The DFA witness summarized that the proposed 3 million pound per 
month limitation on route disposition is based

[[Page 19643]]

on four considerations. According to the witness, the proposed limit 
is: (1) Consistent with the minimum volume of milk sales that triggers 
the fluid milk promotion assessment for handlers; (2) the level at 
which producer-handlers achieve competitive equity with fully regulated 
handlers in terms of plant processing efficiency; (3) the level of 
route disposition that has a significant impact on the pool value of 
milk; and (4) a significant impact on the order's pooled producers and 
fully regulated handlers. The witness indicated that if a producer-
handler's volume is sufficient to reduce a pool's value by a penny 
(one-cent) per hundredweight it is significant and is of sufficient 
magnitude to warrant ending producer-handler exemption from the pooling 
and pricing provisions of the orders. The witness also concluded from 
the study conducted by the consultant witness for DFA that when a 
producer-handler reaches a 3 million pound per month distribution 
level, not only does the producer-handler reach similar plant 
processing cost efficiencies but it is also of sufficient size to 
service a considerable number of retail outlets on a competitive par 
with fully regulated handlers. According to the witness, continuing the 
exemption from an order's pooling and pricing provisions beyond the 3 
million pound sales volume level causes serious market disruptions.
    The DFA witness also testified that the exemption of producer-
handlers from the pooling and pricing provisions of the orders is 
encouraging large producers to consider becoming producer-handlers in 
both Orders 124 and 131 and in other Federal order marketing areas. As 
an example, the witness testified that some retail outlets now seek 
packaged fluid milk supplies from producer-handlers in an effort to 
obtain lower cost milk supplies. The witness was of the opinion that 
without a limit on route disposition volume, producer-handlers will 
displace pooled producers and fully regulated handlers as the dominant 
suppliers of fluid milk not only in the Order 124 and 131 marketing 
areas, but ultimately throughout all other Federal milk marketing 
areas. The witness cautioned that the potential for the growth of 
producer-handlers gives rise to considering lowering Class I milk 
prices as a means to counter the competitive price advantage that 
producer-handlers are afforded by regulatory exemption from pooling and 
pricing provisions.
    The DFA witness testified that the current producer-handler 
definition creates market disorder because it disrupts the flow of 
Class I milk from pooled producers to regulated handlers. In addition, 
the witness testified that pooled producers effectively subsidize the 
balancing costs of producer-handlers. In the opinion of the witness, 
these outcomes are destabilizing and are producing disorder in both 
Orders 124 and 131. In further explanations of these points, the 
witness expressed concern about the loss of Class I revenue that would 
otherwise accrue to pooled producers. As an example, relying on Market 
Administrator data in making professional inferences, the witness 
testified that the largest producer-handler in the Order 131 marketing 
area, Sarah Farms, had monthly route disposition in the range of 12.1 
to 19.1 million pounds. According to the witness, the value of the 
sales revenue lost to the Order 131 pool by not subjecting Sarah Farms 
to the pooling and pricing provisions of the order averaged some 
$317,000 per month, or the equivalent of 12.5 cents per cwt.
    The DFA witness testified that the producer-handler price advantage 
over fully regulated handlers provides a powerful incentive for 
customers to purchase milk from producer-handlers rather than fully 
regulated handlers. The witness testified that producer-handlers have 
as much as a 15-cent per gallon advantage over fully regulated handlers 
in Order 131. According to the witness, the advantage is based on the 
difference between the Order 131 Class I price and the order's blend 
price which ranged from 15.9 to as much as 18.3 cents per gallon during 
the period of January 2000 through July 2003.
    The DFA witness related that wholesale milk buyers base procurement 
decisions on tenths and even hundredths of a cent difference in the 
price per gallon, indicating that price differences of more than 15 
cents per gallon overwhelmingly favors the producer-handler in head-to-
head price competition. The witness testified that lower-priced 
packaged fluid milk products from producer-handlers is used by 
wholesale buyers of milk as leverage in daily price negotiations with 
fully regulated handlers and is a form of disorderly marketing. Such 
market disorder, the witness said, causes all processors to receive 
lower prices for their packaged fluid milk products.
    The DFA witness also expressed the opinion that the plant costs 
faced by a large producer-handler are similar to those faced by fully 
regulated handlers even though the witness had no direct knowledge of 
individual producer-handler businesses in Order 124 or 131. While 
agreeing with the characterization that producer-handlers are a single 
and seamless milk production and processing enterprise, the witness 
asserted that higher balancing and operational costs attributable to 
producer-handler operations are not significantly different than those 
associated with fully regulated handlers of the same processing plant 
size. The witness further asserted that the producer-handler price 
advantage combined with the ability to increase production volume at 
negligible additional costs per unit exaggerates the advantage to a 
point where a producer-handler can increase market share nearly at 
will.
    Through a series of examples depicting scenarios of different plant 
sizes, the DFA witness testified that producer-handlers with 80 and 90 
percent Class I utilization could operate profitably in spite of higher 
balancing costs associated with operating as a producer-handler. The 
witness explained that a large producer-handler experiencing increasing 
returns to its operation could continue to grow in size until it 
controlled a substantial share of the Class I market. The witness 
testified that a producer-handler with route disposition of 3 million 
pounds per month could supply a small regional grocery chain, but 
likely would not be able to diversify its marketing risk with sales to 
other customers.
    According to the DFA witness, if producer-handlers are allowed to 
gain Class I sales without restraint, fully regulated handlers and 
pooled producers would likely come to view Federal milk marketing 
orders as ineffective. According to the witness, under these conditions 
producers possibly would seek to terminate the orders. The DFA witness 
characterized this potential scenario as a form of market disorder.
    The DFA witness said that rising interest in the producer-handler 
option by large dairy farmers challenges the long-term viability of the 
entire Federal milk order system. The witness did acknowledge that no 
new producer-handler operations have entered either the Order 124 or 
131 marketing areas in recent years. The witness also acknowledged that 
market information kept by the Department shows that the volume of 
sales by producer-handlers had declined nationally from 1.47 billion 
pounds per year to 1.16 billion pounds per year between 1988 and 1998.
    The DFA witness offered modifications to Proposal 1 that would also 
be applicable to Proposal 3. Basically, in addition to limiting a 
producer-handlers route disposition to less than 3 million pounds per 
month, the modification made extensive

[[Page 19644]]

changes in terminology as to how producer-handlers are defined. The 
intent of these modifications, the witness said, is to clarify that the 
burden of proof and the responsibility for providing all the details to 
substantiate proof to the Market Administrator for producer-handler 
status rests with the producer-handler.
    The DFA witness testified that Market Administrators will continue 
to be relied upon by Federal orders to use their discretion in 
determining producer-handler status. According to the witness, the 
proposed modifications for the producer-handler definitions are 
expected to provide flexibility for a Market Administrator to 
investigate and audit proposed producer-handler operations and to 
ensure qualification requirements are met. In addition, the witness 
said that if Proposals 1 and 3 are adopted, it was reasonable that 
existing producer-handlers in Orders 124 and 131 be given a period of 
time to adjust their operations to the proposed producer-handler 
requirements.
    Another witness appearing on behalf of DFA testified in support of 
Proposals 1 and 3 on the basis that small and average-sized dairy 
farmers, including producer-handlers with milk production below 3 
million pounds of milk per month, have higher production costs than 
larger dairy farms. The witness said that very large dairy farms tend 
to have management expertise and business sophistication, access to 
capital, access to veterinary services, and economies of size and scale 
that tend to lower their per unit costs of milk production. This DFA 
witness testified that a dairy farm would need approximately 1,800 cows 
to achieve a 3 million pound per month level of production available 
for bottling and route disposition.
    The DFA witness did not know if 3 million pounds of route 
disposition per month was the precise number above which producer-
handlers should become subject to the pricing and pooling provisions of 
Orders 124 and 131. Similarly, the witness did not know what economic 
impact adopting Proposals 1 and 3 would have on producer-handlers in 
the respective marketing areas. The witness did relate having knowledge 
of interest being expressed by dairy farmers who had monthly production 
in excess of 3 million pounds per month seeking possible producer-
handler status.
    A witness representing Northwest Dairy Association (NDA) testified 
that they market the milk of 603 milk producers traditionally 
associated with Order 124. The witness said that NDA also is the parent 
company of WestFarm Foods, an operator of three distributing plants 
located in Seattle, Washington, and Portland and Medford, Oregon. The 
witness added that NDA also operates four milk manufacturing plants in 
the Order 124 marketing area. The witness testified that while NDA does 
not have a direct connection to Order 131, it indirectly shares similar 
concerns with the proponents of Proposal 3 in that they share a border 
with California and share similar concerns regarding the Federal and 
State milk order systems. In addition, the witness noted that Order 124 
has the second largest volume of producer-handler milk marketings of 
any Federal order--second only to Order 131.
    The NDA witness was also appearing on behalf of Tillamook County 
Creamery Association, Farmers Cooperative Creamery, Inland Dairy, and 
Northwest Independent Milk Producers, herein after collectively 
referred to as NDA, in support of Proposals 1, 2, and 3. The witness 
testified that the producer-handler exemption from the pooling and 
pricing provisions of Order 124 provides an unfair competitive 
advantage to producer-handlers at the expense of pooled producers and 
fully regulated handlers. According to the witness, the historical 
justifications for exempting producer-handlers because such entities 
are small operators without significant market impact on prices and 
they do not provide significant competition with fully regulated 
handlers are no longer warranted. The witness testified that producer-
handlers in Order 124 are now a significant force in the marketing area 
and are likely to continue to increase in size and market significance. 
The witness noted that Congress had effectively supported the 
Department's long-standing producer-handler exemption from pooling and 
pricing provisions of Federal orders since the 1960's. The witness 
stated that only a few large producer-handlers currently operate in the 
Order 124 marketing area.
    The witness indicated agreement with other proponent testimony that 
a producer-handler's raw milk cost was the Federal order blend price. 
According to the witness, the blend price represents an alternative 
market price available to a producer-handler. Accordingly, the witness 
asserted, the only reason a producer-handler would seek to continue an 
exemption from an order's pooling and pricing provisions would be to 
maintain a competitive advantage. The witness related that from a 
producer viewpoint the competitive advantage is the ability to retain 
the entire Class I value and from the handler viewpoint, the 
competitive advantage is not accounting to the pool at the order's 
Class I price. The witness estimated the producer-handler advantage 
over the period of January 2000 through October 2003 to be the 
difference between the Order 124 Class I and blend prices which 
averaged about 15.4 cents per gallon or $1.79 per cwt.
    The NDA witness asserted that during a period of rapidly rising 
milk prices, producer-handlers also have a competitive advantage by 
being able to enter into long-term fixed price contracts in a way fully 
regulated handlers cannot. In the opinion of the witness, by offering 
relatively long-term fixed price contracts, a producer-handler may be 
able to attract and retain customers using a pricing policy unavailable 
to fully regulated handlers. The witness stated that this represents a 
form of disorderly marketing.
    According to the NDA witness, producer-handlers use pooled 
producers and pooled handlers to balance their milk supply. The witness 
testified that ``balancing off of the pool'' involves producer-handlers 
selling milk to retail outlets until their milk supply is exhausted 
with retail outlets buying additional milk supplies from fully 
regulated handlers to meet the shortfall. According to the witness, the 
fully regulated handler is not only the residual milk supplier but also 
effectively has the burden of balancing the Class I needs of the market 
not fulfilled by the producer-handler. Consequently, these burdens are 
transferred to the market's pooled producers by the regulated handlers. 
According to the witness, this tactic allows a producer-handler to 
maximize its revenue by obtaining the highest price available while 
essentially avoiding any costs of surplus milk disposal in lower-valued 
uses. This advantage is amplified, the witness said, when a producer-
handler is able to balance its milk production and sales into areas not 
regulated by a Federal milk marketing order.
    The NDA witness testified that the proposed 3 million pound per 
month route disposition limit for producer-handlers is also based on 
political considerations and on an intuitive notion. The witness 
explained that processing plants smaller than 3 million pounds per 
month are exempted by Congress from the 20-cent per hundredweight 
processor-funded fluid milk promotion program. As a result, the witness 
related that the proponents are of the opinion that this level would 
also prove to be acceptable in the context of its application to 
handlers regulated under the terms of a milk

[[Page 19645]]

marketing order. In addition, the witness testified that NDA's 
subsidiary's (WestFarm Foods) own study of processing plant size and 
costs suggests that the DFA plant size and cost study may actually 
understate when plant processing cost efficiencies are gained. 
According to the witness, NDA's study suggests that this occurs at 
about the 2.5 million pounds per month level indicating that plants of 
this size and larger lower their processing costs by about 10 cents per 
gallon. The witness related that a plant processing 3 million pounds 
per month would have a cost savings of approximately 11.4 cents per 
gallon. Accordingly, the witness concluded that producer-handler plants 
that dispose of Class I milk products in excess of 3 million pounds per 
month should therefore become subject to the pooling and pricing 
provisions of Order 124. The witness said this would ensure that all 
similar handlers would have the same raw milk costs.
    The NDA witness also testified in support of Proposal 2. The 
witness viewed this as preventing producer-handlers from expanding the 
benefit of their regulatory status by balancing their supply on the 
market's pooled producers and at the same time tending to ensure that 
fully regulated handlers would not become residual suppliers of fluid 
milk products to the market.
    The NDA witness speculated that the investment required for a 
processing plant to produce only milk packaged in gallons is relatively 
small when compared to a very large dairy farmer's existing investment 
in land, livestock, and equipment. The witness was of the opinion that 
the potentially higher returns on the additional investment for a 
processing plant producing only gallon containers of packaged fluid 
milk would be attractive to very large dairy farmers such that it would 
encourage large producers to become producer-handlers. According to the 
witness, such a scenario threatens the economic attractiveness of the 
Federal order program and the prevailing structure of the dairy 
industry.
    While the NDA witness testified only to conditions affecting Order 
124, the witness did indicate fluid milk marketing has been undergoing 
considerable structural changes for many years that are national in 
scope. The structural changes taking place throughout the dairy 
industry are most markedly exhibited by consolidation in the 
production, processing, marketing, and distribution of dairy products, 
the witness said. As an example, the witness illustrated that 
Vitamilk's decision to go out of business was a direct result of the 
acquisition of its two largest grocery store customers by Safeway and 
Kroger. The witness noted that Safeway and Kroger are both national 
companies that also process milk as fully regulated handlers for their 
own stores and other customers. The witness was of the opinion that 
Vitamilk could not find other profitable business because it was unable 
to compete effectively with existing producer-handlers and other 
competitors in the Pacific Northwest after losing a significant portion 
of its business by the Safeway and Kroger acquisition of their 
customers. The witness was of the opinion that as consolidation 
continues within the dairy industry, a Class I handler may find a 
declining number of marketing alternatives and thus give rise to market 
disorder. The witness was of the opinion that fully regulated handlers 
could be displaced by producer-handlers.
    The NDA witness testified that the rise of warehouse and very high 
volume ``super stores'' also has contributed to the structural changes 
in the dairy industry with packaged fluid milk products being supplied 
as cheaply as possible. According to the witness, ``super stores'' and 
warehouse stores are able to exert market power in obtaining the lowest 
market prices available for fluid milk products at the wholesale level.
    The NDA witness testified that there are approximately 800 pooled 
producers in the Pacific Northwest order. According to the witness, all 
of these producers are small businesses who would receive a benefit in 
the range of 2.4-4 cents per hundredweight for their milk if Proposal 1 
were adopted. An increase in producer income would result, the witness 
said, from the sharing of Class I revenue by pooling the largest 
producer-handlers in the marketing area who individually have route 
disposition in excess of 3 million pounds per month. According to the 
witness, the additional total Class I revenue that would accrue to the 
Order 124 pool would be in the range of $2.8-$4.0 million per month.
    The NDA witness addressed concerns regarding instances where 
handlers and dairy farmers have made investments based on the 
provisions of a Federal milk order. In rationalizing concerns about the 
impact a change in regulation may have on business decisions using 
current order provisions, the witness noted several past Federal order 
decisions where regulatory changes had an impact on persons that had 
built and designed their business practices on existing order 
provisions. For example, the witness noted that the elimination of the 
``bulk tank handler'' provision in the Western milk marketing order by 
a tentative final decision would have effectively reduced the value 
that proprietary bulk tank handlers could assign to their facilities. 
In addition, the witness related how the implementation of Federal milk 
order reform eliminated individual handler pools and reduced the value 
of those investments. According to the witness, these changes occurred 
as a matter of course with the operators of those facilities absorbing 
the actual costs of the regulatory changes. The witness also testified 
that the elimination of ``double dipping'' in the Upper Midwest, 
Central, Mideast, Northeast, Pacific Northwest, and Western orders had 
negative impacts on the investments made by operators who were able to 
take advantage of those regulatory features before they were changed. 
These changes were made without compensation to those operators who 
engaged in the practice of double dipping.
    The NDA witness testified that opponents to placing a route 
disposition limit on producer-handlers incorrectly argue that as 
vertically integrated enterprises, producer-handlers face more risks 
and higher costs than do pooled producers and fully regulated handlers. 
The witness asserted that the Federal order program does not 
incorporate a value for risk in its regulatory framework. In addition, 
the witness noted that some producer-handlers are continuing to stay in 
business even as the total number of producer-handlers has declined in 
the last several years in the Order 124 marketing area. The witness 
related historical data from Market Administrator sources indicating 
that 10 of the 11 producer-handlers which have gone out of business in 
recent years in the Order 124 marketing area had monthly route 
disposition of less than 3 million pounds.
    In other testimony, the NDA witness conceded that no handler is 
exempt from, or subject to, Federal milk order regulations on the basis 
of plant operating costs. In addition, the witness testified that a 
Federal milk order which had many producer-handlers supplying 10 
percent of the Class I market would not represent a disruptive 
influence or create market disorder if the market share of the 
producer-handlers was stable (did not grow). Also, the witness 
indicated that if the market share supplied by producer-handlers was 
stable, but the number of producer-handlers supplying that market 
decreased, the impact of producer-handlers on the marketing conditions 
in the area would not be considered disorderly.

[[Page 19646]]

    The NDA witness testified that a route disposition volume below 3 
million pounds per month does not tend to lend a price or cost 
advantage to producer-handlers. The witness said that the impact of a 
producer-handler on a marketing area's blend price is directly related 
to the size of the marketing area. In this regard, the witness related 
that a 3 million pound milk bottling plant in the Upper Midwest Federal 
order, for example, would have a deminimus impact on that order's blend 
price but nevertheless maintained that a 3 million pound route 
disposition limit was a reasonable trigger to cause producer-handlers 
to become subject to the order's pooling and pricing provisions. The 
witness offered that an appropriate limit could be more than 3 million 
pounds, possibly as high as 4-million pounds, while still reasonably 
meeting the overall objectives sought in Proposal 1. The witness 
cautioned that setting a limit that is too low--for example at 500,000 
pounds per month--would essentially close the marketing and regulatory 
option of market entry as a producer-handler.
    In agreeing with other testimony, a 3 million pound limit was 
consistent with what the NDA witness characterized as a political 
settlement reached with the Department in determining when handlers 
would become subject to a fluid milk promotion program assessment. 
According to the witness, important consideration was given to the 
threat of handlers with route disposition of less than 3 million pounds 
per month being able to band together and vote to terminate the fluid 
milk promotion program. The witness indicated that a 3 million pound 
level is also a coincidentally useful volume as it supports the DFA's 
consultant witness' plant size and cost study and analysis.
    A witness appearing on behalf of NDA's WestFarm Foods testified in 
support of Proposals 1 and 2. The witness provided data comparing the 
variable costs of WestFarm's Medford, Oregon, bottling plant that 
processes 12 million pounds of milk per month with a hypothetical plant 
processing less than 3 million pounds per month. The witness testified 
that the results of this comparison were similar to the results of the 
DFA's study. The witness testified that WestFarm Food's study similarly 
concluded that as plant sizes increase, per unit processing costs tend 
to decrease.
    The NDA witness testified that WestFarm Foods has lost significant 
sales of packaged fluid milk products to grocery stores and school milk 
contracts to producer-handler competitors. The witness reported that 
WestFarm Foods competed with one producer-handler in the Pacific 
Northwest for shelf space in 11 different retail outlets. According to 
the witness, the total volume of these sales was approximately 8-
million pounds per year. The witness indicated that the producer-
handlers was able to offer longer term, fixed price contracts to 
retailers and thereby remove price volatility. The witness said that 
fully regulated handlers, like WestFarm Foods, do not have this ability 
because they must pay the Federal order Class I price which fluctuates 
every month.
    The WestFarm Foods witness asserted that producer-handlers in Order 
124 offer prices for fluid milk products that range from 15 to 45 cents 
per gallon cheaper than milk offered by fully regulated Class I 
handlers, depending on the monthly changes in the order's Class I 
price. The witness further asserted that producer-handlers are able to 
displace the Class I use of milk on the Order 124 pool by selling fluid 
milk products into Alaska, an area not subject to order regulation, at 
prices below the Class I price. According to the witness, when a 
producer-handler displaces potential fully regulated handler sales in 
Alaska, the fully regulated handler's milk is forced to a lower use 
value which lowers the blend price paid to pooled producers. The 
witness asserted that if producer-handler competition was absent in 
Alaska, WestFarm Foods would be the dominant supplier to customers in 
that market. While noting that producer-handlers continue to provide 
significant competition to WestFarm's bottling operations, the witness 
testified that none of the producer-handlers are selling fluid milk 
products below the Federal order minimum Class I price.
    The WestFarm Foods witness testified that WestFarm Foods must meet 
a specified level of Class I sales to qualify all of its milk receipts 
for pooling on Order 124. According to the witness, producer-handlers 
in the marketing area have become very aggressive sellers of milk and 
have increased their sales volume to the point where fully regulated 
Class I handlers are having difficulty qualifying all of their producer 
milk receipts for pooling on the order. The witness attributed such 
pooling difficulties to the lack of growth in the Class I market 
combined with growing producer-handler route disposition. In addition, 
the witness testified that NDA charges its customers an over-order 
premium of between 30 and 45 cents per cwt.
    A witness appearing on behalf of Dean Foods offered testimony in 
support of Proposals 1, 2, and 3. The witness asserted that exemptions 
to pooling and pricing provisions of Federal milk marketing orders 
should be few. According to the witness, the basic underlying 
objectives of an order are to efficiently assure an adequate supply of 
milk for fluid uses and to enhance returns to dairy farmers. The 
witness said that the Federal milk orders achieve these objectives by: 
Using a classified pricing plan; setting minimum class prices; 
marketwide pooling of the classified values of milk which returns a 
blend price to dairy farmers; and verifying handler reporting through 
audits. The witness stressed that absent uniform and universal 
application of an order to market participants, some market 
participants will reap competitive advantages due solely to selective 
exemption from regulation rather than for business reasons.
    According to the Dean witness, only a few types of firms have been 
historically exempted from the pooling and pricing provisions of 
Federal orders which include government and university facilities, 
small processors, and producer-handlers--characterizing the producer-
handler exemption as one of administrative convenience. The witness was 
of the opinion that producer-handlers should only be exempt from the 
pooling and pricing provisions of Federal orders when the effect of 
providing a regulatory exemption has a negligible effect on market 
participants. In this regard, the witness was of the opinion that a 
penny or more in the order's blend price was significant. Relating this 
opinion to conditions in Order 131, the witness determined that the 
order's blend price would be affected by a penny when the route 
distribution of a producer-handler was at the 950,000 pounds per month 
level.
    The Dean witness testified that a dairy farmer operating as a 
producer-handler can receive a higher price than the alternative of an 
order's blend price, depending on the internal transfer price. The 
witness explained that a processor operating as a producer-handler 
essentially has the ability to ``acquire'' milk at a transfer price as 
the milk moves from the farm enterprise to the processing enterprise. 
In this regard, the witness related that such a transfer price can be 
represented by the difference between the order's blend price and the 
Class I price. However, the witness conceded that if the producer-
handler is viewed as a single seamless entity, the application of 
transfer pricing may reveal less information than would an evaluation 
of all costs and revenues in determining the extent of the competitive 
advantage that a producer-

[[Page 19647]]

handler may enjoy by regulatory exemption from the pricing and pooling 
provisions of an order.
    The Dean witness also noted that using an internal transfer price 
may be of limited value as it does not involve price discovery achieved 
through arms-length transactions. However, the witness was of the 
strong opinion that regardless of a measure of operating performance or 
efficiency, a producer-handler would always have a competitive 
advantage over a fully regulated handler. The witness asserted that the 
competitive advantage which accrues to the producer-handler is the 
difference between the order's Class I price and the blend price. In 
this regard the witness was of the opinion that producer-handlers would 
always be able to compete more effectively than fully regulated 
handlers because of their exemption from the pooling and pricing 
provisions of an order.
    The witness offered an opinion as to why there has not been 
significant market entry of new producer-handlers if being exempt from 
the pricing and pooling provisions of an order confers significant 
competitive advantages over fully regulated handlers. In this regard, 
the witness offered that resources do not move easily between different 
enterprises within the dairy industry because of cost and regulatory 
risk. The witness also offered the opinion that if large companies, 
such as Kroger, attempted to become a producer-handler, legislative 
changes to prevent such outcomes would quickly result.
    The Dean Foods witness was of the opinion that the notion of 
disorderly marketing should be seen to exist when the regulatory terms 
of trade between competitors are different. Along this theme, the 
witness testified that in Order 131, disorderly marketing conditions 
exist because the terms of trade between competitors are not the same, 
citing specifically the regulatory exemption from pooling and pricing 
for producer-handlers and no similar exemption for their fully 
regulated competitors. However, the witness contrasted the growing 
presence and market share, in the fluid milk distribution by producer-
handlers in Order 131 with the stable market share of producer-handlers 
in Order 124.
    A witness appearing on behalf of Alan Ritchey, Incorporated (ARI), 
a family-owned dairy farm business located in Texas and Oklahoma, 
testified in opposition to limiting route disposition of producer-
handlers as advanced in Proposals 1 and 3. The witness testified that 
ARI marketed its milk through DFA because DFA is the only available 
buyer in the area. The witness testified that ARI opposed Proposals 1 
and 3 because it would limit the option of becoming a producer-handler 
for those dairy farmers seeking alternative marketing options for their 
milk. The witness characterized the dairy industry as consolidating and 
forcing dairy farmers to consider abandoning their traditional 
relationships with cooperatives. The witness viewed becoming a 
producer-handler as a high-risk business venture but an important 
alternative that should continue to be available to dairy farmers.
    The ARI witness also testified that cooperatives with membership 
and market presence which is national in scope have market power that 
may be reducing the revenue of individual dairy farmers who have no 
other milk marketing alternatives than through a cooperative. In the 
opinion of the witness, preserving the existing producer-handler 
definition provides dairy farmers with an alternative mechanism to 
market their milk directly and retain all of the revenue earned. In 
this regard, the witness indicated that ARI could see no reason why the 
route disposition of a producer-handler should be limited to 3 million 
pounds per month while regulated handlers have no limitations on route 
disposition.
    A witness appearing on behalf of Baum's Dairy (Braum's), a 
producer-handler located in Tuttle, Oklahoma, testified in opposition 
to Proposals 1 and 3. The witness testified that Braum's milks 
approximately 10,000 cows and processes its milk production into fluid 
milk, and cultured and ice cream products. The witness said that all of 
the milk and milk products produced by Braum's Dairy are marketed 
exclusively through its own retail outlets. The witness further 
testified that Braum's does not have sales to wholesale customers and 
maintained that they do not directly compete with fully regulated 
handlers.
    The Braum's witness is of the opinion that Proposals 1 and 3 seek 
to eliminate competition by producer-handlers for the benefit of fully 
regulated handlers and will result in many producer-handlers becoming 
fully regulated. The witness also was of the opinion that Proposals 1 
and 3 were advanced as a means to ultimately seek amending the 
producer-handler provision in all Federal milk orders even though the 
provision has worked well for the past 66 years.
    The witness indicated that Braum's had not always been a producer-
handler but due to Federal order pooling rules for out-of-area milk 
that were detrimental to Braum's interests, the decision was made to 
become a producer-handler. The witness said that in addition to the 
problems posed by pooling rules when the company was a fully regulated 
handler, Braum's also attributed difficulty acquiring a reliable and 
sufficient quantity of high-quality milk on a timely basis as a reason 
for becoming a producer-handler.
    A witness appeared in opposition to Proposals 1 and 3, on behalf of 
Mallorie's Dairy, Edalene Dairy, and Smith Brothers Dairy, all 
producers-handlers in the Order 124 marketing area. The witness was the 
owner of the Pure Milk and Ice Cream Company (Pure Milk), a large Texas 
producer-handler that is no longer in operation. This witness, 
hereinafter referred to as the SBEDMD witness, testified that Pure Milk 
was located in Waco, Texas, and had route disposition across a large 
part of Texas that is now part of the Southwest milk marketing area. 
According to the witness, Pure Milk was the combination of a profitable 
dairy farm whose milk was pooled on the Texas order and a profitable 
fluid distributing and manufacturing plant that produced an array of 
various fluid milk products, ice cream and ice cream mixes. The witness 
was of the opinion that limiting route disposition would render the 
option of becoming a producer-handler an unattractive business option 
under any circumstances. The witness stressed that without the ability 
to grow or otherwise attain economies of size and scale, the producer-
handler business model could never be successful.
    The SBEDMD witness testified to participating in a Federal milk 
order hearing that similarly sought to limit the route disposition of 
producer-handlers under the Texas order in 1989. According to the 
witness, the argument advanced at that time was that the competitive 
advantage of being exempt from the order's pooling and pricing 
provisions enjoyed by large producer-handlers would undermine the 
economic viability of the Federal milk order program by causing harm to 
pooled producers and fully regulated handlers. The witness indicated 
that Pure Milk, operating as a producer-handler, failed not as a result 
of any competitive advantage arising from exemptions from pooling and 
pricing provisions but from the unique risks and costs associated with 
operating as a producer-handler.
    The SBEDMD witness testified that for a time, Pure Milk was 
convinced that there was an advantage to operating as a producer-
handler instead of operating as a pooled producer or a fully regulated 
handler. The witness related that this

[[Page 19648]]

view was held until Pure Milk lost a major customer that caused it to 
become consistently unprofitable. In this regard, the witness testified 
that Pure Milk had an account with a very large grocery chain in Texas 
and explained that when the large grocery chain customer learned of 
Pure Milk's involvement in the 1989 milk order hearing the account was 
lost. The witness characterized and described this business loss as an 
example of the regulatory risk of being a producer-handler.
    The SBEDMD witness also testified that Pure Milk was unable to 
obtain and retain significant long-term contracts except for some 
school business and prison sales. The witness said that as a producer-
handler, there was simply too much marketing risk and insufficient 
long-term contract business to justify the additional required 
investment in plant and equipment to operate profitably. The witness 
testified that as a result of losing a large retail account after being 
its supplier for two years to a fully regulated handler, Pure Milk lost 
sufficient revenue and decided to end operations as a producer-handler.
    The SBEDMD witness also related that in order to operate its plant 
profitably, Pure Milk would have had to achieve a volume of 1.2 million 
pounds per month, a level it never attained. In addition, the witness 
said, the company was never able to contain costs to a level at which 
it could compete effectively with large fully regulated handlers in the 
marketing area. The witness testified that Pure Milk's fully regulated 
competitors had larger plants and operated 24 hours a day, 7 days a 
week, while Pure Milk's plant, in contrast, operated about 17 hours a 
day, 5 days a week. The witness concluded that because their 
competitors operated at a higher capacity, they had plant efficiencies 
Pure Milk could not achieve. The witness attributed Pure Milk's 
inability to achieve the desired level of plant efficiency to the 
producer-handler definition which limited and constrained their ability 
to purchase additional milk supplies from others during their low 
production seasons. The witness also attributed Pure Milk's inability 
to achieve desired plant efficiencies to their inability to market 
surplus milk production at a profit during high milk production 
seasons. The witness described these as other examples of regulatory 
risk faced by a producer-handler.
    At the closing of the Pure Milk plant, the witness indicated that 
he then managed Promised Land Dairy which operated as a small producer-
handler from 1996-1999 supplying specialty packaged fluid milk products 
to health food and grocery stores. The witness said that Promised Land 
Dairy's specialty operation, selling Jersey cow milk in glass bottles, 
also failed to be profitable for the same reasons as the Pure Milk 
Company--the inability to balance supplies, the inability to achieve 
plant operating efficiencies, and the inability to obtain and retain a 
long-term customer base. The witness testified that Promised Land Dairy 
ended its operation as a producer-handler because it could not achieve 
profitability.
    In additional testimony, the SBEDMD witness was of the opinion that 
relying on the concept of transfer pricing as a means for demonstrating 
that a pricing advantage accrues to producer-handlers by being exempt 
from the order's pooling and pricing provisions was misplaced. The 
witness maintained that as a producer-handler, the only measure of 
success is the profitability of the entire operation. However, the 
witness said that Pure Milk used the marketing order's blend price as a 
transfer price for the limited purpose of conducting internal 
evaluations of its production performance and to derive a measure of 
its plant's operating efficiency. The witness testified that the 
company did use Federal order minimum class prices as a basis for 
pricing milk to its customers and as a basis for making contract bids.
    A second witness appearing on behalf of Smith Brothers Farms, 
Edalene Dairy, and Mallorie's Dairy, testified in opposition to 
Proposals 1, 2, and 3. This witness, herein after referred to as the 
SBEDMD second witness, was of the opinion that these proposals would 
adversely restrain competition in the dairy industry in both the Order 
124 and 131 marketing areas. The witness testified that the producer-
handler exemption from pooling and pricing in Orders 124 and 131 serve 
a needed and useful purpose by providing market niches and marketing 
alternatives for operators with dairy production and processing 
expertise as a means to remain competitive in an era of otherwise 
increasing industry consolidation. The witness was of the opinion that 
the best measure of orderliness in dairy markets should be on results 
rather than on the mechanics and operations of a milk marketing order. 
According to the witness, orderly marketing implies protecting the 
rights of producers to choose their market outlet freely without 
coercion or unreasonable barriers to market entry.
    The SBEDMD second witness criticized the proponent's use of the 
Cornell University processing plant study, also relied upon by the NMPF 
witness, as a basis to support the proposed 3 million pound per month 
route disposition limit for producer-handlers. The witness was critical 
of the Cornell study, in part, because the minimum plant sizes 
considered in the study were four times or 12 million pounds larger 
than the 3 million pound limit contained as part of Proposals 1 and 3. 
The witness also was of the opinion that the Cornell plant study 
yielded results that were statistically insignificant because the 
number of plants used in the study was too small to reveal useful 
information. The witness explained that the sample of plants used in 
the study was not applicable to considerations regarding marketing 
conditions in Orders 124 and 131 because: (1) The data were improperly 
grouped into regions using the Consumer Price Index rather than the 
Producer Price Index, (2) the sample of plants did not include any 
plants located in the two marketing order areas, and (3) the sample of 
plants could not demonstrate any similarity to producer-handlers in 
either of the two marketing order areas.
    The SBEDMD second witness also testified that DFA's plant cost 
study results were similarly based on faulty data. According to the 
witness, the statistical analyses used in the DFA plant cost study 
should have been based on observations of individual plant costs rather 
than by averaging plant cost across the various classes of plant sizes 
selected for inclusion in the study. In addition, the witness testified 
that the analyses should have considered all plant costs by region, 
labor type, and type of regulated handler rather than relying only on 
selected costs.
    The SBEDMD second witness was of the opinion that the interest in 
advancing Proposals 1 and 3 stems from what the witness characterized 
as the arbitrary setting of higher than needed Class I differentials in 
all Federal milk orders. According to the witness, higher than needed 
Class I differential levels were set because of proponent lobbying 
efforts during Federal milk order reform. According to the witness, 
lowering Class I differential levels would effectively reduce the 
incentive for further business expansion of producer-handlers.
    In addition, the SBEDMD second witness was of the opinion that 
producer-handlers add much needed competition in the Order 124 and 131 
marketing areas. According to the witness, the high concentration ratio 
of handlers-to-dairy farmers in both orders has created a near 
monopsony of milk buyers that has negative implications for prices 
received by dairy farmers. The

[[Page 19649]]

witness also characterized the high concentration ratio of handlers-to-
dairy farmers as contrary to the public interest because it may result 
in higher prices to consumers.
    The SBEDMD second witness pointed to other changes in marketing 
conditions that warrant not changing the current regulatory exemptions 
of producer-handlers. The witness testified that the consolidation of 
cooperatives through mergers into fewer and larger cooperatives, 
together with full-supply marketing contracts, has reduced dairy farmer 
income because cooperatives can re-blend and re-distribute revenue to 
their members at a value below the order's blend price. The witness 
also testified that cooperatives that are national in scope may not be 
meeting the local needs of their dairy farmer members in markets where 
such cooperatives are the dominant buyer of milk because it leaves 
producers without alternative marketing options except to sell their 
milk through the dominant cooperative. With such changes to marketing 
conditions, the witness concluded that becoming a producer-handler 
provides dairy farmers a useful and needed alternative to limited 
marketing options resulting from dairy industry consolidations.
    The SBEDMD second witness characterized the application of the 
pooling and pricing provisions of Orders 124 and 131 as essentially an 
imposition of a tax on producer-handlers. The witness said that the 
pooling and pricing provisions of the orders should apply only to those 
handlers that purchase milk from producers. Along this theme, while 
acknowledging that producer-handlers are also handlers, the witness did 
not view an intra-firm transfer of milk from the farm production 
enterprise to the processing plant enterprise as equivalent to a 
purchase of milk by a handler from a dairy farmer. The witness 
testified to awareness of a court ruling equating intra-firm transfers 
of milk as identical to purchases of milk but considered such rulings 
not being relevant to the context of this proceeding for limiting the 
route disposition volume of a producer-handler.
    A third witness appearing on behalf of Smith Brothers Farms, 
Edalene Dairy, and Mallorie's Dairy, also testified in opposition to 
Proposals 1 and 2. The witness provided financial information regarding 
efficient dairy processing plant size and costs. The witness indicated 
that successful long-term operators in the fluid processing business 
must operate their plants efficiently and process sufficient volumes to 
achieve a competitive cost structure. The witness said that 
establishing a maximum monthly processing limit of 3 million pounds for 
producer-handlers limits them to operating plants that would be unable 
to capitalize on the economies of scale required to further reduce per 
unit costs to more competitive levels.
    A former Market Administrator of the pre-reform Central Arizona 
milk marketing order testified in opposition to Proposal 1, 2, and 3. 
The witness explained that if regulated, producer-handlers would be 
subject to the pooling and pricing provisions of an order by being 
required to pay into the producer-settlement fund of the order on the 
basis of their Class I sales in the marketing area.
    A witness appearing on behalf of Smith Brothers Dairy (Smith 
Brothers), a producer-handler located in the Order 124 marketing area, 
testified in opposition to Proposals 1 and 2. According to the witness, 
Smith Brothers has been operating as a producer-handler for some 43 
years. The witness testified that Smith Brothers is a family owned and 
operated enterprise that survives by serving niche markets not well 
served by other market participants, including fully regulated 
handlers. The witness testified that the largest single market niche 
served by Smith Brothers is home delivery, representing approximately 
70 percent of its fluid milk sales. According to the witness, Smith 
Brothers purposely pursued this market niche beginning in 1980 when 
home delivery represented only a third of their fluid milk sales. The 
witness was of the opinion that the goal of the proponents advancing 
the adoption of Proposal 1 is to eliminate producer-handlers as 
competitors in the Order 124 marketing area.
    The witness maintained that Smith Brothers has not been a 
disruptive factor in the Order 124 marketing area. The witness 
testified that Smith Brothers does not directly compete for customers 
with large fully regulated handlers as it does not have sales to 
grocery chains, convenience stores, or large commercial retailers in 
the marketing area. Relying on Market Administrator statistics for 
Order 124, the witness related the decline in the number of producer-
handlers from 73 in 1997 to 11 in 2000, and a decline in route 
disposition by all producer-handlers of nearly 6 percent between 2000 
and mid-2003 as evidence that clearly demonstrates that producer-
handlers are not a source of market disorder. The witness also 
discounted the notion that producer-handlers enjoy a competitive 
advantage by noting the lack of entry of new producer-handlers in the 
Order 124 marketing area.
    The Smith Brothers witness testified that the majority of regulated 
handlers in Order 124 are much larger, more diversified, and not 
interested in the niche market of home delivery that Smith Brothers 
serves. The witness testified that limiting a producer-handler's route 
disposition to less than 3 million pounds per month would cause them to 
not only lose their status as a producer-handler but may even result in 
Smith Brothers terminating operations altogether.
    The Smith Brothers witness explained that producer-handlers face 
different costs and risks than do pooled producers and fully regulated 
handlers. According to the witness, producer-handlers have balancing 
risks, farm production risks, and processing risks that, when combined 
into a single business enterprise, are greater than those borne by 
either pooled producers or fully regulated handlers. The witness 
asserted that any pricing advantage the producer-handler may have is 
offset by the combination of these costs and by the loss of opportunity 
to produce, acquire and market other dairy products.
    The witness testified that Smith Brothers, in part, balances its 
own milk production by selling surplus milk into Alaska, an area not 
regulated by a Federal milk order, and characterized Alaska as an 
underserved market.
    A second witness, an independent milk distributor appearing on 
behalf of Smith Brothers, also testified in opposition to Proposals 1 
and 2. The witness testified to operating a milk distribution business 
for more than 26 years and was one of approximately 60 other 
independent distributors selling Smith Brothers dairy products to 
market niches including coffee shops, independent convenience stores, 
the home delivery market, and daycare operations that larger market 
participants do not serve. The witness attributed long-term business 
success as a distributor to personal service, nostalgia, and product 
quality. The witness also attributed sales success by advertising that 
the milk distributed is produced without growth hormones and that the 
milk is produced and processed by a family farm business.
    A third witness for Smith Brothers Dairy also testified in 
opposition to Proposals 1 and 2. The witness was of the opinion that 
these proposals are designed to eliminate producer-handlers as 
competitors of fully regulated handlers. The witness was also of the 
opinion that both proposals are intended to serve as an intentional

[[Page 19650]]

market entry barrier for other large producers who may seek to become 
producer-handlers as a means to re-gain control of their milk 
marketings.
    The witness related that Smith Brothers evaluates itself as a 
single integrated enterprise. The witness testified that as the person 
responsible for measuring the efficiency of the operation, Smith 
Brothers does not rely on the concept of transfer pricing as a means to 
measure the efficiency or market value of their milk production. The 
witness testified that Smith Brothers does not compare its cost of 
production to the Federal order Class I price or the blend price in 
measuring the efficiency of its operations. According to the witness, 
Smith Brothers compares their total costs to the prices the company 
receives for its products (total receipts).
    A witness appearing on behalf of Edalene Dairy, a producer-handler 
located in the Order 124 marketing area, testified in opposition to 
Proposals 1 and 2. The witness stated that as the milk production 
manager and co-owner of Edalene Dairy, their cost of milk production is 
higher than that estimated by those proposing a limit on the route 
dispositions of producer-handlers. The witness testified that Edalene 
Dairy's milk production costs exceeded a recent Order 124 blend price 
of $10.50 per cwt.
    The witness testified that Edalene Dairy once held a milk supply 
contract with Starbucks by replacing Sunshine Dairy, a fully regulated 
handler. According to the witness, the contract provided more than a 
year's lead time for Edalene Dairy to develop additional milk 
production and processing capacities. The witness said that the 
Starbucks account was offered to Edalene Dairy on the basis of its 
customer service, product quality and price.
    The witness testified that Edalene Dairy eventually lost its 
Starbucks contract to Safeway, a fully regulated handler, noting that 
Starbucks phased out Edalene Dairy as a supplier over a six-month 
period. The witness said that reasons given for the loss of the account 
was that Safeway offered to supply milk at a lower price and Starbucks' 
rapid growth gave rise to geographical supply needs that Edalene Dairy 
could not meet. The witness explained that the six-month phase-out of 
Edalene Dairy as a milk supplier to Starbucks was unusual in the dairy 
business. The witness said that more typically, account terminations 
are given with a month's notice or less.
    The witness testified that Edalene Dairy's balancing costs are 
greater than that of the pooled producers of Order 124. The witness 
also testified that during periods of low market prices for milk, 
balancing costs are particularly difficult to manage. The witness 
related that Edalene Dairy's surplus milk production is sold to fully 
regulated handlers but they are paid $1.50 per cwt less than the Class 
III price.
    The Edalene Dairy witness testified that there are several factors 
that tend to restrain the growth of producer-handlers. According to the 
witness, environmental regulations, marketing and production risks, and 
management risks all act to limit the ability for business expansion. 
The witness said that the size of potential customers also can 
constrain a producer-handler's operational flexibility and ability to 
expand the business. The witness said, for example, that a very large 
customer, such as a warehouse customer, may be such a large part of a 
producer-handler's capacity that losing such a customer can risk 
continued economic viability of the entire operation because it is so 
difficult to absorb the loss of revenue and to find new customers.
    The Edalene Dairy witness testified that producer-handlers also 
serve market niches that fully regulated handlers do not service. The 
witness said that if a limit on producer-handler route disposition had 
been in place when the Starbucks account became available, for example, 
the opportunity to service that account would not have been possible. 
The witness asserted that limiting the sales volume of producer-
handlers also would effectively eliminate servicing new market niches 
that might arise in the future. In this regard, the witness cited the 
example of coffee-kiosk shops that were not of interest to fully 
regulated handlers until the mid-1990's.
    The Edalene Dairy witness testified that an important element of 
why their producer-handler operation is valued by their customers is 
because they have complete and total control of the production and 
processing of their milk. The witness testified that without the 
producer-handler exemption from the pooling and pricing provisions of 
Order 124, Edalene Dairy would not be able to offer such a 
differentiated fluid milk product to its customers.
    A second witness, also appearing on behalf of Edalene Dairy, 
testified in opposition to Proposals 1, 2, and 3. The witness testified 
that Edalene Dairy operates an efficient dairy farm operation and 
processing plant as a producer-handler. The witness was of the opinion 
that a producer-handler operates a farm and a plant with risks that 
differ from the risks faced by dairy farmers and processing plant 
operators. According to the witness, a producer-handler differs from 
pooled dairy farmers in three different ways: (1) Pooled producers are 
guaranteed the minimum Federal order blend price, (2) pooled producers 
do not bear the marketing risk and additional costs involved in selling 
their milk, and (3) pooled producers do not bear the risks and costs of 
operating a processing plant. With regard to how a producer-handler 
differs from fully regulated handlers, the witness cited three 
important differences: (1) Fully regulated handlers purchase their milk 
supply and therefore do not incur the risk of production, (2) fully 
regulated handlers know the cost of raw milk before buying it from 
dairy farmers, and (3) a producer-handler bears the risk and cost of 
balancing its milk supply and operates at its sole risk and enterprise, 
a regulatory constraint not applicable to fully regulated handlers.
    The Edalene Dairy witness amplified the above differences between 
producers-handlers, dairy farmers, and fully regulated handlers. With 
respect to dairy farmer and producer-handler differences, the witness 
noted that a pooled producer can deliver milk to alternative buyers if 
its primary buyer is not available but that a producer-handler can only 
deliver milk to its own plant and a dairy farmer has no legal 
requirement or economic responsibility for the viability of any 
particular processing plant or handler. With respect to the fully 
regulated handler and producer-handler differences, the witness noted 
that a fully regulated handler can acquire any quantity of milk from 
any number of dairy farmers and the business failure of any individual 
dairy farmer does not have an overwhelming impact on the economic 
viability of a fully regulated handler's operation.
    The Edalene Dairy witness testified that combined risks--as a 
producer and as a handler--are not incurred by either a pooled producer 
or a fully regulated handler. The witness testified for example, that 
if a producer-handler loses a sale, it continues to have milk 
production that must be disposed of and the costs of that milk 
production must be paid regardless of whether a market exists for that 
milk. According to the witness, the risks and costs of production, 
processing, and marketing accrue to the entire operation because 
producer-handlers are a single operating enterprise.
    Additionally, the Edalene Dairy witness said, there are inseparable 
links between the production and processing portions of the producer-
handler because if either the milk production

[[Page 19651]]

process fails or the processing process fails, both processes affect 
the single operating entity. The witness testified that the regulation 
of the processing and marketing operations of a producer-handler 
coincidentally regulates the dairy farm portion of the producer-handler 
enterprise. According to the witness, the most important benchmark for 
a producer-handler is whether in the long-run the total revenue 
received for its milk exceeds the total costs of its operation.
    The Edalene Dairy witness testified that the Federal order blend 
price is irrelevant to a successful producer-handler and bears no 
relation to the prices received from its milk sales. The witness 
expressed the irony of testimony concerning the importance of the blend 
price to producer-handlers by parties who do not operate as producer-
handlers. The witness said that Edalene Dairy ignores what the Federal 
order blend price may be for the month and seeks to sell milk at the 
highest possible price, but never intentionally below the Federal order 
Class I price. The witness noted that during the past several years 
there have been times when the Class I price fell below the cost of 
production. During such times, the witness was of the opinion that 
fully regulated handlers have a distinct advantage over producer-
handlers.
    The Edalene Dairy witness testified that cooperatives have certain 
regulatory advantages by being able to re-blend pool proceeds and 
actually pay their members less than the order blend price. The witness 
claimed that re-blending allows cooperatives to use their bottling 
operations to essentially subsidize their processing operations. The 
witness testified that if a producer-handler's route disposition was 
more than 3 million pounds per month, the required payment into the 
producer-settlement fund would return no benefit to the producer-
handler. According to the witness, the proceeds paid to the producer-
settlement fund would simply be distributed to other pooled producers. 
This would, according to the witness, have an adverse impact on small 
businesses such as Edalene Dairy, a business with fewer than 500 
employees.
    In addition, the Edalene Dairy witness saw no justification for 
limiting the route disposition of producer-handlers in Order 124 
because Market Administrator statistics indicate a declining market 
share of the Class I market by producer-handlers. The witness also 
asserted that limiting the route distribution of producer-handlers 
would essentially close the marketing option that becoming a producer-
handler offers to large producers. The witness viewed such restrictions 
as acting to reduce competition among handlers rather than enhancing 
it.
    A third witness, the founder of Edalene Dairy, also testified in 
opposition to Proposals 1, 2, and 3. The witness related that when 
acquiring financing, bank loan officers will only consider Edalene 
Dairy's cows as appropriate collateral for financing. The witness 
testified that bankers place no asset value for loan collateralization 
on Edalene Dairy's processing plant facilities.
    A witness appearing on behalf of Mallorie's Dairy, a producer-
handler located in the Order 124 marketing area, testified in 
opposition to Proposals 1 and 2. The witness said that Mallorie's Dairy 
markets its milk on a wholesale basis directly and through independent 
distributors and small independent retailing establishments ranging 
from grocery stores to coffee shops. According to the witness, the milk 
production enterprise of their producer-handler operation is very 
efficient, producing an average of 80 pounds of milk per day per cow. 
The witness testified that Mallorie's Dairy's largest customer is an 
independent distributor who has developed a niche market by supplying 
small companies that other fully regulated handlers do not serve.
    According to the witness, Mallorie's Dairy lost a grocery store 
chain account which had been one of its large long-term customers to a 
fully regulated handler. The witness stressed that any price advantage 
that Mallorie's Dairy derives from the existing producer-handler 
exemption from the pooling and pricing provisions of Order 124 is 
offset by the cost of balancing its milk supply, about 20 percent of 
its production. The witness said that Mallorie's Dairy performs its 
balancing requirements by selling its surplus milk to a local 
cooperative at the lower of the Class III or Class IV price minus a 
substantial discount. According to the witness, balancing sales 
represents about 10 percent of Mallorie's' total sales, while specialty 
milk sales to commercial food processors represent the remainder.
    The Mallorie's Dairy witness was unsure of the full impact that 
adoption of Proposals 1 and 2 would have on Mallorie's Dairy. However, 
the witness said that Mallorie's Dairy would lose its producer-handler 
status and thus be forced to expand its plant size in order to continue 
operating, to remain competitive and to exploit their current marketing 
strengths while seeking new business from warehouse stores such as 
Costco and Walmart.
    The founder of Sarah Farms, a producer-handler located in the Order 
131 marketing area, testified in opposition to Proposals 1, 2, and 3. 
The witness was of the opinion that the purpose of the public hearing 
was to eliminate Sarah Farms as a competitor in the Order 131 marketing 
area. The witness said that imposing a 3 million pound per month route 
disposition limit on producer-handlers would restrict the growth of 
Sarah Farms while leaving competing cooperatives and proprietary 
handlers free to compete without additional restraints. The witness was 
of the opinion that imposing a route disposition limit on producer-
handlers as advanced in Proposal 3, was based on projected future 
conditions and was therefore both unjustified and speculative. 
According to the witness, a restriction on sales volume would force a 
dramatic change to Sarah Farms' business structure and practices when 
there was no evidence of an unfair regulatory advantage by being exempt 
from the Order 131 pooling and pricing provisions.
    The witness testified that Sarah Farms' sales exceed 3 million 
pounds per month, noting that the majority of its current sales and 
sales since becoming a produce-handler in 1995 are in Arizona. The 
witness said that some major customers include Sam's Club, Basha's (a 
grocery store chain), Costco, and other smaller independent retailers. 
The witness said that Sarah Farms' growth was directly related to its 
ability to fill a market void left by competitors who exited the dairy 
business leaving an opportunity that others could not completely fill.
    The witness asserted that Sarah Farms produces a differentiated 
product from that of its competitors by marketing its fluid milk 
products with tamper resistant caps and by delivering their fluid milk 
products to customers within 24 hours of milking which, according to 
the witness, adds up to 7 days to the shelf life of its products. The 
witness also said that Sarah Farms' gallon-sized fluid milk products 
are shipped in cardboard containers, which further differentiates these 
products from their competitors.
    The Sarah Farms witness testified that being a producer-handler is 
a high-risk undertaking. Relying on Market Administrator data, the 
witness noted that the number of producer-handlers in Order 131 has 
declined from six in 1980 to only two in 2003, an important indicator 
of the high-risk nature of being a producer-handler.
    The witness testified that Sarah Farms pays its own balancing costs 
and does not transfer these costs to other fully

[[Page 19652]]

regulated handlers or pooled producers of Order 131. In addition, the 
witness testified that as a producer-handler, Sarah Farms 
simultaneously bears all of its own production, marketing, and 
processing costs and risks unlike pooled producers and fully regulated 
handlers. The witness also was of the opinion that a fluid milk 
processing plant under construction in Clark County, Nevada, an area 
exempt from Federal milk regulation, poses a greater competitive threat 
to producers and fully regulated handlers than any other entity. The 
witness also testified that Sarah Farms does not sell its milk below 
the Order 131 Class I price plus the cost of transportation, packaging, 
and processing.
    A witness representing Food City, a retail grocery chain, testified 
on behalf of Sarah Farms. The witness testified that Food City, and its 
parent company, the Basha's; operate some 144 stores in Arizona, New 
Mexico, and California. The witness said that Food City buys milk from 
Sarah Farms and from a fully regulated handler. The witness indicated 
that Food City's opposition to Proposal 3 was to help assure that Food 
City continues to have more than a single supplier for its fluid milk 
needs. The witness indicated that in the longer term, the availability 
of multiple suppliers tends to assure competitive pricing, reliable 
service, and product quality. The witness said that Food City's 
interest in multiple suppliers transcended the issue of whether the 
supplier is a fully regulated handler or a producer-handler.

Post Hearing Briefs and Motions

    Post hearing briefs filed on behalf of proponents and opponents 
made extensive arguments as they relate to case law, arguing legal 
contexts for why large producer-handlers should or should not become 
subject to the pooling and pricing provisions of the Pacific Northwest 
and the Arizona-Las Vegas marketing orders. Presented herein are 
discussions of the briefs as they relate to the economic and marketing 
conditions of the two orders.
    A brief filed on behalf of NDA reiterated its support for the 
adoption of Proposals 1, 2, and 3. They noted that both Orders 124 and 
131 have fully regulated handlers operating plants whose route 
disposition of Class I milk are smaller than the largest producer-
handlers in the two orders. NDA stressed that the Department cannot 
ignore a situation where the smallest regulated handlers in the market 
are not provided equitable minimum prices as intended by Congress when 
the AMAA established the requirement that classified pricing be uniform 
to all handlers.
    In brief, NDA took issue with the notion by opponents that 
producer-handler balancing costs are greater than that of fully 
regulated handlers. NDA argued that the milk order program does not 
attempt to consider all costs or address issues of profitability. They 
noted that balancing costs are typically borne by regulated handlers 
over and above the minimum cost structure reflected in the orders. In 
this regard, NDA noted that opponents expanded on the burden of their 
own balancing costs but did not consider balancing costs incurred by 
fully regulated handlers. They further explained that balancing costs 
may also be absorbed by marketwide pooling through the mechanism of 
Class III and Class IV pricing, which stressed NDA, is not applicable 
to producer-handlers.
    The rapid and extensive growth of Sarah Farms was also noted by NDA 
who claimed that Sarah Farms now has captured 15 to 20 percent of all 
the Class I sales in Order 131. This equates, the NDA brief said, to a 
reduction in Class I premium dollars by at least $2.5 million per year. 
In the Order 124 area, added NDA, producer-handlers account for about 
10 percent of total in-area Class I sales and similarly reduce Class I 
premium dollars. A brief filed on behalf of DFA reiterated their 
support for the adoption of proposals 1, 2, and 3 stressing those small 
dairies that do not impact total pool value should be the only exempted 
producer-handlers. DFA noted that in Order 124 the three largest 
producer-handlers, which average nearly 5.0 million pounds of Class I 
sales each per month, are larger in size than one-third of the order's 
fully regulated distributing plants. According to the DFA brief, in 
Order 131, Sarah Farms has captured more than 15 million pounds of 
Class I sales per month. DFA was of the opinion that orderly marketing 
conditions can only be maintained if any exceptions to classified 
pricing are limited and justified. DFA emphasized that large producer-
handlers in the two orders have captured a significant share of the 
Class I sales which thereby reduces returns to all producers while 
retaining substantial Class I proceeds for each producer-handler on an 
individual handler pool basis.
    The DFA brief also reiterated reasons why 3 million pounds of Class 
I route distribution should be established as the cap for producer-
handler exemption from full regulation. They stated that there is a 
similar benchmark applicable in the Fluid Milk Promotion Act of 1990. 
They also indicated that volumes of milk sales from stores in the 
marketing areas indicate that at the 3 million pound level, a handler 
could supply a number of small stores. They noted that at this 
threshold size, producer-handlers' economies of scale are sufficient 
enough that as handlers, producer-handlers can be competitive with 
fully regulated handlers. Lastly, DFA maintained that, as producers, 
producer-handlers have substantial economies of scale in on-farm milk 
production that if exempt from pooling, gives producer-handlers a 
significant advantage in the marketplace for fluid milk sales.
    A brief filed on behalf of UDA continued to iterate its support for 
the adoption of Proposal 3. They indicated that they did not support 
limiting producer-handlers sales to 3 million pounds per month on the 
basis that it was the same benchmark as in the Fluid Milk Promotion Act 
of 1990. Rather, UDA finds merit in regulating large producer-handlers 
above 3 million pounds per month in route sales because at such a size 
they are able to achieve economies of scale that enable them to be 
competitive factors in the market and able to compete with fully 
regulated handlers.
    A brief was filed on behalf of Shamrock Foods Company, Shamrock 
Farms Company and the Dean Foods Company in continued support of the 
adoption of Proposal 3. They emphasized that Sarah Farms' doubling of 
Class I sales between 1998 and 2003 was not known and could not have 
been known during the time of adopting the consolidated orders as a 
part of Federal milk order reform. In this regard, they also noted that 
at the time of Federal milk order reform, the Department could not have 
known of the growing importance to integrated operations such as Kroger 
and Safeway of price competition from large warehouse box stores such 
as Costco caused by large producer-handler sales. Lastly, they 
indicated that no limit had been placed on producer-handlers during 
Federal milk order reform because it could not have been known that 
losses to pooled participants would increase by a multiple of nearly 
four from before to after implementation of order reform.
    A brief filed on behalf of NMPF continued to iterate its support 
for adoption of proposals that would limit the size of producer-
handlers. NMPF was of the opinion that the exemption for producer-
handlers violates the principles of producer equity upon which the milk 
order program relies. In addition, they were of the opinion that 
producer-handler exemption threatens orderly marketing. They explained 
that

[[Page 19653]]

farms with over three million pounds of monthly production account for 
about 15 percent of the total U.S. milk supply which equates to about 
40 percent of fluid milk sales. Continued exemption of producer-
handlers from pooling and pricing, the NMPF maintained, threatens both 
producer and handlers.
    A Statement of Interest was filed on behalf of two cooperatives, 
Select Milk Producers and Continental Dairy Products, indicating 
support for adoption of Proposal 3 as submitted by UDA. Select Milk 
Producers is a New Mexico milk marketing cooperative and Continental 
Dairy Products is an Ohio milk marketing cooperative.
    A consolidated brief filed on behalf of Edalene Dairy, Mallorie's 
Dairy, Smith Brothers Farms, and Sarah Farms stressed that as producer-
handlers who have sales in excess of three million pounds per month, 
adoption of any proposal that would subject them to the pooling and 
pricing provisions of the orders would cause their organizations to be 
severely affected. They stressed that if they become required to make 
equalization payments to the producer-settlement funds, this would take 
millions of dollars per year away from their operations and 
redistribute it to other producers with no return benefit to their 
operations.
    In brief, Edalene Dairy, Mallorie's Dairy, Smith Brothers Farms, 
and Sarah Farms indicated that the advantages producer-handlers have as 
alleged by proponents, vanish when the financial benefits of not having 
to pay minimum prices and avoiding equalization payments to the 
producer-settlement fund are offset by their balancing costs. Any 
remaining advantage should be viewed as acceptable given the increased 
risks producer-handlers incur in the marketplace. They indicated that 
rational persons would not take on additional risk without the prospect 
of additional rewards.
    In brief, Edalene Dairy, Mallorie's Dairy, Smith Brothers Farms, 
and Sarah Farms stressed that in their opinion, neither milk supply or 
prices for milk in the two marketing areas had fluctuated unreasonably, 
noting that milk was in such sufficient supply that with or without 
producer-handlers, supplies are plentiful. They did not view their 
fluid milk sales in the marketing area as contributing to the erosion 
of classified prices or blend prices. They cited hearing record 
statistics to assert that they are not a cause of market disorder or 
cause the inefficient movement of milk. They cited the reduction in the 
number of producer-handlers, emphasizing that between 1975 and 2000, 
Order 124 producer-handler numbers fell from 73 to 11 with average 
daily pounds of production increasing only 4.7 percent between 1985 and 
2000. For Order 131, they noted that since 1982 to present, the number 
of producer-handlers fell from seven to two. According to the brief, on 
the basis of such statistics, there can be no finding that producer-
handlers have unabated growth or that they are a source of market 
disruption.
    A motion was filed on behalf of Edalene Dairy, Mallorie's Dairy, 
Smith Brothers Farms and Sarah Farms, all of whom are producer-
handlers, to strike from the hearing record the testimony and related 
exhibits concerning plant costs offered by DFA's consultant witness. 
The presiding Administrative Law Judge received this motion after the 
certification of the hearing record on June 1, 2004. Given that the 
objection goes to the weight to be given to the testimony and exhibits 
and not to the their admissibility, the motion is denied.

Findings

    Although producer-handlers have not been fully regulated as a 
general practice, the AMAA provides the authority to regulate handlers 
of milk to carry out the purposes of the AMAA. With respect to 
producer-handlers, the legislative history indicates that there is 
authority to regulate such operations if they are so large as to 
disrupt the market for producers. In the past, during other rulemaking 
proceedings, producer-handlers have been found not to disrupt the 
marketing of milk and milk products.
    Nevertheless, restrictions have been placed on producer-handlers. 
Both the Pacific Northwest and the Arizona-Las Vegas orders currently 
permit producer-handlers to only purchase supplemental milk only from 
pool sources up to 150,000 pounds per month. In addition, the Arizona-
Las Vegas order, prohibits the disposition of Class I products by a 
producer-handler to a wholesale customer who is also serviced by a pool 
distributing plant that supplies the same product in a same-sized 
package with a similar label in the same month. While each order has 
its own unique definition, it is accurate to say that in general, 
producer-handlers are required to operate their businesses at their own 
enterprise and risk, meaning that the care and management of the dairy 
animals and other resources necessary for the production, processing, 
and distribution of their Class I products are the sole responsibility 
of the producer-handlers.
    Producer-handler exclusion from pooling and pricing provisions also 
has been historically based on the premise that the objectives of the 
AMAA (orderly marketing) could be achieved without extending regulation 
to this category of handler. The Department has articulated its 
authority to subject producer-handlers to further regulation, including 
being subject to marketwide pooling and minimum pricing provisions, if 
they singularly or collectively have an impact on the market in 
previous rulemakings. For example, in a Final Decision (31 FR 7062-
7064; May 13, 1966) for the Puget Sound order, a predecessor to the 
Pacific Northwest order, the Department found that producer-handlers 
should continue to be exempt from pooling and pricing provisions of the 
order with the caveat that the producer-handlers could be subject to 
further regulation if justified by prevailing market conditions. This 
position was amplified in a subsequent Puget Sound Final Decision (32 
FR 1073-10747; July 21, 1967) where the Department found that a hearing 
should be held to consider the regulation of producer-handlers if the 
marketing area is susceptible to being affected by producer-handlers or 
if producer-handler sales could disrupt or operate to the detriment of 
other producers in the market. Such policy was also articulated in 
another recommended decision concerning producer-handlers (Texas and 
Southwest Plains, Recommended Decision, 54 FR 27179, June 28, 1989). 
That decision concluded that subjecting producer-handlers to the 
pooling and pricing provisions of the order would be appropriate if it 
could be shown that producer-handlers cause market disruption to the 
market's dairy farmers or regulated handlers.
    The proposals for fully regulating producer-handlers in this 
proceeding, specifically making them subject to the order's pooling and 
pricing provisions, are based primarily on issues relating to producer-
handler size, specifically the volume of Class I route disposition. The 
producer-handler exemption from pooling and pricing provisions is 
proposed to end when the volume of Class I route disposition in the 
marketing area exceeds 3 million pounds per month.
    In considering issues relating to size, producer-handlers are dairy 
farmers that generally process and sell only their own milk production. 
These entities are dairy farmers as a pre-condition to operating a 
processing plant as producer-handlers. Consequently, the size of the 
dairy farm determines the production level of the operation and is the 
controlling factor in the capacity of the processing plant and possible 
sales

[[Page 19654]]

volume. Accordingly, the major consideration in determining whether a 
producer-handler is a large or small business focuses on its capacity 
as a dairy farm. Under SBA criteria, a dairy farm is considered large 
if its gross revenue exceeds $750,000 per year with a production 
guideline of 500,000 pounds of milk per month. Accordingly, a dairy 
farm with sales of its own milk that exceeds 3 million pounds per month 
is considered a large business.
    Another factor to consider regarding the size of producer-handlers 
is their ability to have an impact on the market's pooled participants. 
Indicators of market affect dairy farmers who pool their milk on the 
orders and by the orders' fully regulated handlers should be determined 
on the basis of prices that are uniform to producers and equitable 
among handlers. When these price conditions are present, milk marketing 
orders are considered to be exhibiting orderly marketing--a key 
objective of the AMAA that relies on the tools of classified pricing 
and marketwide pooling. In the absence of equity among producers and 
handlers, such conditions should be deemed to be disorderly.
    As already discussed above, producer-handler exemptions from the 
pooling and pricing provisions of the orders are based upon the premise 
that the burden of surplus disposal of their milk production was borne 
by them alone. Consequently, they have not shared the additional value 
of their production that arose from Class I sales with pooled dairy 
farmers. In this regard, to the extent that producer-handlers are no 
longer bearing the burden of surplus disposal, specifically disposal of 
milk production in some form other than Class I, gives rise to 
considering regulatory measures that would tend to provide price equity 
among producers and handlers that arises when producer-handlers are 
permitted to retain the entire additional value of milk accruing from 
Class I sales.
    The record supports finding that producer-handlers with more than 3 
million pounds of route disposition per month in both the Pacific 
Northwest and the Arizona-Las Vegas marketing areas are the primary 
source of disruption to the orderly marketing of milk. This disorder is 
evidenced by significantly inequitable minimum prices that handlers pay 
and reduced blend prices that dairy farmers receive under the terms of 
each area's marketing order. Accordingly, producer-handler status under 
the Pacific Northwest and the Arizona-Las Vegas orders should end when 
a producer-handler exceeds 3 million pounds per month of in-area Class 
I route disposition.
    Review of the intent of the producer-handler provision and the 
marketing conditions arising from this provision in these orders could 
warrant finding that the original producer-handler exemption is no 
longer valid or should be limited to 150,000 pounds per month Class I 
route disposition limit. However, the hearing notice for this 
proceeding constrains such a finding to a level of not less than 3 
million pounds per month of Class I route dispositions.
    Adopting a 3 million pound Class I route disposition limit on 
producer-handlers is supported in direct testimony by proponent 
witnesses and other marketing data, most notably the volume of Class I 
route disposition relative to the total volume of Class I sales, and 
structural changes in the markets. Producer-handlers with more than 3 
million pounds of Class I route disposition significantly affect the 
blend price received by producers. This decision finds merit in DFA's 
and Dean's testimony that a blend price impact of one cent per cwt is 
significant. The negative affects on the blend prices received by 
producers in the Pacific Northwest and Arizona-Las Vegas orders, 
attributable to producer-handler route disposition are significant and 
greater than one cent per cwt. The record evidence supports a 
conclusion that the exemption of producer-handlers from pooling and 
pricing has reduced the blend price between $0.04 to $0.06 per cwt per 
month in the Arizona-Las Vegas marketing area and between $0.02 to 
$0.04 per cwt per month for the Pacific Northwest marketing area since 
implementation of Federal milk order reform in January 2000. The causes 
of the blend price reduction arises from a producer-handler's ability 
to price fluid milk at an amount between the blend price and the 
order's Class I price combined with the producer-handler's size 
relative to the total volume of Class I milk disposition in the 
respective marketing areas.
    In general, the difference between the Class I price and the blend 
price not paid into the producer-settlement fund that is the pricing 
advantage enjoyed by producer-handlers over fully regulated handlers. 
While this has always been the case for producer-handlers, those with 
route disposition of more than 3 million pounds of milk per month or 
more in these 2 orders are large enough to have a negative impact on 
the prices received by pooled dairy farmers resulting from an iniquity 
exists with regard to prices paid for milk among similarly situated 
handlers. Since fully regulated handlers do not have the ability to 
escape payment into the producer-settlement fund of the difference in 
their use-value of milk and the order's blend price like producer-
handlers, regulated handlers competing against large producer-handlers 
are at a competitive price disadvantage.
    Even though producer-handlers argue otherwise, this decision agrees 
with proponent arguments, most notably by the NMPF witness, that the 
difference between the Class I price and the blend price is a 
reasonable estimate of the pricing advantage producer-handlers enjoy 
even if it is not possible to determine the precise pricing advantage 
of any individual producer-handler. This pricing advantage is 
compounded as producer-handler size, and the accompanying increase in 
the volume of Class I sales in the marketing area, begins to 
increasingly affect the blend price received by pooled producers.
    The record contains specific examples that demonstrate that 
producer-handlers with route disposition of more than 3 million pounds 
per month have and are placing their fully regulated competitors at a 
comparative sales disadvantage. For example, Shamrock Foods, a 
regulated handler with substantial sales in the Arizona-Las Vegas 
marketing area is constrained in competing on a price basis for 
customers by the order's minimum prices that they must pay for milk 
procurement. Meanwhile the large producer-handler is able to compete 
for commercial customers at prices that a regulated handler is unable 
to match. The competitive pricing advantage of producer-handlers is 
clearly attributable to their exemption from paying the difference 
between the Class I and blend price into the producer-settlement fund. 
While this competitive pricing advantage has been recognized previously 
by the Department (Milk in the Texas Southwest Plains Marketing Area, 
54 FR 27182) and determined not to cause disorderly marketing 
conditions. Marketing conditions and the overall dairy industry 
marketing structure have changed significantly in these orders 
resulting in disorderly marketing conditions. The producer-handlers are 
significantly larger in these two orders and while they are solely 
responsible for their production and processing facilities, they are 
not assuming the entire burden of balancing their production with their 
fluid milk requirements as will discussed later in this decision.
    The record evidence supports concluding that the one large 
producer-handler represents between 12-18 percent of the total Class I 
sales volume in the Arizona-Las Vegas marketing area. The record 
evidence supports a

[[Page 19655]]

conclusion that the exemption of this producer-handler has reduced the 
blend price between $0.04 and $0.06 per cwt per month in the Arizona-
Las Vegas marketing area. Similarly, record evidence reveals that 
producer-handler exemption from pooling and pricing in the Pacific 
Northwest reduces the blend price to all other dairy farmers by $.02-
$.04 per cwt. The Pacific Northwest marketing area has eight producer-
handlers, with four having Class I route disposition exceeding 3 
million pounds per month. In the aggregate, all producer-handlers in 
the Pacific Northwest account for nearly 10 percent of the total Class 
I sales in the marketing area. Importantly, the impact on the marketing 
area's blend price by the exemption from the pooling and pricing 
provision by any of the individual producer-handlers whose sales exceed 
3 million pounds per month on average exceeds $0.01, a level that found 
to be significant and disruptive to the orderly marketing. While the 
marketing conditions of the Pacific Northwest area differ from the 
Arizona-Las Vegas marketing area in the number of producer-handlers and 
the relative market share of producer-handlers, evidence of market 
disruption by producer-handlers resulting in lower blend prices is a 
common factor of both orders.
    As in the Arizona-Las Vegas marketing area, producer-handlers in 
the Pacific Northwest similarly enjoy a competitive sales advantage 
because they do not procure milk at the order's Class I price as 
required of fully regulated handlers. This has resulted in fully 
regulated handlers not being able to compete with producer-handlers for 
Class I route sales. For example, Vitamilk testified that as regional 
grocery chains were acquired by national handlers in the Pacific 
Northwest marketing area, independent regulated handlers such as 
Vitamilk found themselves unable to compete for sales with large 
producer-handlers in the changed marketing environment of fewer 
wholesale customers on a price basis. Vitamilk demonstrated that the 
pricing advantages that accrue to producer-handlers from their 
exemption from pooling and pricing provisions created an insurmountable 
marketing situation that eliminated Vitamilk's ability to compete for 
available customers in the marketing area on the basis of minimum Class 
I prices established by the order.
    For both the Pacific Northwest and the Arizona-Las Vegas marketing 
areas, record evidence demonstrates that producer-handlers have a 
comparative pricing advantage over fully regulated handlers that does 
not ensure equitable minimum prices to similarly situated handlers. 
Such an advantage has resulted in fully regulated handlers losing sales 
to producer-handlers. Producer-handlers have similarly lost accounts to 
fully regulated handlers, but for reasons other than price.
    The record supports concluding that producer-handlers with more 
than 3 million pounds of route dispositions per month have gained the 
ability to no longer bear the burden of the surplus disposal of their 
milk production. This represents a significant development that 
warrants the need for regulatory action because producer-handler 
exemption from the pooling and pricing provisions of the orders has 
been rationalized on the basis that producer-handlers bear the entire 
burden of balancing their own production. A producer-handler not 
bearing the burden of balancing their milk production essentially 
shifts such burden to the market's pooled producers while 
simultaneously retaining the full value of Class I sales for 
themselves.
    A changing retail environment gives rise to the potential of 
producer-handlers entering into sales agreements with retailers to 
furnish the retailer with as much milk as the producer-handler can 
deliver. Marketing milk to national grocery discounters creates an 
environment in which the producer-handlers are given the ability to 
sell nearly their entire production to such a retailer, bypassing the 
need to balance supplies. In such a marketing environment, the 
regulated market's pooled producers essentially become the residual 
suppliers of Class I milk to the market when a producer-handler's 
production is not able to satisfy the fluid milk demands of their 
customer. The retailer need only purchase milk from fully regulated 
handlers to offset what a producer-handler is not able to supply. This 
is of growing concern to both producer and regulated handler interests 
in the Pacific Northwest and the Arizona-Las Vegas marketing areas 
because consumers are buying an increasing share of their grocery needs 
from discount outlets.
    The record evidence also reveals that producer-handlers in both the 
Pacific Northwest and the Arizona-Las Vegas marketing areas with route 
disposition of more than 3 million pounds per month enjoy sales of 
fluid milk products into unregulated areas such as Alaska and 
California. These examples contribute in demonstrating a shifting of 
the burden of balancing milk supplies onto the order's pooled 
producers. This outcome has the compounded disadvantage for regulated 
handlers and their producer-suppliers because fully regulated handlers 
must account to the marketwide pool for Class I sales outside of the 
marketing area at the Class I price. This yields a two-fold advantage 
to producer-handlers; the ability to eliminate balancing their milk 
production through Class I sales at the expense of the regulated 
market, and the ability to compete on a consistent basis at prices that 
fully regulated handlers are unable to meet.
    This evidence contradicts the notion that balancing of their milk 
production is a burden borne exclusively by the producer-handler. Thus 
it is reasonable to find that producer-handlers with Class I route 
distribution in excess of 3 million pounds per month in the Pacific 
Northwest and the Arizona marketing areas are not truly balancing their 
production. Accordingly, this decision finds that as the burden of 
balancing has been essentially shifted to the market's pooled 
participants and producer-handler status should be limited.
    This decision considered the relevance of a 3 million pound route 
disposition threshold for producer-handlers. The relative impact on the 
market's pooled participants by producer-handlers having more than 3 
million pounds of route disposition in the market is measurable and 
significant in both the Pacific Northwest and Arizona-Las Vegas 
marketing areas. When considered in the aggregate, producer-handlers in 
the Pacific Northwest with over 3 million pounds of route disposition 
are able to have a compound impact on the market because they represent 
an even more significant share of the Class I market which negatively 
affects the blend price received by dairy farmers.
    All handlers have different production and processing costs. These 
differences may be due to differing levels of plant operating 
efficiencies related to their size or to that portion of their milk 
supply that may be produced and supplied from their own farms. Whatever 
the cost differences, all fully regulated handlers must pay their use-
value of milk (generally, the difference between the Class I price and 
the blend price) into the order's producer-settlement fund. Similarly, 
all producers have differing milk production costs. Producer cost 
differences, for example, may be the result of farm size or differing 
milk production levels attributable to management ability. 
Nevertheless, producers, regardless of their costs, receive the same 
blend price.
    The record supports finding that disorderly marketing conditions 
exist in the Pacific Northwest and Arizona-Las Vegas marketing areas. 
The source of the

[[Page 19656]]

disorder is directly attributable to the producer-handler exemption 
from the pooling and pricing provisions of the orders. The record 
evidence for full regulation of producer-handlers in excess of 3 
million pounds per month of route disposition support finding that 
market disruption is present because the blend price paid to producers 
in both orders are measurably and significantly lowered.
    Additionally, this recommended decision finds that producer-
handlers with route disposition in excess of 3 million pounds per month 
enjoy significant competitive sales advantages because they do not pay 
the Class I price for raw milk procurement. This clearly gives 
producer-handlers a pricing advantage over fully regulated handlers 
when competing for sales. This pricing advantage becomes amplified when 
producer-handler size increases and further affects the minimum price 
producers receive. Adoption of a 3 million pound per month threshold 
for producer-handlers should tend to significantly reduce disorderly 
marketing conditions that arise from inequitable Class I prices to 
handlers. It should also increase the blend prices to producers whose 
milk is pooled under the orders.
    A 3 million pound per month limitation on route disposition will 
result in the full regulation of a current producer-handler in the 
Arizona-Las Vegas marketing area. Of the producer-handlers operating in 
the Pacific Northwest marketing area, four producer-handlers will 
become regulated by adopting the 3 million pound per month limitation 
on route disposition. Adoption of this limitation will not completely 
eliminate the impact of the other producer-handlers in the Pacific 
Northwest marketing area, but should nevertheless result in a 
significant and immediate reduction in market disruption.
    The hearing notice contained a proposal that for all intents and 
purposes would make the producer-handler definition of the Pacific 
Northwest order the same as that for the Arizona-Las Vegas order, most 
notably the requirement that would not permit a producer-handler to 
market to the same client the same product in a similar package with a 
similar label in the same month as a regulated handler. The record does 
not contain sufficient evidence of disorderly marketing conditions that 
would support recommending a prohibition on producer-handlers in 
marketing to the same client the same product in a similar package with 
a similar label in the same month as a regulated handler.
    Additionally, the proposals contained in the hearing notice seeking 
the full regulation of producer-handlers when they surpass a 3 million 
pound per month threshold in Class I route dispositions in the 
marketing area were substantially modified during the hearing. The 
modifications re-describe producer-handlers and harmonize the producer-
handler definitions between the two orders with changed terminology. 
The record evidence does not support finding that a compelling need to 
make the Pacific Northwest producer-handler definition the same as that 
for the Arizona-Las Vegas order. The current producer-handler 
definitions of both orders adequately describe those entities that 
qualify as producer-handlers.

General Findings

    The findings and determinations hereinafter set forth supplement 
those that were made when the Pacific Northwest and the Arizona-Las 
Vegas orders were first issued and when they were amended. The previous 
findings and determinations are hereby ratified and confirmed, except 
where they may conflict with those set forth herein.
    (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(s), and the minimum 
prices specified in the tentative marketing agreements and the orders, 
as hereby proposed to be amended, are such prices as will reflect the 
aforesaid factors, insure a sufficient quantity of pure and wholesome 
milk, and be in the public interest;
    (C) The tentative marketing agreements and the orders, as hereby 
proposed to be amended, will regulate the handling of milk in the same 
manner as, and will be applicable only to persons in the respective 
classes of industrial and commercial activity specified in marketing 
agreements upon which a hearing has been held; and
    (D) All milk and milk products handled by handlers, as defined in 
the tentative marketing agreement and the order as hereby proposed to 
be amended, are in the current of interstate commerce or directly 
burden, obstruct, or affect interstate commerce in milk or its 
products.

Recommended Marketing Agreements and Order Amending the Orders

    The recommended marketing agreements are not included in this 
decision because the regulatory provisions thereof would be the same as 
those contained in the orders, as hereby proposed to be amended. The 
following order amending the orders, as amended, regulating the 
handling of milk in the Pacific Northwest and the Arizona-Las Vegas 
marketing areas is recommended as the detailed and appropriate means by 
which the foregoing conclusions may be carried out.

List of Subjects in 7 CFR Parts 1124 and 1131

    Milk marketing orders.

    For the reasons set forth in the preamble 7 CFR parts 1124 and 1131 
are amended as follows:
    1. The authority citation for 7 CFR parts 1124 and 1131 continues 
to read as follows:

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

PART 1124--MILK IN THE PACIFIC NORTHWEST MARKETING AREA

    2. Section 1124.10 is revised to read as follows:


Sec.  1124.10  Producer-handler.

    Producer-handler means a person who operates a dairy farm and a 
distributing plant from which there is route distribution within the 
marketing area during the month not to exceed 3 million pounds and who 
the market administrator has designated a producer-handler after 
determining that all of the requirements of this section have been met.
    (a) Requirements for designation. Designation of any person as a 
producer-handler by the market administrator shall be contingent upon 
meeting the conditions set forth in paragraphs (a)(1) through (a)(5) of 
this section. Following the cancellation of a previous producer-handler 
designation, a person seeking to have their producer-handler 
designation reinstated must demonstrate that these conditions have been 
met for the preceding month.
    (1) The care and management of the dairy animals and the other 
resources and facilities designated in paragraph (b)(1) of this section 
necessary to produce all Class I milk handled (excluding receipts from 
handlers fully regulated under any Federal order) are under the 
complete and exclusive control, ownership and management of the 
producer-handler and are operated as the producer-handler's own 
enterprise and its own risk.

[[Page 19657]]

    (2) The plant operation designated in paragraph (b)(2) of this 
section at which the producer-handler processes and packages, and from 
which it distributes, its own milk production is under the complete and 
exclusive control, ownership and management of the producer-handler and 
is operated as the producer-handler's own enterprise and at its sole 
risk.
    (3) The producer-handler neither receives at its designated milk 
production resources and facilities nor receives, handles, processes, 
or distributes at or through any of its designated milk handling, 
processing, or distributing resources and facilities other source milk 
products for reconstitution into fluid milk products or fluid milk 
products derived from any source other than:
    (i) Its designated milk production resources and facilities (own 
farm production);
    (ii) Pool handlers and plants regulated under any Federal order 
within the limitation specified in paragraph (c)(2) of this section; or
    (iii) Nonfat milk solids which are used to fortify fluid milk 
products.
    (4) The producer-handler is neither directly nor indirectly 
associated with the business control or management of, nor has a 
financial interest in, another handler's operation; nor is any other 
handler so associated with the producer-handler's operation.
    (5) No milk produced by the herd(s) or on the farm(s) that supply 
milk to the producer-handler's plant operation is:
    (i) Subject to inclusion and participation in a marketwide 
equalization pool under a milk classification and pricing program under 
the authority of a State government maintaining marketwide pooling of 
returns, or
    (ii) Marketed in any part as Class I milk to the non-pool 
distributing plant of any other handler.
    (b) Designation of resources and facilities. Designation of a 
person as a producer-handler shall include the determination of what 
shall constitute milk production, handling, processing, and 
distribution resources and facilities, all of which shall be considered 
an integrated operation, under the sole and exclusive ownership of the 
producer-handler.
    (1) Milk production resources and facilities shall include all 
resources and facilities (milking herd(s), buildings housing such 
herd(s), and the land on which such buildings are located) used for the 
production of milk which are solely owned, operated, and which the 
producer-handler has designated as a source of milk supply for the 
producer-handler's plant operation. However, for purposes of this 
paragraph, any such milk production resources and facilities which do 
not constitute an actual or potential source of milk supply for the 
producer-handler's operation shall not be considered a part of the 
producer-handler's milk production resources and facilities.
    (2) Milk handling, processing, and distribution resources and 
facilities shall include all resources and facilities (including store 
outlets) used for handling, processing, and distributing fluid milk 
products which are solely owned by, and directly operated or controlled 
by the producer-handler or in which the producer-handler in any way has 
an interest, including any contractual arrangement, or over which the 
producer-handler directly or indirectly exercises any degree of 
management control.
    (3) All designations shall remain in effect until canceled, 
pursuant to paragraph (c) of this section.
    (c) Cancellation. The designation as a producer-handler shall be 
canceled upon determination by the market administrator that any of the 
requirements of paragraphs (a)(1) through (a)(5) of this section are 
not continuing to be met, or under any of the conditions described in 
paragraphs (c)(1), (c)(2) or (c)(3) of this section. Cancellation of a 
producer-handler's status pursuant to this paragraph shall be effective 
on the first day of the month following the month in which the 
requirements were not met or the conditions for cancellation occurred.
    (1) Milk from the milk production resources and facilities of the 
producer-handler, designated in paragraph (b)(1) of this section, is 
delivered in the name of another person as producer milk to another 
handler.
    (2) The producer-handler handles fluid milk products derived from 
sources other than the milk production facilities and resources 
designated in paragraph (b)(1) of this section, except that it may 
receive at its plant, or acquire for route disposition, fluid milk 
products from fully regulated plants and handlers under any Federal 
order if such receipts do not exceed 150,000 pounds monthly. This 
limitation shall not apply if the producer-handler's own-farm 
production is less than 150,000 pounds during the month.
    (3) Milk from the milk production resources and facilities of the 
producer-handler is subject to inclusion and participation in a 
marketwide equalization pool under a milk classification and pricing 
plan operating under the authority of a State government.
    (d) Public announcement. The market administrator shall publically 
announce:
    (1) The name, plant location(s), and farm location(s) of persons 
designated as producer-handlers;
    (2) The names of those persons whose designations have been 
cancelled; and
    (3) The effective dates of producer-handler status or loss of 
producer-handler status for each. Such announcements shall be 
controlling with respect to the accounting at plants of other handlers 
for fluid milk products received from any producer-handler.
    (e) Burden of establishing and maintaining producer-handler status. 
The burden rests upon the handler who is designated as a producer-
handler to establish through records required pursuant to Sec.  1000.27 
that the requirements set forth in paragraph (a) of this section have 
been and are continuing to be met, and that the conditions set forth in 
paragraph (c) of this section for cancellation of the designation do 
not exist.

PART 1131--MILK IN THE ARIZONA-LAS VEGAS MARKETING AREA

    3. Section 1131.10 is revised to read as follows:


Sec.  1131.10  Producer-handler.

    Producer-handler means a person who operates a dairy farm and a 
distributing plant from which there is route distribution within the 
marketing area during the month not to exceed 3 million pounds and who 
the market administrator has designated a producer-handler after 
determining that all of the requirements of this section have been met.
    (a) Requirements for designation. Designation of any person as a 
producer-handler by the market administrator shall be contingent upon 
meeting the conditions set forth in paragraphs (a)(1) through (a)(5) of 
this section. Following the cancellation of a previous producer-handler 
designation, a person seeking to have their producer-handler 
designation reinstated must demonstrate that these conditions have been 
met for the preceding month.
    (1) The care and management of the dairy animals and the other 
resources and facilities designated in paragraph (b)(1) of this section 
necessary to produce all Class I milk handled (excluding receipts from 
handlers fully regulated under any Federal order) are under the 
complete and exclusive control, ownership and management of the 
producer-handler and are operated as the producer-handler's own 
enterprise and its own risk.

[[Page 19658]]

    (2) The plant operation designated in paragraph (b)(2) of this 
section at which the producer-handler processes and packages, and from 
which it distributes, its own milk production is under the complete and 
exclusive control, ownership and management of the producer-handler and 
is operated as the producer-handler's own enterprise and at its sole 
risk.
    (3) The producer-handler neither receives at its designated milk 
production resources and facilities nor receives, handles, processes, 
or distributes at or through any of its designated milk handling, 
processing, or distributing resources and facilities other source milk 
products for reconstitution into fluid milk products or fluid milk 
products derived from any source other than:
    (i) Its designated milk production resources and facilities (own 
farm production);
    (ii) Pool handlers and plants regulated under any Federal order 
within the limitation specified in paragraph (c)(2) of this section; or
    (iii) Nonfat milk solids which are used to fortify fluid milk 
products.
    (4) The producer-handler is neither directly nor indirectly 
associated with the business control or management of, nor has a 
financial interest in, another handler's operation; nor is any other 
handler so associated with the producer-handler's operation.
    (5) No milk produced by the herd(s) or on the farm(s) that supply 
milk to the producer-handler's plant operation is:
    (i) Subject to inclusion and participation in a marketwide 
equalization pool under a milk classification and pricing program under 
the authority of a State government maintaining marketwide pooling of 
returns, or
    (ii) Marketed in any part as Class I milk to the non-pool 
distributing plant of any other handler.
    (6) The producer-handler does not distribute fluid milk products to 
a wholesale customer who is served by a plant described in Sec.  
1131.7(a), (b), or (e), or a handler described in Sec.  1000.8(c) that 
supplied the same product in the same-sized package with a similar 
label to a wholesale customer during the month.
    (b) Designation of resources and facilities. Designation of a 
person as a producer-handler shall include the determination of what 
shall constitute milk production, handling, processing, and 
distribution resources and facilities, all of which shall be considered 
an integrated operation, under the sole and exclusive ownership of the 
producer-handler.
    (1) Milk production resources and facilities shall include all 
resources and facilities (milking herd(s), buildings housing such 
herd(s), and the land on which such buildings are located) used for the 
production of milk which are solely owned, operated, and which the 
producer-handler has designated as a source of milk supply for the 
producer-handler's plant operation. However, for purposes of this 
paragraph, any such milk production resources and facilities which do 
not constitute an actual or potential source of milk supply for the 
producer-handler's operation shall not be considered a part of the 
producer-handler's milk production resources and facilities.
    (2) Milk handling, processing, and distribution resources and 
facilities shall include all resources and facilities (including store 
outlets) used for handling, processing, and distributing fluid milk 
products which are solely owned by, and directly operated or controlled 
by the producer-handler or in which the producer-handler in any way has 
an interest, including any contractual arrangement, or over which the 
producer-handler directly or indirectly exercises any degree of 
management control.
    (3) All designations shall remain in effect until canceled pursuant 
to paragraph (c) of this section.
    (c) Cancellation. The designation as a producer-handler shall be 
canceled upon determination by the market administrator that any of the 
requirements of paragraphs (a)(1) through (a)(5) of this section are 
not continuing to be met, or under any of the conditions described in 
paragraphs (c)(1), (c)(2) or (c)(3) of this section. Cancellation of a 
producer-handler's status pursuant to this paragraph shall be effective 
on the first day of the month following the month in which the 
requirements were not met or the conditions for cancellation occurred.
    (1) Milk from the milk production resources and facilities of the 
producer-handler, designated in paragraph (b)(1) of this section, is 
delivered in the name of another person as producer milk to another 
handler.
    (2) The producer-handler handles fluid milk products derived from 
sources other than the milk production facilities and resources 
designated in paragraph (b)(1) of this section, except that it may 
receive at its plant, or acquire for route disposition, fluid milk 
products from fully regulated plants and handlers under any Federal 
order if such receipts do not exceed 150,000 pounds monthly. This 
limitation shall not apply if the producer-handler's own-farm 
production is less than 150,000 pounds during the month.
    (3) Milk from the milk production resources and facilities of the 
producer-handler is subject to inclusion and participation in a 
marketwide equalization pool under a milk classification and pricing 
plan operating under the authority of a State government.
    (d) Public announcement. The market administrator shall publicly 
announce:
    (1) The name, plant location(s), and farm location(s) of persons 
designated as producer-handlers;
    (2) The names of those persons whose designations have been 
cancelled; and
    (3) The effective dates of producer-handler status or loss of 
producer-handler status for each. Such announcements shall be 
controlling with respect to the accounting at plants of other handlers 
for fluid milk products received from any producer-handler.
    (e) Burden of establishing and maintaining producer-handler status. 
The burden rests upon the handler who is designated as a producer-
handler to establish through records required pursuant to Sec.  1000.27 
that the requirements set forth in paragraph (a) of this section have 
been and are continuing to be met, and that the conditions set forth in 
paragraph (c) of this section for cancellation of the designation do 
not exist.

    Dated: April 7, 2005.
Kenneth C. Clayton,
Acting Administrator, Agricultural Marketing Service.
[FR Doc. 05-7295 Filed 4-12-05; 8:45 am]
BILLING CODE 3410-02-P