[Federal Register Volume 71, Number 35 (Wednesday, February 22, 2006)]
[Proposed Rules]
[Pages 9004-9015]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-1585]


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DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Part 1030

[Docket No. AO-361-A39; DA-04-03B]


Milk in the Upper Midwest Marketing Area; Recommended Decision 
and Opportunity To File Written Exceptions on Proposed Amendments to 
Tentative Marketing Agreement and 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 Upper Midwest (UMW) Federal milk 
marketing order. Specifically, this decision recommends adoption of 
proposals that would deter the de-pooling of milk and increase the 
order's maximum administrative assessment rate.

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

ADDRESSES: Comments (six copies) should be filed with the Hearing 
Clerk, United States Department of Agriculture, STOP 9200--Room 1031, 
1400 Independence Avenue, SW., Washington, DC 20250-9200. Comments may 
also be submitted at the Federal e-Rulemaking portal: http://www.regulations.gov or by e-mail: [email protected]. Reference 
should be made to the title of action and docket number.

FOR FURTHER INFORMATION CONTACT: Gino Tosi, Associate Deputy 
Administrator, Order Formulation and Enforcement Branch, USDA/AMS/Dairy 
Programs, STOP 0231--Room 2968, 1400 Independence Avenue, SW., 
Washington, DC 20250-0231, (202) 690-1366, e-mail [email protected].

SUPPLEMENTARY INFORMATION: This decision recommends adoption of 
amendments that would: (1) Establish a limit on the volume of milk a 
handler may pool during the months of April through February to 125 
percent of the volume of milk pooled in the prior month; (2) Establish 
a limit on the volume of milk a handler may pool during the month of 
March to 135 percent of the volume of milk pooled in the prior month; 
and (3) Allow the market administrator to increase the maximum 
administrative assessment rate up to 8 cents per hundredweight on all 
pooled milk if necessary to maintain the required fund reserves.
    This administrative action is governed by the provisions of 
sections 556 and 557 of Title 5 of the United States Code and, 
therefore, is excluded from the requirements of Executive Order 12866.
    The amendments to the rules proposed herein have been reviewed 
under Executive Order 12988, Civil Justice Reform. They are not 
intended to have a retroactive effect. If adopted, the proposed 
amendments would not preempt any state or local laws, regulations, or 
policies, unless they present an irreconcilable conflict with this 
rule.
    The Agricultural Marketing Agreement Act of 1937, as amended (7 
U.S.C. 601-674), provides that administrative proceedings must be 
exhausted before parties may file suit in court. Under section 
608c(15)(A) of the Act, any handler subject to an order may request 
modification or exemption from such order by filing with the Department 
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 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 August 2004, the month during which the hearing occurred, 
there were 15,802 dairy producers pooled on and 60 handlers regulated 
by the UMW order. Approximately 15,608 producers, or 97 percent, were 
considered small businesses based on the above criteria. Of the 60 
handlers regulated by the UMW during August 2004, 49 handlers, or 82 
percent, were considered small businesses.
    The recommended amendments for adoption of 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 UMW marketing area. Criteria 
for pooling milk are established on the basis of performance standards 
that are considered adequate to meet the Class I fluid needs of the 
market and, 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. Administrative assessments 
are similarly charged 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, recordkeeping, or other compliance requirements because they 
would remain identical to the current requirements. No new forms are 
proposed and no additional reporting requirements would be necessary.
    This 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 approved forms are 
routinely used in

[[Page 9005]]

most business transactions. The 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 June 15, 2004; published June 23, 2004 
(69 FR 34963).
    Notice of Hearing Delay: Issued July 14, 2004; published July 21, 
2004 (69 FR 43538).
    Tentative Partial Decision: Issued April 8, 2005; published April 
14, 2005 (70 FR 19709).
    Interim Final Rule: Issued May 26, 2005; published June 1, 2005 (70 
FR 31321).
    Final Partial Decision: Issued September 29, 2005; published 
October 5, 2005 (70 FR 58086).

Preliminary Statement

    Notice is hereby given of the filing with the Hearing Clerk of this 
recommended decision with respect to proposed amendments to the 
tentative marketing agreement and the order regulating the handling of 
milk in the UMW marketing area. This notice is issued pursuant to the 
provisions of the Agricultural Marketing Agreement Act and the 
applicable rules of practice and procedure governing the formulation of 
marketing agreements and marketing orders (7 CFR part 900).
    Interested parties may file written exceptions to this decision 
with the Hearing Clerk, U.S. Department of Agriculture, STOP 9200--Room 
1031, 1400 Independence Avenue, SW., Washington DC 20250-9200, by April 
24, 2006. Six 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 UMW 
marketing area. The hearing was held pursuant to the provisions of the 
Agricultural Marketing Agreement Act of 1937 (AMAA), 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 at Bloomington, Minnesota, on August 16-19, 2004, 
pursuant to a notice of hearing issued June 16, 2004, published June 
23, 2004, and a notice of hearing delay issued July 14, 2004, and 
published July 21, 2004.
    The material issues on the record of hearing relate to:

1. Pooling Standards
    A. Establishing Pooling Limits
    B. Producer definition.
2. Administrative assessment rate.

Findings and Conclusions

    This recommended decision specifically addresses proposals 
published in the hearing notice as Proposals 3, 4, 5 and features of 
Proposal 2 that seek to establish a limit on the volume of milk that 
can be pooled on the order, features of Proposal 6 intending to clarify 
the Producer definition by providing a definition of ``temporary loss 
of Grade A approval,'' and Proposal 7 which seeks to increase the 
order's maximum administrative assessment rate. As published in the 
hearing notice, Proposals 1, 6, and a portion of Proposal 2 concerning 
diversion limit standards and transportation credits were addressed in 
a tentative partial decision published on April 14, 2005 (70 FR 19709). 
For the purpose of this recommended decision, references to Proposal 2 
will only pertain to the first portion regarding de-pooling and 
references to Proposal 6 will only pertain to establishing a definition 
of ``temporary loss of Grade A approval.''
    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. 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 
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 a formula using National Agricultural 
Statistics Service (NASS) survey prices of cheese, butter, and nonfat 
dried milk powder for the first two weeks of the preceding 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

[[Page 9006]]

``Class price inversion.'' A producer price inversion generally refers 
to when the Class III or IV price exceeds the 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 
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 the 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 UMW 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 supplies 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, manufacturing handlers 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 on how to best limit de-pooling are 
represented by these four proposals. The first approach, published in 
the hearing notice as Proposals 2 and 5, 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 3 and 4, 
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 adoption of Proposal 2, offered by Mid-West 
Dairymen's Company (Mid-West) on behalf of Cass-Clay Creamery Inc. 
(Cass-Clay), Dairy Farmers of America, Inc. (DFA), Foremost Farms USA 
Cooperative (Foremost Farms), Land O'Lakes Inc. (LOL), Milwaukee 
Cooperative Milk Producers (MCMP), Manitowoc Milk Producers Cooperative 
(MMPC), Swiss Valley Farms Company (Swiss Valley), and Woodstock 
Progressive Milk Producers Association (Woodstock). Hereinafter, this 
decision will refer to these proponents as ``Mid-West, et al.'' 
Although Foremost Farms was a proponent of Proposal 2, no testimony was 
offered on their behalf. At the hearing, Plainview Milk Products 
Cooperative and Westby Cooperative Creamery also supported the 
testimony given on behalf of Mid-West, et al. The proponents of 
Proposal 2 are all cooperatives representing producers whose milk 
supplies the milk needs of the marketing area and is pooled on the UMW 
order.
    Specifically, adoption of Proposal 2 will 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 during the months of April 
through February, and to no more than 135 percent of the prior month's 
pooled volume in the month of March. Milk diverted to nonpool plants in 
excess of this limit will not be pooled, and milk shipped to pool 
distributing plants will not be subject to the 125 or 135 percent 
limitation
    As published in the hearing notice, Proposal 5, offered by Dean 
Foods Company (Dean), addresses de-pooling in a similar manner as 
Proposal 2, but would 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. Dean is a handler who operates 
manufacturing plants and distributing plants in the UMW marketing area. 
Producer milk shipped to and physically received at a pool distributing 
plant, and producer milk that was pooled continuously on another 
Federal Order during the previous six months, would not be subject to 
this pooling standard. Proposal 5 is not recommended for adoption.
    As published in the hearing notice, Proposals 3 and 4, also offered 
by Dean, address de-pooling by establishing defined time periods during 
which de-pooled milk could not be pooled. Proposal 3 would require an 
annual pooling commitment by a handler to the UMW market. As advanced 
in Proposal 3, if the milk of a producer is de-pooled in a month, the 
milk of a producer could not re-establish eligibility for pooling on 
the order during the following 11 months unless 10 days' milk 
production of a producer was delivered to a pool distributing plant 
during the month. Under Proposal 3, handlers that de-pool milk have 
limited options to return milk to the pool, either shipping 10 days' 
milk production of a producer to a pool distributing plant during the 
month or waiting 11 months to regain pooling eligibility
    Proposal 4 is similar to Proposal 3 but is less restrictive. Under 
Proposal 4, as modified at the hearing, if a producer's milk is de-
pooled in any of the months of February through June, or during any of 
the preceding three months, or during any of the preceding months of 
July through January, the equivalent of at

[[Page 9007]]

least 10 days' milk production would need to be physically received at 
a pool distributing plant in order to pool all of the dairy farmer's 
production for the month. Additionally, if the milk of a dairy farmer 
is de-pooled in any of the months of July through January, or in a 
preceding month, at least 10 days' milk production of the dairy farmer 
would need to be delivered to a pool distributing plant to have all the 
milk of the dairy farmer pooled for the month.
    The current Producer milk provision of the UMW order considers the 
milk of a dairy farmer to be producer milk when it is delivered 
directly from farms to pool plant or diverted by a pool plant or 
cooperative handler to a nonpool plant. Milk is not eligible for 
diversion to nonpool plants unless at least one days' production of 
such dairy farmer is received at a pool plant anytime during the 
initial qualifying month, often referred to as ``touching-base''. To be 
eligible to pool all of its milk receipts, the pooling handler must 
ship at least 10 percent of its milk receipts to a pool distributing 
plant, producer-handler, a partially regulated distributing plant, or a 
pool distributing plant regulated by another Federal order. A handler's 
diversion of milk to nonpool plants can only be made to nonpool plants 
located in the States of Illinois, Iowa, Minnesota, Wisconsin, North 
Dakota, South Dakota, and the Upper Peninsula of Michigan, or to a 
distributing plant regulated under another Federal order. Milk that is 
subject to inclusion in another marketwide equalization program 
operated by a state government is not considered producer milk. The 
order currently does not limit a handler's ability to de-pool milk.
    The proponents of Proposals 2, 3, 4 and 5 are all of the opinion 
that the current pooling standards are inadequate because they enable 
manufacturing handlers to de-pool milk when advantageous to do so and 
immediately re-pool milk in a following month if advantageous to do so. 
According to the proponents, the UMW blend price is lowered when large 
volumes of sometimes higher valued milk used for manufacturing is de-
pooled and when the large volumes of de-pooled milk returns to the 
pool. Furthermore, the witnesses argued that de-pooling handlers do not 
account to the UMW pool at the order's classified prices and therefore 
face different costs than their similarly situated pooling competitors. 
The proponents insisted that the pooling standards of the order need to 
be amended to ensure producer and handler equity, even though the 
proposals differed on how best to meet this end.
    A witness appearing on behalf of Mid-West, et al., testified in 
support of Proposal 2. The witness was of the opinion that the 
underlying principles of the Federal order program are to supply milk 
to the fluid market, equitably share pool proceeds among all 
participating producers, and promote orderly marketing. The witness 
explained that the Federal order program achieves these objectives 
through classified pricing, through which Class I milk generates 
revenue for the pool; and marketwide pooling, which equalizes payments 
to all participating producers who serve the market regardless of how 
the milk of any single producer is utilized.
    The Mid-West, et al., witness said that currently milk utilized at 
manufacturing plants can be de-pooled and again pooled in a subsequent 
month when it is economically beneficial to the handler. When choosing 
to pool or not to pool, the witness explained, handlers assess whether 
participating in the marketwide pool would require them to make a 
payment into or receive a payment from the PSF. According to the 
witness, milk utilized as Class I must always be pooled regardless of 
whether the pooling handler would make a payment into, or receives a 
payment from, the PSF.
    The Mid-West, et al., witness testified that because manufacturing 
milk can freely exit and return to the pool, producers who regularly 
and consistently service the UMW fluid market are not being treated 
equitably under the terms of the order. According to the witness, these 
producers receive a lower blend price because the value of the milk 
that was de-pooled was not shared equitably among all the market's 
producers.
    The Mid-West, et al., witness maintained that the ability of 
manufacturing handlers to de-pool milk creates inequities among 
handlers and producers. The witness said that when the PPD is negative, 
dairy farmers receive different payments for their milk depending on if 
their milk was pooled, and handlers are not required to account to the 
pool at classified prices depending on their pooling decisions. Class I 
handlers who must pool their milk receipts always have a disadvantage 
when the PPD is negative, explained the witness, because a 
manufacturing handler can opt to de-pool and avoid paying into the PSF. 
According to the witness this results in higher prices that can be paid 
to the producers supplying the manufacturing handler. The witness 
contrasted that when the PPD is positive, milk that had been de-pooled 
seeks to return to the pool. According to the witness, this also 
dilutes the blend price paid to producers who had been supplying the 
Class I handler.
    The Mid-West, et al., witness, relying on Market Administrator 
statistics, noted that in May 2004, all producer milk pooled on the 
order was subject to a negative $1.97 per hundredweight (cwt) PPD. 
However, the witness emphasized that a manufacturing handler who chose 
to de-pool their milk supply and did not have to account to the pool at 
classified prices had an imputed PPD of zero. In other words, the 
witness explained, milk used in manufactured products was worth more 
than milk used in fluid products. Relying on additional Market 
Administrator statistics, the witness demonstrated that if 100 percent 
of eligible Class III milk had pooled in July 2003 through May 2004, 
the estimated PPD would have averaged a negative $0.098 per cwt rather 
than the actual average PPD of negative $0.773 per cwt.
    The Midwest, et al., witness explained how adoption of Proposal 2 
would improve both producer and handler equity. The witness said that 
Proposal 2 would only limit the amount of milk a handler could pool up 
to 125 or 135 percent of the previous month's pooled volume and 
clarified that any milk delivered to a distributing plant would not be 
subject to the 125 or 135 percent pooling calculation. If Proposal 2 
were adopted, the witness claimed, no current handler would have to 
change the physical operations of their plant. While adoption of this 
proposal would not end the practice of de-pooling, speculated the 
witness, it would establish financial consequences for handlers who 
might not otherwise consistently pool their milk receipts.
    In explaining why adoption of Proposal 2 would be reasonable and 
appropriate for the UMW order, the Mid-West, et al., witness said that 
a 125 percent standard should accommodate any change in the potential 
growth of a handler's pooled milk volume resulting from seasonal 
fluctuations in milk supply or the addition of new producers, assuming 
that the handler did not de-pool. Additionally, the witness added that 
to ensure no handler would need to change its physical operations, 
Proposal 2 allows a 135 percent re-pooling standard in March because of 
the fewer calendar days in February. The witness stressed that the 125 
and 135 percent standards allow a handler to de-pool a portion of its 
milk supply and over a period of months, regain the ability to again 
pool its entire supply. The witness added that the proposal does not 
restrict the volume of

[[Page 9008]]

milk able to be pooled in August since this is generally considered the 
start of the new marketing year
    The Mid-West, et al., witness also emphasized that establishing a 
standard on the basis of the prior month's pooled volume has been done 
in other orders. The Northeast order has a ``producer for other 
markets'' provision that restricts the ability to pool the milk of a 
producer if the milk of that producer had been previously de-pooled, 
noted the witness. Furthermore, the witness said, milk orders in the 
south and southeastern part of the country had provisions which limited 
the sharing of marketwide returns in the spring months to only those 
producers whose milk served the fluid market during the fall months.
    The Mid-West, et al., witness predicted that price volatility would 
continue in the future and result in negative PPD's and the further de-
pooling of milk. The witness was of the opinion that price volatility 
and de-pooling have created emergency marketing conditions that would 
warrant the Department to omit issuing a recommended decision.
    A witness from DFA, appearing on behalf of Mid-West, et al., 
testified in support of Proposal 2. The witness testified that DFA 
engages in the practice of de-pooling when warranted to earn sufficient 
revenue to pay their producer members a competitive milk price. The DFA 
witness emphasized that de-pooling creates disorderly marketing 
conditions and supported Proposal 2 as the best option to deter the 
practice of de-pooling. The witness offered scenarios that demonstrated 
the financial incentives available to handlers who de-pool milk. The 
witness asserted that the current pooling standards of the UMW order 
where producers qualify for pooling by meeting a one-day touch base 
standard allow handlers the opportunity to reap financial rewards from 
the market by de-pooling and re-pooling their milk receipts.
    The DFA witness explained that Proposal 2 was a compromise position 
among all the entities of Mid-West, et al., noting that its adoption 
would improve the current disorderly market conditions arising from the 
practice of de-pooling. The witness noted that many alternatives were 
considered but the proponents were of the opinion that Proposal 2 is a 
significant improvement to the order's pooling provisions while still 
allowing handlers to make their own pooling decisions.
    Witnesses from LOL, Swiss Valley, Cass-Clay, MMPC, and DFA Central 
Council, all appearing on behalf of Mid-West, et al., testified in 
support of Proposal 2. Many of the witnesses testified that their 
respective organizations engage in the practice of de-pooling when it 
is to their advantage but that they recognize that the practice has a 
negative impact on the PPD and creates disorderly marketing conditions. 
Consequently, they are of the opinion that while a moderate level of 
de-pooling should be tolerated, a set of standards should be 
established to deter de-pooling in order to maintain orderly marketing 
conditions.
    The Mid-West, et al., witnesses identified above expressed support 
for Proposal 2 as an acceptable and moderate approach to limiting the 
practice of de-pooling. The proposal would allow flexibility in making 
pooling decisions, explained the witnesses, but would also establish 
significant consequences for those who opt to de-pool large volumes of 
their producer milk supply. In this regard, the witnesses said that 
Proposal 2 would result in ensuring more equity among handlers and 
producers during times of price inversions.
    A DFA dairy farmer member, whose milk is pooled on the UMW order, 
testified in support of Proposal 2. The witness was of the opinion that 
if a dairy farmer wants to participate in the UMW marketwide pool and 
share in the revenue generated from the market, they should be prepared 
to service the market every month. When handlers engage in the practice 
of de-pooling their milk receipts, the witness said, the results are 
severe price fluctuations and larger negative PPDs that negatively 
impact the price paid to pooled producers. The witness was of the 
opinion that the adoption of Proposal 2 would result in more stable 
pooled milk volumes and consequently would lessen the severe and 
volatile price changes that producers have experienced.
    A dairy farmer appearing on behalf of MCMP, whose milk is pooled on 
the UMW order, testified in support of Proposal 2. The witness said 
that their farm income was negatively impacted during May 2004 as a 
result of the negative $1.97 per cwt PPD. The witness added that 
neighboring farms that shipped milk to other handlers reported 
receiving a higher price for their milk. The opinion of the witness was 
that the practice of de-pooling has led to non-uniform prices received 
by farmers and that adoption of Proposal 2 would restore price equity 
among producers.
    A witness appearing on behalf of Dean testified in opposition to 
Proposal 2. The witness said that the pooling standards of Proposal 2 
are too liberal and that unlimited pooling in the month of August could 
allow handlers to again take advantage of the pooling system.
    A witness appearing on behalf of Northwest Dairy Association (NDA) 
testified in opposition to Proposal 2. NDA is a dairy cooperative that 
markets 7 billion pounds of milk annually with members in the States of 
Washington, Oregon, Idaho, and Northern California. The witness 
explained that NDA engages in the practice of de-pooling in other 
Federal orders as a way to recover costs in their manufacturing of 
butter and cheese because the Class III and IV make allowances that do 
not adequately reflect such costs. The NDA witness was of the opinion 
that the practice of de-pooling should be addressed at a national 
hearing that would also consider other issues such as the make 
allowances used in the Class III and IV price formulas.
    A witness appearing on behalf of Dean testified in support of 
Proposals 3, 4, and 5. The witness asserted that the intent of the 
Federal order system is to ensure a sufficient supply of milk for fluid 
use and provide for uniform payments to producers who stand ready, 
willing, and able to serve the fluid market. While some entities are of 
the opinion that the Federal order system should ensure a sufficient 
milk supply to all plants, the Dean witness was of the opinion that the 
Federal order system addresses only the need for ensuring a milk supply 
to distributing plants. The witness elaborated on this opinion by 
citing examples of order provisions that stress providing for a regular 
supply of milk to distributing plants as a priority of the Federal milk 
order program.
    The Dean witness was of the opinion that for the Federal milk order 
system to ensure orderly marketing, orders need to provide adequate 
economic incentives that will attract milk to fluid plants and also 
need to properly define regulations to determine the milk of those 
producers who can participate in the marketwide pool. The witness 
argued that a major flaw in the current regulations is that they allow 
handlers to choose when to participate in the pool. In this regard, the 
witness said, the order lacks the economic incentive for pool 
participation by its lack of an economic disincentive to the practice 
of de-pooling.
    The Dean witness testified that Proposals 3, 4, and 5 are designed 
to establish proper economic incentives for supplying the fluid market 
and maintain equity among handlers and producers. While each proposal 
offered a slightly different solution to the problem, the witness said 
Dean Foods supports their adoption in the following order or

[[Page 9009]]

preference: Proposal 3, Proposal 4, and then Proposal 5.
    A second witness appearing on behalf of Dean testified in support 
of Proposals 3, 4, and 5. The witness argued that when handlers engage 
in the practice of de-pooling it creates a burden on the producers who 
consistently serve the Class I needs of the market. According to the 
witness, when the PPD is negative, there is an incentive for handlers 
to de-pool Class III and Class IV milk. When a handler opts to de-pool, 
it decreases the amount of pooled milk and makes the PPD more negative 
than it would have been had all milk been pooled, the witness said. 
When the PPD is positive, milk previously de-pooled seeks to be re-
pooled which increases the volume of pooled milk valued at lower 
classified prices and lowers the blend price paid to all producers, the 
witness asserted. The major ``losers'' in this process, concluded the 
witness, are the producers whose milk is continuously pooled regardless 
of the PPD.
    The second Dean witness said that Proposal 3 was designed to 
increase the availability of milk for fluid use and ensure that pool 
proceeds are only shared among producers who consistently service the 
fluid market. The witness said that if Proposal 3 is adopted, de-pooled 
milk could again become pooled as long as the producer delivered ten-
day's milk production to a pool distributing plant for twelve 
consecutive months. Once that standard was met, the witness added, the 
producer's milk could then be pooled under the more flexible provisions 
of the UMW order.
    The Dean witness asserted that there are three benefits to adoption 
of Proposal 3: (1) When the PPD is negative, more Class III milk would 
stay in the pool resulting in a less negative PPD; (2) Some Class III 
de-pooled milk would never be re-pooled which would result in a more 
positive PPD; and (3) Class III de-pooled milk would have to 
demonstrate regular and significant deliveries to distributing plants 
in order to be re-pooled.
    In explaining Proposal 4 as an alternative to Proposal 3, the 
second Dean witness indicated that the difference in the two proposals 
is the number of months that the ten-day touch base provision would be 
applicable before de-pooled milk could again be pooled under normal 
circumstances. The witness was of the opinion that Proposal 4 would 
discourage some de-pooling, however, the harm caused by the practice of 
de-pooling would be better prevented by the adoption of Proposal 3.
    The Dean witness also discussed Proposal 5 as a less desirable 
alternative to Proposals 3 and 4. According to the witness, Proposal 5 
would limit the amount of milk that can be pooled to 115 percent of the 
handler's previous month's pooled milk volume. The witness explained 
that the greater the volume of de-pooled milk, the more time needed 
under Proposal 5 for a handler to re-pool all its milk receipts. This, 
the witness said, ensures that the entities that benefit the most from 
the practice of de-pooling would not receive an immediate benefit that 
would otherwise occur when re-pooling.
    A third witness appearing on behalf of Dean testified in support of 
Proposal 3. The witness said that the current liberal pooling standards 
of the UMW order are one source of disorderly marketing and are 
preventing all producers from sharing equally in pool proceeds. The 
witness asserted that the Federal milk order system was designed so 
that through marketwide pooling all producers would share equally in 
pool proceeds, and that through classified pricing milk would move to 
the market's highest-valued use.
    Relying on Market Administrator statistics for January 2000 through 
June 2004, the witness asserted that the volume of pooled Class III 
milk varied from 1.5 billion pounds in January 2004 to 11 million 
pounds in April 2004. Furthermore, the witness said, the blend price in 
April 2004 would have been $2.97 higher if all Class III milk had been 
pooled. The witness was of the opinion that these large swings in the 
volume of pooled milk results in the disorderly marketing condition of 
inequitable sharing of pool proceeds among producers.
    A witness appearing on behalf of Oberweis Dairy testified in 
support of Proposals 2 and 3. Oberweis Dairy operates a distributing 
plant with approximately 40 dairy farmer suppliers and 32 ice cream 
stores in the Chicago and St. Louis area markets. The witness was of 
the opinion that it is inequitable to producers and Class I handlers 
when manufacturing handlers engage in the practice of de-pooling. The 
witness was of the opinion that either all handlers should be able to 
engage in the practice of de-pooling or de-pooling should be 
prohibited. While no proposal at the hearing proposed such a 
restriction, the witness was of the opinion that Proposal 3 would be 
the best option to restore equity among producers. Nevertheless, the 
witness said that Oberweis would support the adoption of Proposal 2 if 
the Department finds it to be more appropriate.
    A witness appearing on behalf of the Wisconsin Farmers Union, 
Minnesota Farmers Union, and the North Dakota Farmers Union testified 
about the negative effects of de-pooling on dairy producers. These 
organizations represent farmers of various agricultural products in 
their respective States. The witness asserted that when a cooperative 
engages in the practice of de-pooling, dairy farmers are negatively 
impacted because the revenue a cooperative gains from de-pooling is not 
paid to producers by the cooperatives. The witness insisted that the 
practice of de-pooling should be curbed so that producers are 
adequately paid for the total value of their milk.
    A witness appearing on behalf of Galloway Company (Galloway) 
testified in support of all proposals that would limit the practice of 
de-pooling. Galloway owns and operates a dairy manufacturing plant in 
the UMW marketing area. The witness was of the opinion that large 
negative PPD's are due, in part, to de-pooling and that has a negative 
impact on the income of Galloway. The witness was of the opinion that 
changes to order provisions to limit the ability to re-pool are 
necessary but had no opinion as to which proposal would be the best 
option.
    A post-hearing brief submitted by Dean reiterated their opinion 
that the pooling standards of the order need to be amended to correct 
the disorderly marketing conditions arising from the practice of de-
pooling. The brief argued that the practice of de-pooling is disorderly 
because a handler who de-pools milk avoids accounting to the pool at 
classified prices and is not required to pay its suppliers the minimum 
blend price. However, asserted Dean, a pooled handler not only accounts 
to the pool at classified prices and pays its suppliers the minimum 
blend price, the handler also finds it necessary to pay large premiums 
to keep its suppliers.
    According to the Dean brief, negative PPD's and the resulting 
practice of de-pooling are not a national issue, noting that de-pooling 
typically occurs in markets with low Class I utilization such as the 
UMW. The Dean brief predicted that the practice of de-pooling would 
occur in the future and therefore concluded that the disorderly 
marketing conditions arising from the practice of de-pooling warrant 
emergency action from the Department by omitting a recommended 
decision.
    A post hearing brief submitted on behalf of Lamers Dairy, Inc. 
(Lamers) asserted that the ability of some handlers to engage in the 
practice of de-

[[Page 9010]]

pooling when it is economically advantageous is a disorderly marketing 
condition. Furthermore, the brief expressed the opinion that de-pooling 
causes inequitable treatment among handlers because pooling handlers 
must account to the PSF at minimum classified prices while handlers who 
de-pool their milk receipts do not. The Lamers brief supported adoption 
of Proposal 3 as the most appropriate solution to limit the practice of 
de-pooling.
    A witness appearing on behalf of Mid-West, et al., testified in 
opposition to Proposal 3. According to the witness, requiring a 
producer whose milk was de-pooled to deliver 10-day's milk production 
to a pool distributing plant is a standard that would be extremely 
difficult to meet. The witness stressed that finding access to a pool 
distributing plant for 10-day's production would not only be extremely 
difficult, it would also be costly. The Mid-West, et al., brief also 
contended that the proposals offered by Dean would require physical 
changes in plant operations that are not necessary to address the 
practice of de-pooling in the UMW market.
    The Mid-West, et al., brief disagreed with others who were of the 
opinion that the de-pooling issue should be addressed at a national 
hearing. The brief explained that historical Federal milk order policy 
is that the pooling provisions of orders be reflective of each order's 
individual marketing conditions. Therefore, the brief concluded, it is 
appropriate to address the practice of de-pooling on an individual 
order basis.
    A witness appearing on behalf of Associated Milk Producers, Inc. 
(AMPI) testified in opposition to all proposals intended to limit the 
practice of de-pooling as specified in Proposals 2, 3, 4, and 5. The 
witness' testimony was given on behalf of Alto Dairy Cooperative, 
Bongards' Creameries, Ellsworth Cooperative Creamery, Family Dairies 
USA, First District Association, Davisco Foods, Valley Queen Cheese 
Company and Wisconsin Cheesemakers Association (WCA). The members 
consist of cooperative associations and handlers who market or purchase 
milk in the UMW marketing area. Hereinafter, this coalition of members 
will be referred to collectively as ``AMPI, et al.''
    The AMPI, et al., witness testified that the option to engage in 
the practice of de-pooling in response to price inversions has been a 
longstanding part of the Federal milk order system. The witness 
testified that as a result of timing differences in announcing 
classified prices, a lag between changes in the market value of milk 
used in manufacturing and corresponding changes in the Federal order 
Class I price sometimes results in price inversions. The witness 
explained that the occasional price inversion is caused by the 
announcement of the Class I price approximately two weeks prior to the 
month and the announcement of the price for milk used in Class II, III, 
and IV products occurring after the close of the month--a difference of 
six weeks. The witness drew attention to April 2004 where the value of 
Class III milk increased $6.02 per cwt during the six-week lag. This 
resulted in a blend price that was substantially less than the 
estimated Class III price, resulting in a large amount of de-pooled 
Class III milk because, the witness said, there was no incentive for 
manufacturing handlers to pool all of their milk receipts.
    The AMPI, et al., witness asserted that the argument that de-pooled 
milk does not serve, nor is available to serve, the fluid market is 
false. According to the witness, milk that is de-pooled is available to 
the Class I market during the month it is marketed and a decision to 
de-pool the milk is made after the end of the month when the Class II, 
III and IV prices are known. Additionally, the witness asserted that 
fluid milk plants always receive a continuous supply of fluid milk 
because of their contractual supply agreements.
    The AMPI, et al., witness characterized the proposals under 
consideration to address the practice of de-pooling as designed to 
penalize handlers who engage in de-pooling their Class III milk. AMPI, 
et al., the witness stated, is strongly opposed to this change in 
pooling philosophy. The witness was of the opinion that the Federal 
order system should continue to provide for the marketwide sharing of 
money derived from sales of Class I milk since it is Class I sales that 
historically generate additional revenue to producers. However, the 
witness said, the order should not force handlers to share money 
generated from manufactured milk products to offset a low Class I 
price.
    The AMPI, et al., witness was of the opinion that the practice of 
de-pooling is a national issue that should be addressed in a national 
hearing. The witness believed that a better solution to the practice of 
de-pooling would be to eliminate the advanced pricing of Class I milk 
and instead announce all Class prices after the end of the month.
    The AMPI, et al., witness also testified that emergency marketing 
conditions do not exist to warrant the omission of a recommended 
decision by the Department. The witness stressed that price inversions 
and the practice of de-pooling have occurred in the Federal order 
system for decades and any major change in Department policy regarding 
this practice should be addressed in a recommended decision where 
interested parties can file comments and exceptions.
    A post-hearing brief submitted on behalf of AMPI, et al., 
reiterated their opposition to all of the proposals that seek to deter 
de-pooling. The brief argued that the AMAA intended for the government 
to only require the sharing of the revenues generated from fluid sales. 
According to the brief, requiring manufactured milk to remain pooled 
oversteps the authority of the AMAA. The brief also expressed the 
opinion that Proposals 3, 4, and 5 are designed to limit a producer's 
access to the market and should therefore be denied. Furthermore, the 
brief stressed that Proposals 3 through 5 would unfairly increase costs 
of some UMW handlers because of the increased transportation and 
capital investment that would be needed to comply with the proposed 
amendments.
    A witness appearing on behalf of WCA, testified in opposition to 
all proposals intended to limit the practice of de-pooling as specified 
in Proposals 2, 3, 4, and 5. The witness testified that WCA represents 
dairy manufacturers and marketers with 32 of its members operating 42 
pooled dairy facilities on the UMW order. According to the witness, 30 
of the 42 pooled dairy facilities are small businesses and if the 
proposals to limit the practice of de-pooling were adopted, these small 
businesses would face new and significant costs to comply with the 
proposed new standards without benefit to their dairy farmer suppliers.
    The WCA witness expressed concern that Proposal 2 addressed the 
practice of de-pooling without regard to the cause of negative PPD's, 
specifically the inversion of classified prices. The witness also said 
that Proposals 2, 3, 4 and 5 would put an additional administrative 
burden on handlers by requiring them to designate which producers would 
remain pooled or de-pooled. The witness asserted that access to 
distributing plants in the UMW market is very limited and it would be 
hard for a de-pooled producer to re-associate with a distributing plant 
in order to be eligible to again pool their milk on the order.
    The WCA witness was of the opinion that Proposals 3 and 4 also 
would add additional transportation costs, administrative costs, and 
the potential need for additional silo capacity to accommodate the 
increased volume of milk that would be needed to meet the

[[Page 9011]]

10-day production delivery standard at a pool distributing plant. The 
witness explained that many WCA members do not have the capacity to 
accommodate meeting a 10-day production delivery standard for each 
month. The witness was also of the opinion that existing supply 
contracts provide ample milk supplies for the Class I market and 
concluded that additional deliveries to pool plants are not needed to 
assure an adequate supply to Class I facilities.
    A witness appearing on behalf of the National Family Farm 
Coalition, an organization representing family farms located in 32 
states including those states comprising the UMW marketing area, 
testified in opposition to all proposals at the hearing. The witness 
was of the opinion that the entire Federal order system was in need of 
a complete reform. The witness asserted that the proponents of the 
proposals being heard were entities whose past actions have lowered 
prices received by family farmers.
    A post-hearing brief submitted on behalf of Alto Dairy (Alto), a 
cooperative with 580 dairy farmer members in Wisconsin and Michigan, 
reiterated their opposition to all proposals seeking to limit the 
practice of de-pooling. The brief stressed that a decision to de-pool 
is made separately from the decision to adequately supply the Class I 
needs of the market.
    An Extension Dairy Marketing Specialist at the University of 
Wisconsin testified on the issues surrounding the practice of de-
pooling but did not support or oppose any specific proposal. The 
witness referred to and explained a research paper which identified and 
explained problems arising in the UMW marketing area by pooling distant 
milk, the practice of de-pooling, and the resulting economic impacts to 
producers. The witness said that if manufacturing prices for milk 
rapidly increase during the month there will be a negative PPD but as 
prices begin to decline, the PPD will again become positive over time. 
The witness also explained that a negative PPD does not mean that 
producers lost money. Rather, the witness clarified, the PPD is a 
calculation of the difference between the Class III price and the blend 
price that producers receive. However, concluded the witness, the 
ability to engage in the practice of de-pooling does result in volatile 
PPD's and gives rise to inequities among producers and handlers.
    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 UMW 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 UMW 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 
UMW order decreased by over 60 percent from 1.94 billion pounds to 608 
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 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 changes. However, milk receipts

[[Page 9012]]

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 $4.11 per cwt. If 
all eligible milk had been pooled, the PPD would have been $2.97 per 
cwt higher or a negative $1.14 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 Cook County, Illinois, 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.\1\ These computations reveal that the effective 
monthly Class I differential averaged $1.76 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.
---------------------------------------------------------------------------

    \1\ 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 or 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.
    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-value 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, primarily the 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

[[Page 9013]]

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 during the months of April through February to 125 
percent of the total volume pooled by the handler or cooperative in the 
prior month and to 135 percent of the prior month's pooled volume 
during the month of March. 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 this proceeding 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 that 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 UMW order have differences. They all seek 
to address the market disorder arising from the practice of de-pooling. 
However, this decision does not find adoption of the two ``dairy farmer 
for other market'' proposals--Proposals 3 and 4--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 5, 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 by a handler during the months 
of April through February to 125 percent of the total milk receipts the 
handler pooled in the prior month and to 135 percent of the prior 
month's pooled volume during the month of March 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 to 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 warrant public comments before a final decision is 
issued.

B. Producer Definition

    A proposal published in the hearing notice as Proposal 6, seeking 
to specify the length of time a dairy farmer may lose Grade A status 
before losing producer status on the order, is not recommended for 
adoption. Proposal 6, offered by Dean, would amend the Producer 
definition by explicitly stating that a dairy farmer may lose Grade A 
status for up to 21 calendar days per year before needing to requalify 
as a producer on the order. The UMW order currently does not specify 
the specific length of time a dairy farmer may lose Grade A status 
before needing to requalify as a producer on the order. Currently, a 
dairy farmer must deliver one day's milk production to a pool plant 
during the first month a producer is to be pooled in order to have 
their milk pooled and priced under the terms of the order.
    A witness appearing on behalf of Dean testified in support of 
Proposal 6. The witness said the UMW order currently does not specify 
how long a dairy farmer who temporarily loses their Grade A status can 
retain producer status before they must requalify as a producer on the 
order. Proposal 6, the witness stated, sets a reasonable limit to the 
number of days a producer can lose Grade A status within a calendar 
year.
    A witness appearing on behalf of Mid-West, et al., testified in 
opposition to Proposal 6. The witness said that many situations could 
arise where a producer is unable to regain Grade A status in less than 
21 days due to damages resulting from situations beyond their control. 
The current order language provides for waivers in pooling standards 
for pool plants due to such ``acts of God'' and, in the witness' 
opinion, is adequately provided for in the Producer definition of the 
current order language.
    The Producer definition of the UMW order does not define the length 
of time a producer may lose Grade A status before needing to requalify 
for producer status on the order. The issue of qualifying for producer 
status is important since it determines which producers and which 
producer milk is entitled to share in the revenues arising from the 
marketwide pooling of milk on the UMW order.
    The definition of ``temporary'' used by the Market Administrator 
has accommodated the Upper Midwest market by giving producers a 
reasonable amount of time to regain Grade A status without burdening 
the market with excessive touch-base shipments or recordkeeping 
requirements. Limiting the time period a producer can lose Grade A 
status would require handlers and the Market Administrator to track the 
producer's loss of Grade A status throughout the year to determine when 
the 21 day limit is reached.
    This decision finds that the additional touch-base shipments that 
would be required for a dairy farmer to requalify for producer status 
on the order would cause uneconomic shipments of milk. Additionally, 
the increased recordkeeping requirements would burden handlers without 
contributing to the goals and application of the proposed amendments to 
the pooling standards contained in this decision. Accordingly, Proposal 
6 is not recommended for adoption.

2. Administrative Assessment Rate

    A proposal, published in the hearing notice as Proposal 7, seeking 
to increase the maximum assessment rate of the

[[Page 9014]]

UMW order, should be adopted. Specifically, the maximum administrative 
assessment rate should be increased from the current rate of 5 cents 
per cwt to 8 cents per cwt. At the time of the hearing, the 
administrative assessment rate of 5 cents per cwt applied to all milk 
pooled on the order and was the maximum assessment rate that could be 
charged. Adoption of this proposal will not increase the administrative 
assessment above the current rate but it will give the market 
administrator the ability to increase the assessment up to a maximum 8 
cents per cwt, if necessary.\2\
---------------------------------------------------------------------------

    \2\ Official notice is taken of a letter from the UMW Market 
Administrator to UMW handlers, cooperatives and interested persons, 
dated September 28, 2005, that decreases the administrative 
assessment from 5 cents to 4 cents per cwt, effective with milk 
produced on or after September 1, 2005.
---------------------------------------------------------------------------

    According to the Market Administrator, Proposal 7 was offered 
because there is not sufficient milk volume being consistently pooled 
on the UMW order to generate adequate funding for the proper 
administration of the order. Administration of the UMW order generates 
substantial costs for the many services provided to UMW marketing area 
participants including pooling, auditing, gathering market information, 
and providing market services such as laboratory testing, explained the 
witness. The witness noted that there are also fixed expenses such as 
salaries and office leases and that the order must maintain a specified 
minimum level of operating reserves.
    The Market Administrator stated that from 2000 to 2002, the amount 
of producer milk on the UMW order ranged from 1.7 to 1.95 billion 
pounds per month. According to the witness, this volume of pooled milk 
generated sufficient funds for the administration of the order for the 
4-cent per cwt assessment rate being assessed on pooled milk during 
that time. However, the witness said, from July through November 2003 
almost 6.2 billion pounds of producer milk was de-pooled which resulted 
in the loss of nearly $2.5 million in potential revenue for the 
administration of the order. According to the Market Administrator, 
this loss of revenue caused the assessment rate to be increased from 4 
cents to 5 cents per cwt. The Market Administrator stressed that 
substantial de-pooling occurred again from March through May 2004 when 
nearly 4.7 billion pounds of producer milk was de-pooled.
    The Market Administrator emphasized that the UMW order still 
services the de-pooled milk because handlers make decisions to de-pool 
their milk receipts after the end of the month after already utilizing 
many of the UMW order services. According to the Market Administrator, 
the UMW order must sometimes service an approximately 2 billion pound 
market per month while only collecting an assessment on 600 to 700 
million pounds of milk. At the current assessment rate of 5 cents per 
cwt, noted the Market Administrator, the order needs approximately 1.5 
billion pounds of pooled producer milk per month to operate and provide 
the services expected by market participants.
    The Market Administrator said that actions to reduce operating 
costs have taken place but an increase in the maximum assessment rate 
is needed to ensure the proper administration of the order and to 
maintain necessary operating reserves. The Market Administrator 
explained that increasing the maximum administrative assessment rate to 
8 cents per cwt would not necessarily be the actual rate that would be 
charged to pooling handlers. The Market Administrator stressed that the 
proposed 8-cent assessment rate is a maximum level, and the actual 
assessment rate charged would only be as high as needed to operate the 
order.
    The Mid-West, et al., brief expressed support of the Proposal 7 but 
emphasized that the assessment rate should be viewed as a maximum. The 
brief speculated that if Proposal 2 is adopted, the volume of milk 
pooled consistently will stabilize making it unnecessary to raise the 
assessment rate. The brief also discussed the option of having the 
assessment rate vary to ensure that milk which is consistently pooled 
does not pay for services on milk that is de-pooled and does not pay an 
assessment.
    A witness appearing on behalf of Dean viewed Proposal 7 as an extra 
tax on those producers who already pay for the administration of the 
order every month, unlike those producers whose milk is de-pooled. The 
witness contended that if Proposal 3, 4, or 5 were adopted, the amount 
of milk being de-pooled on the UMW order would decrease significantly, 
thus giving the Market Administrator a more consistent income stream. 
However, asserted the witness, if the Department decided to increase 
the administrative assessment, Dean would encourage an amended 
provision that would charge a higher assessment on milk not pooled in 
the previous month.
    Dean's post-hearing brief reiterated support for increasing the 
maximum administrative rate while maintaining that adoption of Proposal 
3 would prevent the need to actually increase the administrative 
assessment rate. The brief proposed that if the administrative 
assessment rate is increased, the Market Administrator should be 
granted the authority to insulate continuously pooled producers from 
paying the increased assessment.
    A witness appearing on behalf of WCA testified in opposition to 
Proposal 7. The witness asserted that the Market Administrator should 
use other means to address what the witness characterized as short-term 
funding declines.
    A witness representing Oberweis Dairy also opposed adoption of 
Proposal 7 because it would increase costs to producers.
    The hearing record reveals that fluctuations in the volume of milk 
pooled on the UMW order attributed to de-pooling can reduce the Market 
Administrator revenues to a level too low for proper administration of 
the order. At the current assessment rate of 5 cents per cwt, 1.5 
billion pounds of pooled milk is needed to generate sufficient funds 
for the administration of the order. However, de-pooling has resulted 
in pooled volumes far below that needed to generate an adequate revenue 
stream.
    The recommended adoption of a proposal to deter the de-pooling of 
milk should result in a more stable revenue stream for the 
administration of the UMW order. Nevertheless, it is reasonable to 
increase the maximum administrative assessment rate to ensure that the 
Market Administrator has the proper funds to carry out all of the 
services provided by the UMW order. While the maximum administrative 
rate should be increased to 8 cents per cwt, the actual rate charged 
will only be as high as necessary to properly administer the order and 
provide the necessary services to market participants.
Rulings on Proposed Findings and Conclusions
    Briefs and proposed findings and conclusions were filed on behalf 
of certain interested parties. These briefs, proposed findings and 
conclusions, and the evidence in the record were considered in making 
the findings and conclusions set forth above. To the extent that the 
suggested findings and conclusions filed by interested parties are 
inconsistent with the findings and conclusions set forth herein, the 
requests to make such findings or reach such conclusions are denied for 
the reasons previously stated in this decision.

[[Page 9015]]

General Findings
    The findings and determinations hereinafter set forth supplement 
those that were made when the UMW order was first issued and when it 
was amended. The previous findings and determinations are hereby 
ratified and confirmed, except where they may conflict with those set 
forth herein.
    (a) The tentative marketing agreement and the order, as hereby 
proposed to be amended, and all of the terms and conditions thereof, 
will tend to effectuate the declared policy of the Act;
    (b) The parity prices of milk as determined pursuant to section 2 
of the Act are not reasonable in view of the price of feeds, available 
supplies of feeds, and other economic conditions which affect market 
supply and demand for milk in the marketing area, and the minimum 
prices specified in the tentative marketing agreement and the order, as 
hereby proposed to be amended, are such prices as will reflect the 
aforesaid factors, insure a sufficient quantity of pure and wholesome 
milk, and be in the public interest; and
    (c) The tentative marketing agreement and the order, as hereby 
proposed to be amended, will regulate the handling of milk in the same 
manner as, and will be applicable only to persons in the respective 
classes of industrial and commercial activity specified in, the 
marketing agreement upon which a hearing has been held.
Recommended Marketing Agreement and Order Amending the Order
    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 UMW 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 1030

    Milk marketing orders.

    For the reasons set forth in the preamble, 7 CFR part 1030, is 
proposed to be amended as follows:

PART 1030--MILK IN THE UPPER MIDWEST MARKETING AREA

    1. The authority citation for 7 CFR part 1030 continues to read as 
follows:

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

    2. Section 1030.13 is amended by adding a new paragraph (f), to 
read as follows:


Sec.  1030.13  Producer milk.

* * * * *
    (f) The quantity of milk reported by a handler pursuant to Sec.  
1030.30(a)(1) and/or Sec.  1030.30(c)(1) for April through February may 
not exceed 125 percent, and March may not exceed 135 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 in excess of this limit received at pool 
plants, other than pool distributing plants, shall be classified 
pursuant to Sec.  1000.44(a)(3)(v) and Sec.  1000.44(b)(3)(v) of this 
title. 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 market administrator will make the determination. The 
following provisions apply:
    (1) Milk shipped to and physically received at pool distributing 
plants shall not be subject to the 125 or 135 percent limitation;
    (2) Producer milk qualified pursuant to ----.13 of any other 
Federal Order and continuously pooled in any Federal Order for the 
previous six months shall not be included in the computation of the 125 
or 135 percent limitation;
    (3) The market administrator may waive the 125 or 135 percent 
limitation:
    (i) For a new handler on the order, subject to the provisions of 
Sec.  1030.13(f)(3), 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).
    3. Section 1030.85 is revised, to read as follows:


Sec.  1030.85  Assessment for order administration.

    On or before the payment receipt date specified under Sec.  
1030.71, each handler shall pay to the market administrator its pro 
rata share of the expense of administration of the order at a rate 
specified by the market administrator that is no more than 8 cents per 
hundredweight with respect to:
    (a) Receipts of producer milk (including the handler's own 
production) other than such receipts by a handler described in Sec.  
1000.9(c) that were delivered to pool plants of other handlers;
    (b) Receipts from a handler described in Sec.  1000.9(c) of this 
title;
    (c) Receipts of concentrated fluid milk products from unregulated 
supply plants and receipts of nonfluid milk products assigned to Class 
I use pursuant to Sec.  1000.43(d) of this title and other source milk 
allocated to Class I pursuant to Sec.  1000.44(a)(3) and (8) of this 
title and the corresponding steps of Sec.  1000.44(b) of this title, 
except other source milk that is excluded from the computations 
pursuant to Sec.  1030.60(h) and (i); and
    (d) Route disposition in the marketing area from a partially 
regulated distributing plant that exceeds the skim milk and butterfat 
subtracted pursuant to Sec.  1000.76(a)(1)(i) and (ii) of this title.

    Dated: February 15, 2006.
Lloyd C. Day,
Administrator, Agricultural Marketing Service.
[FR Doc. 06-1585 Filed 2-21-06; 8:45 am]
BILLING CODE 3410-02-P