[Federal Register Volume 70, Number 182 (Wednesday, September 21, 2005)]
[Proposed Rules]
[Pages 55458-55478]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-18758]



[[Page 55457]]

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Part II





Department of Agriculture





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Agricultural Marketing Service



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7 CFR Parts 1005 and 1007



Milk in the Appalachian and Southeast Marketing Areas; Partial Decision 
on Proposed Amendments to Marketing Agreements and to Orders; Proposed 
Rule

  Federal Register / Vol. 70, No. 182 / Wednesday, September 21, 2005 / 
Proposed Rules  

[[Page 55458]]


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DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Parts 1005 and 1007

[Docket No. AO-388-A15 and AO-366-A44; DA-03-11]


Milk in the Appalachian and Southeast Marketing Areas; Partial 
Decision on Proposed Amendments to Marketing Agreements and to Orders

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Proposed rule; partial final decision.

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SUMMARY: This partial final decision adopts proposed amendments to the 
Appalachian and Southeast marketing areas as contained in a partial 
recommended decision published in the Federal Register on May 20, 2005. 
Specifically, this decision would expand the Appalachian milk marketing 
area, eliminate the ability to simultaneously pool the same milk on the 
Appalachian or Southeast order and on a State-operated milk order that 
has marketwide pooling, and amend the transportation credit provisions 
of the Southeast and Appalachian orders. The orders as amended are 
subject to approval by producers in the affected markets.

FOR FURTHER INFORMATION CONTACT: Antoinette M. Carter, Marketing 
Specialist, USDA/AMS/Dairy Programs, Order Formulation and Enforcement 
Branch, STOP 0231-Room 2971, 1400 Independence Avenue, SW., Washington, 
DC 20250-0231, (202) 690-3465, e-mail address: 
[email protected].

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

Regulatory Flexibility Analysis and Paperwork Reduction Act

    In accordance with the Regulatory Flexibility Act (5 U.S.C. 601 et 
seq.), the Agricultural Marketing Service has considered the economic 
impact of this action on small entities and has certified that this 
proposed rule will not have a significant economic impact on a 
substantial number of small entities.
    For the purpose of the Regulatory Flexibility Act, a dairy farm is 
considered a ``small business'' if it has an annual gross revenue of 
less than $750,000, and a dairy products manufacturer is a ``small 
business'' if it has fewer than 500 employees. For the purposes of 
determining which dairy farms are ``small businesses,'' the $750,000 
per year criterion was used to establish a production guideline of 
500,000 pounds per month. Although this guideline does not factor in 
additional monies that may be received by dairy producers, it should be 
an inclusive standard for most ``small'' dairy farmers. For purposes of 
determining a handler's size, if the plant is part of a larger company 
operating multiple plants that collectively exceed the 500-employee 
limit, the plant will be considered a large business even if the local 
plant has fewer than 500 employees.
    During February 2004, the month in which the hearing was held, the 
milk of 7,311 dairy farmers was pooled on the Appalachian (Order 5) and 
Southeast (Order 7) milk orders (3,395 Order 5 dairy farmers and 3,916 
Order 7 dairy farmers). Of the total, 3,252 dairy farmers (or 96 
percent) and 3,764 dairy farmers (or 96 percent) were considered small 
businesses on the Appalachian and Southeast orders, respectively.
    During February 2004, there were a total of 36 plants associated 
with the Appalachian order (25 fully regulated plants, 7 partially 
regulated plants, 1 producer-handler, and 3 exempt plants) and a total 
of 51 plants associated with the Southeast order (32 fully regulated 
plants, 6 partially regulated plants, and 13 exempt plants). The number 
of plants meeting the small business criteria under the Appalachian and 
Southeast orders were 13 (or 36 percent) and 13 (or 25 percent), 
respectively.
    The proposed amendments adopted in this partial final decision 
would expand the Appalachian milk marketing area to include 25 counties 
and 15 cities in the State of Virginia that currently are not in any 
Federal milk marketing area (the partial recommended decision 
inadvertently referenced ``14 cities'' verses ``15 cities''). This 
decision adopts proposed amendments to the producer milk provisions of 
the Appalachian and Southeast milk orders that would prevent producers 
who share in the proceeds of a state marketwide pool from 
simultaneously sharing in the proceeds of a Federal marketwide pool on 
the same milk. In addition, this decision adopts proposed amendments to 
the transportation credit provisions of the Appalachian and Southeast 
orders.
    The proposed amendments to expand the Appalachian marketing area 
would likely continue to regulate under the Appalachian order two fluid 
milk distributing plants located in Roanoke, Virginia, and Lynchburg, 
Virginia, and shift the regulation of a distributing plant located in 
Mount Crawford, Virginia, from the Northeast order to the Appalachian 
order.
    The proposed amendments would allow the Kroger Company's (Kroger) 
Westover Dairy plant, located in Lynchburg, Virginia, that competes for 
a milk supply with other Appalachian order plants to continue to be 
regulated under the order if it meets the order's minimum performance 
standards. The plant has been regulated by the Appalachian order since 
January 2000. In addition, the proposed amendments would remove the 
disruption that occurs as a result of the Dean Foods Company's (Dean 
Foods) Morningstar Foods plant, located in Mount Crawford, Virginia, 
shifting its regulatory status under the Northeast order.
    The Appalachian order currently contains a ``lock-in'' provision 
that provides that a plant located within the marketing area that meets 
the order's minimum performance standard will be regulated by the 
Appalachian order even if the majority of the plant's Class I route 
sales are in another marketing area. The proposed expansion along with 
the lock-in provision would regulate fluid milk distributing plants 
physically located in the marketing area that meet the order's minimum

[[Page 55459]]

performance standard even if the majority of their sales are in another 
Federal order marketing area. Accordingly, the proposed amendments 
would regulate three distributing plants under the Appalachian order: 
Kroger's Westover Dairy, located in Lynchburg, Virginia; Dean Foods' 
Morningstar Foods plant, located in Mount Crawford, Virginia; and 
National Dairy Holdings' Valley Rich Dairy, located in Roanoke, 
Virginia. Based on Small Business Administration criteria these are all 
large businesses.
    This decision adopts proposed amendments to the transportation 
credit provisions of the Appalachian and Southeast orders. The 
Appalachian and Southeast orders contain provisions for a 
transportation credit balancing fund from which payments are made to 
handlers to partially offset the cost of moving bulk milk into each 
marketing area to meet fluid milk demands.
    The proposed amendments adopted in this final decision would 
increase the maximum rate of the transportation credit assessment of 
the Appalachian and Southeast orders by 3 cents per hundredweight. 
Specifically, the proposed amendments would increase the maximum rate 
of assessment for the Appalachian order from 6.5 cents per 
hundredweight to 9.5 cents per hundredweight while increasing the 
maximum rate of assessment for the Southeast order from 7 cents per 
hundredweight to 10 cents per hundredweight. Increasing the 
transportation assessment rates will tend to minimize the exhaustion of 
the transportation credit balancing fund when there is a need to import 
supplemental milk from outside the marketing areas to meet Class I 
needs.
    Currently, the Appalachian and Southeast orders provide that 
transportation credits shall apply to the milk of a dairy farmer who 
was not a ``producer'' under the order during more than two of the 
immediately preceding months of February through May but not more than 
50 percent of the milk production of the dairy farmer, in aggregate, 
was received as producer milk under the order during those two months. 
The proposed amendments contained in this final decision would provide 
the Market Administrator of the Appalachian order and the Market 
Administrator of the Southeast order the discretionary authority to 
adjust the 50 percent milk production standard.
    This decision adopts proposed amendments that would prohibit the 
simultaneous pooling of the same milk on the Appalachian or Southeast 
milk marketing orders and on a State-operated order that provides for 
the marketwide pooling of milk. Since the 1960's, the Federal milk 
order program has recognized the harm and disorder that result to both 
producers and handlers when the same milk of a producer is 
simultaneously pooled on more than one Federal order. When this occurs, 
producers do not receive uniform minimum prices, and handlers receive 
unwarranted competitive advantages.
    The need to prevent ``double pooling'' became critically important 
as distribution areas expanded, orders merged, and a national pricing 
surface was adopted. Milk already pooled under a State-operated program 
and able to simultaneously be pooled under a Federal order has 
essentially the same undesirable outcomes that Federal orders once 
experienced and subsequently corrected. Accordingly, proposed 
amendments to eliminate the ``double pooling'' of the same milk on the 
Appalachian or Southeast order and a State-operated milk order that has 
marketwide pooling are adopted.
    The proposed amendments would be applied to all Appalachian and 
Southeast order participants (producers and handlers), which consist of 
both large and small business. Since the proposed amendments adopted in 
this final decision would be subject to all the orders' producers and 
handlers regardless of their size, the provisions are not expected to 
provide a competitive advantage to any participant. Accordingly, the 
proposed amendments will not have a significant economic impact on a 
substantial number of small entities.
    A review of reporting requirements was completed under the 
Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35). It was 
determined that these adopted proposed amendments would have no impact 
on reporting, recordkeeping, or other compliance requirements because 
they would remain identical to the current requirements. No new forms 
are proposed and no additional reporting requirements would be 
necessary.
    This action does not require additional information collection that 
requires clearance by the Office of Management and Budget (OMB) beyond 
currently approved information collection. The primary sources of data 
used to complete the forms are routinely used in most business 
transactions. Forms require only a minimal amount of information which 
can be supplied without data processing equipment or a trained 
statistical staff. Thus, the information collection and reporting 
burden is relatively small. Requiring the same reports for all handlers 
does not significantly disadvantage any handler that is smaller than 
the industry average.
    Prior documents in this proceeding:
    Notice of Hearing: Issued January 16, 2004; published January 23, 
2004 (69 FR 3278).
    Partial Recommended Decision: Issued May 13, 2005; published May 
20, 2005 (70 FR 29410).

Preliminary Statement

    A public hearing was held upon proposed amendments to the marketing 
agreements and orders regulating the handling of milk in the 
Appalachian and Southeast marketing areas. The hearing was held, 
pursuant to the provisions of the Agricultural Marketing Agreement Act 
of 1937, as amended (7 U.S.C. 601-674), and the applicable rules of 
practice and procedure governing the formulation of marketing 
agreements and marketing orders (7 CFR part 900), at Atlanta, Georgia, 
on February 23-26, 2004, pursuant to a notice of hearing issued January 
16, 2004, and published January 20, 2004 (69 FR 3278).
    Upon the basis of the evidence introduced at the hearing and the 
record thereof, the Department, on May 13, 2005, issued a Partial 
Recommended Decision containing notice of the opportunity to file 
written exceptions thereto.
    The material issues, findings, conclusions, and rulings of the 
Partial Recommended Decision are hereby approved and adopted and are 
set forth in herein. The material issues on the record of the hearing 
relate to:
    1. Merger of the Appalachian and Southeast Marketing Areas.
    a. Merging the Appalachian and Southeast milk marketing areas and 
remaining fund balances.
    b. Expansion of the Appalachian marketing area.
    c. Transportation credits provisions.
    2. Promulgation of a new ``Mississippi Valley'' milk order.
    3. Eliminating the simultaneous pooling of the same milk on a 
Federal milk order and a State-operated milk order that provides for 
marketwide pooling.
    4. Producer-handler provisions.
    This partial final decision deals only with Issues 1 through 3. 
Issue No. 4 will be addressed separately in a forthcoming decision.

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 55460]]

1. Merger of the Appalachian and Southeast Marketing Areas

1a. Merging the Appalachian and Southeast Milk Marketing Areas and 
Remaining Fund Balances
    This decision does not adopt a proposal that would merge the 
current Appalachian marketing area and Southeast milk marketing area 
into a single marketing area under a proposed single milk order. 
Accordingly, a proposal that would combine the fund balances of the 
current Appalachian and Southeast orders is rendered moot and is not 
adopted in this final decision.
    The Appalachian marketing area consists of the States of North 
Carolina and South Carolina, parts of eastern Tennessee, Kentucky 
excluding southwest counties, 7 counties in northwest/central Georgia, 
20 counties in southern Indiana, 8 counties and 2 cities in Virginia, 
and 2 counties in West Virginia. The Southeast order marketing area 
consists of the entire States of Alabama, Arkansas, Louisiana, 
Mississippi, Georgia (excluding 7 northern counties), southern 
Missouri, western/central Tennessee, and southern Kentucky.
    A witness testifying on behalf of Southern Marketing Agency, Inc. 
(SMA), presented testimony in support of Proposals 1 and 2 as contained 
in the hearing notice published in the Federal Register (69 FR 3278). 
Proposal 1 would merge the current Appalachian and Southeast marketing 
areas into a single marketing area (hereafter referred to as the 
proposed merged milk order) and Proposal 2 would combine the remaining 
balances of funds of the current Appalachian and Southeast orders if 
the proposed merged order was adopted. According to the witness, SMA is 
a marketing agency whose cooperative members include Arkansas Dairy 
Cooperative Association, Inc. (ADCA), Dairy Farmers of America, Inc. 
(DFA), Dairymen's Marketing Cooperative, Inc. (DMC), Lone Star Milk 
Producers, Inc. (Lone Star), Maryland & Virginia Milk Producers 
Cooperative Association, Inc. (MD&VA), and Southeast Milk, Inc. (SMI) 
(proponent cooperatives).
    The witness for the proponent cooperatives said SMA was created in 
response to a changing market structure and is an extension of the 
cooperatives' initiative to consolidate and seek enhanced marketing 
efficiencies. The witness indicated that SMA pools certain costs and 
returns for its cooperative member producers supplying distributing 
plants fully regulated under the Appalachian and Southeast milk orders. 
SMA considers the Appalachian and Southeast orders one market in terms 
of the distribution of revenues, the allocation and pooling of 
marketing costs, milk supply and demand, and the development of its 
annual budget, the witness explained.
    The proponent cooperatives' witness stated that the proposed merged 
milk order would create a milk market which would be commonly supplied 
and deserving of a common blend price. The witness testified that the 
continued existence of the separate Appalachian and Southeast Federal 
milk orders across a functionally single fluid milk marketing area 
inhibits market efficiency in supplying and balancing the market, 
creates unjustified blend price differences, encourages uneconomic 
movements of milk, and results in the inequitable sharing of the Class 
I proceeds of what should be a single market.[FEDREG][VOL]*[/
VOL][NO]*[/NO][DATE]*[/DATE][PRORULES][PRORULE][PREAMB][AGENCY]*[/
AGENCY][SUBJECT]*[/SUBJECT][/PREAMB][SUPLINF][HED]*[/HED]?>
    The proponent cooperatives' witness stated that different blend 
prices and different and separate pool qualification requirements 
constitute disruptive conditions that would be removed by a merger of 
the orders. The witness asserted that the proposed merger would allow 
producer milk to flow more freely between pool plants and provide for 
the equal sharing of balancing costs across all producers in the 
proposed merged milk order.
    The proponent cooperatives' witness stressed that the adoption of 
the proposed merged milk order would assure producers that milk would 
be sold at reasonable minimum prices and producers would share pro rata 
in the returns from sales of milk including milk not needed for fluid 
use. The witness further stated that handlers would be assured that 
competitors would pay a single set of minimum prices for milk set by 
the established order. The witness stated that a proposed merged milk 
order is in the public interest because it assures that an adequate 
supply of high quality milk will be available for consumers.
    The proponent cooperatives' witness noted that the adoption of a 
new Federal order is contingent upon being able to show that interstate 
commerce occurs in the proposed marketing area. It is the opinion of 
the witness that ``interstate commerce'' does exist due to the movement 
of bulk and packaged milk products within, into, and out of the 
Appalachian and the Southeast marketing areas--the proposed marketing 
area.
    The proponent cooperatives' witness noted a trend of larger 
geographical areas being served by fewer Federal milk marketing orders. 
Specifically, the witness said between 1996 and 2003 the number of 
dairy farmers in the southeastern States of Alabama, Arkansas, Georgia, 
Kentucky, Louisiana, Mississippi, Missouri, North Carolina, South 
Carolina, Tennessee, and Virginia declined from 11,712 to 7,180. This 
decrease, the witness explained, parallels the trend of a drop in the 
number of dairy farmers pooled on the current Appalachian and Southeast 
orders. The witness stated that based on the final decision for Federal 
Order Reform (issued March 12, 1999, and published April 2, 1999 (64 FR 
16025), 8,180 dairy farmers were expected to pool their milk on the 
consolidated Appalachian and Southeast orders. However, the witness 
noted only 7,243 dairy producers supplied milk to the two orders during 
December 2003.
    The proponent cooperatives' witness stressed that there is an acute 
milk deficit in the Appalachian and Southeast Federal orders. 
Referencing data obtained from the USDA National Agricultural 
Statistics Service (NASS) for the States of Alabama, Arkansas, Georgia, 
Kentucky, Louisiana, Mississippi, Missouri, North Carolina, South 
Carolina, Tennessee, and Virginia (southeast region), the witness 
testified that a decline in dairy farmers led to a decline in milk 
production in the southeast region. The witness noted milk production 
decreased from 13,518 million pounds in 1996 to 10,671 million pounds 
in 2003 a decline of 21 percent. The witness asserted that this decline 
coupled with an increase in population has resulted in a major 
expansion of the milkshed for the southeastern region of the United 
States.
    According to the proponent cooperatives' witness, 9,072 million 
pounds of Class I producer milk was pooled on the combined Appalachian 
and Southeast orders during 2003. The witness said marketings of milk 
produced in the southeastern region was 10,671 million pounds in 2003, 
which means 85 percent of Grade A milk production was needed for Class 
I use on an annual basis.
    In 1996, the proponent witness testified, it was anticipated that 
72 fluid milk processing plants were or would become fully regulated 
distributing plants on the consolidated Appalachian and Southeast 
orders. However, the witness noted, only 52 remained regulated by the 
orders during December 2003. The witness indicated that of the fully 
regulated pool plants existing in both January 1996 and December 2003, 
more than two-thirds have experienced at least one ownership change and 
some have experienced several ownership changes.

[[Page 55461]]

    The proponent cooperatives' witness cited a set of criteria used 
for consolidation of marketing areas and orders during the reform 
process. The witness said this list included overlapping route sales 
and areas of milk supply, the number of handlers within a market, the 
natural boundaries, the cooperative associations operating in the 
service area, provisions common to the existing orders, milk 
utilization in common dairy products, disruptive marketing conditions, 
and transportation differences.
    The proponent cooperatives' witness testified that significant 
competition for sales between plants exists between the Appalachian and 
Southeast marketing areas. The witness noted that a ``corridor of 
competition'' is the shared border of the Appalachian and Southeast. 
The witness testified that Federal milk order data for 2003 shows Class 
I disposition on routes inside the Southeast order by Appalachian order 
pool plants was 11.25 percent of the total Class I route disposition by 
all plants in the Southeast order. According to the witness, Class I 
route disposition in the Southeast marketing area by Appalachian order 
pool plants has increased in total by 11.1 percentage points since 
January 2000 (i.e., 5.9 percentage points from 2000 to 2001, 2.1 
percentage points from 2001 to 2002, and 1.9 percentage points from 
2002 to 2003). In addition, the witness stated that record data reveals 
that Class I route disposition by Appalachian order pool plants into 
the Southeast marketing area was 63.9 percent of the total Class I 
disposition by all nonpool plants for the Southeast order during 2003.
    According to the proponent cooperatives' witness, all of the 
distributing plants currently regulated under the Appalachian and 
Southeast orders are expected to be fully regulated by the proposed 
merged milk order. Using December 2003 data, the witness stated that 
the proposed merged milk order would have had a Class I route 
distribution of 773.4 million pounds. The witness added that 86.58 
percent of Class I sales would have been from milk produced in the 
proposed marketing area. The witness stated that the proposed Southeast 
marketing area would rank third in the total number of pool plants 
regulated by a Federal milk order.
    The proponent cooperatives' witness stated that there is 
substantial and significant overlap of the supply of producer milk for 
the Appalachian and Southeast marketing areas. The witness noted 
Federal order data for 2000 through 2003 shows that dairy farmers 
located in southern Indiana, central Kentucky, central Tennessee, 
central North Carolina, western South Carolina, and central and 
southern Georgia have supplied milk to plants regulated under 
Appalachian or Southeast orders. The witness said milk of dairy farmers 
located in the Central marketing area and Southwest marketing area, and 
dairy farmers located in northwestern Indiana and south central 
Pennsylvania, have supplied fluid milk plants regulated by the 
Appalachian and Southeast orders.
    In December 2003, the witness stated, dairy farmers located in 28 
states supplied milk to handlers regulated under the Appalachian or 
Southeast orders. Sixteen of the 28 states supplied milk to both 
marketing areas and 13 states were located wholly or partially within 
the proposed merged milk order marketing area, the witness noted.
    The witness for the proponent cooperatives testified that the 
proposed merged milk marketing area and order would rank second in 
Class I utilization representing 19.5 percent of total Class I sales in 
all Federal milk orders. Using annual Federal milk order data, the 
witness noted that for 2003, Class I utilization for the Appalachian 
and Southeast marketing areas was 70.36 percent and 65.47 percent, 
respectively. The witness said the combined Class I utilization for the 
proposed merged milk marketing area would have been 67.77 percent for 
2003 or 9,072 million pounds of 13,386 million pounds of producer milk 
pooled.
    The proponent cooperatives' witness noted that milk not needed for 
fluid uses in the Appalachian marketing area is primarily used in Class 
II and Class IV while milk not needed for fluid uses in the Southeast 
marketing area is primarily used in Class III. For 2003, the witness 
noted that non-fluid milk utilization for the Appalachian order was 
14.41 percent Class II, 7.11 percent Class III, and 8.12 percent Class 
IV, while the non-fluid milk utilization for the Southeast order was 
9.97 percent Class II, 17.79 percent Class III, and 6.78 percent Class 
IV. The witness stressed that these differing uses of milk result in 
different blend prices between the Appalachian and Southeast orders 
which leads to disorderly marketing conditions. The witness emphasized 
that differences in blend prices between the two orders is largely due 
to significant differences in uses and prices in the manufacturing 
classes and is not necessarily due to significant differences in Class 
I milk utilization.
    The witness explained that SMA in April 2002 began the common 
pooling of the costs and returns to supply the customers of member 
cooperatives in the separate orders in an effort to alleviate 
disruptive blend price differences. The witness testified that while 
this procedure has resolved some blend price differences, their 
procedure does not result in removing inequitable blend prices for all 
producer milk pooled on the separate orders.
    Regarding the commonality of cooperative associations in the two 
marketing areas, the proponent cooperatives' witness stated that 
cooperative membership is an indication of market association and 
provides support for the consolidation of marketing areas. The witness 
noted that the six SMA member cooperatives accounted for approximately 
734 million pounds of producer milk during November 2003, which 
represents about 67 percent of the total producer milk that would be 
pooled on the proposed merged milk order. Also, the witness stated 
these cooperatives market milk of other cooperatives whose member 
producers' milk would be pooled on the proposed merged milk order. 
Using November 2003, the witness stated approximately 871 million 
pounds or 79 percent of the producer milk pooled under the proposed 
merged milk order would be represented by these proponent cooperatives.
    The witness for the proponent cooperatives pointed out that the 
regulatory provisions of the Appalachian and Southeast orders are 
similar in most respects except for the qualification standards for 
producer milk and a producer. While not a Federal milk order regulatory 
provision, the proponent witness stated that the common handling of 
costs and returns for milk that would be pooled on the proposed merged 
milk order recognized similar marketing conditions within the proposed 
marketing area.
    The proponent cooperative witness testified that the proposed 
merged milk order should retain the Appalachian order pool plant 
provisions. The witness recommended adopting provisions that would 
allow the pooling of a supply plant operated by a cooperative 
association that is located outside the marketing area but within the 
State of Virginia. The witness stated that the proposed merged milk 
order should include the Appalachian order ``split'' pool plant 
provision which would continue to provide for defining that portion of 
a pool plant designated as a ``nonpool plant'' that is physically 
separate and operates separately from the pool portion of such plant.
    The proponent cooperatives' witness stated that lock-in provisions 
should be included in the proposed merged milk order. According to the 
witness,

[[Page 55462]]

distributing plants in the Southeastern markets have been ``locked in'' 
or fully regulated as pool plants under the order in which they are 
physically located since the mid-1980s. The witness testified that unit 
pooling distributing plants on the basis of their physical location 
should be retained in the proposed merged milk order. The witness noted 
that the Appalachian and Southeast orders currently provide that two or 
more plants operated by the same handler that are located within the 
marketing area may qualify for pool status as a unit by meeting the in-
area Class I route disposition standards specified for pool 
distributing plants.
    The witness for the proponent cooperatives explained that lock-in 
provisions help to preserve the viability of capital investments in 
pool distributing plants. The witness indicated that lock-in provisions 
in the Southeast and Appalachian orders adequately provide for 
regulatory stability for pool plants on the edge of a market area that 
may shift regulatory status between two orders due to changes in route 
disposition patterns.
    The proponent cooperatives' witness recommended changing the 
``touch base'' requirement of the producer milk provision from a 
``days'' production standard to a ``percentage'' production standard. 
This change, the witness stated, will accommodate pooling the milk of 
large producers who ship multiple loads of milk per day. The witness 
proposed that individual producers deliver 15 percent of their monthly 
milk production (equivalent to approximately 4.5 days of milk 
production) to a pool plant during January through June and 33 percent 
(equivalent to about 10 days of milk production) of their of monthly 
milk production during the months of July through December. The witness 
stated that the 33 percent production standard is a reasonable minimum 
requirement for establishing a producer's association with the market 
during the short production months of July through December. Under 
their proposal, the milk of a dairy farmer would be eligible for 
diversion to a nonpool plant the first day of the month during which 
the milk of such dairy farmer meets the order's touch base 
requirements.
    The proponent cooperatives' witness indicated that their proposal 
contains current Southeast order language that limits the total amount 
of producer milk that may be diverted by a pool plant operator or 
cooperative association to 33 percent during the months of July through 
December and 50 percent during January through June.
    The proponent cooperatives' witness proposed that the reserve 
balances of the marketing services, administrative expense, producer-
settlement funds, and the transportation credit balancing funds that 
have accrued in the individual Appalachian and Southeast orders be 
merged or combined in their entirety if the proposed merged milk order 
is adopted. The witness explained that the handlers and producers 
servicing the milk needs of the individual orders would continue to 
furnish the milk needs of the proposed marketing area.
    According to the proponent cooperatives' witness, it would be 
appropriate to combine the reserve balances of the orders' marketing 
service funds since marketing service programs for producers would 
continue under the proposed merged milk order. In regards to the 
administrative expense funds, the witness stated that it would be 
equitable and more efficient to combine the remaining administrative 
funds accumulated under the individual orders. In addition, the witness 
indicated that this would enable the producer-settlement funds and the 
transportation credit funds of the proposed merged milk order to 
continue without interruption.
    Witnesses for Maryland & Virginia Milk Producers Cooperative, Inc. 
(MD&VA), Arkansas Dairy Cooperative, Inc. (ADCA), Lone Star Milk 
Producers, Inc. (Lone Star), and Dairymen's Marketing Cooperative, Inc. 
(DMC), testified in support of consolidating the current Appalachian 
and Southeast milk orders into a single milk order. According to 
witnesses, MD&VA is comprised of 1,450 to 1,500 dairy farmers, ADCA has 
160 member dairy farmers, Lone Star is comprised of about 160 member 
dairy farmers, and DMC is comprised of 168 member dairy farmers. The 
witnesses indicated that all of the cooperatives are members of SMA and 
that the milk of their dairy farmer members is shipped to plants 
regulated by the Appalachian or Southeast orders.
    The MD&VA witness asserted that the consolidation of the current 
Appalachian and Southeast marketing areas and orders is necessary due 
to changes in the marketing structure (i.e., milk production and 
processing sectors) in the southeastern United States. The witness was 
of the opinion that the area covered by the two current orders is 
essentially a single market and that all of the producers delivering 
milk to the market should share a common Federal order blend price.
    The witnesses for MD&VA, ADCA, Lone Star, and DMC stated the 
producer milk requirements under the current Appalachian and Southeast 
orders make it difficult to ensure the pooling of milk on the orders. 
The witnesses contended a merger of the Appalachian and Southeast 
marketing areas and orders would enhance market equity, allow for 
increased efficiencies in supplying a deficit milk region, and 
eliminate the disruptive and disorderly marketing conditions that 
currently exist in the Appalachian and Southeast orders by eliminating 
blend price differences.
    A witness representing Georgia Milk Producers, Inc. (GMP), 
testified in opposition to the merger as proposed in Proposals 1 and 2. 
The witness was of the opinion that USDA had made a mistake in 2000 
when the western part of the current Southeast marketing area, which 
had a lower Class I utilization, was added to the Southeast marketing 
area which had a higher Class I utilization.
    Other testimony presented on behalf of GMP, and relying on 1997 
data, indicated that milk production in Georgia fell short of Georgia's 
fluid milk demand by about 122 million pounds as compared to only 4 to 
11 million pound supply shortfalls in the other states included in the 
proposed merged milk order area. The witness stated that the widening 
supply-demand gap will accelerate as population increases and milk 
production declines in Georgia. The GMP witness stated that: ``Based on 
the decline in production in the region compared to the growth in 
demand, USDA has not sufficiently considered the needs of the dairy 
farmers in the states covered by the Order.'' According to the witness, 
GMP dairy farmers have lost income each time the Southeast Federal 
order has been expanded.
    The GMP witness testified that a rejection of the proposed merged 
milk order together with the creation of a new Mississippi Valley 
Order, as offered by Proposal 5, would be the first step to help 
rectify the mistake made in Federal milk order reform. The witness 
supported raising the utilization in the most deficit areas of the 
Southeastern States by creating a Mississippi Valley order and 
combining the high utilization areas of the remainder of the current 
Southeast order (Order 7) into a new smaller Southeast Order.
    The GMP witness asserted that historically, the larger the 
marketing area, the higher the balancing costs in a deficit market. The 
witness further asserted that transportation credits shift part of that 
cost to the entire market rather than to the dairy farmers in the order 
who are members of cooperatives. The witness testified that 
transportation credits unintentionally encourage the importation of 
milk rather than

[[Page 55463]]

encourage increased production of local milk.
    A witness representing the Kroger Company (Kroger) testified in 
support of the proposed merger of the Appalachian and Southeast orders. 
According to the witness, Kroger owns and operates Winchester Farms 
Dairy, in Winchester, Kentucky, and Westover Dairy, in Lynchburg, 
Virginia. The witness stated that both plants are pool distributing 
plants regulated on the Appalachian milk order. The witness stated that 
Kroger owns and operates Heritage Farms Dairy in Murfreesboro, 
Tennessee, and Centennial Farms Dairy in Atlanta, Georgia, both fully 
regulated distributing plants under the Southeast milk order.
    According to the Kroger witness, their Winchester, Kentucky, plant 
was associated with the Ohio Valley order (now part of the Mideast 
order) from 1982 to 1988, with the Louisville-Lexington-Evansville 
order from 1988 through 1999, and with the Appalachian order since 
2000. The witness indicated that previous decisions by USDA adopted 
pool plant provisions that allowed their Winchester, Kentucky, plant to 
be regulated under the Appalachian order. According to the witness, 
being regulated by the Appalachian order retains that plant's ability 
to procure milk with a higher blend price when compared with the 
Mideast order.
    The Kroger witness indicated that with the exception of the 
Murfreesboro, Tennessee, plant, which has a minority supply of milk 
from independent producers, all of the Kroger pool distributing plants 
are supplied by Dairy Farmers of America, Inc. The witness indicated 
that if their Winchester plant were to again be associated with the 
Mideast order, the returns to the milk supplying cooperative would be 
reduced due to the lower Mideast order blend price. The witness 
requested that the current Appalachian order pool plant definition be 
included in the proposed merged milk order. This request, according to 
the witness, would permit their plant located in Winchester, Kentucky, 
to continue its association with the proposed merged milk order rather 
than with the Mideast order.
    A witness representing Dairy Farmers of America, Inc. (DFA), 
testified that the proponents do not anticipate any difficulties from 
merging of the two orders or expanding the proposed merged milk order 
area to include additional Virginia counties. According to the witness, 
the Virginia State Milk Commission has been able to simultaneously 
operate a producer base milk pricing program for producers supplying 
milk to plants with Class I sales within the State. The witness 
indicated that DFA opposes any change to the proposed merged milk order 
provisions that may cause conflicts between the operations of the 
Virginia State Milk Commission and the Federal milk marketing order 
program.
    A witness representing Prairie Farms testified in opposition to 
Proposals 1 and 2. The witness indicated that the fluid milk industry 
would be better served by more Federal milk marketing orders covering 
smaller areas rather than fewer Federal milk marketing orders covering 
large areas. The witness indicated that Federal milk order reform left 
``dead zones'' in the States of Illinois and Missouri, near St. Louis. 
According to the witness, this area is not able to attract a fluid milk 
supply and experiences weekly fluid milk deficits.
    The Prairie Farms witness indicated that the low per capita milk 
production in Illinois, in combination with economic incentives to move 
the milk produced in Illinois and eastern Missouri into the Appalachian 
and Southeast orders, has caused disorderly marketing conditions. The 
witness indicated that the blend price differences between the Upper 
Midwest order and the Central order are not sufficient to cover the 
transportation cost of moving milk to the ``dead zones''. The witness 
testified that at an October 31, 2001, meeting, DFA--Prairie Farms' 
major supplier--indicated that they would no longer be able to provide 
supplemental milk supplies to Prairie Farms due to the lack of 
incentives and expenses.
    The Prairie Farms witness stated that today's dairy environment 
shows that the current order system needs to be reconfigured and 
inequities fixed system-wide. The witness asserted that the 
consequences for nearby marketing areas and adjacent orders must be 
considered when revising or merging orders. The witness indicated that 
market efficiency suffers and difficulties occur in supplying and 
balancing the market at all Federal milk order borders. The witness 
indicated that the lines drawn between marketing areas create 
unjustified blend price differences, encourage uneconomic movements of 
milk, and result in the inequitable sharing of Class I proceeds.
    A witness representing Dean Foods testified in opposition to the 
proposed merger of the Appalachian and the Southeast market areas. 
According to the witness, more and smaller order areas create more 
flexible incentives to deliver milk to Federal order pool plants. 
According to the witness, relative blend prices determine where milk is 
shipped and pooled. According to the witness the disincentives 
associated with increased transportation costs increase faster than the 
incentives from the higher location value of the merged order blend 
price. The witness cited the St. Louis/southern Illinois area and its 
chronic milk deficit as a prime example of these phenomena.
    Post-hearing briefs addressing Proposals 1 and 2 were submitted by 
SMA, Dean Foods, and Prairie Farms. The proponent cooperatives for the 
proposed merged milk order, submitted a post-hearing brief reiterating 
their support for the merger of the Appalachian and Southeast orders. 
The brief described conditions existing in the Appalachian and 
Southeast orders as disruptive and disorderly, and asserted that these 
conditions are symptoms of a market that has changed significantly 
since the orders were promulgated by Federal order reform, effective 
January 1, 2000.
    According to the proponent cooperatives' brief, a merger of the 
existing orders would bring blend price uniformity, recognize inter-
order competition and integrate Class I sales within the proposed 
merged milk order, recognize common supply areas within the proposed 
merged milk order, and allow producer milk to move more freely between 
pool plants within the proposed marketing areas. In addition, 
proponents contended it would equalize the costs of balancing within 
the proposed marketing area, erase the artificial line that separates a 
common milk market, and recognize the common pooling of costs and 
returns for producer milk within the proposed merged order. The brief 
asserts that no additional parties would become regulated as a result 
of the proposed merged milk order. According to the proponent 
cooperatives' brief, other options that forestall a complete merger are 
inadequate to correct the present disruptive and disorderly conditions 
in the separate orders.
    Opposition to Proposal 1 was reiterated by Dean Foods and Prairie 
Farms in a joint post-hearing brief. The brief suggested that blend 
price differences between orders cause milk to move to where it is most 
needed. Dean Foods and Prairie Farms stated that without blend price 
differences milk movements between and within marketing areas are 
impaired. The opponents brief suggested a national hearing in order to 
consider simultaneously all marketing regions because the results of 
one proceeding directly affects other regions. The brief stated that 
combining the Appalachian

[[Page 55464]]

and Southeast marketing areas was considered but was not adopted under 
Federal milk order reform.
    The Dean Foods and Prairie Farms joint brief stated that market 
administrator data demonstrates that moving milk to where it is needed 
through blend price differences effectively moves milk from the west to 
the east for the Southeast marketing area and from north to south for 
the Appalachian marketing area. The brief offered the St. Louis area as 
an example of blend price differences that are sometimes too small to 
cover additional costs of transporting milk to major metropolitan area 
for fluid use. The brief indicated that similar problems could result 
elsewhere if the two orders are merged.
    In their joint brief, Dean Foods and Prairie Farms suggested that 
although a majority of dairy market participants may favor a merger, it 
is important to consider the minority opinion. The brief also requested 
the inclusion of the Kentucky counties of Ballard, Calloway, Carlisle, 
Fulton, Graves, Hickman, Marshall, and McCracken in the Southeast 
marketing area if Proposal 1 is denied and Proposal 5 is adopted.
    Dean Foods and Prairie Farms' joint brief contended that the 
proposal to merger the Appalachian and Southeast orders brings forth a 
significant policy and legal question the Department must address prior 
to issuing a decision on the merits of the proposal. The proposed 
merger, if adopted, would cause the number of Federal orders to fall to 
below the minimum number of 10 required by Congress in the 1996 Farm 
Bill, they stated.
    A written statement submitted on behalf of LuVel Dairy Products, 
Inc., requested that the administrative requirements of the producer-
settlement fund be modified to extend the time period in which payments 
to the fund are due by one full business day and to allow payments due 
to the fund to be submitted overnight instead of through the electronic 
wiring of funds. However, this was not a noticed proposal and no 
evidence or witness was available to testify regarding this written 
request.
    The 1996 Farm Bill mandated that Federal milk orders be 
consolidated to not less than 10 or more than 14. The Federal order 
reform final decision issued March 12, 1999, and published in the 
Federal Register April 2, 1999 (64 FR 16026), meet the requirements set 
forth in the 1996 Farm Bill through the consolidation of the 31 Federal 
milk orders into 11 orders. The Agricultural Marketing Agreement Act of 
1937 (Act), as amended, provides the Department the authority to issue 
and amend orders. Accordingly, the merger proposal may be considered by 
the Department.
    A partial recommended decision published in the May 13, 2005, 
Federal Register (70 FR 29410) found that record evidence does not 
support merging the Southeast and Appalachian marketing areas or 
substantiate the need for merging these two separate marketing order 
areas. Record evidence of this proceeding clearly demonstrates that the 
measure of association between the Appalachian and Southeast marketing 
areas in terms of overlapping Class I route sales and overlapping milk 
procurement areas is relatively unchanged since the consolidated orders 
were implemented in January 2000. The evidence of this record does not 
indicate that current marketing conditions within the two marketing 
areas are disorderly.
    Southern Marketing Agency, Inc., (SMA) and Dairy Farmers of 
America, Inc., (DFA) filed comments in response to the partial 
recommended decision expressing opposition to the Department's denial 
of the proposed merger. They noted that the proposed merger was 
supported by a substantial portion of market participants servicing the 
Class I needs of the market with minimal opposition from milk 
processing companies. In comments filed by MD&VA and ADCA, the 
cooperatives maintained their support for the proposed order merger.
    In comments and exceptions filed in response to the recommended 
decision, both SMA and DFA contended that the proposed order merger is 
needed due to the milk supply relative to the demand for milk 
southeastern region of the United States. The proponents continue to 
maintain that the two marketing orders are effectively a single fluid 
market.
    SMA reiterated the need for the merger of the marketing areas and 
orders stating logistical and marketing efficiency in supplying these 
deficit markets with supplemental milk is paramount to the area 
producers, to processors of milk, and ultimately to consumers. SMA 
contended that the milk deficit condition in the southeast region 
necessitates the importation of milk from wherever it is available, 
which currently is the Southwest and Mideast marketing areas. The 
proponents asserted that daily interplay of the milk supply to the 
Appalachian and Southeast marketing areas from these outside-area 
locations demonstrates the absolute need to merge the two orders.
    SMA stated that other alternatives to the proposed merger were 
considered including the merger of the transportation credit funds of 
the two orders and other amendments to the orders' transportation 
credit provisions, development of reciprocal producer qualification 
standards on the two orders, adjustments in the orders' producer milk 
qualification provisions, and amendments to the orders' pool plant 
provisions. SMA contended that the proposed merger is the only viable 
alternative to resolving all the issues in the proposed marketing area.
    DFA expressed disappointment at the recommended denial of the 
proposed merger and stated that the main concern of DFA and other 
proponent cooperatives is the additional costs associated with serving 
the market in two marketing areas. According to DFA, the proposed 
merger is critical because the milk supply relative to demand in the 
southeastern region grows even more deficit each month. The cooperative 
stated that servicing a deficit milk market is an extremely expensive 
proposition and suggested that efforts to reduce marketing costs be 
given the most serious consideration. DFA contended the proposed order 
merger would aid the market's suppliers in returning more dollars to 
dairy farmers.
    SMA and DFA contended the partial recommended decision provided no 
set standards regarding overlapping Class I route disposition and milk 
procurement areas which the denial of the proposed merger was based. 
They asked that a standard be identified or developed and communicated 
to the industry. DFA indicated the partial recommended decision 
provided references to the 1999 Federal order reform decision that do 
not explicate the objective basis of that decision but rather simply 
invokes the decision. DFA insisted the industry would be better served 
by more transparent decision-making criteria.
    As proposed in the partial recommended decision, this decision 
finds that record evidence does not support merging the Southeast and 
Appalachian marketing areas. Record evidence of this proceeding does 
not substantiate the need for merging these two separate marketing 
order areas. Overlap of Class I route disposition between the two 
marketing areas is relatively unchanged since the separate orders were 
created in 2000. The overlap in milk supply areas for plants in the 
Appalachian and Southeast marketing areas remains minimal and unchanged 
since 2000. Blend price differences and other marketing conditions in 
the two marketing areas raised by the proponents are not significantly 
different from conditions existing in 2000. The proponents have

[[Page 55465]]

not demonstrated that the current marketing conditions are disorderly. 
The proponents have not made a convincing case that the current 
marketing conditions are disorderly.
    The Act provides that milk orders may be issued where the marketing 
of milk is in the current of interstate or foreign commerce or where it 
directly burdens, obstructs, or affects interstate or foreign commerce. 
Federal milk orders define the terms under which handlers in specified 
markets purchase milk from dairy farmers. The orders are designed to 
promote the orderly exchange of milk between dairy farmers (producers) 
and the first buyers (handlers) of milk. As the proponents assert, 
orders do provide terms and provisions to identify those who are 
supplying the Class I needs of a market and thus, should share in the 
order revenues. The record evidence of this proceeding does not support 
a finding that the current Appalachian and Southeast milk orders are 
not achieving the goal of orderly marketing.
    Proponents in providing justification to merge the Appalachian and 
Southeast marketing areas and orders advanced a set of criteria that 
was essentially the same criteria as the criteria the Department used 
during Federal milk order reform. The criteria included overlapping 
Class I route sales and overlapping milk procurement areas. As noted in 
the partial recommended decision, the criteria considered when the 
current Appalachian and Southeast marketing areas and orders were 
established as part of Federal milk order reform are considered in this 
decision. The Department considered and weighed this set of criteria 
and the supporting justification offered by proponents of the proposed 
order merger.
    In determining whether Federal milk order marketing areas should be 
merged, the Department generally has considered the extent to which 
Federal order markets share common characteristics such as overlapping 
sales and procurement areas, and other commonly shared structural 
relationships. The most important of these factors are evidence of 
overlapping sales patterns among handlers of Class I milk and 
overlapping milk procurement area. In support of the proposed merger, 
proponents assert that there is substantial overlap in Class I route 
sales and milk procurement areas between the Appalachian and Southeast 
markets. However, record evidence of this proceeding clearly 
demonstrates that the measure of association between these two 
marketing areas in terms of overlapping Class I route sales and 
overlapping milk procurement areas is relatively unchanged since the 
consolidated orders became effective in January 2000.
    Several criteria were used by the Department in determining which 
of the 31 milk order marketing areas exhibited a sufficient measure of 
association in terms of sales, procurement area, and other structural 
relationships to warrant consolidation or mandated by the 1996 Farm 
Bill into the current 10 milk marketing areas. These criteria included 
overlapping route disposition, overlapping areas of milk supply, number 
of handlers within a market, natural boundaries, cooperative 
associations, common regulatory provisions, and milk utilization in 
common dairy products.
    The primary factors during reform that supported the creation of 
the consolidated Appalachian milk order marketing area and the 
consolidated Southeast milk order marketing area were overlapping route 
sales and milk procurement areas between the marketing areas. The 
determinations were based on an analysis of milk sales and procurement 
area overlap between the pre-reform orders using 1997 data. 
Specifically, the Federal order reform final decision issued March 1999 
stated that the primary factors for the consolidation of the (1) 
Tennessee Valley, (2) Louisville-Lexington-Evansville, and the (3) 
Carolina marketing areas into the current Appalachian milk order 
marketing area were commonality of overlapping route disposition and 
milk procurement between the two marketing areas. The decision found 
that there was ``a stronger relationship between the three marketing 
areas involved than between any one of them and any other marketing 
area on the basis of both criteria'' (64 FR 16059).
    For the Southeast order, the Federal order reform final decision 
stated that the basis for the adopted Southeast marketing area which 
consolidated the former Southeast marketing area with additional 
counties in Arkansas, Kentucky, and Missouri was ``overlapping route 
dispositions within the marketing area to a greater extent than with 
other marketing areas. Procurement of producer milk also overlaps 
between the states within the market'' (64 FR 16064).
    Proposals to merge the Appalachian and Southeast order marketing 
areas into a single marketing area were considered during the Federal 
order reform process. Dairy Farmers of America, Inc., and Carolina-
Virginia Milk Producers Association submitted comments requesting that 
the proposed consolidated Appalachian order marketing area and the 
proposed consolidated Southeast order marketing area be combined into a 
single consolidated Southeast marketing area. Also, the Kentucky Farm 
Bureau Federation requested a single Federal order consisting of the 
proposed consolidated Appalachian and Southeast marketing areas 
including all of the State of Kentucky.
    The proponents for merging the two consolidated marketing areas 
contended that common procurement areas between the orders would result 
in different blend prices paid to producers if the orders were not 
consolidated. The Federal order reform final decision rejected this 
assertion stating that ``As discussed in the proposed rule, 
consolidating the Carolina and Tennessee Valley markets with the 
Southeast does not represent the most appropriate consolidation option 
because of the minor degree of overlapping route disposition and 
producer milk between these areas'' (64 FR 16060). Accordingly, the 
order merger proposals were not adopted during Federal order reform. 
These findings continue to apply to the current proposed merged order.
    Record evidence indicates that the Appalachian and Southeast order 
marketing areas share minor and unchanged commonality in sources of 
milk supply, fluid milk route sales, and market participants 
(cooperative associations and handlers). However, as discussed later in 
this decision, such measures of association between the Appalachian and 
Southeast order marketing areas can only support a finding to maintain 
two separate Federal order marketing areas with some minor 
modifications.
    Overlapping Route Sales and Milk Supply. Current proponents of 
merging the Appalachian and Southeast marketing areas contend that 
there is substantial overlap in route sales and milk supply areas. The 
movements of packaged fluid milk between Federal milk order marketing 
areas provide evidence that plants from more than one Federal milk 
order are in competition with each other for fluid milk sales. 
Overlapping sales patterns that result in the regulatory shifting of 
handlers between orders tend to cause disorderly marketing conditions 
by changing the price relationships between competing handlers and 
neighboring dairy farmers. As discussed later in this decision, there 
is no evidence of disorder occurring within the Appalachian and 
Southeast order marketing areas as a result of plants shifting 
regulation to other orders.

[[Page 55466]]

    Overlapping milk supply principally applies when the major 
proportions of a market's milk is supplied by the same area. The cost 
of a handler's milk is influenced by the location of the milk supply 
which affects other competitive factors. The common pooling of milk 
produced within the same procurement area under the same order 
facilitates the uniform pricing of producer milk among dairy farmers. 
However, all marketing areas having overlapping procurement areas do 
not warrant consolidation. An area that supplies a minor proportion of 
an adjoining area's milk needs from minor proportions of its own total 
milk supply and has minimal competition among handlers in the adjacent 
marketing area for fluid sales, supports concluding that the two 
marketing areas are clearly separate and distinct.
    As contained in the partial recommended decision, this decision 
provides detailed analysis of the association between the Appalachian 
and Southeast order marketing areas in terms of overlapping Class I 
route sales and milk procurement areas from 2000 through 2003.
    Based on record evidence of Federal milk order data, Table 1 
illustrates that the Appalachian and Southeast order marketing areas 
have experienced no significant change in overlapping Class I route 
sales or milk procurement since the orders were consolidated.

 Table 1:--Overlapping Route Sales and Milk Supply Appalachian (Order 5)
                   and Southeast (Order 7) Milk Orders
------------------------------------------------------------------------
                                              From order 5  From order 7
                    Date                       to order 7    to order 5
                                                (percent)     (percent)
------------------------------------------------------------------------
                            Route Disposition
                        (Share of Class I Sales)
------------------------------------------------------------------------
Annual Average--2000........................          11.4           1.9
Annual Average--2001........................          12.2           2.4
Annual Average--2002........................          12.2           1.9
Annual Average--2003........................          12.4           2.0
---------------------------------------------
                        Overlapping Milk Supply
                     (Share of Total Producer Milk)
------------------------------------------------------------------------
Annual Average--2000........................           3.1           8.5
Annual Average--2001........................           3.2           6.9
Annual Average--2002........................           3.2           6.8
Annual Average--2003........................           3.2          4.3
------------------------------------------------------------------------
Source: Appalachian and Southeast Market Administrator Data.

    For the 2000 through 2003 period, route sales by distributing 
plants regulated by the Appalachian order into the Southeast marketing 
area averaged about 12 percent, while the route sales from plants 
regulated by the Southeast order into the Appalachian marketing area 
averaged about 2 percent. Record data also indicates that the majority 
of the Class I sales by distributing plants regulated by the 
Appalachian and Southeast orders is within each of the respective 
orders. For the 4-year period, Appalachian order handlers accounted for 
about 75 percent of the total Class I sales within the order's 
marketing area and plants regulated by the Southeast order accounted 
for about 85 percent of the order's total Class I sales.
    Of the total producer milk pooled on the Appalachian order, the 
amount of producer milk produced in the Southeast marketing area 
decreased from 8.5 percent in 2000 to 4.3 percent in 2003. The milk 
produced in the Appalachian marketing area that was pooled on the 
Southeast order accounted for about 3.2 percent of the total producer 
milk pooled on the Appalachian order for the same 4-year period.
    In summary, the Table 1 data illustrates that route sales from 
Appalachian order handlers into the Southeast marketing area increased 
slightly (1 percentage point) from 2000 to 2003, while route sales from 
the Southeast order regulated plants into the Appalachian marketing 
area remained relatively unchanged for the 4-year period. Likewise, the 
data in Table 1 shows that producer milk pooled on the Appalachian 
order that originated from the Southeast marketing area declined each 
year since 2000, while the producer milk pooled on the Southeast order 
that originated from the Appalachian marketing area has remained 
unchanged since the orders were consolidated in January 2000.
    Table 2, which is based on Federal milk order record data, further 
details the source of producer milk pooled on the Appalachian and 
Southeast orders.

                        Table 2.--Source of Producer Milk for the Appalachian and Southeast Orders by Order and Unregulated Areas
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                              Percent from       Percent from       Percent from       Percent from     Percent from all
                           Year                               inside order     northeast order     mideast order     southeast order    other orders and
                                                                  area               area               area               area        unregulated areas
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                             Appalachian Order Producer Milk
--------------------------------------------------------------------------------------------------------------------------------------------------------
2000.....................................................               51.9                6.7                9.1                8.5               23.9
2001.....................................................               47.9                6.9               11.4                6.9               26.8
2002.....................................................               46.7                7.3               14.6                6.8               24.6
2003.....................................................               45.1                5.8               19.2                4.3               25.6
----------------------------------------------------------


[[Page 55467]]


--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                              Percent from       Percent from       Percent from       Percent from     Percent from all
                           Year                               inside order      central order     southwest order      Appalachian      other orders and
                                                                  area               area               area            order area     unregulated areas
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                              Southeast Order Producer Milk
--------------------------------------------------------------------------------------------------------------------------------------------------------
2000.....................................................               66.5                8.9               17.1                3.1                4.4
2001.....................................................               59.8                9.8               20.1                3.2                7.1
2002.....................................................               57.0               10.5               21.8                3.2                7.5
2003.....................................................               58.1               14.2               17.5                3.2               7.1
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Appalachian and Southeast Market Administrator Data.

    The Table 2 data illustrates that the share of total producer milk 
pooled on the Appalachian order produced within the marketing area 
during 2000 through 2003 has declined from about 51 percent to about 45 
percent. The amount of producer milk produced in the Southeast 
marketing area as a share of the total amount of producer milk pooled 
on the Appalachian order also has declined from 8.5 percent in 2000 to 
4.3 percent in 2003. At the same time, the amount of producer milk 
produced in the Mideast marketing area that was pooled on the 
Appalachian order increased from 9.1 percent in 2000 to 19.2 percent in 
2003.
    During 2000 through 2003, the Northeast, Southeast, and Mideast 
marketing areas accounted for about 27 percent of the total producer 
milk pooled on the Appalachian order. Of the total producer milk pooled 
on the Appalachian order that was produced outside the Appalachian 
marketing area during this period, 12.7 percent was produced in the 
Southeast marketing area, 12.8 percent in the Northeast marketing area, 
and 26 percent in the Mideast marketing area. In addition, record data 
indicates that approximately half of the pooled milk on the Appalachian 
order is produced in counties within the marketing area and 20 percent 
to 25 percent of the total pooled milk is supplied by Federally 
unregulated areas, mainly from counties in the State of Virginia, 
Pennsylvania, and New York.
    For the 4-year period of 2000 through 2003, record data reveals the 
share of the total Southeast order producer milk produced within the 
marketing area declined from about 67 percent in 2000 to about 58 
percent in 2003. However, this decline was not supplied by producer 
milk that was produced in the Appalachian marketing area which remained 
relatively unchanged at about 3 percent from 2000 through 2003. Record 
data reveals that the supplemental milk for the Southeast order is 
produced primarily in the Central and Southwest marketing areas. 
Specifically, the share of producer milk produced in the Central 
marketing area that was pooled on the Southeast order increased from 
8.9 percent in 2000 to 14.2 percent in 2003. In addition, producer milk 
produced in the Southwest marketing area that was pooled on the 
Southeast order was about 17 percent in 2000, increased to about 22 
percent in 2002, and declined to about 17 percent in 2003.
    The record data clearly reveals the degree of overlap in milk 
supply between the Appalachian and Southeast milk order marketing areas 
has decreased over the 4-year period since Federal order reform while 
the degree of overlap between the Appalachian and Mideast orders has 
increased each year. The data further reveals that the primary out-of-
area sources of supplemental milk for the Appalachian order marketing 
area are the Northeast and Mideast regions. In contrast, the primary 
out-of-area sources of milk supply for the Southeast order marketing 
area are the Southwest and Central marketing areas.
    Record data reveals that the minimal overlap in milk supply areas 
that exists between the Appalachian and Southeast milk order marketing 
areas is primarily concentrated along the Tennessee and Kentucky 
borders. Such overlap is typical for adjoining marketing areas. The 
Federal order reform final decision addressed the issue of overlapping 
milk supply areas among adjacent orders by stating that ``an area that 
supplies a minor proportion of an adjoining area's milk supply with a 
minor proportion of its own total milk production while handlers 
located in the area are engaged in minimal competition with handlers 
located in the adjoining area likely does not have a strong enough 
association with the adjoining area to require consolidation. For a 
number of the consolidated areas it would be very difficult, if not 
impossible, to find a boundary across which significant quantities of 
milk are not procured for other marketing areas.'' (64 FR 16045) 
Accordingly, the overlap existing between the Appalachian and Southeast 
milk order marketing areas does not warrant an order merger.
    Based on the record data, this decision finds that the overlap in 
route sales and milk procurement areas between the Appalachian and 
Southeast milk order marketing areas does not support merging the two 
orders.
    Milk Utilization. During 2000 through 2003, the 4-year weighted 
average Class I utilizations for the Appalachian and Southeast orders 
were 66.9 percent and 63.1 percent, respectively. The level of Class I 
utilization is a factor considered in determining whether orders should 
be merged but does not form the basis for adopting a merger because it 
is a function of how much milk is pooled on an order.
    From 2000 through 2004, the non-Class I use of milk (Class II, 
Class III, and Class IV) of the Appalachian and Southeast marketing 
areas has been different. During this 5-year period, Appalachian order 
Class II, Class III and Class IV utilization rates averaged 14.5 
percent, 7.3 percent, and 10.1 percent, respectively. For the same 
period, the Class II, Class III, and Class IV utilization rates for the 
Southeast order averaged 10.8 percent, 17.3 percent, and 8.5 percent, 
respectively. This data illustrates that the Appalachian marketing area 
is balanced primarily by Class II and Class IV while in the Southeast 
marketing area is balanced by Class II and Class III.
    Blend Prices. Proponent cooperatives contend that the differences 
in blend prices between the Appalachian and Southeast milk orders 
result in disruptive marketing conditions. The blend price of an order 
is a function of the utilization of milk in the respective classes 
(Class I, Class II, Class III, and Class IV) at the corresponding class 
prices. The blend prices for the Appalachian and Southeast order have 
differed due to the orders' different class utilization of milk. The 
magnitude of the blend price differences is primarily attributed to the 
differences between the class prices since the Appalachian marketing 
area is mainly balanced by Class II and Class IV and the Southeast 
marketing area by Class II and Class III. The blend price difference 
further illustrates that the Appalachian and

[[Page 55468]]

Southeast milk orders have separate and distinct market 
characteristics.
    For the 5-year period of 2000 to 2004, the annual average blend 
price of the Appalachian order has been higher than that of the 
Southeast order blend price. This is in part due to the Appalachian 
order having a greater percentage of milk utilized in Class I compared 
to the Southeast order over the past five years. The range of the blend 
price differences for the Appalachian and Southeast orders is mainly 
due to differences in the Class III and Class IV prices (i.e., the 
``balancing'' classes of milk). When the Class III prices goes up 
relative to the Class IV price, the blend price difference between the 
two orders narrows due to the predominance of milk utilized in Class 
III among the non-Class I uses in the Southeast marketing area.
    Blend price differences between the Appalachian and Southeast 
orders have narrowed since the orders were consolidated in 2000. The 
differences in the weighted average blend prices for the two orders was 
$0.36 per cwt in 2000, $0.24 per cwt in 2001, $0.21 per cwt in 2002, 
$0.09 per cwt in 2003, and $0.08 per cwt in 2004. Over the 2000 to 2004 
period, the Appalachian order blend price exceeded the Southeast order 
blend price by an average of $0.20 per cwt.
    A 1995 final decision that consolidated five former Southeastern 
orders (Georgia, Alabama-West Florida, New Orleans-Mississippi, Greater 
Louisiana, and Central Arkansas) with unregulated counties of four 
states to form the Southeast order addressed the issue of blend price 
differences among orders (60 FR 25014). The decision stated that blend 
price differences between orders may be caused by a number of factors 
including order provisions, institutional factors, the location of 
surplus milk and differences in class prices. The decision concluded 
that the five separate orders were encouraging plants to shift 
regulation among the orders which resulted in disorderly marketing 
conditions as producers and handler inequity greatly increased.
    The current Southeast and Appalachian orders do not experience 
disorderly marketing conditions as a result of plants shifting 
regulation between orders. This may be attributed to the current lock-
in and unit pooling provisions contained in the Appalachian and 
Southeast orders' pooling provisions. The lock-in provisions provide 
that a plant located within a marketing area that meets the minimum 
performance standards of the order will be regulated by that order even 
if the majority of its sales occur in another marketing area. Also, the 
unit pooling provisions allow two or more plants located in the 
marketing area and operated by the same handler to qualify for pool 
status as a unit by meeting the order's total and in-area route 
disposition standards as if they were a single distributing plant.
    A plant shifting regulation to an order with a lower blend price 
could jeopardize the plant's ability to maintain a milk supply. Current 
Appalachian and Southeast order provisions allow a plant that meets the 
performance standards of the order and is physically located within the 
order marketing area to be regulated by the order even if the majority 
of its sales are in another marketing area. The provisions were adopted 
into the southeastern orders and retained in the consolidated 
Appalachian and Southeast orders to allow plants that are associated 
with the market and are servicing the market's fluid needs to be 
regulated under the order in which they are physically located.
    If these provisions were not present in the Appalachian and 
Southeast orders, plants could shift regulation between orders which 
could cause disorderly marketing conditions to occur. Since record data 
indicates that the Appalachian and Southeast orders' blend price 
differences are continuing to decrease and there are provisions that 
prevent plants from shifting regulation among orders, this decision 
finds that the blend price differences between the two orders do not 
form a contributing basis for merging the two marketing areas.
    Proponents of the proposed order merger filed comments to the 
partial recommended decision stating that the decision placed great 
weight on the fact that no plants have switched regulation between the 
two orders and implied that such action is a preeminent form of 
disorderly marketing. Proponents asserted that such an implication 
misses the complexities of the marketplace. Proponents asserted the two 
separate Appalachian and Southeast orders result in the improperly 
sharing of Class I revenues under each of the orders and inefficient 
milk movements.
    The partial recommended decision noted a 1995 decision that 
concluded that the existence of five separate orders were encouraging 
plants to shift regulation among the orders which resulted in 
disorderly marketing conditions. The partial recommended decision 
indicated that no record evidence revealed marketing disorder in the 
Appalachian and Southeast marketing areas resulting from the orders 
provisions, which would support a merger on this basis.
    The record provides no specific evidence of inefficient milk 
movements resulting from the orders' provisions. Also, record evidence 
reveals no inequitable sharing of the Class I proceeds within each of 
the marketing areas.
    Both the Appalachian and Southeast orders provide discretionary 
authority to the Market Administrator to adjust certain performance 
standards, if upon completion of an investigation, the Market 
Administrator finds that the standards are resulting in inefficient 
movements of milk, and that a modification of such standards will 
ensure that the Class I needs of the market are met.
    An analysis of the record data reveals that the proposed merger 
would likely lower the blend price paid to dairy farmers whose milk is 
pooled on the Appalachian milk order and increase the blend price paid 
to dairy farmers whose milk is pooled on the Southeast milk order. The 
gains to Southeast order dairy farmers would be offset by losses to 
Appalachian order dairy farmers by a similar magnitude.
    If the two order marketing areas are merged and assuming no 
significant depooling in the Federal order system, it is projected that 
for the period of 2005 through 2009 the blend price paid to dairy 
farmers whose milk is pooled on the current Appalachian order would be 
reduced by about $0.07 per cwt on average, while the blend price paid 
to dairy farmers whose milk is pooled on the current Southeast order 
would be increased by $0.07 per cwt on average. The $0.07 per cwt 
decline in the current Appalachian order blend price would cause 
average order pool receipts to decline by about 11 million pounds and 
average order pool revenues to fall by $6.6 million. For the current 
Southeast order, the $0.07 per cwt blend price increase would increase 
average order pool receipts by an average of 11 million pounds, 
resulting in an average gross pool revenue increase of $6.5 million per 
year.
    Record testimony by proponent cooperatives indicates that SMA has, 
through its pooling of costs and returns, reduced their pay price 
differences to their member producers. Thus, a merger of the 
Appalachian and Southeast orders would merely increase the blend price 
for Southeast order nonmember producers while reducing the blend price 
received by Appalachian order nonmember producers.
    Proponents of the proposed merger filed comments contending that 
the consolidation of the Appalachian and

[[Page 55469]]

Southeast marketing areas and orders would result in additional money 
to dairy farmers in terms of efficiencies in milk movements. The 
proponents' assertions of market efficiencies arising for the proposed 
merger are out weighed by the projected negative impact of the order 
merger on the revenues of Appalachian order nonmember producers, 
particularly, when the record does not contain any specific evidence of 
disorder resulting from the provisions of the two orders. In effect, 
while benefiting certain producers, the proposed merged milk marketing 
area and order would negatively affect certain other dairy farmers.
    Based on this analysis, the absence of disorderly marketing 
conditions, together with the minimal and unchanged overlap between the 
Appalachian and Southeast orders in Class I sales and milk procurement 
area, the two marketing areas and orders should not be merged.
    Cooperative Associations. Record evidence clearly demonstrates that 
there is a strong cooperative association commonality between the 
Appalachian and Southeast order marketing areas. During December 2003, 
there were a total of 14 cooperatives marketing the milk of members on 
the Appalachian and Southeast orders and 9 of these cooperatives 
marketed milk on both orders. A number of these cooperatives are 
members of SMA and others cooperatives have the milk of their members 
that is pooled on the Appalachian and Southeast orders marketed by SMA.
    The evidence indicates that proponent cooperatives market the 
majority of the milk pooled on the Appalachian and Southeast orders. 
For example, for December 2003, proponent cooperatives marketed 62.23 
percent of the total producer milk pooled on the Appalachian order and 
69.68 percent of the total producer milk pooled on the Southeast order. 
While commonality of cooperative associations can be significant, it is 
not a primary criteria used to determine whether orders should be 
merged.
    The record indicates that the proposed merger could likely provide 
some administrative relief to SMA in marketing the milk of their 
cooperative members. However, this outcome is at the expense of 
independent dairy farmers who are currently associated with the 
Appalachian order.
    Market and Structural Changes. Record evidence indicates that there 
have been several market and structural changes in the Southeast and 
Appalachian markets since the Federal Order Reform process began in 
1996 and the implementation of the consolidated orders in January 2000. 
These changes include fewer and larger producers and producer 
organizations, handler consolidations, and other plant ownership 
changes.
    From January 2000 through December 2003, the number of dairy 
farmers pooled on the Appalachian and Southeast milk orders decreased. 
For the Southeast, the decline was 13.2 percent from 4,213 to 3,658, 
and the number of dairy farmers pooled on the Appalachian order 
decreased by 15.6 percent from 4,974 to 4,200. Milk production in the 
Appalachian and Southeast marketing areas has decreased since the 
Federal orders were consolidated. This decrease in milk production has 
caused additional supplemental milk to be imported into these deficit 
milk production markets.
    The record reveals that producer organizations associated with the 
Appalachian and Southeast order marketing areas changed since the 
Federal order reform process. In 1996, there were 14 cooperative 
associations marketing the milk of their members on the current 
Appalachian order and nine Southeast order cooperatives. During 
December 2003, the number of cooperative associations marketing 
members' milk on the Appalachian and Southeast orders was 12 and 11, 
respectively. In 2002, five cooperative associations formed SMA, which 
markets the majority of the raw milk supplied to plants regulated by 
the Appalachian and Southeast orders.
    The number of pool distributing plants on the Appalachian and 
Southeast orders for 1996 was 29 and 36, respectively. For December 
2003, the number of pool distributing plants for the orders was 24 and 
27, respectively. The plant changes that have occurred include 
ownership changes, new plant openings, as well as plant closings.
    Taken singularly or as a whole, the structural changes that have 
occurred from 1996 to present have had no significant impact on 
overlapping route disposition and overlapping procurement patterns of 
the Appalachian and Southeast orders.
    Other order provisions. Proponent cooperatives' proposal to combine 
the balances of the Producer Settlement Funds, the Transportation 
Credit Balancing Funds, the Administrative Assessment Funds, and the 
Marketing Service Funds of the Appalachian and Southeast milk orders 
for the proposed merged milk order is not adopted in this decision. The 
proposal is moot since this decision does not propose merging the two 
orders.
    Proponent cooperatives offered order provisions for inclusion in 
the proposed merged milk order. These recommendations included adopting 
for the proposed merged milk order provisions that currently are 
included in the Appalachian order and/or the Southeast order. The 
proponent cooperatives recommended that the proposed merged milk order 
include pool plant provisions currently in the Appalachian order, and 
proposed the ``touch-base'' requirement of the producer milk provisions 
include a ``percentage'' production standard instead of a ``days'' 
production standard. Since this decision does not adopt the proposal to 
merge the Appalachian and Southeast marketing areas, the 
recommendations concerning order provisions for the proposed merged 
milk order are moot.
    The proponent cooperatives requested that the proposed merged milk 
order contain transportation credit provisions currently applicable to 
the Appalachian and Southeast milk orders, with certain modifications. 
The proponent cooperatives requested the transportation credit 
provisions be modified to increase the maximum rate of assessment to 
$0.10 per cwt, change the months a producer's milk is not allowed to be 
associated with the market for such producer to be eligible for 
transportation credits, and provide the Market Administrator the 
authority to adjust the 50-percent production eligibility standard. 
They also supported the proposed changes for the individual orders if 
their order merger proposal was not adopted.
    Proponent cooperatives contended that by adopting transportation 
credits provisions of the Appalachian and Southeast orders the 
Department established the inextricable and common supply relationship 
between the orders. The proponents state that the proposed order merger 
simply extends that recognition to provide common uniform prices and 
terms of trade for all dairy farmers delivering milk to the market, and 
a common set of producer qualification requirements.
    This decision finds that the inclusion of transportation credit 
provisions of the Appalachian and Southeast orders is not a basis for 
merging the two orders. Such provisions were incorporated and 
established in the orders based on the prevailing marketing conditions 
in each individual order marketing area.
    Record indicates that the orders' transportation credit balancing 
funds have functioned differently since 2000 with respect to the 
assessment rates at which handlers made payments and the payments from 
the orders'

[[Page 55470]]

transportation credit balancing funds. The Appalachian order waived the 
collection of assessments at least two months of each year from 2001 
through 2003. The Southeast order, while collecting assessments at the 
maximum rate of $0.07 per cwt, has prorated payments from the 
transportation credit balancing fund each year since 2001.
    In exceptions to the partial recommended, SMA contends that the 
record is replete of evidence of disorder with respect to the payouts 
under the Appalachian and Southeast orders' transportation credit 
provisions. This decision finds that the different levels of payouts of 
transportation credits under the orders do not substantiate the need to 
merge the two orders. The payments from the orders' transportation 
credit balancing funds and the assessment rates at which handlers made 
payments are reflective of the prevailing marketing conditions in the 
individual markets.
    As discussed later, proposed amendments to the transportation 
credit provisions of the Appalachian and Southeast orders are adopted 
in this decision. The proposed amendments are warranted due to the 
declining milk production within the Appalachian and Southeast 
marketing areas and the anticipated growing need of importing milk 
produced outside the marketing areas to supply the fluid needs of the 
markets.
1b. Expansion of the Appalachian Marketing Area
    While the proposal for merging the Appalachian and Southeast milk 
marketing areas is not adopted, this decision would expand the current 
boundaries of the Appalachian milk marketing area to include certain 
unregulated counties and cities in the State of Virginia. (The partial 
recommended decision inadvertently noted ``14'' unregulated cities 
verses ``15'' and excluded the city of Waynesboro, which is located in 
Augusta County, Virginia, from the list of proposed cities.)
    Expansion of the marketing area adjoining the Appalachian marketing 
area was contained in the proposal published in the hearing notice as 
Proposal 3. The proposal would have expanded the proposed merged milk 
order marketing area to include 25 currently unregulated counties and 
15 currently unregulated cities in the State of Virginia. Similarly, a 
proposal published in the notice of hearing as Proposal 4 sought the 
expansion of the marketing area by adding an area adjoining the 
Appalachian marketing area that includes two unregulated cities and two 
unregulated counties in State of Virginia. Proposal 3, which also was 
supported by proponents of Proposal 4, is adopted.
    Proponent cooperatives of Proposal 3 offered that the merger of the 
Appalachian and Southeast marketing areas be expanded to include the 
Virginia counties of Allegheny, Amherst, Augusta, Bathe, Bedford, 
Bland, Botetourt, Campbell, Carroll, Craig, Floyd, Franklin, Giles, 
Grayson, Henry, Highland, Montgomery, Patrick, Pittsylvania, Pulaski, 
Roanoke, Rockbridge, Rockingham, Smyth, and Wythe) and Virginia cities 
of Bedford, Buena Vista, Clinton Forge, Covington, Danville, Galax, 
Harrisonburg, Lexington, Lynchburg, Martinsville, Radford, Roanoke, 
Salem, Staunton, and Waynesboro.
    The proponent cooperatives' witness testified that the addition of 
the 25 counties and the 15 cities would properly change the regulatory 
status of a Dean Foods' Morningstar Foods plant located at Mount 
Crawford, Virginia, from the Northeast order to the Appalachian order. 
Also, the witness stated the proposed expansion would have the effect 
of fully and continuously regulating under the Appalachian order two 
fluid milk distributing plants (the Kroger Company's Westover Dairy 
plant, located in Lynchburg, Virginia, and the National Dairy Holdings' 
Valley Rich Dairy plant, located in Roanoke, Virginia) under the 
proposed merger.
    The witness said the Dean Foods Company's Mount Crawford plant 
alternates between partially regulated and fully regulated status under 
the Northeast milk order. According to the witness, in order for the 
plant to procure an adequate supply of milk, producers delivering to it 
must receive a blend price comparable with the blend price generated 
under the proposed merged milk order, if adopted.
    The proponent cooperatives' witness stated that the milk supply 
located near Dean Foods' Mount Crawford, Virginia, plant is an 
attractive source of supply for plants that are fully regulated by the 
Appalachian order that are located in southern Virginia, North 
Carolina, South Carolina, and eastern Tennessee. The witness indicated 
that the impact of this proposal on the Virginia State Milk Commission 
and Virginia base-holder producers would be insignificant. The witness 
was of the opinion that, if there were any impact on Virginia base-
holders producers, it would be positive--reflecting the higher blend 
price at Mount Crawford, Virginia, for the plants under the proposed 
merged milk order versus the Northeast order.
    The proponent cooperatives submitted a post-hearing brief 
supporting the expansion of the proposed merged milk order area to 
include the additional 25 counties and 15 cities in Virginia.
    A witness representing the Kroger Company (Kroger) testified in 
support of Proposal 4 to expand the proposed merged milk order to 
include two currently unregulated counties (Campbell and Pittsylvania), 
and two currently unregulated cities (Lynchburg and Danville) in the 
State of Virginia. The witness stated that Kroger owns and operates 
four pool distributing plants associated with the Southeast and 
Appalachian milk orders, including Westover Dairy located in Lynchburg, 
Virginia. The witness also testified in support of adopting the current 
Appalachian order pool plant definition.
    According to the Kroger witness, the Appalachian order pool 
distributing plant provisions require that at least 25 percent of a 
plant's total route disposition must be to outlets within the marketing 
area. This requirement, explained the witness, has restricted Kroger's 
ability to expand its Class I sales into areas outside the Appalachian 
marketing area, including the area directly associated with the plant's 
physical location (Lynchburg, Virginia).
    The Kroger witness noted that Westover Dairy has been a fully 
regulated plant on the Appalachian order since January 2000, and prior 
to reform, the plant was regulated on the Carolina order--one of the 
former orders combined to form the Appalachian order. According to the 
Kroger witness, the total in-area route disposition standard increased 
from 15 percent to 25 percent when the consolidated and reformed 
Appalachian order became effective in January 2000. This change, the 
witness contended, has created an undue hardship on Westover Dairy and 
has forced it to relinquish sales in areas outside of the Appalachian 
market to maintain its pool status under the order. The witness 
concluded by stating that Kroger prefers Proposal 3--the larger 
expansion--which would not only expand the order area to include their 
plant located at Lynchburg, Virginia, but would allow a further 
expansion of Class I sales into other surrounding areas.
    The witnesses for MD&VA, ADCA, Lone Star, and DMC testified in 
support of Proposal 3 to expand the proposed Southeast milk order area 
to include certain unregulated counties and cities in the State of 
Virginia as proposed by the proponent cooperatives. The witnesses 
stated that the cooperatives were not opposed to the expansion of the 
proposed Southeast milk marketing

[[Page 55471]]

area into the smaller territory in the State of Virginia as proposed by 
Kroger but stated the larger expanded area in Proposal 3 was 
preferable.
    The MD&VA witness explained that some of its member producers are 
located in the proposed expanded area and that the cooperative delivers 
the milk of producers holding Virginia Milk Commission base to plants 
fully regulated under the Appalachian milk order. According to the 
witness, the milk of MD&VA member producers is marketed to Dean Foods' 
Morningstar Foods plant located in Mount Crawford, Virginia, which 
would become a pool distributing plant if the proposed merged milk 
order and the expansion to Virginia counties and cities are adopted.
    Witness appearing on behalf of Dean Foods and Prairie Farms stated 
they were not opposed to Proposals 3 and 4. Thus, there was no 
opposition expressed at the hearing or in post-hearing briefs to the 
adoption of these proposals.
    In response to the partial recommended decision, Kroger, Dairy 
Farmers of America, Inc. (DFA), MD&VA, and ADCA filed comments in 
support of expanding the Appalachian marketing area to include certain 
unregulated counties and cities in the State of Virginia. Kroger stated 
the proposed expansion is supported by the hearing record. According to 
DFA, the current Appalachian order configuration makes it difficult for 
plants to establish supply patterns and pricing terms since the 
potential exists for plants to shift their regulatory status from month 
to month. Thus, DFA asserted the proposed expansion is beneficial 
because it will assure full and regular pool plant status for the 
affected bottling plants.
    MD&VA and ADCA asserted that the proposed expansion of the 
Appalachian marketing area will enhance producer and handler equity, 
provide for orderly marketing, and improve marketing efficiencies. 
Under the current Appalachian order, MD&VA and ADCA noted that the 
Kroger's Westover Dairy plant, located in Lynchburg, Virginia, has 
limited expansion of sales area to preserve its regulatory status as a 
pool distribution plant on the order. The cooperatives stated the 
proposed marketing area expansion will allow the plant to operate more 
efficiently, perpetuate the plant's regulatory status as a pool plant, 
and eliminate the disorder that could occur if the plant's regulatory 
status changes.
    According to MD&VA and ADCA, the Dean Foods' Morningstar Foods 
plant, located in Mount Crawford, Virginia, has been plagued with 
issues of regulatory status. MD&VA and ADCA asserted that the proposed 
expansion should correct actual and perceived handler inequities 
between partially regulated and fully regulated handlers that result 
from different blend prices, and bring forth order and stability in the 
marketing area. The cooperatives explained that the continual shifting 
of regulatory status between, or in and out of a Federal milk order is 
disorderly. They stated the proposed expansion will remove the disorder 
associated with the plant's continuous change in regulatory status.
    This decision adopts proposed amendments to the Appalachian order 
that would expand the marketing area to include 25 currently 
unregulated counties and 15 cities in the State of Virginia. The 
proposed amendments would cause the full and regular regulation under 
the Appalachian order of three fluid milk distributing plants--one of 
which has been shifting regulatory status under the Northeast order--
provided the plants meet the order's minimum performance standard. The 
plants are located in Lynchburg, Virginia, Roanoke, Virginia, and Mount 
Crawford, Virginia. Because of Appalachian order's lock-in provision, 
these plants, which would be physically located within the Appalachian 
marketing area, would continue to be regulated under the Appalachian 
order even if the majority of their sales are in another Federal order 
marketing area.
    The proposed expansion would continue the regulation of two fluid 
milk distributing plants (Kroger's Westover Dairy plant, Lynchburg, 
Virginia, and National Dairy Holdings' Valley Rich Dairy plant, 
Roanoke, Virginia) under the Appalachian order. The proposed expansion 
also would shift the regulation of the Dean Foods' Morningstar Foods 
plant, Mount Crawford, Virginia, from the Northeast order to the 
Appalachian order.
    The Kroger's Westover Dairy plant has been regulated by the 
Appalachian order since the order was consolidated in January 2000. 
Current Appalachian order pool plant provisions require that at least 
25 percent of a distributing plant's total Class I sales be to outlets 
within the marketing area. Prior to the reform of Federal milk orders, 
the former order marketing areas that were combined into the 
Appalachian order marketing area contained a 15 percent in-area route 
disposition standard for pool distributing plants.
    Record evidence indicates that the current in-area Class I route 
sales standard likely is limiting the growth potential of Kroger's 
Westover Dairy plant, located in Lynchburg, Virginia. It is not the 
intent of Federal milk orders to inhibit the growth of handlers. 
Federal orders are designed to provide for the orderly exchange of milk 
from the dairy farmer to the first buyer (handler). The orders also 
provide minimum performance standards to ensure that the fluid needs of 
the market are satisfied. Accordingly, the adoption of the expansion 
proposal would allow the Kroger Westover Dairy plant to maintain a milk 
supply in competition with nearby Appalachian order plants, and 
eliminate any disorder that is resulting from current Appalachian order 
provisions.
    In the case of Dean Foods' Morningstar Foods plant in Mount 
Crawford, Virginia, the proposed amendments would eliminate the current 
disruption and disorder caused by the plant shifting its regulatory 
status from fully to partially regulated status under the Northeast 
order. Such shifting from fully to partially regulated status under an 
order may cause financial harm to producers supplying. The proposed 
expansion should result in more order and stability in the marketing 
area.
    The record indicates that the Kroger's Westover Dairy plant and 
Dean Foods' Morningstar plant are supplied by producers located near 
the plants and that the plants compete with other Appalachian order 
plants in milk procurement. This decision finds that orderly market 
conditions would be preserved by the adoption of the proposed expansion 
amendments. The regulation of no other plants should be affected by the 
adoption of these proposed amendments. In addition, the proposed 
expansion of the Appalachian marketing area is not expected to have a 
negative impact on the blend price paid to producers.
    If the proposed marketing area expansion for the Appalachian order 
becomes effective, milk originating from any of the 25 counties or 15 
cities in the State of Virginia would not be eligible to receive 
transportation credits under the Appalachian and Southeast orders.
1c. Transportation Credits Provisions
    As proposed in the partial recommended decision, this decision 
finds that the maximum rates of the transportation credit assessment 
for the Appalachian and Southeast orders should each be increased by 3 
cents per hundredweight. Increasing the transportation assessment rates 
will tend to minimize the exhaustion of the transportation credit 
balancing fund when the need for importing supplemental bulk milk from 
outside of the marketing areas to meet Class I

[[Page 55472]]

needs occurs. Additionally, this decision provides the Market 
Administrators of the orders the discretionary authority to increase or 
decrease the 50 percent production standard for determining the milk of 
a dairy farmer that is eligible for transportation credits. Such dairy 
farmer should not have been a producer under the order during more than 
two of the immediately preceding months of February through May for the 
milk of the dairy farmer to be eligible for receipt of a transportation 
credit.
    The Appalachian and Southeast orders each contain a transportation 
credit balancing fund from which a payment is made to partially offset 
the cost of moving milk into each marketing area to meet fluid milk 
demands. The fund is the mechanism by which handlers deposit, on a 
monthly basis, payments at specified rates for eventual payout as 
defined by a specified formula. The orders' transportation credit 
provisions provide payments typically during the short production 
months of July through December to handlers who incur hauling costs 
importing supplemental milk to meet the fluid demands of the market.
    Transportation credit payments are restricted to bulk milk received 
from plants regulated by other Federal orders or shipped directly from 
farms of dairy farmers located outside the marketing areas and who are 
not regularly associated with the market. The handler payments into the 
funds are applicable to the Class I milk of producers who supply the 
market throughout the year. The Market Administrators of the orders are 
authorized to adjust payments to and from the relevant transportation 
credit balancing fund.
    The transportation credit provisions of the Appalachian and 
Southeast orders differ by the assessment rate at which handlers make 
payments to the transportation credit balancing fund. The maximum rate 
of assessment for the Appalachian order is $0.065 per cwt while the 
maximum rate of assessment for the Southeast order is $0.07 per cwt.
    A feature of the proposal for merging the Appalachian and Southeast 
marketing areas and orders was providing for a maximum transportation 
assessment rate of 10 cents for the proposed Southeast order. This 
would essentially represent a 3-cent per cwt increase from the current 
Southeast order, and a 3.5-cent increase from the Appalachian order. 
While there was no separate proposal for increasing the assessment rate 
for the transportation credit fund, it was made clear by the proponents 
that in the absence of adopting the proposed merger an increase in the 
transportation credit assessment rate was warranted and supported for 
the current orders.
    With regard to the transportation credit issue, the proponent 
cooperatives' witness testified that the maximum transportation credit 
assessment rate should be increased to $0.10 per cwt. According to the 
witness, the increase is necessary to eliminate insufficient funding 
for transportation credit claims that would likely have been paid had 
sufficient funds been available. According to the witness, the 
transportation credit rate of $0.07 per cwt for the current Southeast 
order has been at the maximum rate since the inception of the order, 
but that payments from the transportation credit balancing fund were 
exhausted in 2001, 2002, and 2003 resulting in prorating dollars from 
the transportation credit balancing fund to the amount of 
transportation claims submitted for receipt of the credit. In contrast, 
the witness noted, the transportation credit fund for the Appalachian 
order has been sufficiently funded since 2000 thus enabling the payment 
of all claims.
    The proponent cooperatives' witness was of the opinion that the 
exhaustion of transportation credit funding in the Southeast order 
resulted in inequitable supplemental milk costs to handlers between the 
two orders. The witness testified that handlers procuring supplemental 
milk supplies for the Appalachian order were reimbursed at 100 percent 
of their claimed credits while handlers procuring supplemental milk 
supplies for the Southeast order were reimbursed at approximately 50 
percent of their claimed credits. According to the witness, the unequal 
payout between the two orders results in disorderly marketing 
conditions exhibited by inequitable costs for producer milk among 
handlers.
    Dean Foods and Prairie Farms voiced opposition to the proponents' 
proposed amendments to increase the maximum rate of assessments and 
increase the amount of milk that would be eligible of for 
transportation credits. Dean Foods and Prairie Farms pointed out that 
the proposals to incorporate transportation credit provisions into the 
southeastern orders were strongly opposed by some fluid milk processors 
and some dairy farmers. They noted that the intent and purpose of 
transportation credit provisions were to only pay a portion of the cost 
associated with hauling supplemental milk to the markets to meet fluid 
needs.
    In their post-hearing brief, Dean Foods and Prairie Farms stated 
there is no reason to increase the rate of assessment. Changing the 
rate of assessment, they contended, would effectively change the system 
of pricing without considering the impact on other marketing orders.
    In opposition to any change in the rate of transportation credits, 
a witness for Georgia Milk Producers, Inc. (GMP), testified that 
increasing the assessment rate would generate more revenue to be paid 
to truck drivers instead of paying higher prices to local dairy 
farmers. According to the witness, the price of milk paid to local 
dairy farmers should be increased rather than subsidizing additional 
outlays for transportation costs.
    The GMP witness suggested that instead of increasing the 
transportation credit assessment rate, a financial incentive should be 
initiated for dairy farmers to encourage milk production during the 
fall months when fluid milk demands are highest. According to the 
witness, if the incentive plan still does not cover the local milk 
production deficits, only then should the assessment rate for 
transportation credits be increased. The witness was of the opinion 
that an incentive plan encouraging local milk production would reduce 
hauling costs because less milk would be imported into the Southeast 
market. The witness also was of the opinion that a financial incentive 
plan would lower balancing costs by encouraging the movement of milk 
supplies located near processing plants.
    Three comments were filed in support of the proposed amendments to 
the transportation credit provisions as contained in the partial 
recommended decision.
    Dairy Farmers of America, Inc. (DFA), supported the decision to 
increase by 3 cents per cwt the maximum transportation credit 
assessment rates to fund the existing transportation credit funds of 
the Appalachian and Southeast orders. According to DFA, costs are 
exceeding the reimbursement as provided by the transportation credits 
due to declining milk production in the southeastern region and 
increasing costs of procuring and transporting supplemental milk 
supplies. DFA asserted that the increase in the orders' maximum 
assessment rates will provide additional money to offset costs and 
allow processors and consumers to bear an increased share of the market 
supply cost.
    MD&VA and ADCA expressed support for the proposed amendments to the 
transportation credit provision of the Appalachian and Southeast 
orders. Specifically, the cooperative associations support increasing 
the maximum assessment rates under both orders by 3 cents per cwt, and 
proposed

[[Page 55473]]

amendments that provide the Market Administrator of each of the orders 
the discretionary authority to set the milk production standard for 
determining which producer milk meets the performance standard.
    MD&VA and ADCA stated the current maximum rates provided in the 
individual orders are insufficient to cover transportation credit 
claims. The cooperatives noted that the Market Administrators for the 
Appalachian and Southeast orders prorated payments during several 
months of the 2004 payout period. MD&VA and ADCA stated the record 
indicates that milk production continues the declining trend while 
Class I sales is projected to increase. The increase in the maximum 
assessment rate for the Appalachian and Southeast orders is necessary 
to correct shortages and lessen handler inequities, the cooperatives 
asserted. They maintained that insufficiency in the funds has worsened 
and created an increased burden on the marketers of raw milk to find 
other ways to help cover the costs associated with the transport of 
milk.
    MD&VA and ADCA expressed support for greater Market Administrator 
discretion in setting limits and minimum performance standards in 
Federal Orders. The cooperative indicated that defining under the order 
what milk is ``supplemental milk'' by limiting the portion of milk 
pooled from a dairy farmer in the spring months is a prime example of 
an Order provision which needs flexibility. They asserted that overly 
rigid provisions in the Appalachian and Southeast areas can cause 
inefficiencies in the marketing of milk, disorderly marketing, or 
uneconomic movements of milk.
    MD&VA explained that unexpected declines in milk production in the 
spring months may signal the need for additional shipments of milk into 
the order areas over historic levels. In such a case, the cooperatives 
indicated that it is highly desirable for the Market Administrator to 
have discretionary authority to adjust the delivery standard. The order 
requirement that prior to making any change in the provision a Market 
Administrator must seek views, data and argument from the industry 
assures openness in decision-making, inclusiveness, and fairness, the 
cooperatives asserted.
    Current Appalachian and Southeast order transportation credit 
provisions have been a feature of the orders, or predecessor orders, 
since 1996. The need for transportation credits arose from the 
consistent need to import milk from many areas outside of these 
marketing areas during certain months of the year when milk production 
in the areas is not sufficient to meet Class I demands. The 
transportation credit provisions provide payments to handlers and 
cooperative associations in their capacity as handlers to cover some of 
the costs of importing supplemental milk supplies into the Appalachian 
and Southeast marketing areas during the short production months of 
July through December. The provisions also are designed to limit the 
ability of producers who are not normally pooled on these orders from 
pooling their milk on the Appalachian and Southeast orders during the 
flush production months when such milk is not needed to supply fluid 
needs.
    While Federal milk order reform made modifications to certain 
features of the transportation credit fund provisions of the 
Appalachian and Southeast orders, the maximum assessment rate at which 
payments are collected was not modified. The current maximum rate of 
$0.065 per cwt for the Appalachian order has been sufficient to meet 
most of the claims made by handlers applying for transportation credit. 
The record reveals that since implementation of milk order reform in 
January 2000, the Market Administrator for the Appalachian order waived 
assessing handlers in at least two months of each year from 2001 
through 2003.
    For the current Southeast order, the current maximum transportation 
credit rate of $0.07 per cwt has not been sufficient to cover hauling 
cost claims by handlers. As a result, the Market Administrator of the 
Southeast order has prorated payments from the transportation credit 
balancing fund since 2001.
    Even though this decision does not adopt the merger of the current 
Southeast and Appalachian marketing areas, the fundamental purpose of 
the transportation credit fund provisions of the orders are strongly 
supported by the proponent cooperatives. This support is independent of 
providing for a new and larger Southeast milk marketing order.
    An increase in the maximum transportation credit assessment rate 
for the Appalachian and Southeast orders is warranted on the basis of 
declining milk production within the Appalachian and Southeast 
marketing areas. For example, the final decision of Federal milk order 
reform anticipated that about two-thirds of the milk supply for the 
Appalachian order would be produced within the marketing area, with 
supplemental milk supplies from unregulated areas to the north in 
Virginia and Pennsylvania (based on 1997 data). Since implementation of 
Federal order reform in January 2000, record evidence reveals that only 
50 percent of the Appalachian milk supply is produced within the 
marketing area. The trend of lower in-area milk production strongly 
suggests that the anticipated future needs of relying on milk supplies 
from outside the marketing area will only grow and that steps should be 
taken to assure a continuing adequate supply of milk for handlers 
servicing the marketing area. An increase in the Appalachian order 
maximum transportation credit assessment rate is a means of assuring 
and adequate milk supply for fluid use for the area. The Southeast 
marketing area exhibits the same trend.
    To the extent that assessments are not needed to meet expected 
transportation credit claims, this decision adopts provisions that 
provide discretionary authority to the Market Administrator to set the 
assessment rate at a level deemed sufficient or to waive assessments. 
Additionally, the transportation credit provisions of the Appalachian 
and Southeast orders prevent the accumulation of funds beyond actual 
handler claims. In this regard, increasing the transportation credit 
rate will not result in an unwarranted accumulation of funds beyond 
what is needed to pay handler claims.
    As part of the proposed merged marketing areas and orders, the 
proponent cooperatives' witness proposed that any producer that is 
located outside of the marketing area would be eligible for 
transportation credits if that producer did not pool more than 50 
percent of the producer's own milk production during the months of 
March and April. The witness testified that the Market Administrator 
should also be given the discretionary authority to adjust the 50 
percent limit based on the prevailing supply and demand conditions for 
milk in the area.
    The current transportation credit provisions of the Appalachian and 
Southeast orders specify that transportation credits will apply to the 
milk of a dairy farmer who was not a ``producer'' under the order 
during more than 2 of the immediately preceding months of February 
through May, and not more than 50 percent of the production of the 
dairy farmer during those two months, in aggregate, was received as 
producer milk under the orders during those two months. These 
provisions provide the basis for determining the milk of a dairy farmer 
that is truly supplemental to the market's fluid needs. The provision 
specifies the months of February through May--the period when milk 
production is greatest--as the months

[[Page 55474]]

used to determine the eligibility of a producer whose milk is needed on 
the market.
    The Market Administrators of the orders should be given 
discretionary authority to adjust the 50 percent eligibility standard 
for producer milk receiving transportation credits based on the 
prevailing marketing conditions within the marketing area. The Market 
Administrator should have the authority to increase or decrease this 
requirement because it is consistent with authorities already provided 
for supply plant performance standards and diversion limit standards. 
Accordingly, the proposed change to the transportation credit 
provisions of the Appalachian and Southeast orders is recommended for 
adoption.
    This decision does not recommend changing the period the milk of a 
dairy farmer is not allowed to be associated with the market for such 
dairy farmer's milk to be eligible for transportation credits. If the 
months were modified from February through May to March and April, the 
definition of supplemental milk under the transportation credit 
provisions would effectively change. Supplemental milk for purposes of 
determining the eligibility of transportation credits is that milk that 
is not regularly associated with the market. The proposed change would 
allow supplemental milk to be delivered to a pool plant all twelve 
months, potentially lowering the uniform price during those high 
production months by pooling additional milk when is not needed for 
fluid use.
    By retaining the months of February through May and allowing the 
Market Administrators of the Appalachian and Southeast orders to adjust 
the 50 percent production standard, the current definition of 
supplemental milk remains intact. The orders' Market Administrator 
would be allowed to increase or decrease the 50 percent production 
standard, if warranted, based on current marketing conditions.

2. Promulgation of a New ``Mississippi Valley'' Milk Order

    A proposal, published in the hearing notice as Proposal 5, seeking 
to split from the current Southeast marketing area and forming a new 
Mississippi Valley milk marketing area and order was not proposed for 
adoption in the partial recommended decision and is not adopted in this 
final decision.
    A witness appearing on behalf of Dean Foods and Prairie Farms 
testified in support of Proposal 5. In splitting the current Southeast 
marketing area, a new marketing area, to be named the Mississippi 
Valley order, would include the area of the existing Southeast 
marketing area west of the Alabama-Mississippi borderline including the 
States of Mississippi, Louisiana, Arkansas. According to the witness, 
this new marketing area would extend northward through the relevant 
portions of Tennessee and Kentucky, and would include southern 
Missouri. The second order, according to the witness, would consist of 
the remainder of the current Southeast marketing area, i.e., Georgia, a 
portion of the western panhandle of Florida, and Alabama.
    The Dean Foods-Prairie Farms witness, and others supporting the 
adoption of Proposal 5, asserted that increasing the number of Federal 
milk marketing areas and orders would provide the economic incentives 
for more efficient movement of milk and increase the blend price 
received by producers who supply the needs of the Class I market. 
According to the witnesses, splitting the Southeast order into two 
orders would reduce transportation costs and improve the efficient 
operation of the transportation credit balancing fund in each proposed 
new marketing area by more efficiently attracting milk to the Class I 
market and decreasing the need for hauling milk from longer distances.
    The Dean Foods-Prairie Farms witness testified that there are two 
major incentives to ship milk to distributing plants--the blend price 
paid by pool distributing plants and the blend price paid for diverted 
milk. According to the witness, there are two disincentives to ship 
milk to a pool distributing plant under any order--the net 
transportation cost of shipping milk and the alternative blend prices 
in other markets that may attract milk to plants in those other 
markets. The witnesses cited milk deficit areas in southern Illinois 
and St. Louis, Missouri, as examples of areas where, in the opinion of 
the witnesses, blend price differences result in a failure to attract 
enough milk to adequately serve the Class I market. The witness 
asserted that the establishment of a Mississippi Valley order would 
likely result in blend price differences between the new areas which 
would provide producers the economic incentives of receiving higher 
blend prices while incurring lower transportation costs.
    The Dean Foods-Prairie Farms witness testified that a national 
hearing may be justified to more fully consider the border, pricing, 
and milk deficit issues and alternatives to proposals (like Proposals 1 
and 5) advanced to merge or to split the Southeast marketing area. 
According to the witness, when marketing area borders are changed, such 
change affects all marketing areas in the Federal order milk order 
system. The witness was of the opinion that considering border issues 
would necessarily require a broad rethinking of the marketing areas of 
the entire Federal order program and that a national hearing may be the 
most appropriate venue to consider these affects.
    A witness for GMP testified that the expansions of the Southeast 
marketing area prior to Federal milk order reform, and as a result of 
Federal order reform, have successively reduced income to Georgia 
producers. The witness explained that the expansions of the marketing 
area have discouraged local milk production and encouraged movements of 
milk from outside the marketing area. According to the witness, the 
declining ability of local production to meet the Class I needs of the 
market, and the increased balancing requirements of an expanded 
marketing area, have increased costs while reducing revenues to Georgia 
dairy farmers.
    In the opinion of the GMP witness, the establishment of a separate 
Mississippi Valley marketing area and order and a smaller Southeast 
marketing area would have positive benefits for Georgia milk producers. 
The witness explained that as a smaller Southeast marketing area, the 
Georgia market would likely experience lower balancing costs and 
expanded local production to meet the growing Class I needs of the 
market.
    A witness for proponents of Proposal 1 testified in opposition to 
adopting a new Mississippi Valley marketing area by splitting it from 
the current Southeast marketing area. According to the witness, the 
proposed new marketing area would not lead to lower transportation 
costs but instead may lead to increased administrative difficulties 
with transportation credit balancing funds. The witness was of the 
opinion that blend price enhancement for the proposed smaller Southeast 
marketing area would be achieved at the expense of producers pooled on 
the proposed new Mississippi Valley order.
    The opposition witness was of the opinion that blend prices for the 
proposed smaller Southeast marketing area may increase to levels that 
would exacerbate differences between the blend prices of the new 
smaller Southeast and the Appalachian order and may give rise to 
unintended market disruptions. The witness was of the opinion that a 
smaller Southeast marketing area and order also may result in 
administrative difficulties in the operation of transportation credit

[[Page 55475]]

balancing funds among the three orders and may lead to the inefficient 
movements of milk. The witness expressed the opinion that splitting the 
Southeast marketing area would not address the concerns that proponents 
of Proposal 1 have raised regarding overlapping sales and inefficient 
milk movement issues between the Appalachian and Southeast marketing 
areas. The witness indicated that these issues would remain unresolved 
if the Southeast marketing area was split and if the Southeast and 
Appalachian marketing areas were not merged.
    A post hearing brief by the proponents of Proposal 5 reiterated 
their position that creating more, rather than fewer, blend price 
differences will provide incentives to ship milk to markets where the 
milk is demanded. In addition, the brief reiterated that splitting the 
Southeast marketing area will reduce transportation costs and result in 
more efficient movement of milk in a smaller Southeast marketing area 
and a Mississippi Valley marketing area. The brief also called for the 
including the Kentucky counties of Ballard, Calloway, Carlisle, Fulton, 
Graves, Hickman, Marshall, and McCracken into the smaller Southeast 
order if Proposal 5 is adopted.
    Southern Marketing Agency, Inc., and Dairy Farmers of America, Inc. 
(DFA), filed comments to the partial recommended decision supporting 
the denial of the proposed split of the Southeast order marketing area. 
DFA stated that for proponents of the proposed order merger adoption of 
Proposal 5 would have exacerbated their milk supply issues--made it 
more expensive to service the markets--and would have been of no 
corresponding benefit to milk suppliers.
    The proposal to split the current Southeast marketing area hinges 
on the assertions that geographically smaller marketing areas tend to 
reduce transportation and balancing costs and increase blend prices for 
pooled producers in each of the newly defined marketing areas. The 
record does not contain specific evidence to support these conclusions. 
The record lacks evidence to support concluding that the adoption of 
Proposal 5 would lower transportation costs, increase local milk 
production, and reduce balancing costs. The same is true for concluding 
that local milk production would be encouraged and increased to the 
extent that transportation expenses, and the need for continued 
transportation credit fund payments, would be significantly reduced 
while bringing forth a sufficient supply of milk to meet the Class I 
needs of the proposed marketing areas.
    Opponents of Proposal 5 argued that blend price increases from 
splitting the Southeast marketing area may not occur and that lower 
transportation cost may not be realized.
    This decision does not adopt Proposal 5. The record is insufficient 
in demonstrating the marketing efficiencies advanced by the proponents.

3. Eliminating the Simultaneous Pooling of the Same Milk on a Federal 
Milk Order and a State-Operated Milk Order That Provides for Marketwide 
Pooling

    A proposal, published in the hearing notice as Proposal 6, seeking 
to prohibit the simultaneous pooling of the same milk on the 
Appalachian or Southeast milk marketing orders and on a State-operated 
order that provides for the marketwide pooling of milk is adopted in 
this partial final decision. Currently, neither the Appalachian or 
Southeast orders have a provision that would prevent the simultaneous 
pooling of the same milk on the order and on a State-operated order 
that provides for marketwide pooling.
    The proponents of Proposal 6, Deans Foods and Prairie Farms 
testified that the simultaneous pooling of milk on more than one 
marketing order was prohibited between all Federal milk orders. 
According to the Dean Food-Prairie Farms' witnesses, a loophole was 
inadvertently created during the consolidation of Federal orders 
permitting double pooling of the same milk on a Federal milk marketing 
order and on a State-operated order that, like a Federal order, 
provides for the marketwide pooling of producer milk. (The double 
pooling of milk has become known as ``double dipping.'')
    According to the Dean Foods/Prairie Farms'' witnesses, this 
loophole has been exploited for financial gain by some parties at the 
expense of pooled producers in other Federal orders until prohibited by 
subsequent milk order amendments. The proponents testified that 
proposals similar to Proposal 6 have been adopted in the Upper Midwest, 
Pacific Northwest, and Central Federal milk orders.
    Proponents testified that prohibition of double dipping in the 
Southeast and Appalachian orders would close a potential loophole in 
these orders or in a successor order if these orders were merged. The 
witnesses testified that the pooling of milk regulated by Virginia and 
Pennsylvania milk programs would not be affected by the prohibition of 
double pooling. According to the witnesses, milk that is pooled on 
these State milk programs does not receive extraordinary benefits that 
would have an impact on Federal milk order pools. No opposition 
testimony was presented.
    Dairy Farmers of America, Inc., Maryland and Virginia Milk 
Producers Cooperative Association, Inc. (MD&VA), and Arkansas Dairy 
Cooperative Association, Inc. (ADCA), filed comments to the partial 
recommended decision supporting findings to eliminate the simultaneous 
pooling of the same milk on the Appalachian and Southeast milk order 
and a State-operated order that provides marketwide pooling.
    MD&VA and ADCA noted that the hearing record indicates that the 
Virginia State Milk Commission does not operate a producer revenue 
pool. Accordingly, the cooperatives asserted, the proposed amendments 
that would eliminate the pooling of milk under the Appalachian or 
Southeast orders of a dairy farmer that shares simultaneously in the 
revenues of a State-operated marketwide pool must not pertain to 
Virginia Milk Commission Base-holder dairy farmers.
    According to MD&VA and ADCA, the ability for milk to be 
simultaneously pooled on a State-operated marketwide pool and a Federal 
order pool violates the premises established for the pooling of milk. 
The cooperatives stated milk may serve one market only at a time, and 
thus, must not be allowed to be pooled on multiple pools at one time. 
They noted that recommended and final decisions for other orders 
rightfully implemented amendments to prohibit the simultaneously 
pooling of milk on multiple orders, and assert that the Appalachian and 
Southeast orders should be amended likewise.
    Since the 1960s the Federal milk order program has recognized the 
harm and disorder that resulted to both producers and handlers when the 
same milk of a producer was simultaneously pooled on more than one 
Federal order. When this occurs, producers do not receive uniform 
minimum prices, and some handlers receive unfair competitive 
advantages. The need to prevent ``double pooling'' became critically 
important as distribution areas expanded, orders merged, and a national 
pricing system was adopted. Milk already pooled under a State-operated 
program and able to simultaneously be pooled under a Federal order 
creates the same undesirable outcomes that allowing milk to be pooled 
on two Federal orders used to cause and subsequently corrected.
    There are other State-operated milk order programs that provide for 
marketwide pooling. For example, New York operates a milk order program 
for

[[Page 55476]]

the western region of that State. A key feature explaining why this 
State-operated program has operated for years alongside the Federal 
milk order program is the provision in the State pool that excludes 
milk from the State pool when the same milk is already pooled under a 
Federal order. Other States with marketwide pooling similarly do not 
allow double-pooling of Federal order milk.
    The record supports that the Appalachian, Southeast, and possible 
successor orders should be amended to preclude the ability to 
simultaneously pool the same milk on the order if the milk is already 
pooled on a State-operated order that provides for marketwide pooling. 
Although no record evidence was presented illustrating or documenting 
current double pooling of milk in the Appalachian and Southeast orders, 
the adoption of Proposal 6 offers a reasonable solution for prohibiting 
the same milk to draw pool funds from Federal and State marketwide 
pools simultaneously. It is consistent with the current prohibition 
against allowing the same milk to participate simultaneously in more 
than one Federal order pool.
    Evidence presented at the hearing establishes that milk that can be 
pooled simultaneously on a State-operated order and a Federal order 
would render the Appalachian and Southeast milk orders unable to 
establish prices that are uniform to producers and to handlers. This 
shortcoming of the pooling provisions allows milk which was pooled on a 
State order to be pooled milk on a Federal order. Such milk therefore 
could not provide a reasonable or consistent service to meet the needs 
of the Class I market because it was committed to the State order.
    Adoption of Proposal 6 will not establish any barrier to the 
pooling of milk from any source that actually demonstrates performance 
in supplying the Appalachian and Southeast markets' Class I needs. 
Accordingly, Proposal 6 is included as part of this partial final 
decision.

4. Producer-Handler Provisions

    Proposals considered at the hearing regarding the regulatory status 
of producer-handlers will be addressed in a separate decision.
    Dairy Farmers of America, Inc. (DFA), filed a comment response to 
the partial recommended decision expressing disappointment in the lack 
of decision regarding the producer-handler issue and expects a decision 
on these provisions to be issued soon.
    As stated previously in this decision, Issue No. 4 regarding the 
producer-handler provisions of the Appalachian and Southeast orders 
will be addressed separately in a forthcoming decision.

Requests for Expedited Issuance of Final Decision

    Comments submitted by Dairy Farmers of America, Inc., Maryland and 
Virginia Milk Producers Cooperative Association, Inc. (MD&VA), Arkansas 
Dairy Cooperative Association, Inc. (ADCA), and Southern Marketing 
Agency, Inc. (SMA), in response to the partial recommended decision 
requested the expedited issuance of a final decision on proposed 
amendments contained in the partial recommended decision.

Conforming Change

    This decision amends the Appalachian and Southeast orders to 
appropriately reference the Deputy Administrator of Dairy Programs to 
reflect changes in a position and program name within the Agricultural 
Marketing Service.

Rulings on Proposed Findings and Conclusions

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

General Findings

    The findings and determinations hereinafter set forth supplement 
those that were made when the Appalachian and Southeast 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 agreements and the orders, as hereby 
proposed to be amended, and all of the terms and conditions thereof, 
will tend to effectuate the declared policy of the Act;
    (b) The parity prices of milk as determined pursuant to section 2 
of the Act are not reasonable in view of the price of feeds, available 
supplies of feeds, and other economic conditions which affect market 
supply and demand for milk in the marketing areas, and the minimum 
prices specified in the 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, the 
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 for Appalachian 
marketing area, and 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.

Rulings on Exceptions

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

Marketing Agreement and Order

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

Determination of Producer Approval and Representative Period

    June 2005 is hereby determined to be the representative period for 
the purpose of ascertaining whether the issuance of the orders, as 
amended and as hereby proposed to be amended, regulating the handling 
of milk in the Appalachian, and Southeast marketing areas is approved 
or favored by producers, as defined under the terms of the orders (as 
amended and as hereby proposed to be amended), who during

[[Page 55477]]

such representative period were engaged in the production of milk for 
sale within the aforesaid marketing areas.

List of Subjects in 7 CFR Parts 1005 and 1007

    Milk marketing orders.

    Dated: September 15, 2005.
Lloyd C. Day,
Administrator, Agricultural Marketing Service.

Order Amending the Order Regulating the Handling of Milk in the 
Appalachian and Southeast Marketing Areas

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

Findings and Determinations

    The findings and determinations hereinafter set forth supplement 
those that were made when the 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) Findings. A public hearing was held upon certain proposed 
amendments to the tentative marketing agreements and to the orders 
regulating the handling of milk in the Appalachian and Southeast 
marketing areas. The hearing was held pursuant to the provisions of the 
Agricultural Marketing Agreement Act of 1937, as amended (7 U.S.C. 601-
674), and the applicable rules of practice and procedure (7 CFR part 
900).
    Upon the basis of the evidence introduced at such hearing and the 
record thereof, it is found that:
    (1) The said orders as hereby amended, and all of the terms and 
conditions thereof, will tend to effectuate the declared policy of the 
Act;
    (2) The parity prices of milk, as determined pursuant to Section 2 
of the Act, are not reasonable in view of the price of feeds, available 
supplies of feeds, and other economic conditions which affect market 
supply and demand for milk in the aforesaid marketing areas. The 
minimum prices specified in the order as hereby amended are such prices 
as will reflect the aforesaid factors, insure a sufficient quantity of 
pure and wholesome milk, and be in the public interest; and
    (3) The said orders as hereby amended regulate the handling of milk 
in the same manner as, and is applicable only to persons in the 
respective classes of industrial or commercial activity specified in, 
marketing agreements upon which a hearing has been held; and
    (4) All milk and milk products handled by handlers, as defined in 
the order as hereby amended, are in the current of interstate commerce 
or directly burden, obstruct, or affect interstate commerce in milk or 
its products.

Order Relative to Handling

    It is therefore ordered, that on and after the effective date 
hereof, the handling of milk in the Appalachian and Southeast marketing 
areas shall be in conformity to and in compliance with the terms and 
conditions of the orders, as amended, and as hereby amended, as 
follows:
    The provisions of the proposed marketing agreements and orders 
amending each of the specified orders contained in the Recommended 
Decision issued by the Administrator, Agricultural Marketing Service, 
on May 13, 2005, and published in the Federal Register on May 20, 2005 
(70 FR 29410), shall be and are the terms and provisions of this order, 
amending the orders, and are set forth in full herein.

PART 1005--MILK IN THE APPALACHIAN MARKETING AREA

    1. The authority citation for 7 CFR part 1005 continues to read as 
follows:

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

    2. Section 1005.2 is amended by revising the Virginia counties and 
cities to read as follows:


Sec.  1005.2  Appalachian marketing area.

* * * * *
Virginia Counties and Cities
    Alleghany, Amherst, Augusta, Bath, Bedford, Bland, Botetourt, 
Buchanan, Campbell, Carroll, Craig, Dickenson, Floyd, Franklin, Giles, 
Grayson, Henry, Highland, Lee, Montgomery, Patrick, Pittsylvania, 
Pulaski, Roanoke, Rockbridge, Rockingham, Russell, Scott, Smyth, 
Tazewell, Washington, Wise, and Wythe; and the cities of Bedford, 
Bristol, Buena Vista, Clifton Forge, Covington, Danville, Galax, 
Harrisonburg, Lexington, Lynchburg, Martinsville, Norton, Radford, 
Roanoke, Salem, Staunton, and Waynesboro.
* * * * *
    3. Section 1005.13 is amended by revising the introductory text and 
adding a new paragraph (e) to read as follows:


Sec.  1005.13  Producer milk.

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


Sec.  1005.81  [Amended]

    4. In Sec.  1005.81(a), remove ``$0.065'' and add, in its place, 
``$0.095''.


Sec.  1005.82  [Amended]

    5. In Sec.  1005.82, paragraph (b) is amended by removing the words 
``Director of the Dairy Division'' and adding, in their place, the 
words ``Deputy Administrator of Dairy Programs'' and adding a new 
paragraph (c)(2)(iv) to read as follows:


Sec.  1005.82  Payments from the transportation credit balancing fund.

* * * * *
    (c) * * *
    (2) * * *
    (iv) The market administrator may increase or decrease the milk 
production standard specified in paragraph (c)(2)(ii) of this section 
if the market administrator finds that such revision is necessary to 
assure orderly marketing and efficient handling of milk in the 
marketing area. Before making such a finding, the market administrator 
shall investigate the need for the revision either on the market 
administrator's own initiative or at the request of interested persons. 
If the investigation shows that a revision might be appropriate, the 
market administrator shall issue a notice stating that the revision is 
being considered and inviting written data, views, and arguments. Any 
decision to revise an applicable percentage must be issued in writing 
at least one day before the effective date.
* * * * *

PART 1007--MILK IN THE SOUTHEAST MARKETING AREA

    6. The authority citation for part 1007 continues to read as 
follows:

    Authority: 7 U.S.C. 601-674, and 7253.

    7. Section 1007.13 is amended by revising the introductory text and 
adding a new paragraph (e) to read as follows:

[[Page 55478]]

Sec.  1007.13  Producer milk.

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


Sec.  1007.81  [Amended]

    8. In Sec.  1007.81(a), remove ``$0.07'' and add, in its place, 
``$0.10''.


Sec.  1007.82  [Amended]

    9. In Sec.  1007.82, paragraph (b) is amended by removing the words 
``Director of the Dairy Division'' and adding, in their place, the 
words ``Deputy Administrator of Dairy Programs'' and adding a new 
paragraph (c)(2)(iv) to read as follows:


Sec.  1007.82  Payments from the transportation credit balancing fund.

* * * * *
    (c) * * *
    (2) * * *
    (iv) The market administrator may increase or decrease the milk 
production standard specified in paragraph (c)(2)(ii) of this section 
if the market administrator finds that such revision is necessary to 
assure orderly marketing and efficient handling of milk in the 
marketing area. Before making such a finding, the market administrator 
shall investigate the need for the revision either on the market 
administrator's own initiative or at the request of interested persons. 
If the investigation shows that a revision might be appropriate, the 
market administrator shall issue a notice stating that the revision is 
being considered and inviting written data, views, and arguments. Any 
decision to revise an applicable percentage must be issued in writing 
at least one day before the effective date.
* * * * *
[This marketing agreement will not appear in the Code of Federal 
Regulations]

Marketing Agreement Regulating the Handling of Milk in Certain 
Marketing Areas

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

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

    II. The following provisions: Sec.  ----------\3\ Record of milk 
handled and authorization to correct typographical errors.
    (a) Record of milk handled. The undersigned certifies that he/she 
handled during the month of ----------\4\, hundredweight of milk 
covered by this marketing agreement.
---------------------------------------------------------------------------

    \3\ Next consecutive section number.
    \4\ Appropriate representative period for the order.
---------------------------------------------------------------------------

    (b) Authorization to correct typographical errors. The undersigned 
hereby authorizes the Deputy Administrator, or Acting Deputy 
Administrator, Dairy Programs, Agricultural Marketing Service, to 
correct any typographical errors which may have been made in this 
marketing agreement.
    Sec.  ----------\3\ Effective date. This marketing agreement shall 
become effective upon the execution of a counterpart hereof by the 
Secretary in accordance with Section 900.14(a) of the aforesaid rules 
of practice and procedure.
    In Witness Whereof, The contracting handlers, acting under the 
provisions of the Act, for the purposes and subject to the limitations 
herein contained and not otherwise, have hereunto set their respective 
hands and seals.

Signature


By (Name) --------------------


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


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


(Seal)

Attest


[FR Doc. 05-18758 Filed 9-20-05; 8:45 am]
BILLING CODE 3410-02-P