[Federal Register Volume 71, Number 35 (Wednesday, February 22, 2006)]
[Proposed Rules]
[Pages 9015-9033]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-1584]


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DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Part 1032

[Docket No. AO-313-A48; DA-04-06]


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

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Proposed rule; recommended decision.

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SUMMARY: This decision recommends adoption of proposals that would 
amend certain features of the Central Federal milk marketing order. 
Specifically, this decision recommends adoption of proposals that would 
increase supply plant performance standards, amend features of the 
``touch-base'' provision, amend certain features of the ``split plant'' 
provision and decrease the diversion limit standards of the order. This 
decision also recommends adoption of a proposal that would limit the 
volume of milk a handler can pool in a month to 125 percent of the 
total volume of milk pooled in the previous month.

DATES: Comments should be submitted on or before April 24, 2006.

ADDRESSES: Comments (6 copies) should be filed with the Hearing Clerk, 
STOP 9200-Room 1031, United States Department of Agriculture, 1400 
Independence Avenue, SW., Washington, DC 20250-9200.

[[Page 9016]]

Comments may also be submitted at the Federal e-Rulemaking portal: 
http://www.regulations.gov or by submitting comments by e-mail: 
[email protected]. Reference should be made to the title of 
action and docket number.

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

SUPPLEMENTARY INFORMATION: This decision recommends adoption of 
amendments that would: (1) Increase supply plant performance standards 
to 25 percent for the months of August through February and to 20 
percent for the months of March through July; (2) Require the non-pool 
side of a split plant to maintain nonpool status for 12 months; (3) 
Amend the ``touch-base'' feature of the order to require that at least 
one day's production of the milk of a dairy farmer be received at a 
pool plant in each of the months of January, February, and August 
through November, to be eligible for diversion to non-pool plants; (4) 
Lower the diversion limit standards by five percentage points, from 80 
percent to 75 percent, for the months of August through February, and 
by five percentage points, from 85 percent to 80 percent for the months 
of March through July; and (5) Establish provisions that would limit 
the volume of milk a handler may pool in a month to 125 percent of the 
volume of milk pooled in the prior month.
    This administrative action is governed by the provisions of 
Sections 556 and 557 of Title 5 of the United States Code, and 
therefore, is excluded from the requirements of Executive Order 12866. 
The amendments to the rules proposed herein have been reviewed under 
Executive Order 12988, Civil Justice Reform. It is not intended to have 
a retroactive effect. If adopted, the proposed rule would not preempt 
any state or local laws, regulations, or policies, unless they present 
an irreconcilable conflict with this rule.
    The Agricultural Marketing Agreement Act of 1937 (the Act), as 
amended (7 U.S.C. 601-674), provides that administrative proceedings 
must be exhausted before parties may file suit in court. Under section 
608c(15)(A) of the Act, any handler subject to an order may request 
modification or exemption from such order by filing with the Department 
of Agriculture (Department) a petition stating that the order, any 
provision of the order, or any obligation imposed in connection with 
the order is not in accordance with the law. A handler is afforded the 
opportunity for a hearing on the petition. After a hearing, the 
Department would rule on the petition. The Act provides that the 
district court of the United States in any district in which the 
handler is an inhabitant, or has its principal place of business, has 
jurisdiction in equity to review the Department's ruling on the 
petition, provided a bill in equity is filed not later than 20 days 
after the date of the entry of the ruling.

Regulatory Flexibility Act and Paperwork Reduction Act

    In accordance with the Regulatory Flexibility Act (5 U.S.C. 601 et 
seq.), the Agricultural Marketing Service has considered the economic 
impact of this action on small entities and has certified that this 
proposed rule will not have a significant economic impact on a 
substantial number of small entities. For the purpose of the Regulatory 
Flexibility Act, a dairy farm is considered a ``small business'' if it 
has an annual gross revenue of less than $750,000, and a dairy products 
manufacturer is a ``small business'' if it has fewer than 500 
employees.
    For the purposes of determining which dairy farms are ``small 
businesses,'' the $750,000 per year criterion was used to establish a 
production guideline of 500,000 pounds per month. Although this 
guideline does not factor in additional monies that may be received by 
dairy producers, it should be an inclusive standard for most ``small'' 
dairy farmers. For purposes of determining a handler's size, if the 
plant is part of a larger company operating multiple plants that 
collectively exceed the 500-employee limit, the plant will be 
considered a large business even if the local plant has fewer than 500 
employees.
    During January 2005, there were 5,778 dairy producers pooled on, 
and 23 handlers regulated by, the Central order. Approximately 5,365 
producers, or 92.9 percent, were considered ``small businesses'' based 
on the above criteria. Of the 23 handlers regulated by the Central 
order during January 2005, 11 handlers, or 47.8 percent, were 
considered ``small businesses.''
    The recommended amendments regarding the pooling standards serve to 
revise established criteria that determine those producers, producer 
milk, and plants that have a reasonable association with and 
consistently serve the fluid needs of the Central milk marketing area. 
Criteria for pooling are established on the basis of performance levels 
that are considered adequate to meet the Class I fluid needs of the 
market and, by doing so, determine those producers who are eligible to 
share in the revenue that arises from the classified pricing of milk.
    Criteria for pooling are established without regard to the size of 
any dairy industry organization or entity. Therefore, the proposed 
amendments will not have a significant economic impact on a substantial 
number of small entities.
    A review of reporting requirements was completed under the 
Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35). It was 
determined that these proposed amendments would have no impact on 
reporting, record keeping, or other compliance requirements because 
they would remain identical to the current requirements. No new forms 
are proposed and no additional reporting requirements would be 
necessary.
    This recommended decision 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.
    No other burdens are expected to fall on the dairy industry as a 
result of overlapping Federal rules. This rulemaking proceeding does 
not duplicate, overlap, or conflict with any existing Federal rules.
    Interested parties are invited to submit comments on the probable 
regulatory and informational impact of this proposed rule on small 
entities. Also, parties may suggest modifications of this proposal for 
the purpose of tailoring their applicability to small businesses.

Prior Documents in This Proceeding

    Notice of Hearing: Issued September 17, 2004; published September 
22, 2004 (69 FR 56725).
    Notice of Hearing Delay: Issued October 18, 2004; published October 
13, 2004 (69 FR 61323).

Preliminary Statement

    Notice is hereby given of the filing with the Hearing Clerk of this

[[Page 9017]]

recommended decision with respect to the proposed amendments to the 
tentative marketing agreement and the order regulating the handling of 
milk in the Central marketing area. This notice is issued pursuant to 
the provisions of the Agricultural Marketing Agreement Act (AMAA) and 
the applicable rules of practice and procedure governing the 
formulation of marketing agreements and marketing orders (7 CFR part 
900).
    Interested parties may file written exceptions to this decision 
with the Hearing Clerk, United States Department of Agriculture, Room 
1031-Stop 9200, 1400 Independence Avenue, SW., Washington, DC 20250-
9200, by the [insert date 60 days after publication of this decision in 
the Federal Register.] Six (6) copies of the exceptions should be 
filed. All written submissions made pursuant to this notice will be 
made available for public inspection at the office of the Hearing Clerk 
during regular business hours (7 CFR 1.27(b)).
    The hearing notice specifically invited interested persons to 
present evidence concerning the probable regulatory and informational 
impact of the proposals on small businesses. Some evidence was received 
that specifically addressed these issues, and some of the evidence 
encompassed entities of various sizes.
    A public hearing was held upon proposed amendments to the marketing 
agreement and the order regulating the handling of milk in the Central 
marketing area. The hearing was held, pursuant to the provisions of the 
Agricultural Marketing Agreement Act of 1937, as amended (7 U.S.C. 601-
674), and the applicable rules of practice and procedure governing the 
formulation of marketing agreements and marketing orders (7 CFR part 
900).
    The proposed amendments set forth below are based on the record of 
a public hearing held in Kansas City, Missouri, on December 6-8, 2004, 
pursuant to a notice of hearing issued September 17, 2004, published 
September 22, 2004 (69 FR 56725), and a notice of a hearing delay 
issued October 13, 2004, published October 18, 2004, (69 FR 61323).
    The material issues on the hearing record relate to:
    1. Pooling Standards.
    A. Performance standards for supply plants.
    B. The ``Split plant'' provision.
    C. System pooling for supply plants.
    D. Elimination of the supply plant provision.
    E. Standards for producer milk.
    2. Establishing pooling limits.
    3. Transportation and assembly credits.

Findings and Conclusions

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

1. Pooling Standards

A. Performance Standards for Supply Plants
    A portion of a proposal, published in the hearing notice as 
Proposal 1, seeking to increase supply plant performance standards by 
five percentage points, from 20 percent to 25 percent, for the months 
of August through February, and from 15 percent to 20 percent for the 
months of March through July, is recommended for adoption. A portion of 
another similar proposal, published in the hearing notice as Proposal 
5, seeking to increase supply plant performance standards by 20 
percentage points, from 15 percent to 35 percent, for the month of 
July, by 15 percentage points, from 20 percent to 35 percent, for the 
months of August through January and by 10 percentage points, from 15 
percent to 25 percent, for the month of March is not recommended for 
adoption. Currently, the Central order requires a supply plant to ship 
20 percent of its total receipts to a distributing plant during the 
months of August through February, and 15 percent of its total receipts 
during the months of March through July, in order for the total 
receipts of the supply plant to be pooled.
    Proposal 1 was offered jointly by Dairy Farmers of America, Inc., 
(DFA), and Prairie Farms Cooperative (PF), hereafter referred to as 
DFA/PF. DFA/PF are member-owned Capper-Volstead cooperatives that pool 
milk on the Central order. Proposal 1 would increase the amount of milk 
a supply plant would be required to ship to a distributing plant by 
five percentage points, from 20 percent to 25 percent, for the months 
of August through February, and from 15 percent to 20 percent for the 
months of March through July, in order to pool all of its receipts on 
the Central order.
    The proponents are of the opinion that current supply plant 
performance standards enable milk that does not demonstrate a 
consistent and reliable service to the Class I market to be pooled on 
the order. The proponents contend that the pooling of this additional 
milk is causing an unwarranted lowering of the order's blend price.
    A witness appearing on behalf of DFA/PF testified in support of 
Proposal 1. The DFA/PF witness stated that increasing the volume of 
milk a supply plant is required to ship to a pool distributing plant in 
order to have all the receipts of the supply plant pooled, combined 
with other proposed changes to the Central order pooling provisions, 
will better identify milk ready, willing and able to service the fluid 
milk needs of the Central marketing area.
    The DFA/PF witness testified that the proposed increase in the 
performance standards for supply plants would increase the blend price 
received by dairy farmers whose milk is pooled and priced on the 
Central order. The witness was of the opinion that an increase in the 
blend price will serve to attract and retain milk supplies that are 
otherwise shipped from the Central order area to neighboring marketing 
areas. The witness asserted that increasing supply plant performance 
standards will ensure that the Class I needs of the Central marketing 
area are being met.
    The DFA/PF witness testified that current supply plant performance 
standards allow far more milk to be pooled on the Central order than is 
necessary. Relying on market administrator data, the witness noted that 
the projected Class I utilization of 50.1 percent, anticipated during 
Federal order reform for the consolidated marketing area, was not 
achieved. The witness added that the average Class I utilization in the 
Central marketing area has ranged from a low of 26 percent in 2002 to 
nearly 33 percent in 2003. The witness was of the opinion that these 
average Class I utilization levels demonstrate that reserve supplies of 
milk in the marketing area of 74 and 67 percent, respectively, for 2002 
and 2003, far exceed the 49-50 percent reserve levels projected during 
Federal order reform. In addition, the witness noted that increased 
supply plant performance standards implemented in 2001 have not been 
effective in reducing the excess reserve supply of milk in the 
marketing area. The witness concluded that this data confirms that the 
current performance standards of the Central order provide 
opportunities for milk not regularly and consistently serving the Class 
I market to be pooled on the order.
    The DFA/PF witness described concerns regarding the geography of 
the Central marketing area and explained that higher prices are 
received for milk in the bordering Southeast and Appalachian marketing 
areas. According to the witness, higher milk prices in the Appalachian 
and Southeast orders tend to attract milk from the Central marketing 
area and create localized supply imbalances within the eastern portion 
of the marketing area. The witness testified that increasing supply 
plant performance standards would deter milk originating from

[[Page 9018]]

within the Central order boundaries from pooling on the Appalachian and 
Southeast orders. According to the witness this would tend to increase 
the blend price paid to dairy farmers whose milk is pooled on the 
Central order.
    A number of DFA member dairy farmers whose milk is pooled on the 
Central order testified in support of the portion of Proposal 1 that 
would increase supply plant performance standards. The dairy farmer 
witnesses were of the opinion that increasing supply plant performance 
standards will raise the level of Class I utilization and in turn, 
increase the blend price.
    A witness from National All-Jersey (NAJ) representing AMPI, et al., 
(Associated Milk Producers Inc., Central Equity Cooperative, Land O'' 
Lakes, Inc., First District Association, Foremost Farms USA, joined by 
Wells Dairy, Inc., Milnot Holdings and National All-Jersey), testified 
in opposition to the portion of Proposal 1 that would increase supply 
plant performance standards. NAJ is a national organization whose 
mission is to promote milk pricing equity and increase the value and 
demand for the milk produced by the Jersey breed. The NAJ witness was 
of the opinion that increasing supply plant performance standards would 
result in inefficient movements of milk and pass the costs of 
regulatory inefficiencies to consumers.
    In their post hearing brief, DFA/PF reiterated their support for 
Proposal 1. The brief asserted that adoption of the portion of Proposal 
1 that would increase supply plant performance standards would more 
accurately identify the milk of producers servicing the fluid needs of 
the market. According to the brief, increasing supply plant performance 
standards will increase the blend price for the producers who provide 
regular and consistent service to the Class I market. The DFA/PF brief 
reiterated support for not pooling milk which does not provide regular 
and consistent service to the fluid milk needs of the Central marketing 
area.
    A brief from Select Milk Producers, Inc. (Select) and Continental 
Dairy Products, Inc. (Continental) supported adoption of the higher 
performance standard features of Proposal 1. Select and Continental are 
member-owned Capper-Volstead cooperatives whose milk is pooled on the 
Central order. The brief noted that adoption of higher performance 
standards would deter the pooling of milk on the order not servicing 
the fluid needs of the market.
    A portion of Proposal 5, advanced by Dean Foods (Dean) (who 
described themselves as the largest processor and distributor of fluid 
milk in the United States, owning and operating nine distributing 
plants regulated by the Central order,) would increase supply plant 
performance standards by 20 percentage points, from 15 percent to 35 
percent, for the month of July, by 15 percentage points, from 20 
percent to 35 percent, for the months of August through January and by 
10 percentage points, from 15 percent to 25 percent, for the month of 
March. These proposed changes to supply plant performance standards are 
not recommended for adoption.
    Two witnesses appeared on behalf of Dean in support of increasing 
supply plant performance standards. The witnesses were of the opinion 
that current supply plant performance standards are inadequate to 
assure a reasonable supply of fluid milk to the order's distributing 
plants. The witnesses were of the opinion that increasing supply plant 
performance standards as they proposed to the levels advanced would 
better attract an adequate milk supply for Class I use to the marketing 
area.
    The first Dean witness testified that marketwide pooling and 
classified pricing are built on the assumption that Class I milk is the 
highest priced class and that pool revenues generated from Class I 
sales will attract a regular and consistent milk supply. The witness 
was of the opinion that current supply plant performance standards 
allow handlers to pool milk on the Central order that does not 
regularly and consistently serve the Class I market. According to the 
witness, low supply plant performance standards reduce the blend price 
paid to producers who consistently serve the needs of the Central order 
fluid market by allowing lower-valued milk to be pooled on the order.
    The first Dean witness was of the opinion that adoption of higher 
performance standards would increase the volume of milk available to 
the Class I market. The witness further testified that if the USDA 
adopted higher performance standards for supply plants, adoption of 
Proposals 9 and 10, or Proposals 11, 12, and 13 would also be 
necessary. (Proposals 9, 10, 11, 12, and 13 are discussed later in this 
decision.)
    The second Dean witness also was of the opinion that increasing 
supply plant performance standards would help to ensure that the fluid 
milk needs of the marketing area are being met. According to the 
witness, increasing supply plant performance standards would decrease 
the volumes of milk in lower-valued uses pooled on the order, thereby 
increasing the order's blend price. The witness testified that 
increasing supply plant performance standards would assist fluid milk 
handlers located in St. Louis and southern Illinois, who compete with 
handlers located in the Appalachian and Southeast orders, obtain needed 
milk supplies.
    A brief submitted on behalf of DFA/PF opposed adoption of the level 
of performance standards for supply plants offered by Dean. DFA/PF 
noted that increasing supply plant performance standards to the levels 
advanced in Proposal 5 are unnecessarily high and are more restrictive 
than current market conditions could reasonably justify.
    A brief submitted by AMPI, et. al., reiterated the group's 
opposition to increased performance standards for supply plants as 
advanced by both Dean and DFA/PF. The brief highlighted the contention 
that increased performance standards for supply plants would unfairly 
penalize reserve suppliers of the marketing area by restricting their 
ability to share in the benefits of the marketwide pool.
B. The ``Split Plant'' Provision
    A proposal from Dean, published in the hearing notice as Proposal 
10, seeking to require the nonpool side of a split plant to maintain 
nonpool status for 12 months, is recommended for adoption. Another Dean 
proposal, published in the hearing notice as Proposal 9, seeking to 
eliminate the split plant provision is not recommended for adoption.
    The current split plant provision provides for designating a 
portion of a pool plant as a nonpool plant provided that the nonpool 
portion of the plant is physically separate and operated separately 
from the regulated or ``pool'' side of the plant. Current provisions 
afford handlers operating a split plant the option of maintaining 
nonpool status or qualifying the nonpool side of the plant for pooling 
on a monthly basis.
    The Dean witness testified that the nonpool side of a split plant 
can facilitate the pooling of milk that does not demonstrate a regular 
and consistent service to the fluid milk needs of the Central marketing 
area. The witness stated that if Proposal 10 was adopted, then Proposal 
4, a proposal to eliminate all supply plant provisions, and Proposal 9, 
a proposal to eliminate split plants, would not be needed.
    The Dean witness testified that Proposal 10 would require the 
nonpool side of a split plant to maintain nonpool status for a 12-month 
interval. According to the witness, adoption of this provision would 
deter pooling milk that does not regularly and consistently

[[Page 9019]]

serve the Class I market. The witness added that Proposal 10 was 
advanced as an alternative to Proposal 9. The witness testified that as 
advanced in Proposal 9, a split plant plant could either be a pool 
plant or a nonpool plant but not both. The witness stated that if USDA 
did not eliminate split plants then Dean would seek the adoption of 
Proposal 10.
    In a post hearing brief, Select and Continental supported adoption 
of Proposal 10. The brief stated that Proposal 10 would deter the 
pooling of milk that does not regularly and consistently serve the 
Class I market. According to the brief, split plants should be 
prohibited from using milk receipts in the nonpool side of the plant 
from being pooled without demonstrating actual service to the Class I 
market. The brief expressed the opinion that reducing the volume of 
milk that a split plant could pool on the order from its nonpool side 
would tend to increase the Central order blend price.
    The Select and Continental brief however, opposed the elimination 
of split plants as advanced in Proposal 9. The brief stated that 
requiring a split plant to elect non-pool status for 12 months for its 
nonpool side would provide sufficient incentive to prevent the pooling 
of excess milk through split plants.
    DFA/PF commented on brief that Dean's Proposals 4-13 in general 
``go too far, too fast'' given the current market conditions of the 
Central marketing area. According to the brief, DFA/PF contend that the 
adoption of the Dean proposals would not serve the needs of small dairy 
farms. The brief noted that some small producers may not have 
alternative markets for their milk if Dean's proposal to eliminate the 
split plant provision was adopted.
    The AMPI, et al., brief opposed elimination of the split plant 
provision or requiring a 12 month pooling commitment from operators of 
split plants. Their opposition was based on the view that elimination 
of split plants, or imposing a 12 month pooling commitment for split 
plant operators, would unfairly restrict their ability to pool milk on 
the order.
C. System Pooling for Supply Plants
    Three proposals presented by Dean, published in the hearing notice 
as Proposals 11, 12 and 13, and modified at the hearing, are not 
recommended for adoption. Proposal 11 would eliminate providing for 
supply plant systems. Proposal 12 would require a supply plant system 
to be operated by only one handler. Proposal 13 would require that 
every plant participating in a system be required to ship 40 percent of 
the system's qualifying shipment as if they had been operating as 
separate plants. Proposal 13 also would prohibit using milk shipped 
directly from producer farms as qualifying shipments. Current Central 
order provisions provide the ability for 2 or more supply plants 
(subject to certain additional conditions) to operate as a ``system'' 
in meeting the qualifications for pooling in the same manner as a 
single plant.
    The Dean witness testified that system pooling affords handlers the 
ability to link several supply plants together in an effort to qualify 
producer milk for pooling on the order. According to the witness, 
current system pooling provisions allow plants and farms close to 
distributing plants to deliver producer milk on behalf of more distant 
plants, thereby providing for the pooling of milk that does not 
regularly and consistently serve the Class I market. According to the 
witness, adoption of Proposal 11 would require plants to transfer milk 
to obtain and maintain eligibility for pool qualification. The witness 
stated that Proposal 11 would require every handler to pool their 
producers on the basis of actual deliveries to distributing plants.
    The Dean witness testified in support of Proposal 12 in the event 
supply plant systems were not eliminated as advanced in Proposal 11. 
According to the witness, Proposal 12 would limit the use of supply 
plant systems to a single handler rather than multiple handlers as 
currently provided in the order. The witness testified that allowing 
only a single handler to qualify pool supply plants through system 
pooling provisions would ensure that each handler is willing and able 
to demonstrate regular and consistent service to the fluid milk needs 
of the Central marketing area.
    The Dean witness testified that Proposal 13 would require each 
plant in a supply plant system to meet at least 40 percent of the total 
performance standard required for pooling. According to the witness, 
Proposal 13 is similar to Proposal 11 in that it would prohibit the use 
of milk shipped directly from producer farms to qualify a supply plant 
system. However, the witness stated that Proposal 13 also would require 
every supply plant in a supply plant system to ship a significant 
volume of milk to the fluid market. The witness noted that 
qualification of distant milk would be discouraged by adoption of 
Proposals 12 and 13 since the use of milk shipped directly from 
producer farms for qualification purposes would be prohibited. The Dean 
witness expressed preferences for the adoption of Proposal 11 over 
Proposal 12, and adoption of Proposal 12 over Proposal 13.
    A witness from DFA/PF expressed opposition to Proposals 11, 12, and 
13, because their adoption would eliminate or overly restrict the 
operation of supply plant systems. On brief, DFA/PF noted that, as with 
elimination of the split plant provision, some small producers may not 
have alternative markets for their milk if supply plant systems are 
eliminated or are made overly restrictive.
    In a post hearing brief, AMPI, et al., reiterated opposition to 
Proposals 11, 12, and 13. The AMPI, et al., brief opposed restrictions 
on pooling milk of producers ready, willing, and able to serve the 
Class I needs of the Central marketing area. The brief opposed 
elimination or restriction of supply plant systems contending such 
action would eliminate markets for the milk of small dairy farmers 
without alternative markets available.
    Select and Continental also opposed adoption of Proposals 11, 12 
and 13 in their post-hearing brief. The brief opposed eliminating or 
restricting supply plant systems on the basis that no verifiable 
evidence was presented demonstrating that supply plant systems do not 
provide consistent and reliable service to the Class I market.
D. Elimination of the Supply Plant Provision
    A proposal by Dean, published in the hearing notice as Proposal 4, 
seeking to eliminate the supply plant provision, is not recommended for 
adoption.
    A Dean witness characterized Proposal 4 as a preferred alternative 
to increasing supply plant performance standards sought in Proposals 1 
and 5. The witness explained that if Proposal 4 is adopted, then 
Proposals 9-13, seeking to increase performance standards for supply 
plants and supply plant systems would not be needed. The witness 
testified that while the role of supply plants in the milk order system 
is to supply the needs of distributing plants, the milk supply of 
plants for the Central marketing area is only of residual concern 
because it provides an outlet for reserve producers when their milk is 
not needed for fluid use.
    The Dean witness testified that supply plants no longer represent 
the most efficient means for supplying distributing plants. According 
to the witness, supply plants play a minor role in the Central 
marketing area, representing less than 5 percent of the milk shipped to 
distributing plants. According to the witness, milk assembled from 
farms must be received

[[Page 9020]]

at a supply plant, cooled and stored, and reloaded and delivered to 
distributing plants. The witness stated that the increased handling of 
milk through supply plants reduces its quality compared with milk that 
is direct delivered from farms. The witness said that direct delivery 
from farms to distributing plants is a superior method for ensuring 
that milk pooled on the order serves the Class I needs of the market. 
The witness was of the opinion that supply plants inappropriately 
facilitate pooling milk that does not regularly and consistently serve 
the Class I market.
    A witness representing NAJ testified in opposition to the 
elimination of supply plants. According to the witness, elimination of 
the supply plant provision also would reduce the ability of dairy 
farmers to pool milk on the Central order. The witness was of the 
opinion that eliminating the supply plant provision would have a 
negative impact on the income of the cooperatives represented by NAJ. 
The witness stated that supply plants provide a legitimate means by 
which producers continue to serve the Class I market of the Central 
marketing area.
    A witness for DFA/PF testified in opposition to the elimination of 
supply plants. According to the witness, provisions for supply plants 
should be provided because they continue to play a role in supplying 
milk to distributing plants. DFA/PF reiterated this opposition to 
Proposal 4 in their post-hearing brief. AMPI, et al., joined DFA/PF in 
opposing this proposal.
E. Standards for Producer Milk
    Several amendments to the Producer milk provision of the Central 
order are recommended for adoption. The amendments were largely 
contained in Proposal 1. Changes to the producer milk provision are 
necessary to more accurately identify the milk of those dairy farmers 
that are regularly and consistently serving the Class I needs of the 
market. The recommended amendments for adoption include: (1) Increasing 
the touch-base standard so that one day's milk production of a dairy 
farmer must be delivered to a pool plant in each of the months of 
January, February and August through November for the milk of the dairy 
farmer to be eligible for diversion to a nonpool plant; and (2) 
Decreasing the diversion limit standards to not more than 75 percent of 
receipts during August through February, and not more than 80 percent 
of receipts for March through July.
    The feature of Proposal 1 to geographically limit the location of 
nonpool plants eligible to receive diverted milk to those plants in 
States located in the marketing area and New Mexico is not recommended 
for adoption.
    Proposal 1 would increase the touch-base standard to require the 
equivalent of at least one days' milk production of a dairy farmer be 
physically received at a pool plant in each of the months of January, 
February and August through November. If the touch-base standard is not 
met, the milk would have to be physically received at a pool plant in 
each of the months of March through July and December. The current 
touch-base standard of the Central order specifies a one-time only 
delivery standard.
    The DFA/PF witness explained that the current one-time touch-base 
standard of the Central order should be replaced by the strengthened 
touch-base feature of Proposal 1. The witness continued that the months 
of January, February, and August through November, were added to the 
proposed touch-base standard to correspond with periods of higher Class 
I demands. The DFA witness explained that requiring one day's milk 
production of a producer to be delivered to a pool plant in each of 
these six months should increase milk available for Class I use. The 
DFA/PF witness was opposed to any touch-base standard of more than one 
day per month for the six months advanced by the proposal, as being 
overly restrictive.
    The DFA/PF witness testified that increasing the touch-base 
standard and lowering the diversion limit standards of the Central 
order will help to ensure that milk that could not consistently and 
reliably demonstrate service to the Class I market is not pooled on the 
order. The witness testified that the pooling of such milk on the order 
reduces the blend price paid to producers who consistently and reliably 
serve the Class I needs of the Central marketing area.
    The DFA/PF witness acknowledged that amendments to the pooling 
provisions of the Central order implemented in 2003 reduced the volume 
of milk pooled that was not serving the Class I needs of the market. 
However, the witness noted that those changes did not contemplate that 
milk from the Mountain States might seek to be pooled on the Central 
order. The witness was of the opinion that the current touch-base and 
diversion limit standards were inadequate to prevent the sharing of 
Class I revenue with the milk of producers that could not possibly 
serve the Class I market of the Central marketing area. The witness was 
of the opinion that if milk located far from the Upper Midwest 
marketing area \1\ and currently pooled on the Upper Midwest order were 
to seek an alternative order on which to pool, the current pooling 
standards of the Central order make it the most likely candidate among 
Federal milk orders. The witness testified that the current pooling 
standards of the Central order can not adequately prevent such milk 
from pooling because the pooling standards are too liberal. According 
to the witness, this milk can not demonstrate regular and reliable 
service to the Class I market.
---------------------------------------------------------------------------

    \1\ Interim amendments to the pooling provision of the Upper 
Midwest order were implemented on July 1, 2005. See Tentative 
Partial Decision published in the Federal Register, April 4, 2005 
(70 FR 19709).
---------------------------------------------------------------------------

    The DFA/PF witness illustrated that milk produced in Idaho, for 
example, cannot profitably be delivered to distributing plants located 
in the Central marketing area. According to the witness, milk produced 
in this region would need to travel more than 680 miles for delivery at 
the nearest distributing plant of the order located in Denver. The 
witness asserted that the current one-time touch-base standard combined 
with the existing diversion limit standards of the order provide the 
incentive for milk located far from the marketing area to be profitably 
pooled on the order which otherwise would not be economically feasible.
    The witness provided a scenario where a single 50,000-pound load of 
milk delivered once to Denver could cause one million pounds of milk to 
be pooled on the Central order through the diversion process but 
delivered to plants far from the marketing area. According to the 
witness' calculations, a 50,000-pound load of milk delivered once to a 
pool plant located in Denver would incur a loss $4,640. However, the 
witness explained that each additional load of milk, up to one million 
pounds now qualified for diversion to nonpool plants located near 
producers farms, would return an additional $7,081. The witness 
emphasized that the milk portrayed in this example would rely solely on 
the liberal pooling standards of the order. The milk would never 
consistently and reliably supply the Central marketing area.
    In another scenario, the DFA/PF witness illustrated the impact of 
25 million pounds of milk a month shipped from southern Idaho that 
would be pooled on the Central order through the diversion process by 
meeting the one-time touch-base standard during the months of November 
2003-January 2004. The witness explained that pooling this volume of 
milk would have

[[Page 9021]]

reduced the Central order's blend price by $0.25 per cwt.
    In a third scenario, the DFA/PF witness demonstrated how milk 
located in southern Idaho can be pooled every month through the 
diversion process by meeting the one-time touch-base standard of the 
Central order. The witness said that this scenario was based on the 58-
month period of January 2000 to October 2004. The witness explained 
that this scenario assumes that a single 50,000-pound load of milk was 
shipped to a distributing plant located in the Central marketing area 
and all other milk diverted to nonpool plants are located in Idaho. The 
witness testified that the shipping handler would receive a positive 
return averaging $0.348 per cwt per month ($201,000 over the 58-month 
period) on the total volume of milk pooled. The DFA/PF witness 
concluded that from their scenarios, the current Central order 
diversion limit and touch-base standards encourage pooling of milk that 
can not and does not regularly and consistently supply the Class I 
needs of the market.
    A brief submitted by Select and Continental supported the producer 
milk amendments called for in Proposal 1, except for limiting 
diversions to nonpool plants that are located in the States comprising 
the Central marketing area. The brief noted that the goal of the 
Federal order program should be to ensure that milk pooled on the order 
actually serves the Class I market.
    Features of Proposal 5, offered by Dean, regarding diversion limits 
and touch-base standards should not be adopted. Proposal 5 seeks to 
raise the touch-base standard to 4 days in each month of the year and 
decrease diversion limits to 65 percent for the months of July through 
January, and 75 percent during the months of February through June. A 
Dean witness stated that increasing the touch base requirement would 
ensure the increased availability of milk to serve the needs of the 
fluid market. The witness testified that adopting higher touch-base and 
lower diversion limit standards would ensure that pool plants would 
keep their facilities operating at a higher level of output than would 
be the case if more milk were diverted.
    The diversion limit standard feature of Proposal 5 was modified by 
Dean on brief. The modification specified that milk would not be 
eligible for diversion ``unless'' (instead of ``until'') milk has been 
physically received as producer milk at a pool plant, and the exception 
for a loss of Grade A status was changed to a period not to exceed 21 
rather than 10 days in a calendar year.
    The witness from NAJ, on behalf of AMPI, et al., testified in 
opposition to increasing the touch-base and lowering the diversion 
limit standards as advanced. The witness stated that the proposed 
lowering of diversion limits together with increasing supply plant 
performance standards as called for in Proposal 5 would have negative 
consequences for dairy farmer income, if adopted. The NAJ witness was 
of the opinion that the aim of Proposal 5 was to deter milk from being 
pooled on the order. It was the witness' opinion that the adoption of 
Proposal 5 would create marketing inefficiencies and additional costs 
for members of NAJ. The witness also was of the opinion that the 
adoption of Proposal 5 would discourage available milk supplies in the 
milkshed from pooling on the Central order.
    The record reveals that the current pooling provisions of the 
Central order suggest that distributing plants in certain areas of the 
marketing area are having difficulty obtaining reliable milk supplies. 
Because this decision does not recommend the adoption of transportation 
credits (discussed later in this decision) for the movement of milk to 
distributing plants, increasing the performance standards for supply 
plants is a reasonable measure to better assure that all distributing 
plants of the order are adequately supplied. Additionally, other 
measures should be taken to prevent the pooling of milk which can not 
demonstrate regular and consistent service in supplying the Class I 
needs of the marketing area. The pooling of such milk would result in 
an unwarranted lowering of the blend price returned to those producers 
who demonstrate regular and consistent service in supplying the Class I 
needs of the market.
    The pooling standards of all Federal milk marketing orders, 
including the Central order, are intended to ensure that an adequate 
supply of milk is available to meet the Class I needs of the market and 
provide the criteria for determining the producer milk that has 
demonstrated service in meeting the Class I needs of the market and 
thereby receive the order's blend price. The pooling standards of the 
Central order are represented in the Pool plant, Producer, and the 
Producer milk provisions of the order and are based on performance, 
specifying standards that if met, qualify a producer, the milk of a 
producer, or a plant to share in the benefits arising from the 
classified pricing of milk.
    Pooling standards that are performance-based provide the only 
viable method for determining those producers eligible to share in the 
marketwide pool. It is usually the additional revenue generated from 
the higher-valued Class I use of milk that adds additional income to 
producers, and it is reasonable to expect that only those producers who 
consistently bear the costs of supplying the market's fluid needs 
should share in the returns arising from higher-valued Class I sales. 
An important objective of pooling standards is identifying the milk 
that serves the fluid milk needs of the market, a feature which if 
ineffective can result in pooling milk that is not providing such 
service. Record evidence supports finding that certain features of 
pooling standards of the Central order relating to performance 
standards for supply plants, diversion limits, touch-base, and split 
plants need to be amended given the pooling of milk that does not 
regularly and consistently serve the Class I needs of the Central 
marketing area.
    The most recent amendments to the Central order (published in the 
August 27, 2003, Final Decision (68 FR 51640)) intended to correct 
similar inadequacies of the supply plant pooling provisions and 
diversion limit standards for the consolidated Central order. However, 
the record reveals that the combination and features adopted for pool 
plants in 2003, have not been as effective as intended to reasonably 
assure that only milk of producers who regularly and consistently serve 
the Class I market is pooled on the order.
    Record evidence reveals that the performance and pooling standards 
of the Central order are inadequate to ensure that the benefits of 
consistently and reliably servicing the Class I market are shared 
equitably among those producers who actually bear the costs of serving 
that market. The record evidence demonstrates that milk distant from 
the Central marketing area does not provide reasonable service to the 
Class I market but can be pooled on the order because of current 
pooling standards. This evidence shows that pooling large volumes of 
milk at lower class-use values has lowered the order's blend price. 
Specifically, the record shows that the current one-time touch-base 
standard and the diversion limit standard of the order does not 
properly identify the milk of producers who reliably and consistently 
serve the Class I market.
    The record demonstrates that current pooling standards of the 
Central order make it the most logical order for distant milk--such as 
in Southern Idaho--to be pooled. The record shows that the current 
performance standards of the Central order are insufficient to prevent

[[Page 9022]]

milk from qualifying for pooling while not performing service to the 
Class I market.
    In addition, the record provides evidence that milk produced in 
areas distant from the marketing area cannot profitably be delivered to 
distributing plants in the Central marketing area. However, the current 
liberal touch-base and diversion limit standards make pooling on the 
Central order attractive while reducing the blend price of the order 
for those producers who actually provide service to the Class I market.
    Record evidence reveals the continued importance of supply plants 
for producers whose milk provides consistent and reliable service to 
the Class I market. According to the record, opposition to restrictive 
supply plant standards beyond those advanced in Proposals 1 and 10 was 
based on the continued need for supply plant service to distributing 
plants in the marketing area. Similarly, the record reveals a consensus 
among producers concerning their continued support for supply plant 
systems as an integral part of milk supply networks in the Central 
marketing area. Opposition to the elimination or additional restriction 
of supply plants and supply plant systems in Proposals 4, 11, 12, and 
13, is revealed by the record to be based on the continued importance 
of supply plant systems to supplying the Class I market.
    Record evidence from proponents and opponents of limiting 
diversions to supply plants located in the marketing area or New Mexico 
supports concluding that dairy farmers in some regions of the Central 
marketing area rely on supply plants to market their milk. In addition, 
the record contains evidence that supply plants and supply plant 
systems continue to provide necessary service to the Class I market 
without regard to the location of those plants or plant systems. 
According to the record, distant milk may use the pooling standards of 
the Central order as a means to pool milk that will never perform 
service to the Class I market. However, the record does not show 
clearly that milk diverted to supply plants outside the marketing area 
or New Mexico cannot be part of the legitimate reserve of the market 
which may require additional pooling safeguards. Performance rather 
than plant location continues to be the standard for identifying the 
milk of producers who should share in the benefits of pooling. In that 
regard, this decision finds agreement with the opponents of limiting 
diversions to supply plants located within the marketing area or New 
Mexico, as sought in Proposal 1, to serve the legitimate needs of the 
market.
    This decision finds that several of the performance standards 
advanced in Proposal 1 are reasonable in light of other recommended 
changes to the order's pooling provisions. The combination of 
amendments increasing supply plant performance standards, modifying the 
split plant provision, reducing diversion limit standards and 
increasing the touch-base standard are appropriate in light of denying 
proposals to establish transportation and assembly credits. The 
recommended amendments should more accurately identify the milk of 
those producers that provide a consistent and reliable supply of milk 
to the Class I needs of the Central marketing area and assure that 
distributing plants are adequately supplied.
    The record indicates that milk located either inside or outside the 
marketing area can be reported as diverted milk by a pooled handler. 
This milk is eligible to receive the order's blend price. Under the 
current pooling provisions, this can occur after a one-time delivery to 
a Central marketing area pool plant. After the initial delivery, 
however, such milk need never again be physically delivered to a 
Central marketing area pool plant. The record evidence confirms that 
usually this milk is delivered to a nonpool plant located nearer the 
farms of producers located far from the marketing area who cannot serve 
the Class I market. It is therefore appropriate to amend the order's 
diversion provisions to ensure that milk pooled through the diversion 
process is part of the legitimate reserve supply of the pool plant from 
which it was diverted. It is necessary to safeguard against excessive 
milk supplies becoming associated with the market through the diversion 
process to prevent the unwarranted reduction of the order's blend 
price.
    However, the record does not support finding that diversions to 
plants not located within the marketing area or New Mexico cannot be 
part of the legitimate reserve supply for the marketing area. In this 
regard, the proposed limitation on diversions based on plant location 
is not reasonable. Based on the record, the proposed increase in the 
touch-base standard and lowering of the diversion limitation standard 
should be adequate to ensure that milk consistently and reliably 
serving the Class I market is properly identified. Accordingly, the 
portion of Proposal 1 seeking to limit diversions to plants located in 
the marketing area or New Mexico is not recommended for adoption.
    This decision finds that the touch-base standard should be amended 
so that at least one days' milk production of a dairy farmer is 
physically received at a pool plant during January, February, and 
August through November for the milk of the dairy farmer to be eligible 
for diversion to a nonpool plant. Amending the touch-base standard 
should reduce the ability of milk not performing a consistent and 
reliable service to the Class I market from being pooled. The months of 
January, February, and August through November are, according to the 
record, the high demand months for fluid milk. Adoption of the one-day 
touch base standard for each of these three months would tend to more 
properly identify the milk of those producers serving the market's 
Class I needs. Accordingly, the proposal is recommended for adoption.
    Record evidence does not support finding that the 4-day touch base 
standard advanced by Dean would improve the identification of dairy 
farmers whose milk serves beyond what a 1-day standard would provide 
within the context of current marketing conditions. This will be 
reinforced by the other amendments to the order's pooling standards 
recommended for adoption.
    The proposal requiring a handler to make a 12-month commitment if 
opting to create a split plant would ensure that the milk shipped from 
the pool side of a split-plant serves the Class I market. This proposal 
(Proposal 10, advanced by Dean) is a reasonable modification of the 
split plant feature for supply plants to provide for orderly marketing 
and maintain the integrity and intent of the order's performance 
standards. The proposal retains the principle that milk regularly and 
consistently demonstrating service to the Class I needs of the market 
should benefit from being pooled on the order. Accordingly, Proposal 10 
is recommended for adoption.
    The Federal milk order system recognizes that there are costs 
incurred by producers in servicing an order's Class I market. The 
primary reward to producers for performing such service is receiving 
the order's blend price. Taken as a whole, the amended pooling 
provisions will ensure that milk seeking to be pooled consistently 
demonstrates service in meeting the marketing area's Class I needs. 
Consequently, adoption of these amended pooling provisions will provide 
for more equitable sharing of revenue generated from Class I sales 
among those producers who bear those

[[Page 9023]]

costs and assure Class I handlers of a regular and reliable supply for 
fluid use.

2. Establishing Pooling Limits

Preliminary Statement

    Federal milk marketing orders rely on the tools of classified 
pricing and marketwide pooling to assure an adequate supply of milk for 
fluid (Class I) use and to provide for the equitable sharing of the 
revenues arising from the classified pricing of milk. Classified 
pricing assigns a value to milk according to how the milk is used. 
Regulated handlers who buy milk from dairy farmers are charged class 
prices according to how they use the farmer's milk. Dairy farmers are 
then paid a weighted average or ``blend'' price. The blend price that 
dairy farmers are paid for their milk is derived through the marketwide 
pooling of all class uses of milk in a marketing area. Thus each 
producer receives an equal share of each use class of milk and is 
indifferent as to the actual Class for which the milk was used. The 
Class I price is usually the highest class price for milk. 
Historically, the Class I use of milk provides the additional revenue 
to a marketing area's total classified use value of milk.
    The series of Class prices that are applicable for any given month 
are not announced simultaneously. The Class I price and the Class II 
skim milk price are announced prior to the beginning of the month for 
which they will be effective. Class prices for milk in all other uses 
for the month are not determined until on or before the 5th day of the 
following month. The Class I price is determined by adding a 
differential value to the higher of either an advanced Class III or 
Class IV value. These values are calculated based on formula using 
National Agricultural Statistics Service (NASS) survey prices of 
cheese, butter, and nonfat dried milk powder for the first two weeks of 
the prior month. For example, the Class I price for August is announced 
in late July and is based on the higher of the Class III or IV value 
computed using NASS commodity price surveys for the first two weeks of 
July.
    The Class III and IV prices for the month are determined and 
announced after the end of the month based on the NASS survey prices 
for the selected dairy commodities during the month. For example, the 
Class III and IV prices for August are based on NASS survey commodity 
prices during August. A large increase in the NASS survey price for the 
selected dairy commodities from one month to the next can result in the 
Class III or IV price exceeding the Class I price. This occurrence is 
commonly referred to by the dairy industry as a ``Class price 
inversion.'' A producer price inversion generally refers to when the 
Class III or IV price exceeds the average classified use value, or 
blend price, of milk for the month. Price inversions have occurred with 
increasing frequency in Federal milk orders since the current pricing 
plan was implemented on January 1, 2000, despite efforts made during 
Federal Order Reform to reduce such occurrences. Price inversions can 
create an incentive for dairy farmers and manufacturing handlers who 
voluntarily participate in the marketwide pooling of milk to elect not 
to pool their milk on the order. Class I handlers do not have this 
option; their participation in the marketwide pool is mandatory.
    The producer price differential, or PPD, is the difference between 
the Class III price and the weighted average value of all Classes. In 
essence, the PPD is the dairy farmer's share of the additional/reduced 
revenues associated with the Class I, II and IV milk pooled in the 
market. If the value of Class I, II and IV milk in the pool is greater 
than the Class III value, dairy farmers receive a positive PPD. 
However, a negative PPD can occur if the value of the Class III milk in 
the pool exceeds the value of the remaining classes of milk in the 
pool. This can occur as a result of the price inversions discussed 
above.
    The Central Federal order operates a marketwide pool. The Order 
contains pooling provisions which specify criteria that, if met, allow 
dairy farmers to share in the benefits that arise from classified 
pricing through pooling. The equalization of all class prices among 
handlers regulated by an order is accomplished through a mechanism 
known as the producer settlement fund (PSF). Typically, Class I 
handlers pay the difference between the blend price and their use-value 
of milk into the PSF. Manufacturing handlers typically receive a draw 
from the PSF, usually the difference between the Class II, III or IV 
price and the blend price. In this way, all handlers pay the Class 
value for milk and all dairy farmer suppliers receive at least the 
order's blend price.
    When manufacturing class prices of milk are high enough to result 
in a use-value of milk for a handler that is higher than the blend 
price, handlers of manufacturing milk may choose to not pool their milk 
receipts. Opting to not pool their milk receipts allows these handlers 
to avoid the obligation of paying into the PSF. The choice by a 
manufacturing handler to not pool their milk receipts is commonly 
referred to as ``de-pooling''. When the blend price rises above the 
manufacturing class use-values of milk these same handlers again opt to 
pool their milk receipts. This is often referred to as ``re-pooling''. 
The ability of manufacturing handlers to de-pool and re-pool 
manufacturing milk is viewed by some market participants as being 
inequitable to both producers and handlers.

The ``De-Pooling'' Proposals

    Proponents are in agreement that milk marketing orders should 
contain provisions that will tend to deter the practice of de-pooling. 
Four proposals intending to deter the de-pooling of milk were 
considered in this proceeding. The proposals offered different degrees 
of deterrence against de-pooling by establishing limits on the amount 
of milk that can be re-pooled. The proponents of these four proposals 
are generally of the opinion that de-pooling erodes equity among 
producers and handlers, undermines the orderly marketing of milk and is 
detrimental to the Federal order system.
    Two different approaches to deter de-pooling are represented by 
these four proposals. The first approach, published in the hearing 
notice as Proposals 2 and 8, addresses de-pooling by limiting the 
volume of milk a handler can pool in a month to a specified percentage 
of what the handler pooled in the prior month. The second approach, 
published in the hearing notice as Proposals 6 and 7, addresses de-
pooling by establishing what is commonly referred to as a ``dairy 
farmer for other markets'' provision. These proposals would require 
milk of a producer that was de-pooled to not be able to be re-pooled by 
that producer for a defined time period. All proponents agreed that 
while none of the proposals would completely eliminate de-pooling, they 
would likely deter the practice.
    Of the four proposals received that would limit de-pooling, this 
decision recommends Proposal 2, offered by DFA/PF, for adoption. 
Specifically, adoption of the proposal would limit the volume of milk a 
handler could pool in a month to no more than 125 percent of the volume 
of milk pooled in the prior month. Milk diverted to nonpool plants in 
excess of this limit would not be pooled, and milk shipped to pool 
distributing plants would not be subject to the 125 percent limitation. 
The 125 percent limitation may be waived at the discretion of the 
Market Administrator for a new handler on the order or for an existing 
handler whose milk supply changes due to unusual circumstances.
    As published in the hearing notice, Proposal 8, offered by Dean 
Foods, addresses de-pooling in a similar manner as Proposal 2, but 
would

[[Page 9024]]

establish a limit on the total volume of milk a handler could pool in a 
given month to 115 percent of the volume that was pooled in the prior 
month. This proposal was modified at the hearing to allow for pooling 
the milk receipts of a new handler on the order without volume 
restrictions.
    As published in the hearing notice, Proposals 6 and 7, also offered 
by Dean Foods would address de-pooling by establishing defined time 
periods during which de-pooled milk could not be pooled. Proposal 6 
essentially would require an annual pooling commitment by handler to 
the market. Under Proposal 6, if the milk of a producer is de-pooled in 
a month, then the milk of the producer could not re-establish 
eligibility for pooling on the order during the following eleven months 
unless ten days milk production was delivered to a pool distributing 
plant. Under Proposal 6, handlers that de-pool milk have limited 
options to return milk to the pool, either shipping ten days milk 
production of a producer to a pool distributing plant or waiting eleven 
months for eligibility to re-pool.
    Under Dean's Proposal 7, a handler that de-pools milk cannot re-
pool for a 2 to 4 month time period, depending on the month in which 
de-pooling occurred. Proposal 7 also provides the option to return milk 
to the pool by shipping ten days milk production of a producer to a 
pool distributing plant. Proposals 6 and 7 were modified at the 
hearing.
    A witness appearing on behalf of DFA/PF testified in support of 
Proposal 2 and in general opposition to the practice of de-pooling. The 
witness testified that adoption of Proposal 2 would minimize the 
practice of de-pooling since not all the milk that was de-pooled could 
immediately return to the pool in the following month. The witness 
noted that both DFA and Prairie Farms de-pool milk when advantageous 
but stressed that the practice of de-pooling and re-pooling is 
detrimental to the Federal order system.
    The DFA/PF witness testified that restricting the pooling of milk 
on the basis of prior performance is not a new concept in Federal milk 
marketing order provisions. The witness referenced the ``dairy farmer 
for other markets'' provision currently in place in the Northeast order 
as an example of pooling provisions based on prior performance. The 
witness noted that Proposal 2 is similar to a ``dairy farmer for other 
markets'' provision as it limits pooling based on the handler's 
previous month's pooled volume. The DFA/PF witness speculated that the 
manner in which Proposal 2 attempts to reduce the practice of de-
pooling is too drastic for some and not strong enough for others. 
Nevertheless, adoption of Proposal 2, the witness stressed, would 
provide an appropriate economic consequence to discourage those 
entities that might otherwise choose to de-pool.
    The DFA/PF witness was of the opinion that since the purpose of 
Federal milk marketing orders are to ensure an adequate supply of milk 
for the fluid market, equitably share pool proceeds, and promote 
orderly marketing, milk order provisions should attract milk to its 
highest valued use when needed and provide for milk to clear the market 
when not needed in higher-class uses. Since Class I milk cannot be de-
pooled, the witness noted, Class I handlers can be at a disadvantage to 
handlers who can de-pool during periods of price inversions. Class I 
handlers are unable to maintain a competitive pay price for their milk 
supply, the witness explained, since Class II, III or IV handlers who 
de-pool may pay dairy farmers a higher price for their milk. The 
witness stressed that when the Class I price is not high enough to 
attract milk from other uses, disorderly conditions arise in the 
marketplace.
    The DFA/PF witness asserted that when a Class II, III or IV handler 
de-pools milk, inequities arise for the dairy farmers who supplied the 
de-pooling handler. In the absence of provisions to discourage de-
pooling, the witness explained, de-pooling becomes a rational economic 
practice since only Class I milk is required to be pooled and its value 
shared through the order's blend price.
    The DFA/PF witness testified that the combination of de-pooling 
with recent increasingly volatile milk prices requires immediate 
regulatory measures to mitigate the disorderly effects that de-pooling 
has on market participants. The witness cited market administrator data 
showing that since implementation of Federal order reform in 2000 there 
have been 43 months when opportunities to de-pool existed for the 
Central order.
    Relying on statistics provided by the market administrator, the 
witness illustrated that in April 2004 a handler in the Central order 
choosing to de-pool was able to pay over $4.00 per hundredweight (cwt) 
more for milk than a Class I handler unable to de-pool because the 
Class III price was $19.66 and the uniform price was $15.64. The 
witness characterized pricing differences of this magnitude as 
disruptive, disorderly and a competitive disadvantage for any Class I 
handler. When similarly situated handlers face disparate costs in 
procuring a supply of milk, the witness added, producers in common 
procurement areas are negatively affected. The witness asserted that 
this is a disorderly marketing condition.
    Two DFA member dairy farmers from Nebraska testified in support of 
Proposal 2. Both witnesses maintained that they received smaller milk 
checks than they otherwise would have received if milk had not been de-
pooled. The witnesses added that when fluid milk bottlers experience 
difficulties in obtaining a milk supply, the costs to supply that milk 
should be passed on to consumers, not dairy farmers. The witnesses also 
stated that in order to equalize returns from all classified uses of 
milk, there needs to be a commitment to have all milk pooled every 
month of the year.
    Two DFA member dairy farmers from Missouri also testified in 
support of Proposal 2. The witnesses noted that de-pooling amplifies 
the problem of negative PPD's. The witnesses were of the opinion that 
de-pooling creates differences in pay prices among similarly located 
dairy farmers whose milk is pooled in the Central market, and that 
different pay prices represent a disorderly marketing condition. The 
witnesses stated that in order to enjoy the additional funds usually 
generated by the Class I market, handlers should be required to 
demonstrate that their milk is available for the Class I market by not 
de-pooling.
    A dairy farmer from Kansas testified in opposition to the practice 
of de-pooling. The witness was of the opinion that a commitment to 
serve the Class I market should be required in order to share in the 
blend price. The witness stressed that in order to share in the returns 
generated from the marketwide pool handlers and cooperatives should 
participate in the pool every day not only when it may be profitable.
    A witness testified on behalf of Dean in support of Proposal 8. The 
witness explained that Proposal 8 addresses the practice of de-pooling 
in a similar manner as Proposal 2 but would limit the pooling of milk 
to 115 percent of the volume that was pooled in the prior month. The 
witness was of the opinion that a monthly pooling limit would 
discourage the de-pooling of milk since the greater the proportion of a 
handler's milk that is de-pooled, the longer it will take to re-pool 
that milk. Accordingly, the witness concluded, those who benefit the 
most from de-pooling also would have the most difficulty in attempting 
to regain pool status.
    A witness for Dean also testified in support of Proposals 6 and 7 
which would establish defined time periods

[[Page 9025]]

during which de-pooled milk could not be re-pooled. The witness 
testified that Dean prefers adoption of Proposal 6 over Proposal 7. 
Proposal 6 would impose a 12-month period during which de-pooled milk 
could not again be pooled while Proposal 7 would establish a 2 to 4 
month period during which de-pooled milk could not again be pooled. 
Under Proposal 6, the witness explained, if the milk of a producer were 
de-pooled, the milk could only reassociate before the annual commitment 
period if ten days production of the milk of the producer was delivered 
to a pool distributing plant. According to the witness, Proposal 7 
would provide an option for milk that had been de-pooled to return to 
the pool during certain specified months of the year depending on when 
the milk was de-pooled or by shipping ten days production of the milk 
of a producer to a pool distributing plant.
    The Dean witness testified that a similar provision to those 
contained in Proposals 6 and 7 is currently in place in the Northeast 
order. The witness was of the opinion that defined time periods during 
which de-pooled milk cannot again become pooled causes handlers to 
behave differently by taking a longer term view of pooling. The witness 
explained that handlers in the Northeast order need to evaluate more 
than the current month's economic impacts of pooling or not pooling 
milk, along with possible future missed opportunities.
    The Dean witness further contrasted the current ``dairy farmer for 
other markets'' provision effective in the Northeast to the standards 
proposed in Proposals 6 and 7. The witness testified that in the 
Northeast order, July is a month when de-pooled milk can return to the 
pool regardless of when the milk had been de-pooled during the previous 
year. Relying on market administrator data, the witness related that 
during the months of February through July 2004, large volumes of milk 
were de-pooled from the Northeast order. Because of the ``dairy farmer 
for other markets'' provision, the witness explained, milk that was de-
pooled during the months of February through June could not return to 
the pool until July. During this period, noted the Dean witness, a 
large volume of milk usually pooled on the Northeast order was pooled 
on the Mideast order.
    The Dean witness testified that Proposal 6 would require a handler 
that de-pooled milk in a month to remain off the pool for eleven 
additional months or ship 10 days milk production of a producer to a 
pool distributing plant in order for all milk of a producer to return 
to the pool, while Proposal 7 would provide the option to either return 
during designated months depending on the month in which milk was de-
pooled, or ship 10 days milk production of a producer to a pool 
distributing plant in order for all milk of a producer to return to the 
pool.
    A second Dean witness offered additional testimony in support of 
Proposal 6. The witness testified that Proposal 6 would exclude from 
the pool the milk of any dairy farmer not continuously pooled under a 
Federal milk order during the previous twelve months. The only 
exception to this exclusion would be a dairy farmer who temporarily 
lost Grade A status but was reinstated as a Grade A producer within 21 
days, noted the additional Dean witness. The witness emphasized that 
the portion of Proposal 6 that would require delivery of 10 days milk 
production of a dairy farmer to a pool distributing plant in order for 
all milk of a producer to re-join the pool would discourage de-pooling. 
The 10 day delivery requirement would insure that participation in the 
pool was open to any dairy farmer for whom it was technically and 
economically feasible to supply milk for fluid use. According to the 
witness, Proposals 6 and 7 also would make more milk readily available 
to service the fluid needs of the market.
    The additional Dean witness also stressed that adoption of Proposal 
6 would not totally eliminate de-pooling but would make it more 
difficult to re-pool milk after it had been de-pooled. The Dean witness 
testified that producer milk continuously pooled on the Central, or any 
other Federal milk order, which shares in both the costs and benefits 
of pool participation on a continuous basis would not be affected by 
adoption of Proposal 6.
    The second Dean witness added that adoption of Proposal 6 would 
increase returns to producers and provide for more orderly marketing 
conditions. The witness was of the opinion that adoption of Proposal 6 
would cause Class II, III or IV milk to remain pooled during times when 
the blend price was lower than the respective class price. This would 
increase the PPD, by making it less negative, and raise the blend price 
received by all producers, the witness concluded. Adoption of Proposal 
6 also would cause some Class III milk that is de-pooled to never 
return to the pool, the witness noted, since it would no longer be 
financially advantageous.
    A Kansas dairy farmer testified in support of Proposal 6. The 
witness stated that de-pooling cost Kansas dairymen who supplied the 
needs of the fluid market $6.2 million between March 2004 and October 
2004. The witness spoke in favor of any proposal that would require 
greater commitment to servicing the Class I needs of the Central 
marketing area.
    A DFA member dairy farmer from Missouri testified that de-pooling 
hurts dairy farmers and was in favor of any proposal that would limit 
the ability for milk to return to the pool the immediate month after 
de-pooling. The witness stated that there should be a waiting period of 
at least 2 or 3 months to pool milk after the milk had been de-pooled 
or a limit on the milk volume that could return to the pool the month 
after de-pooling.
    A witness appearing on behalf of Dean testified in opposition to 
Proposal 2. The witness was of the opinion that limiting pooling to 125 
percent of receipts pooled during the previous month was too loose of a 
standard and urged the adoption of Proposal 6 or Proposal 8.
    A witness appearing on behalf of AMPI, et al., testified in 
opposition to Proposals 2, 6, 7, and 8. The witness was of the opinion 
that de-pooling was an issue that was national in scope, and should be 
addressed in a national hearing. The witness testified that the 
voluntary option of pooling or not pooling milk delivered to a nonpool 
plant has been a mainstay of the Federal order system and should not be 
amended. The witness was of the opinion that Proposals 2, 6, 7, and 8 
do not address the root cause of price inversions--advance Class I 
pricing--but rather only treats the symptom of the problem. Class I 
prices are announced by the USDA in advance, noted the witness, while 
milk prices for manufactured uses are announced after the month has 
passed. This can cause a lag between changes in the value of milk and 
changes in the advanced Class I price, added the witness, sometimes 
resulting in a Class III price that exceeds the uniform and Class I 
price, otherwise known as a price inversion. The witness added that it 
would be appropriate to reconsider whether advanced pricing remains 
sound regulatory policy.
    The AMPI, et al., witness was also of the opinion that Federal 
order Class I price differentials are artificially high. Milk used to 
produce cheese, the witness noted, is priced entirely through the 
marketplace and receives benefit from the Federal order system only 
when the uniform price is higher than the Class III price. Adoption of 
Proposals 2, 6, 7 or 8, the witness noted, would penalize milk used in 
the production of cheese by limiting the amount of milk that could be 
pooled and was a radical change in Federal

[[Page 9026]]

order pooling philosophy. The witness added that adoption of these 
proposals would require cheese manufacturers to estimate Federal order 
blend prices and PPDs in an effort to decide whether it was more 
profitable to de-pool, remain pooled or a combination of both.
    The AMPI, et al., witness testified that the de-pooling of milk 
does not cause any reduction to the amount of milk available to serve 
the fluid market. The witness was of the opinion that when milk was de-
pooled there was not a reduction in the amount of milk made available 
to service the fluid market since the de-pooled milk may rejoin the 
pool the next month. The AMPI, et al., witness added that the Federal 
order system should be sharing money derived from Class I handlers, not 
taking money from dairy farmers whose milk is used in the production of 
cheese simply to offset a low Class I price created by the timing of 
announcing Class prices.
    The AMPI, et al., witness was also of the opinion that the 
Department should not consider Proposals 2, 6, 7 and 8 on an emergency 
basis. The witness testified that the proposed shift in regulatory 
policy as contained within these proposals should require the issuance 
of a recommended decision with opportunity for public comment.
    A witness representing NAJ testified that the problems arising from 
de-pooling are a result of the timing of price announcements. The 
witness also stated that the de-pooling issue would best be addressed 
at a national hearing.
    In a post hearing brief, DFA/PF reiterated the position that the 
pooling of milk in any month should not exceed 125 percent of the milk 
volume pooled in the previous month. The brief indicated that the 
pooling proposals (Proposals 6, 7, and 8) advanced by Dean are too 
restrictive for the current marketing conditions in the Central 
marketing area. According to the brief, Proposal 2 represents the least 
restrictive pooling proposal that could be supported by current 
marketing conditions while providing a reasonable deterrent to de-
pooling.
    A brief on behalf of AMPI, et al., reiterated the view that de-
pooling and re-pooling should be addressed on a national basis and that 
pooling decisions should continue to be based on immediate market 
conditions. The brief expressed the view that the ability to de-pool 
continues to be unrelated to the willingness to serve the needs of the 
Class I market.
    A brief by Select/Continental supported Proposal 6 as advanced by 
Dean. The brief noted that this ``dairy farmer for other markets'' 
proposal offered the most comprehensive means to eliminate the 
inequities of de-pooling while maintaining the strongest possible 
support for producers continuously and reliably serving the needs of 
the Class I market. The brief noted that Proposals 2 and 8, seeking to 
restrict the ability to pool to 125 percent and 115 percent of the 
previous month's volume respectively, was an improvement over current 
conditions but was not as robust as Proposal 6 which would require a 
12-month pooling commitment by handlers. The brief found agreement with 
AMPI, et al., that de-pooling is an issue that should be addressed on a 
national basis.
    The brief by Dean reiterated support for Proposals 6, 7 or 8, in 
order of preference, seeking to restrict the ability of handlers to de-
pool and re-pool milk in the Central marketing area. The brief 
expressed the view that Class I handlers who are required to pool their 
milk receipts are at a constant financial disadvantage to those 
handlers who may opt to pool or not pool.
    All Federal milk marketing orders require the pooling of milk 
received at pool distributing plants--which is predominantly Class I 
milk--and all pooled producers and handlers on an order share in the 
additional revenue arising from higher valued Class I sales. 
Manufacturing handlers and cooperatives of Class II, III and IV uses of 
milk who meet the pooling and performance standards make all of their 
milk receipts eligible to be pooled and usually find it advantageous. 
Manufacturing handlers and cooperatives who supply a portion of their 
total milk receipts to Class I distributing plants receive the 
difference between their use-value of milk and the order's blend price. 
Federal milk orders, including the Central order, establish limits on 
the volume of milk eligible to be pooled that is not used for fluid 
uses primarily through diversion limit standards. However, 
manufacturing handlers and cooperatives are not required, as are Class 
I handlers, to pool all their eligible milk receipts.
    According to the record, manufacturing handlers and cooperatives 
have opted to not pool their milk receipts when the manufacturing class 
prices of milk are higher than the order's blend price--commonly 
referred to as being ``inverted.'' During such months, manufacturing 
handlers and cooperatives have elected to not pool all of their 
eligible milk receipts because doing so would require them to pay into 
the PSF of the order, the mechanism through which handler and producer 
prices are equalized. When prices are not inverted, handlers would pool 
all of their eligible receipts and receive a payment or draw from the 
PSF. In receiving a draw from the PSF, such handlers will have 
sufficient money to pay at least the order's blend price to their 
supplying dairy farmers.
    When manufacturing handlers and cooperatives opt to not pool all of 
their eligible milk receipts in a month, they are essentially avoiding 
a payment to the PSF. This, in turn, enables them to avoid the 
marketwide sharing of the additional value of milk that accrues in the 
higher-valued uses of milk other than Class I. When the Class I price 
again becomes the highest valued use of milk, or when other class-price 
relationships become favorable, the record reveals that these same 
handlers opt to again pool their eligible milk receipts and draw money 
from the PSF. It is the ability of manufacturing handlers and 
cooperatives opting to not pool milk and thereby avoid the marketwide 
sharing of the revenue accruing from non-Class I milk sales that is 
viewed by proponents as giving rise to disorderly marketing conditions. 
According to proponents, producers and handlers who cannot escape being 
pooled and priced under the order are not assured of equitable prices.
    The record reveals that since the implementation of Federal milk 
marketing order reform in January 2000, and especially in more recent 
years, large and rapid increases in manufactured product prices during 
certain months have provided the economic incentives for manufacturing 
handlers to opt not to pool eligible milk on the Central order. For 
example, during the three month period of February to April 2004, the 
Class III price increased over 65 percent from $11.89 per cwt to $19.66 
per cwt. During the same time period, total producer milk pooled on the 
Central order decreased by nearly 50 percent from 1.16 billion pounds 
to 612 million pounds. When milk volumes of this magnitude are not 
pooled the impacts on producer blend prices are significant. Producers 
who incur the additional costs of consistently servicing the Class I 
needs of the market receive a lower return than would otherwise have 
been received if they did not continue to service the Class I market. 
Prices received by dairy farmers who supplied the other milk needs of 
the market are not known. However, it is reasonable to conclude that 
prices received by dairy farmers were not equitable or uniform.
    The record reveals that ``inverted'' prices of milk are generally 
the result of the timing of Class price announcements. Despite changes 
made as part of Federal milk order reform to

[[Page 9027]]

shorten the time period of setting and announcing Class I milk prices 
and basing the Class I price on the higher of the Class III or Class IV 
price to avoid price inversions, large month-to-month price increases 
in Class III and Class IV product prices sometimes trumped the intent 
of better assuring that the Class I price for the month would be the 
highest-valued use of milk. In all orders, the Class I price (and the 
Class II skim price) is announced prior to or in advance of the month 
for which it will apply. The Class I price is calculated by using the 
National Agricultural Statistics Service (NASS) surveyed cheese, 
butter, nonfat dry milk and dry whey prices for the two most current 
weeks prior to the 24th day of the preceding month and then adding a 
differential value to the higher of either the advanced Class III or 
Class IV price.
    Historically, the advance pricing of Class I milk has been used in 
all Federal orders because Class I handlers cannot avoid regulation and 
are required to pool all of their Class I milk receipts, they should 
know their product costs in advance of notifying their customers of 
price. However, milk receipts for Class III and IV uses are not 
required to be pooled; thus, Class III and IV product prices (and the 
Class II butterfat value) are not announced in advance. These prices 
are announced on or before the 5th of the following month. Of 
importance here is that manufacturing plant operators and cooperatives 
have the benefit of knowing all the classified prices of milk before 
making a decision to pool or not pool eligible receipts.
    The record reveals that the decision of manufacturing handlers or 
cooperatives to pool or not pool milk is made on a month-to-month basis 
and is generally independent of past pooling decisions. Manufacturing 
handlers and cooperatives that elected to not pool their milk receipts 
did so to avoid making payments to the PSF and they anticipated that 
all other manufacturing handlers and cooperatives would do the same. 
However, the record indicates that normally pooled manufacturing 
handlers and cooperatives met the pooling standards of the order to 
ensure that the Class I market was adequately supplied and that they 
established eligibility to pool their physical receipts, including 
diversions to nonpool plants. Opponents to proposals to deter de-
pooling are of the view that meeting the pooling standards of the order 
and deciding how much milk to pool are unrelated events. Proponents 
took the view that participation in the marketwide pool should be based 
on a long-term commitment to supply the market because in the long-term 
it is the sales of higher priced Class I milk that adds additional 
revenue to the pool.
    The producer price differential, or PPD, is the difference between 
the Class III price and the weighted average value of all Class I, II 
and IV milk pooled. In essence, the PPD is the residual revenue 
remaining after all butterfat, protein and other solids values are paid 
to producers. If the pooled value of Class I, II and IV milk is greater 
than the Class III value, dairy farmers receive a positive PPD. While 
the PPD is usually positive, a negative PPD can occur when class prices 
rise rapidly during the six-week period between the time the Class I 
price is announced and the time the Class II butterfat and III and IV 
milk prices are announced. When manufacturing prices fall, this same 
lag in the announcement of class prices yields a positive PPD.
    As revealed by the record, when manufacturing plants and 
cooperatives opted to not pool milk because of inverted price 
relationships, PPD's were much more negative. When this milk is not 
pooled, a larger percentage of the milk remaining pooled will be 
``lower'' priced Class I milk. When manufacturing milk is not pooled, 
the weighted average value of milk decreases relative to the Class II, 
III or IV value making the PPD more negative. For example, record 
evidence demonstrated that in April 2004, a month when a sizeable 
volume of milk was not pooled, the PPD was a negative $3.97 per cwt. If 
all eligible milk had been pooled, the PPD would have been $.87 per cwt 
higher or a negative $3.10 per cwt.
    The record reveals that when manufacturing handlers and 
cooperatives opt to not pool milk, unequal pay prices may result to 
similarly located dairy farmers. For example, Dean noted that when a 
cooperative delivers a high percentage of their milk receipts to a 
distributing plant, it lessens their ability to not pool milk, making 
them less competitive in a marketplace relative to other producers and 
handlers. Other evidence in the record supports conclusions identical 
to Dean that when a dairy farmer or cooperative is able to receive 
increased returns from shipping milk to a manufacturing handler during 
times of price inversions, other dairy farmers or cooperatives who may 
have shipped more milk to a pool distributing plant are competitively 
disadvantaged.
    The record of this proceeding reveals that the ability of 
manufacturing handlers and cooperatives to not pool all of their 
eligible milk receipts gives rise to disorderly marketing conditions 
and warrants the establishment of additional pooling standards to 
safeguard marketwide pooling. Current pooling provisions do not require 
or prohibit handlers and cooperatives from pooling all eligible milk 
receipts. However, the record reveals that when handlers and 
cooperatives opt to not pool milk inequities arise among producers and 
handlers that are contrary to the intent of the Federal milk marketing 
order program--maintaining orderly marketing conditions.
    The record contains extensive testimony regarding the effects on 
the milk order program resulting from advance pricing and the priority 
the milk order program has placed on the Class I price being the 
highest valued use of milk. It remains true that the Class I use of 
milk is still the highest valued use of milk notwithstanding those 
occasional months when milk used in usually lower-valued classes may be 
higher. This has been demonstrated by an analysis of the effective 
Class I differential values--the difference in the Class I price at the 
base zone of Jackson County, Missouri, and the higher of the Class III 
or Class IV price--for the 65 month period of January 2000 through May 
2005 performed by USDA.\2\ These computations reveal that the effective 
monthly Class I differential averaged $1.97 per cwt. Accordingly, it 
can only be concluded that in the longer-term Class I sales continue to 
be the source of additional revenue accruing to the pool even when, in 
some months, the effective differential is negative.
---------------------------------------------------------------------------

    \2\ Official notice is taken of data and information published 
in Market Administrator Bulletins as posted on individual Market 
Administrator Web sites.
---------------------------------------------------------------------------

    Price inversions occur when the wholesale price for manufactured 
products rises rapidly indicating a tightening of milk supplies to 
produce those products. It is for this reason that the Department chose 
the higher of the Class III and Class IV prices as the mover of the 
Class I price. Distributing plants must have a price high enough to 
attract milk away from manufacturing uses to meet Class I demands. As 
revealed by the record, this method has not been sufficient to provide 
the appropriate price signals to assure an adequate supply of milk for 
the Class I market. Accordingly, additional measures are needed as a 
means of assuring that milk remains pooled and thus available to the 
Class I market. Adoption of Proposal 2 is a reasonable measure to meet 
the objectives of orderly marketing.

[[Page 9028]]

    This decision does find that disorderly marketing conditions are 
present when producers do not receive uniform prices. Handlers and 
cooperatives opting to not pool milk do not account to the pool at the 
classified use-values of those milk receipts. They do not share the 
higher classified use-value of their milk receipts with all other 
producers who are pooled on the order are incurring the additional 
costs of servicing the Class I needs of the market. This is not a 
desired or reasonable outcome especially when the same handlers and 
cooperatives will again pool all of their eligible receipts when class-
price relationships change in a subsequent month. These inequities 
borne by the market's producers are contrary to the intent of the 
Federal order program's reliance on marketwide pooling--ensuring that 
all producers supplying the market are paid uniform prices for their 
milk regardless of how the milk of any single producer is used.
    It is reasonable that the order contain pooling provisions intended 
to deter the disorderly conditions that arise when de-pooling occurs. 
Such provisions maintain and enhance orderly marketing. Accordingly, 
this decision finds it reasonable to recommend adoption of provisions 
that would limit the volume of milk a handler or cooperative may pool 
in a month to 125 percent of the total volume pooled by the handler or 
cooperative in the prior month. Adoption of this standard will not 
prevent manufacturing handlers or cooperatives from electing to not 
pool milk. However, it should serve to maintain and enhance orderly 
marketing by encouraging participation in the marketwide pooling of all 
classified uses of milk.
    Consideration was given on whether de-pooling should be considered 
at a national hearing with other, broader national issues of milk 
marketing. However each marketing area has unique marketing conditions 
and characteristics which have area-specific pooling provisions to 
address those specific conditions. Because of this, pooling issues are 
considered unique to each order. This decision finds that it would be 
unreasonable to address pooling issues, including de-pooling, on a 
national basis.
    Some manufacturing handlers and cooperatives argue that their milk 
did perform in meeting the Class I needs during the month and this 
occurred before making their pooling decisions. They argue that the 
Class I market is therefore not harmed and that the intents and goals 
of the order program are satisfied. With respect to his preceding and 
in response to these arguments, this decision finds that the practice 
of de-pooling undermines the intent of the Federal order program to 
assure producers uniform prices across all uses of milk normally 
associated with the market as a critical indicator of orderly marketing 
conditions. Similarly, handlers and cooperatives who de-pool 
purposefully do so to gain a momentary financial benefit (by avoiding 
making payments to the PSF) which would otherwise be equitably shared 
among all market participants. While the order's performance standards 
tend to assure that distributing plants are adequately supplied with 
fresh, fluid milk, the goals of marketwide pooling are undermined by 
the practice of de-pooling. Producers and handlers who regularly and 
consistently serve the Class I needs of the market will not equitably 
share in the additional value arising momentarily from non-fluid uses 
of milk. These same producers and handlers will, in turn, be required 
to share the additional revenue arising from higher-valued Class I 
sales in a subsequent month when class-price relationships change.
    The four proposals considered in this proceeding to deter the 
practice of de-pooling in the Central order have differences. They all 
seek to address market disorder arising from the practice of de-
pooling. However, this decision does not find adoption of the two 
``dairy farmer for other markets'' proposals--Proposals 6 and 7--
reasonable because they would make it needlessly difficult for milk to 
be re-pooled and because their adoption may disrupt prevailing 
marketing channels or cause the inefficient movement of milk. Likewise, 
Proposal 8, to restrict pooling in a month to 115 percent of the prior 
month's volume pooled by the handler, is not recommended for adoption. 
Adoption of this proposal would disrupt current marketing conditions 
beyond what the record justifies. Therefore, this decision recommends 
adoption of Proposal 2 to limit the pooling of milk in any month by a 
handler to 125 percent of the handler's pooled receipts in the prior 
month because it provides the most reasonable measure to deter the 
practice of de-pooling.
    Consideration was given to omitting a recommended decision on the 
issue of de-pooling. The record does not support a conclusion that 
adoption of measures to deter de-pooling warrant emergency action. The 
recommended adoption of provisions to limit the volume of milk that can 
be pooled during the month on the basis of what was pooled in the 
preceding month warrants public comments before a final decision is 
issued.

3. Transportation and Assembly Credits

    A proposal, published in the hearing notice as Proposal 3 and 
modified at the hearing, seeking establishment of transportation and 
assembly credits in the Central Order is not recommended for adoption. 
The published proposal seeks to provide a credit for the shipment of 
milk from supply plants to distributing plants. The proposal was 
modified at the hearing to expand the transportation credit to include 
milk shipped directly from dairy farms to distributing plants. In 
addition, the modified proposal would provide an assembly credit for 
milk shipped directly from dairy farms to distributing plants.
    The proposal would provide a credit for the shipment of milk from 
supply plants and dairy farms to distributing plants at a rate of 
$0.003 per cwt per mile, excluding the first 25 miles of shipment and 
all shipments farther than 500 miles. In addition, the proposal would 
provide for a credit of $0.10 per cwt for the assembly of milk from 
dairy farms to distributing plants. The Central order does not 
currently have transportation or assembly credit provisions.
    As published in the hearing notice, Proposal 3 was advanced by 
AMPI, et al. The modification to Proposal 3, presented at the hearing 
to include transportation credits for shipments from dairy farms 
directly to distributing plants was advanced by DFA/PF.
    On behalf of all proponents of Proposal 3, the Foremost, et al., 
witness requested that the proposal be modified to remove all 
references to ``milk reload stations'' as originally offered in the 
proposal. Accordingly, no additional references will be made concerning 
re-load stations in this decision.
    A witness appearing on behalf of AMPI, et al., testified that 
transportation and assembly credits are needed in the Central marketing 
area to allow transporting handlers to recover costs of assembling and 
transporting milk to serve the Class I needs of the market.
    The AMPI, et al., witness was of the opinion that the rates and 
distance limitations proposed for the transportation and assembly 
credits would compensate handlers for approximately 75 percent of the 
cost of moving milk from supply plants to distributing plants within 
the marketing area. The witness asserted that this was reasonable 
because it would keep transportation and assembly cost recovery at less 
than full cost. According to the witness, the proposed

[[Page 9029]]

rates and distance limitations would tend to discourage inefficient 
movements of milk by handlers from seeking transportation and assembly 
credits.
    The AMPI, et al., witness expressed the opinion that all producers 
receiving the benefits of marketwide pooling should contribute to the 
recovery of costs associated with moving milk within the marketing area 
to serve the Class I needs of the market. The witness provided examples 
of milk movements where supply plant handlers moving milk to 
distributing plants were unable to recover the full costs of assembling 
and transporting milk at Federal order minimum prices. The witness 
testified that because handlers transporting milk directly from dairy 
farms to distributing plants incur costs similar to the overhead costs 
incurred by handlers transporting milk from supply plants, the 
proponents seek an assembly credit for all milk that serves the Class I 
market. The AMPI, et al., witness testified that even though dairy 
farmers currently are charged for the cost of assembling their milk 
into loads and transporting the milk to distributing plants, the 
charges are insufficient to completely recoup the costs incurred by 
handlers.
    A witness representing DFA/PF testified in support of Proposal 3 
and modified the proposal to include the transportation and assembly 
credits for milk shipped directly from farms to distributing plants. 
The witness asserted that the costs of assembly and transportation of 
milk in the Central marketing area are not fully recouped in the market 
by handlers. The witness noted that the $0.003 per mile transportation 
credit rate would apply to milk shipped to a distributing plant.
    The DFA/PF witness testified that additional compensation for the 
transportation and assembly of milk for fluid use is needed in 
particular areas of the Central marketing area because the order's 
blend price is insufficient to keep milk produced in the marketing area 
within the marketing area. The witness noted this was specifically 
apparent in the southeastern portion of the marketing area that borders 
portions of the Southeast and Appalachian orders. In addition, the 
witness testified that the location values of milk for markets within 
the Central marketing area, for example in St. Louis, Missouri, and 
areas of southern Illinois, are similarly insufficient to attract milk. 
According to the witness, this causes milk procurement problems for 
some distributing plants in this localized portion of the Central 
marketing area.
    The DFA/PF witness testified that marketwide service payments are 
authorized in the legislation that provides for Federal milk orders. 
The witness explained that payments for services not elsewhere 
compensated can be taken from producer revenue to compensate providers 
of services that are of marketwide benefit. The witness asserted that 
transportation and assembly operations performed in the Central 
marketing area meet the general objectives of providing marketwide 
service for marketwide benefit. According to the witness, Proposal 3, 
as modified, describes a set of services that benefit the entire 
market. The witness was of the opinion that the marketwide services 
include: marketing of milk, farm pick-up of milk, off-load and re-load 
of milk, procurement of milk, selling milking equipment, disseminating 
information and prices to producers, milk testing, delivery to 
distributing plants, and other field services.
    According to the DFA/PF witness, inclusion of milk shipped directly 
from dairy farms to distributing plants for transportation and assembly 
credits would be more representative of how the majority of milk is 
transported to distributing plants regulated by the order. The witness 
noted that in the Central marketing area distributing plants receive 
only about 4.5 percent of their milk from supply plants. The witness 
testified that the modification of Proposal 3 to include milk shipped 
from farms to distributing plants would more accurately represent the 
transportation compensation requirements needed to ensure delivery of 
milk for fluid use.
    According to the DFA/PF witness, the inclusion of farm to 
distributing plant shipments would require the Market Administrator of 
the Central order to verify handler claims for receiving credits. The 
witness indicated that least-distance routes for delivery from each 
point of origin to the destination distributing plants would need to be 
determined. According to the witness, the additional cost that would be 
borne by the Market Administrator in administering transportation and 
assembly provisions would be negligible and should not require a higher 
administrative assessment. However, the witness acknowledged that 
proponents had not consulted the Market Administrator's office for an 
estimate of additional administrative costs that may be borne in 
operating a transportation and assembly credit provision.
    The DFA/PF witness testified that the St. Louis area market is 
unable to consistently and successfully attract milk from the Central 
order's milkshed because the order's Class I price and the blend price 
are lower than those in the nearby Appalachian and Southeast marketing 
areas. According to the witness, marketwide service payments for 
transportation and assembly of milk to serve markets such as St. Louis 
would provide sufficient financial incentive to offset the higher blend 
prices of these bordering Federal milk marketing areas. Additionally, 
it would ensure a consistent and reliable supply of milk to meet the 
needs of that portion of the Central marketing area's Class I market, 
the witness said.
    A witness for Prairie Farms (PF) testified in support of the 
adoption of Proposal 3 as modified at the hearing. The witness was of 
the opinion that without expansion of transportation and assembly 
credits that included direct shipped milk, the ability to serve the 
Class I needs of all locations in the Central marketing area would not 
be achieved because milk would seek the higher blend prices available 
in the nearby markets of the Appalachian and Southeast orders. The 
witness from Prairie Farms provided example scenarios of actual and 
hypothetical net returns possible for handlers shipping milk to 
distributing plants in the Central, Appalachian, and Southeast 
marketing areas. The witness compared these returns to net returns 
available from shipping to distributing plants in Illinois and St. 
Louis within the Central marketing area. According to the witness, 
these example scenarios reinforced the assertion that milk is attracted 
by higher Class I prices in localized areas of the Appalachian and 
Southeast marketing areas.
    The PF witness was of the opinion that inappropriate Class I 
differential levels, as in the St. Louis area example, were the root 
cause of the market's inability to attract sufficient fluid milk; 
however, modifications to the Class I price surface are not currently 
feasible. In light of this, the witness stated that obtaining the 
needed financial incentives to ensure delivery of milk to this deficit 
portion of the marketing area by the use of transportation and assembly 
credits is a reasonable alternative to changing the Class I 
differentials.
    The DFA/PF witness estimated that providing credits for milk 
transported from farms to distributing plants would reduce the Central 
order's blend price to dairy farmers by $0.045 per cwt per month. The 
Foremost, et al., witness testified that the impact of providing 
credits for assembly would reduce the Central order's blend price by 
$0.036-$0.040 per cwt per month. The DFA/PF

[[Page 9030]]

witness testified that the combined impact of transportation credits 
for the supply plant to distributing plant movements, direct delivery 
from farms to distributing plants, and assembly credits would reduce 
the Central marketing area's blend price by a total of $0.081-$0.085 
per cwt per month.
    A witness for Dean testified in support of Proposal 3 as modified 
by DFA/PF. The Dean witness expressed a preference for the DFA/PF 
modification to include direct farm milk shipments to distributing 
plants but did not support adoption of assembly credits. The witness 
noted that Dean would consider the entire Proposal 3, including the 
DFA/PF modification, if the assembly credit feature were retained. The 
witness was of the opinion that adopting the proposal would increase 
equity among handlers and producers who supply the Class I market. 
However, the witness was unable to identify distributing plants in the 
St. Louis and southern Illinois portions of the marketing area that did 
not or could not receive sufficient milk supplies. In addition, the 
witness was unable to recall if handlers had asked or relied on the 
Central marketing area's Market Administrator to increase the Central 
order's performance standards to bring forth milk to meet the market's 
Class I needs.
    In a post hearing brief, Select/Continental indicated general 
opposition to adopting transportation and assembly credits for milk 
movements from supply plants to distributing plants. The brief 
expressed support for a transportation and assembly credit provision 
that would be limited to milk shipped directly from dairy farms to 
distributing plants. According to the brief, milk should be attracted 
to markets for specific use through classified pricing. Fluid milk, 
according to the brief, should be attracted to distributing plants by 
appropriate location values. According to the brief, implementing 
transportation and assembly credits in the Central marketing area would 
be an admission that the Class I price surface was no longer successful 
in meeting the Class I needs of the marketing area.
    In a post hearing brief, DFA/PF reiterated their support for 
transportation and assembly credits as modified. The brief reiterated 
support and reinforcement of the testimony offered to expand the scope 
for transportation and assembly credits to include direct farm-to-plant 
milk movements. Likewise, Dean Foods reiterated its support in a post-
hearing brief for expanding transportation and assembly credits to 
include direct farm-to-plant milk movements as a means to improve the 
available milk supply for its distributing plant operations in the 
southeastern portion of the Central order.
    Geographically, the Central marketing area is the largest Federal 
milk marketing area, spanning the distance from eastern Illinois to 
western Colorado. It is bordered by the Upper Midwest, Mideast, 
Appalachian, Southeast, and Southwest marketing areas. The marketing 
area also is bordered by unregulated areas on the west including Utah, 
portions of western South Dakota, western portions of Nebraska, and all 
of Wyoming. In addition the Central marketing area completely surrounds 
a large unregulated area in central Missouri.
    Proposal 3 as advanced by AMPI, et al., seeks to establish a 
marketwide service payment in the form of a transportation credit for 
the movement of milk from supply plants to distributing plants at a 
rate of $0.003 per cwt per mile. The proposal provides for a distance 
limit for receipt of the credit for milk movements between 25 to 500 
miles from the supply plants to distributing plants. The proposal also 
seeks the establishment of an assembly credit feature for which 
handlers would collect $0.10 per cwt for the assembly of loads of milk 
within the marketing area.
    The modification to Proposal 3, advanced by DFA/PF, seeks expansion 
of the transportation credit to include milk shipped directly from 
dairy farms to distributing plants. The modification would establish a 
transportation credit rate of $0.003 per cwt per mile for milk shipped 
directly from dairy farms to distributing plants. The combination of 
the two proposals effectively seeks transportation and assembly credits 
for all Class I milk pooled on the Central order. The rationale for the 
modification to Proposal 3 is that milk shipped directly from farms to 
distributing plants represents more than 95 percent of all milk shipped 
to distributing plants. Milk shipped from supply plants represents 
about 5 percent of all milk shipped to distributing plants.
    Proponents estimate that the Central order blend price would be 
lowered in the range of $0.036-$0.040 per cwt per month by the assembly 
credit feature for all Class I milk, if adopted. The proponents 
estimate that the impact of the transportation credit for all Class I 
milk pooled on the Central order would be a blend price reduction of 
approximately $0.045 per cwt, if adopted. The combined reduction to the 
Central order blend price per month would be $0.081-$0.085 per cwt.
    The transportation and assembly credits advanced by the proponents 
are similar to the transportation and assembly credits implemented in 
the Chicago Regional order, a predecessor order of the current Upper 
Midwest order. The transportation and assembly credit provisions of the 
Chicago Regional order were carried forward into the provisions of the 
current Upper Midwest order as a part of Federal milk order reform. 
These provisions were first implemented in 1987 to ensure that the 
costs of serving the Class I market of the Chicago Regional marketing 
area were shared by all market participants that benefited from the 
revenue generated from Class I sales. The impact on producer revenue 
was expected to be minimal according to the Final Decision published 
October 15, 1987, (7 CFR 10130).
    The transportation credit and assembly credit provisions of the 
Upper Midwest order provide an assembly credit of $0.08 per cwt and a 
transportation credit for the transportation of milk transferred from 
pool plants to distributing plants of $0.028 cents per cwt per mile. 
Transportation or assembly credits are not applied to milk shipments to 
distributing plants directly from producer farms. The credits are 
computed by the Market Administrator and are deducted from the 
marketwide value of milk before calculation of the order's blend price. 
The impact of these credits on the Upper Midwest blend price ($0.02-
$0.03 per cwt) are one fourth to one third the magnitude of impact that 
proponents expect the proposed transportation and assembly credits 
would have on the Central order blend price, if adopted.
    The transportation and assembly credit features of the current 
Upper Midwest order and the pre-reform Chicago Regional order are 
similar in the magnitudes of their costs per mile and per hundredweight 
of milk handled. The transportation and assembly credit provisions of 
the Chicago Regional order applied to a geographically compact milkshed 
with the emphasis on encouraging milk movements to the single urban 
market of Chicago. The Chicago Regional marketing area (and the Chicago 
metropolitan area of the current Upper Midwest marketing area) was 
supplied with milk primarily from southern and central Wisconsin. The 
transportation and assembly credit feature of the current Upper Midwest 
marketing order provides pool plants that serve the Class I market with 
some recovery of assembly and transportation costs

[[Page 9031]]

incurred in transferring milk to distributing plants.
    In contrast, the Central marketing area is geographically much 
larger and handlers with Class I route disposition serve multiple urban 
centers in a variety of States located from Illinois to Colorado. The 
record reveals that the area of concern to the proponents is a 
relatively limited area of St. Louis and portions of southern Illinois. 
The record does not reveal that there are other portions of the 
marketing area where problems have been identified in procuring milk 
supplies for Class I use. Accordingly, it is reasonable to conclude 
that marketwide service payments in the form of transportation and 
assembly credits on all Class I milk may only solve a localized problem 
while all dairy farmers would receive a lower blend price for their 
milk.
    The impact of transportation and assembly credits on dairy farmer 
income is far lower in the Upper Midwest marketing area than that 
proposed for the Central order. For example, according to Market 
Administrator data, the reduction to the Upper Midwest blend price in 
October 2004 was $ 0.015 per cwt and $0.0125 per cwt for the assembly 
and transportation credits, respectively. This represents an overall 
reduction of $0.0275 per cwt to the Upper Midwest blend price in that 
month. Market Administrator data shows that during May 2005 the 
reduction to the Upper Midwest blend price attributable to the combined 
impact of the transportation and assembly credit features was $0.020 
per cwt.
    The record reveals that the impact anticipated by proponents of 
transportation and assembly credits on the Central order blend price 
would be a reduction of as much as $0.081-$0.085 per cwt. The reduction 
in blend prices and dairy farmer income that would result from the 
adoption of a transportation and assembly credit of this magnitude 
would be 3-4 times the magnitude of the blend price reduction that 
dairy farmers experience in the Upper Midwest. According to Market 
Administrator information, the average sized producer in the Central 
marketing area produces and markets about 200,000 pounds of milk per 
month. The average reduction in income for such an average producer per 
month would be $160-$170 per month, or about $2000 per year. A similar 
sized producer in the Upper Midwest marketing area would experience a 
reduction in income of $40-$57 per month or about $500-$680 per year. 
The differences in magnitudes are interesting but germane only to the 
extent that transportation and assembly credits are justified.
    The proposed transportation and assembly credits are justified by 
proponents on the basis that the movement of milk to serve the Class I 
market is a marketwide service of marketwide benefit and credits for 
providing marketwide services are authorized in the Agricultural 
Marketing Agreement Act of 1937, (AMAA) as amended. However, the focus 
of the record evidence is on the marketing conditions in the southern 
Illinois and St. Louis regions of the Central marketing area. However, 
the record, does not indicate that price differences as noted in 
proponent testimony concerning the eastern portion of the marketing 
area occur elsewhere in the Central marketing area. The record does not 
support concluding that handlers serving major urban areas in other 
regions of the marketing area (such as, Denver, Oklahoma City, or 
Tulsa) experience difficulty in attracting milk supplies. This supports 
concluding that the issues raised by the proponents are at best 
localized in nature rather than marketwide.
    In addition, the record reveals in the testimony of the AMPI, et 
al., witness that some transportation and assembly costs incurred by 
handlers for milk delivered to distributing plants are recovered by the 
marketplace. While proponents have asserted that the recovery of costs 
for assembly by handlers is incomplete, the record contains 
insufficient information upon which to judge if lowering producer blend 
prices by as much as $.08 per cwt is reasonable. The size of the likely 
blend price reduction is important but not the critical factor in 
determining whether transportation and assembly credits are reasonable 
for the Central marketing area. The most important factor in that 
regard is whether the marketwide costs would provide marketwide rather 
than local benefits.
    Record evidence supplied by a Class I handler located in St. Louis 
indicates that the firm is able to continue receiving, bottling, and 
selling milk in the St Louis area. This evidence suggests that milk 
movements to handlers in the St. Louis area are occurring and meet the 
order's Class I needs. This evidence provides a basis to conclude that 
the order provisions attract sufficient milk for fluid use. In this 
regard, the need for additional government intervention beyond what the 
order currently provides in meeting the market's fluid demands is not 
warranted.
    The record evidence concerning challenges faced by handlers in 
moving milk within the Central marketing area to distributing plants in 
St. Louis and Illinois indicates that there may be, at best, localized 
problems in supplying the Class I needs of these plants. The proponents 
for transportation and assembly credits attribute these difficulties to 
the higher location values and blend prices of nearby or bordering 
portions of the Southeast and Appalachian orders. However, the record 
reveals that handlers have not sought alternative actions to bring 
forth additional milk supplies to meet Class I demands. For example, 
there is no record evidence illustrating that the Market Administrator 
has been called upon to change performance standards or diversion 
limits which would better ensure that the Class I needs of any of the 
Central marketing area's distributing plants would be met.
    This recommended decision finds that adoption of the proposed 
transportation and assembly credit provision is not supported by record 
evidence. Accordingly, this recommended decision does not find 
agreement with the rationale advanced by proponents that marketwide 
service payments in the form of transportation and assembly credits for 
milk are needed to overcome deficiencies of the Central order. At best, 
record evidence demonstrates that if there are difficulties in 
procuring milk for Class I use, they are isolated to a fraction of the 
marketing area. Adopting transportation and assembly credits would 
unreasonably lower the returns to all dairy farmers pooled on the order 
to address a localized issue.

Withdrawn Proposal

    A proposal published as Proposal 14, seeking to require payments 
from the producer settlement fund to be made no later than the next 
business day after the due date for payments into the producer 
settlement fund, was advanced by the Market Administrator. The proposal 
was withdrawn and was not considered in this decision.

Rulings on Proposed Findings and Conclusions

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

[[Page 9032]]

reasons previously stated in this decision.

General Findings

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

Recommended Marketing Agreement and Order Amending the Orders

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

List of Subjects in 7 CFR Part 1032

    Milk marketing orders.

    For the reasons set forth in the preamble, 7 CFR Part 1032 is 
proposed to be amended as follows:

PART 1032--MILK IN THE CENTRAL MARKETING AREA

    1. The authority citation for 7 CFR Part 1032 continues to read as 
follows:

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

    2. Section 1032.7 is amended by revising paragraph (c) introductory 
text and paragraph (h)(7) to read as follows:


Sec.  1032.7  Pool plant.

* * * * *
    (c) A supply plant from which the quantity of bulk fluid milk 
products shipped to (and physically unloaded into) plants described in 
paragraph (c)(1) of this section is not less than 25 percent during the 
months of August through February and 20 percent in all other months of 
the Grade A milk received from dairy farmers (except dairy farmers 
described in Sec.  1032.12(b)) and from handlers described in Sec.  
1000.9(c), including milk diverted pursuant to Sec.  1032.13, subject 
to the following conditions:
* * * * *
    (h) * * *
    (7) That portion of a regulated plant designated as a nonpool plant 
that is physically separate and operated separately from the pool 
portion of such plant. The designation of a portion of a plant must be 
requested in advance and in writing by the handler and must be approved 
by the market administrator. Such nonpool status shall be effective on 
the first day of the month following approval of the request by the 
market administrator and thereafter for the longer of twelve (12) 
consecutive months or until notification of the desire to requalify as 
a pool plant, in writing, is received by the market administrator. 
Requalification will require deliveries to a pool distributing plant(s) 
as provided for in Sec.  1032.7(c). For requalification, handlers may 
not use milk delivered directly from producer's farms pursuant to Sec.  
1000.9(c) or Sec.  1032.13(c) for the first month.
    3. Section 1032.13 is amended by revising paragraph (d)(1), 
redesignating paragraphs (d)(2) through (6) as paragraphs (d)(4) 
through (8), adding new paragraphs (d)(2) and (d)(3), revising 
redesignated paragraph (d)(4), and adding a new paragraph (f), to read 
as follows:


Sec.  1032.13  Producer milk.

* * * * *
    (d) * * *
    (1) Milk of a dairy farmer shall not be eligible for diversion 
until milk of such dairy farmer has been physically received as 
producer milk at a pool plant and the dairy farmer has continuously 
retained producer status since that time. If a dairy farmer loses 
producer status under the order in this part (except as a result of a 
temporary loss of Grade A approval), the dairy farmer's milk shall not 
be eligible for diversion until milk of the dairy farmer has been 
physically received as producer milk at a pool plant;
    (2) The equivalent of at least one day's milk production is caused 
by the handler to be physically received at a pool plant in each of the 
months of January and February, and August through November;
    (3) The equivalent of at least one days' milk production is caused 
by the handler to be physically received at a pool plant in each of the 
months of March through July and December if the requirement of 
paragraph (d)(2) of this section (Sec.  1032.13) in each of the prior 
months of August through November and January through February are not 
met, except in the case of a dairy farmer who marketed no Grade A milk 
during each of the prior months of August through November or January 
through February.
    (4) Of the quantity of producer milk received during the month 
(including diversions, but excluding the quantity of producer milk 
received from a handler described in Sec.  1000.9(c)) the handler 
diverts to nonpool plants not more than 75 percent during the months of 
August through February, and not more than 80 percent during the months 
of March through July, provided that not less than 25 percent of such 
receipts in the months of August through February and 20 percent of the 
remaining months' receipts are delivered to plants described in Sec.  
1032.7(a) and (b);
* * * * *
    (f) The quantity of milk reported by a handler pursuant to Sec.  
1032.30(a)(1) and/or Sec.  1032.30(c)(1) for the current month may not 
exceed 125 percent of the producer milk receipts pooled by the handler 
during the prior month. Milk diverted to nonpool plants reported in 
excess of this limit shall be removed from the pool. Milk received at 
pool plants in excess of the 125 percent limit, other than pool 
distributing plants, shall be classified pursuant to Sec.  
1000.44(a)(3)(v). The handler must designate, by producer pick-up, 
which milk is to be removed from the pool. If the handler fails to 
provide this information the provisions of paragraph (d)(5) of this 
section shall apply. The following provisions apply:
    (1) Milk shipped to and physically received at pool distributing 
plants shall not be subject to the 125 percent limitation;
    (2) Producer milk qualified pursuant to any other Federal Order in 
the previous month shall not be included in the computation of the 125 
percent limitation; provided that the producers comprising the milk 
supply have been

[[Page 9033]]

continuously pooled on any Federal Order for the entirety of the most 
recent three consecutive months.
    (3) The market administrator may waive the 125 percent limitation:
    (i) For a new handler on the order, subject to the provisions of 
paragraph (f)(3) of this section, or
    (ii) For an existing handler with significantly changed milk supply 
conditions due to unusual circumstances;
    (4) A bloc of milk may be considered ineligible for pooling if the 
market administrator determines that handlers altered the reporting of 
such milk for the purpose of evading the provisions of this paragraph 
(f).

    Dated: February 15, 2006.
Lloyd C. Day,
Administrator, Agricultural Marketing Service.
[FR Doc. 06-1584 Filed 2-21-06; 8:45 am]
BILLING CODE 3410-02-P