[Federal Register Volume 71, Number 95 (Wednesday, May 17, 2006)]
[Proposed Rules]
[Pages 28590-28604]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-4591]


 ========================================================================
 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
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 

  Federal Register / Vol. 71, No. 95 / Wednesday, May 17, 2006 / 
Proposed Rules  

[[Page 28590]]



DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Part 1000

[Docket no. AO-14-A73, et al.; DA-03-10]


Milk in the Northeast and Other Marketing Areas; Recommended 
Decision and Opportunity to File Written Exceptions on Proposed 
Amendments to Marketing Agreements and Orders

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Proposed rule; recommended decision.

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------------------------------------------------------------------------
    7 CFR part           Marketing area                 AO Nos.
------------------------------------------------------------------------
1001..............  Northeast...............  AO-14-A73.
1005..............  Appalachian.............  AO-388-A14.
1006..............  Florida.................  AO-356-A37.
1007..............  Southeast...............  AO-366-A43.
1030..............  Upper Midwest...........  AO-361-A38.
1032..............  Central.................  AO-313-A47.
1033..............  Mideast.................  AO-166-A71.
1124..............  Pacific Northwest.......  AO-368-A34.
1126..............  Southwest...............  AO-231-A67.
1131..............  Arizona Las-Vegas.......  AO-271-A39.
------------------------------------------------------------------------

SUMMARY: This document recommends changes to the fluid milk product 
definition for all Federal milk marketing orders and is based on the 
record of a hearing held June 20-23, 2005, in Pittsburgh, Pennsylvania. 
Specifically, this document recommends maintaining the current 6.5 
percent nonfat milk solids criteria and incorporating an equivalent 
2.25 percent true protein criteria in determining if a product meets 
the fluid milk product definition. This decision also proposes to 
clarify how milk and milk-derived ingredients should be priced under 
all orders. In addition, ``drinkable'' yogurt products containing at 
least 20 percent yogurt, keifir and products designed to be meal 
replacements, regardless of packaging, are proposed to be exempted from 
the fluid milk product definition.

DATES: Comments should be submitted on or before July 17, 2006.

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

FOR FURTHER INFORMATION CONTACT: Henry H. Schaefer, Economist, USDA/
AMS/Dairy Programs, Upper Midwest Milk Market Administrators Office, 
Suite 210, 4570 West 77th Street, Minneapolis, Minnesota 55435-5037, 
(952) 831-5292. E-mail address: [email protected]; or Gino M. Tosi, 
Associate Deputy Administrator, USDA/AMS/Dairy Programs, Order 
Formulation and Enforcement, Stop 0231-Room 2971-S 1400 Independence 
Avenue, SW., Washington, DC 20250-0231, (202) 690-1366, e-mail address: 
[email protected].

SUPPLEMENTARY INFORMATION: This administrative action is governed by 
the provisions of Sections 556 and 557 of Title 5 of the United States 
Code and, therefore, is excluded from the requirements of Executive 
Order 12866.
    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 (Act), as amended 
(7 U.S.C. 604-674), 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 habitant, or has its 
principal place of business, has jurisdiction in equity to review the 
USDA'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 
manufacture 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.
    For the month of June 2005, the month the hearing was held, 52,425 
dairy farmers were pooled on the Federal order system. Of the total, 
49,160, or 94 percent were considered small businesses. During the same 
month, 1,530 plants were regulated by or reported their milk receipts 
to their respective Market Administrator. Of the total, 847, or 55 
percent were considered small businesses.
    This decision recommends maintaining the current 6.5 percent nonfat 
milk solids criteria and adding a minimum true protein standard of 2.25 
percent to the fluid milk product definition. These criteria are not 
intended to be absolute determinates of

[[Page 28591]]

whether a product meets the fluid milk product definition. The form and 
intended use of the product will be the primary criteria used by the 
Department for determining whether a product meets the fluid milk 
product. The proposed amendments also would not consider beverages 
containing 20 percent or more yogurt as an ingredient in the finished 
product or Kefir as meeting the fluid milk product definition. In 
addition, this decision recommends removing the requirement that meal 
replacements be packaged in hermetically-sealed containers to be exempt 
from the fluid milk product definition.
    The proposed amendments to the fluid milk product definition set 
out the criteria for determining if the use of producer milk and milk-
derived ingredients in such products should be priced at the Class I 
price. The established criteria for the classification of producer milk 
established are applied in an identical fashion to both large and small 
businesses and will not have any different impact on those businesses 
producing fluid milk products. 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 are necessary.
    This notice does not require additional information collection that 
needs 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. 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.
    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 its applicability to small businesses.
    Prior documents in this proceeding: Notice of Hearing: Issued April 
6, 2005; published April 12, 2005 (70 FR 19012).

Preliminary Statement

    Notice is hereby given of the filing with the Hearing Clerk of this 
recommended decision with respect to the proposed amendments to the 
tentative marketing agreements and the orders regulating the handling 
of milk in the Northeast and other marketing areas. This notice is 
issued pursuant to the provisions of the Agricultural Marketing 
Agreement Act and 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 July 17, 2006. 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.
    The proposed amendments set forth below are based on the record of 
a public hearing held in Pittsburgh, Pennsylvania, on June 20-23, 2005, 
pursuant to a notice of hearing issued April 6, 2005; published April 
12, 2005 (70 FR 19012).
    The material issues on the record of the hearing relate to:
    1. Amending the fluid milk product definition.

Findings and Conclusions

    This decision recommends maintaining the current 6.5 percent nonfat 
milk solids criteria and incorporating an equivalent 2.25 percent 
minimum true protein criteria in determining if a product meets the 
fluid milk product definition. This decision proposes that for purposes 
of computing the true protein or nonfat milk solids content of a 
product, all milk-derived ingredients be included.
    This decision also proposes to exempt from the fluid milk product 
definition ``drinkable'' yogurt products (often referred to as smoothie 
products) that contain at least 20% yogurt, Kefir, and dietary products 
designed to be meal replacements that are marketed to the health care 
industry regardless of packaging. As proposed, such products would be 
considered Class II products and the dairy ingredients included in 
these products would be priced at the Federal order Class II price.
    Federal milk orders currently specify that a fluid milk product 
shall include any milk product in fluid or frozen form that contains 
less than 9 percent butterfat that is intended to be used as beverages. 
The fluid milk product definition contains a non-definitive list of 
dairy products that are fluid milk products. It also sets a maximum 
upper limit on the butterfat contained in a product of 9 percent and a 
lower limit of 6.5 percent nonfat milk solids by weight for a product 
to be considered a fluid milk product. Dairy products that do not fall 
within these limits are not considered fluid milk products and the milk 
used to produce these products are classified in Class II, Class III or 
Class IV depending on the form or purpose for which the products are to 
be used.
    Eleven proposals were published in the hearing notice for this 
proceeding. Proposals 1, 3, 4, and 6 were abandoned at the hearing by 
there proponents in support of other noticed proposals. No further 
reference to these proposals will be made.
    A proposal published in the hearing notice as Proposal 2, offered 
by Dairy Farmers of America, Inc. (DFA), seeks to amend the fluid milk 
product definition to include any dairy ingredient, including whey, 
when calculating the milk contained in a product on a protein-
equivalent or nonfat solids equivalent basis. DFA is a dairy farmer-
member owned cooperative whose members milk is pooled throughout the 
Federal order system.
    H.P. Hood LLC (H.P. Hood), which owns and operates milk processing 
and manufacturing plants in the Eastern and Midwest United States, is 
the proponent of a proposal published in the hearing notice as Proposal 
5 that was modified at the hearing. As modified, Proposal 5 seeks to 
amend the fluid milk product definition to include any product that, 
based upon substantial evidence as determined by the Department, 
directly competes with other fluid milk products and that the 
Department must make a written determination before any product can be 
reclassified as a fluid milk product.
    A proposal published in the hearing notice as Proposal 7 was 
offered by the National Milk Producers Federation (NMPF). NMPF consists 
of 33 dairy-

[[Page 28592]]

farmer member cooperatives that represent more than 75 percent of U.S. 
dairy farmers. Proposal 7 seeks to amend the fluid milk product 
definition by removing the reference ``6.5 percent nonfat solids 
standard and whey,'' and adopting a 2.25 percent true milk protein 
criteria. During the hearing, DFA offered a modification to Proposal 7 
by seeking to authorize the Department to make an interim 
classification determination for new products that result from new 
technology. The Department would then convene a hearing to address the 
use of the new technology in classification decisions and make a final 
classification determination for the new product within one year.
    A proposal published in the hearing notice as Proposal 8 seeks to 
amend the fluid milk product definition by excluding yogurt-containing 
beverages. This proposal was offered by The Dannon Company, Inc. 
(Dannon), a wholly owned subsidiary of The Danone Group, which produces 
yogurt and fresh dairy products in 40 countries including the United 
States.
    A proposal published in the hearing notice as Proposal 9 also seeks 
to amend the fluid milk product definition by excluding drinkable food 
products that contain at least 20 percent yogurt by weight from the 
fluid milk product definition. Proposal 9 was offered by General Mills, 
Inc. (General Mills), a food manufacturer that markets such products as 
Yoplait yogurt and yogurt-containing products in over 100 countries, 
including the United States.
    A proposal published in the hearing notice as Proposal 10 was 
offered by the Novartis Nutrition Corporation (Novartis). Novartis is a 
company that develops and manufactures products, including milk based 
products, designed to meet specific nutritional needs. Proposal 10 
seeks to amend the fluid milk product definition by removing the 6.5 
percent nonfat milk solids standard and excluding formulas prepared for 
dietary use.
    A proposal published in the hearing notice as Proposal 11 seeks to 
amend the fluid milk product definition by excluding healthcare 
beverages distributed to the healthcare industry. Proposal 11 was 
offered by Hormel Foods, LLC (Hormel), a wholly-owned subsidiary of 
Hormel Foods Corporation and manufacturer of a variety of food products 
primarily for the health care industry.
    A witness appearing on behalf of National Milk Producers Federation 
(NMPF) testified in support of Proposal 7. The witness testified that 
Proposal 7 would close loopholes in the current fluid milk product 
definition that have allowed products developed as a result of new 
technology to avoid classification as a fluid milk product. The witness 
said that the 6.5 percent nonfat solids standard should be eliminated 
and replaced with a 2.25 percent protein standard that would also 
include whey proteins in determining if the product meets the protein 
standard. The witness stressed that whey proteins should be defined as 
whey proteins that are a by-product of the cheese making process. The 
witness was of the opinion that adoption of Proposal 7 would not alter 
the classification of any product currently being marketed.
    The NMPF witness stressed that Federal order regulations have 
always adapted to marketing conditions and that the current fluid milk 
product definition should be amended to reflect changes in market 
conditions brought about by changes in technology. The witness 
testified that technology has evolved such that milk can now be 
separated into numerous components that can be recombined to create a 
vast number of new milk products. The witness argued that new 
technology has enabled manufacturers to manipulate milk components, 
such as removing lactose or substituting whey for other milk solids, to 
create new products that contain less than 6.5 percent nonfat milk 
solids. This enables manufacturers of the new products to avoid 
classification of the new product as a fluid milk product even though 
the form and use does not differ from what is currently considered as 
fluid milk products.
    The NMPF witness testified that Carb Countdown[supreg], a product 
manufactured by the H.P. Hood Company, contains whey and has a reduced 
lactose content that results in its composition below 6.5 percent 
nonfat milk solids standard. According to the witness, two market 
research studies suggest that the product is similar in form and use to 
traditional fluid milk. Relying upon a market study conducted by IRI, a 
market research firm, the witness related that 98.4 percent of Carb 
Countdown[supreg] sales are purchased as a substitute for fluid milk 
while only 1-percent of its sales are represented as an expansion of 
the fluid milk market.
    The NMPF witness was of the opinion that classifying a product on 
the basis of protein is appropriate because protein is the highest 
valued skim component in the marketplace. The witness testified that a 
2.25 percent protein standard is the appropriate equivalent of the 
current 6.5 percent nonfat milk solids standard. The witness asserted 
that protein has the most value to producers, processors and consumers 
because it contributes to milk nutrition, flavor and texture. While the 
witness was of the opinion that all dairy-derived ingredients should be 
used in computing the true protein standard of a product, the witness 
did not believe whey and whey product ingredients should be priced at 
the Class I price. The witness maintained that the use of whey and whey 
products should not exclude a product from the fluid milk product 
definition because manufactures are using whey in their new products to 
avoid a fluid milk product classification. The witness also noted that 
instead on relying upon the Food and Drug Administration (FDA) 
standard, the Department should provide its own definition of whey.
    A post-hearing brief submitted on behalf of NMPF reiterated the 
positions they testified to at the hearing. The brief asserted that 
adoption of a protein standard would close regulatory loopholes that 
prevent products developed as a result of new technology from avoiding 
classification as a fluid milk product. According to the brief, 
adoption of a true protein standard merely changes the way milk 
proteins are accounted for and would not change the classification of 
any product. However, these changes would capture those products 
currently formulated to avoid being classified as a fluid milk product.
    A witness from Dairy Farmers of America (DFA), appearing on behalf 
of DFA and Dairylea Cooperative, Inc., (DLC), testified in support of 
NMPF's Proposal 7 and Proposal 2. DFA is a dairy-member owned 
cooperative with 12,800 member farms located in 49 states. DLC is a 
dairy-member owned cooperative with 2,400 member farms located in seven 
states.
    The DFA/DLC witness was of the opinion that the purpose of the 
hearing was to refine the fluid milk product definition to reflect 
current market conditions brought about by technological innovations to 
ensure that dairy farmers are equitably paid for their milk. The 
witness testified that dairy processing technology, such as ultra 
filtration and milk component fractionalization, has enabled new 
products to be developed that were not foreseen when the current 
classification definition was last considered.
    The DFA/DLC witness testified that the current fluid milk product 
definition does not recognize the value of dairy proteins in the 
development of new products and therefore does not classify and 
subsequently price these new products appropriately. The witness 
claimed that manufacturers formulate

[[Page 28593]]

their products so as to contain less than 6.5 percent total nonfat milk 
solids to avoid a Class I use of milk even though these products 
compete directly with and are substitutes for fluid milk and fluid milk 
uses.
    The DFA/DLC witness was of the opinion that the form and use of a 
product should be the primary factor in determining product 
classification. The witness said that secondary criteria used to make 
classification determinations should include such factors as: Product 
composition, a specific but not exclusive list of included and excluded 
dairy products, product substitutability and enhancement of producer 
revenue. The witness argued that eliminating the current total nonfat 
milk solids standard and replacing it with an equivalent milk protein 
standard would better reflect the demand for dairy proteins in the 
marketplace.
    The DFA/DLC witness offered a modification to Proposal 7 that the 
witness said would provide the Department with latitude for classifying 
future products which are a result of new technology. The witness 
explained that the modification would allow the Department to make an 
interim classification decision for a new product and then have up to 
one year to hold a public hearing to determine the appropriate 
permanent classification.
    The DFA/DLC witness also testified in support of Proposal 2. The 
witness said that its adoption would recognize the importance of dairy 
proteins in the marketplace by including all dairy protein sources, 
including whey and whey products, in computing the products protein 
content. However, said the witness, while whey and whey products would 
be used in classification determinations, those ingredients should not 
be priced as Class I.
    A post-hearing brief submitted on behalf of DFA/DLC reiterated 
their support for adopting a protein standard. The brief reiterated 
their claim that new technology has enabled some products that contain 
less than 6.5 percent nonfat milk solids to be classified at a lower 
use-value than competitors in the market. The brief maintained that 
adoption of a protein standard would more adequately identify products 
that should be classified as fluid milk product's in light of new 
fractionation technology.
    A witness appearing on behalf of O-AT-KA Milk Products Cooperative, 
Inc. (O-AT-KA) testified in support of Proposals 2 and 7. O-AT-KA is a 
cooperative owned by the dairy farmer members of Upstate Farms 
Cooperative, Inc.; Niagara Milk Cooperative, Inc. and Dairylea 
Cooperative, Inc. The witness was of the opinion that the development 
of new technology necessitates a change to the fluid milk product 
definition. However, the witness cautioned that changes should not 
capture all beverages which contain milk solids as fluid milk products 
because not all milk-containing beverages compete with fluid milk.
    The O-AT-KA witness asserted that Proposal 7 should not be thought 
of as a fundamental change to the current standard; rather that the 
proposed true protein standard of 2.25 percent is an equivalent to the 
current 6.5 percent nonfat milk solids standard and should be 
considered as a needed clarification brought about by new technological 
advances in milk processing. According to the witness, the proposed 
2.25 percent standard recognizes protein as a highly-valued ingredient 
in milk products and that products with less than 2.25 percent protein 
would remain exempt from fluid milk product classification. The witness 
also advocated the adoption of Proposal 2 which would include whey and 
whey products in the computation of the protein percentage of the 
product but would not price the whey ingredients at Class I prices.
    A post-hearing brief, submitted on behalf of O-AT-KA, reiterated 
their support for Proposal 7. The brief claimed that the adoption of 
the protein standard would increase the use of dairy ingredients in 
beverages that are not ``in the competitive sphere of the traditional 
milk beverages,'' thus increasing producer revenue. The brief also 
supported DFA/DLC's modification to Proposal 7 giving the Department 
authority to make an interim classification decision if a new product 
is a result of new technology.
    A post-hearing brief submitted on behalf of Select Milk Producers, 
Inc. (Select) and Continental Dairy Products (Continental) expressed 
support for adoption of a protein standard as a component of the fluid 
milk product definition. According to the brief, Select and Continental 
are dairy-farmer owned cooperatives that market milk on various Federal 
orders. The brief argued that adoption of a protein standard is a 
needed change to reflect current manufacturing technology and does not 
fundamentally alter current regulations. The brief stressed that milk 
proteins are valuable ingredients in the market and that classification 
and pricing determinations should be reflective of this.
    A witness appearing on behalf of H.P. Hood testified in opposition 
to any changes to the fluid milk product definition. The witness was of 
the opinion that the fluid milk product definition should not be 
amended in a manner that would classify more dairy products as fluid 
milk products unless data is provided which would conclude such 
products compete directly with fluid milk and such amendments would 
enhance producer revenue.
    The H.P. Hood witness asserted that if Proposal 7 was adopted and 
resulted in the reclassification of some products as fluid milk 
products, the change would only affect a small number of products and 
the enhancement of producer revenue would be minimal. If ingredient 
substitution for milk occurred as a result of adopting other proposals, 
the witness said, producer revenue could actually decrease. The witness 
was of the opinion that adoption of proposals which broaden the fluid 
milk product definition would stifle product innovation and discourage 
the use of dairy-derived ingredients because of the resulting increased 
costs to the manufacturer. These results, the witness said, should not 
be encouraged by the Federal milk order program.
    A post-hearing brief submitted on behalf of H.P. Hood reiterated 
their opposition of Proposal 7. The brief maintained that no disorderly 
marketing conditions exist to warrant a change to the fluid milk 
product definition and that proponents of the protein standard failed 
to meet the burden of proof required by the AMAA to make a regulatory 
change. The H.P. Hood brief reviewed many factors used by the 
Department in previous classification decisions to determine the proper 
classification of Class I products. Their list included, but was not 
limited to, demand elasticities, enhancement of producer revenue and 
product competition. The brief stated that proponents failed to provide 
adequate data addressing these factors or prove that disorderly 
marketing conditions exist to warrant a change, and urged the 
Department to terminate the proceeding.
    A witness appearing on behalf of Leprino Foods Company (Leprino) 
testified in opposition to the adoption of the 2.25 percent protein 
standard contained in Proposal 7. According to the witness, Leprino 
operates nine plants in the United States that manufacture mozzarella 
cheese and whey products. The witness was of the opinion that a protein 
standard would reclassify products such as sport and protein drinks and 
yogurt smoothie products that are formulated with ingredients such as 
whey and whey products as fluid milk products. The witness stressed 
that broadening the fluid milk product definition to account for all 
dairy derived ingredients could

[[Page 28594]]

lessen the demand for such ingredients. The witness speculated that 
manufacturers may seek out other less costly non-dairy ingredient 
substitutes which would result in decreased producer revenue.
    A witness appearing on behalf of Dannon testified in opposition to 
Proposals 2 and 7. The witness was opposed to the adoption of a protein 
standard and to the inclusion of whey when calculating the nonfat milk 
solids content of a product because, the witness said, it was not the 
original intent of the fluid milk product definition to include these 
milk-derived ingredients. The witness believed that adoption of a 
protein standard would cause more products to be classified as fluid 
milk products even though they do not compete with fluid milk. The 
witness argued that protein is not a major component of fluid milk 
products and therefore using a protein standard would not be 
appropriate for making classification determinations. The witness 
speculated that if a protein standard was adopted, it could stifle 
product innovation or cause food processors to use non-dairy 
ingredients in their food products. The witness also opposed Proposal 2 
seeking to include whey proteins in determining the protein content of 
a product. The witness said that if whey proteins are included, 
manufacturers may look for less expensive non-dairy ingredients to be 
used as a viable substitute.
    A post-hearing brief submitted on behalf of Dannon reiterated their 
opposition to the adoption of a protein standard claiming that adequate 
justification for such a change was not given by proponents at the 
hearing and that the mere ability to test for milk proteins does not 
justify its adoption.
    A post-hearing brief submitted on behalf of the National Yogurt 
Association (NYA) expressed opposition to Proposal 7. According to the 
brief, NYA is a trade association representing manufacturers of live 
and active culture yogurt products and suppliers of the yogurt 
industry. The brief claimed that proponent testimony was inconsistent 
regarding the impact on product classification of their proposals and 
stated that if the 2.25 percent protein standard were adopted, at least 
one yogurt-containing product would be reclassified as a fluid milk 
product. The brief also asserted that proponents did not provide a 
clear picture of how Proposal 7 would be implemented. Specifically, the 
brief noted that the following were not addressed: (1) How wet and dry 
whey would be handled, (2) how whey from cheese production would be 
differentiated from whey from casein production, and (3) how products 
that meet the proposed 2.25 percent true protein standard and contain 
whey and other proteins would be classified and priced was not 
addressed.
    The NYA brief speculated that including whey in the protein 
calculation would lead to more products being classified as fluid milk 
products and cause manufacturers to seek out less costly non-dairy 
ingredients. The potential loss to producer revenue by substitution 
with non-dairy ingredients, concluded the brief, is not supported by 
the record.
    A post-hearing brief submitted on behalf of National Cheese 
Institute (NCI) expressed opposition to Proposal 7 and claimed that its 
adoption would stifle the use of dairy-derived ingredients, 
particularly whey proteins. According to the brief, NCI is a trade 
association representing processors, manufacturers, marketers and 
distributors of cheese and related products. NCI claimed that 
proponents of Proposal 7 did not identify any specific marketplace 
disorder that would be corrected by the adoption of a protein standard 
or list any product that would be reclassified if the fluid milk 
product definition were amended. The brief reviewed previous rulemaking 
decisions where proposals were denied because proponents failed to 
demonstrate that disorderly marketing conditions were present.
    The NCI brief stressed that use of dairy-derived ingredients in a 
product should not automatically qualify a product as a competitor of 
fluid milk or that their classification in a lower-valued use 
negatively affects producer revenue. The brief further maintained that 
proponents did not adequately address why whey proteins should be 
included in determining if the product met the proposed protein 
standard for a fluid milk product and why whey should be priced at the 
Class I price. The brief concluded that whey should be excluded from 
the fluid milk product definition because its inclusion would lead to 
products being classified as fluid milk products even when they do not 
compete with fluid milk.
    A post-hearing brief submitted on behalf of Sorrento Lactalis, Inc. 
(Sorrento) objected to the adoption of a protein standard. According to 
the brief, Sorrento is a manufacturer that operates five cheese plants 
throughout the United States. The brief stated that adoption of a 
protein standard as part of the fluid milk product definition would 
reduce the demand for dairy ingredients, especially whey proteins, 
which in turn will result in increased costs to manufacturers and 
reduced producer revenue.
    A witness testifying on behalf of H.P. Hood was of the opinion that 
if the Department found changing the fluid milk product definition was 
warranted, adoption of a modified Proposal 5 would be appropriate. The 
witness said that adoption of Proposal 5 would provide the Department 
with standards to determine if a dairy product with less than 6.5 
percent nonfat milk solids competes with and displaces fluid milk sales 
which would justify classification of the product as a fluid milk 
product. The witness also noted that if Proposal 5 was adopted, a new 
product with less than 6.5 percent nonfat milk solids and route 
distribution in a Federal milk marketing area of less than 3 million 
pounds would be exempted from classification as a fluid milk product. 
This distribution criteria, the witness explained, would allow 
manufacturers to test market a new product with the assurance that it 
would not be classified as a fluid milk product until the distribution 
threshold was exceeded.
    A witness appearing on behalf of Leprino testified in support of 
Proposal 5. The witness was of the opinion that fluid milk products 
should only be those products that meet the FDA standard of identity 
for milk and cultured buttermilk and products that compete with milk 
and cultured buttermilk. The witness testified that the fluid milk 
product definition is currently too broad and as a result, has lessened 
the demand for dairy ingredients in new non-traditional dairy products 
because of the possibility of being classified as a fluid milk product. 
The witness argued that many of these new products do not compete for 
sales with fluid milk and their use of dairy-derived ingredients should 
not qualify them to be defined as a fluid milk product.
    The Leprino witness explained that advances in technology have 
allowed the creation of dairy-derived ingredients through milk 
fractionation. The witness stated that the use of dairy-derived 
ingredients has made it difficult to classify products by their 
components. According to the witness, dairy manufacturers are avoiding 
investing in some product innovation because of the regulatory burden 
and increased costs that are associated with manufacturing a fluid milk 
product.
    A witness testifying on behalf of DFA/DLC was opposed to the 
adoption of Proposal 5. The witness said that Proposal 5 would place an 
undue burden on the Department in making classification determinations 
and would also extend Class II classification to more products, neither 
of which the witness supported. The post-hearing

[[Page 28595]]

brief submitted by DFA/DLC reiterated their opposition.
    A witness appearing on behalf of Bravo! Foods International 
Corporation, Lifeway Foods, Inc., PepsiCo, Starbucks Corporation and 
Unilever United States, Inc., testified in opposition to all proposals 
that would reduce or eliminate the 6.5 percent minimum nonfat milk 
solids standard, adopt a protein standard, or include whey in 
determining the nonfat milk solids content of a product. Hereinafter, 
these companies are referred to collectively as Bravo!, et al.
    A post-hearing brief submitted on behalf of Bravo!, et al., urged 
the termination of the proceeding except for the portion addressing the 
exemption of yogurt and kefir products from the fluid milk product 
definition. Bravo!, et al., asserted that the hearing record does not 
support adoption of a protein standard. The brief stated that decisions 
to amend Federal order provisions are not made without clear evidence 
of disorderly market conditions, the potential shortage of milk for 
fluid use, or lowering of producer revenue. The brief also discussed 
letters sent to the Department by producers and manufacturers which 
urged that a hearing be postponed because more analysis and market data 
was needed to justify amending the current fluid milk product 
definition. Bravo!, et al., argued that conducting the hearing was 
premature and without adequate study and market data on the proposals 
that are under consideration. According to the brief, more time was 
needed to accurately determine the impact of new milk products on the 
marketplace.
    The Bravo!, et al., brief summarized hearing testimony from 
previous Department rulemaking decisions where no changes were 
recommended due to a lack of evidence to support a regulatory change. 
The brief asserted that this proceeding also lacked evidence of 
disorderly marketing conditions which would warrant a change to the 
fluid milk product definition. According to Bravo!, et al., proponents 
did not provide evidence of disorder in the marketplace nor did they 
substantiate their claims that products currently in the market would 
not be reclassified if a protein standard was adopted. On the basis of 
such conditions, the brief concluded that the current fluid milk 
product definition is adequate.
    If the Department did not terminate the proceeding, the Bravo!, et 
al., brief recommended that the 6.5 percent nonfat milk solids 
standards remain, that the computation of nonfat milk solids not be 
made on a milk equivalency basis, and that whey and whey ingredients be 
excluded from the computation.
    A witness appearing on behalf of Fonterra USA, Inc. (Fonterra) 
testified in opposition to proposals that would include milk protein 
concentrates (MPCs) in determining if the product met the protein 
standard of the fluid milk product definition. Fonterra is a wholly 
owned subsidiary of Fonterra Co-operative Group Limited, a New Zealand 
based dairy cooperative owned by 12,000 New Zealand dairy farmers. 
Fonterra operates plants within the United States that produce, among 
other things, MPCs. The witness stressed that changes to the fluid milk 
product definition would increase ingredient costs, discourage 
manufacturing companies from using dairy ingredients in their products, 
and force those companies to seek other less costly substitutes such as 
soy and soy products.
    A post-hearing brief submitted on behalf of Fonterra reiterated 
their objection to changing the nonfat milk solids standard and 
predicted that adoption of a protein standard would make classification 
decisions unnecessarily complicated without providing additional 
benefits to producers. The brief asserted that the hearing record did 
not contain a sufficient economic analysis on the possible benefits 
that adopting a protein standard would have on producer revenue or its 
impact on the dairy industry.
    The Fonterra brief speculated that adoption of a protein standard 
would increase the market price for milk proteins, discourage new 
product development and encourage the substitution of producer milk 
with non-dairy ingredients. The brief noted that the annual growth rate 
of soy and soy products in nutritional products from 1999 to 2003 was 
16.5 percent, while the growth of milk proteins in nutritional products 
only increased 10.1 percent over the same time period. The brief 
predicted that if protein prices rise as a result of the adoption of a 
protein standard, the growth of soy proteins will likely increase 
because they could be substituted for more costly milk proteins.
    The Fonterra brief also stated that the hearing record does not 
reveal disorder in the market by the application of the current fluid 
milk product definition and therefore concluded that amending the fluid 
milk product definition is not justified. The Fonterra brief also 
argued that proponents did not provide adequate reasoning for including 
whey proteins in determining if a product met the protein standard but 
not pricing whey proteins the same as other milk proteins. Furthermore, 
the brief stated that proponents did not propose a method for 
differentiating between whey proteins resulting from cheese production 
and whey proteins from other sources.
    A witness appearing on behalf of the American Beverage Association 
(ABA) testified in opposition to all proposals seeking to amend the 
fluid milk product definition. ABA is a trade association that 
represents beverage producers, distributors, franchise companies and 
their supporting industries. The witness was of the opinion that the 
current fluid milk product definition already properly classifies dairy 
products and that there is insufficient evidence to warrant any 
changes. The witness claimed that any change would broaden the fluid 
milk product definition to include products that contain only small 
amounts of milk. The witness argued that many new beverage products 
which contain small amounts of milk or milk ingredients do not compete 
with fluid milk but do compete with soft drinks, juices and bottled 
water. The witness asserted that amending the fluid milk product 
definition to include some dairy ingredients not currently considered 
would increase manufacturers cost of production, result in stifled 
innovation of new products and encourage the use of non-dairy 
ingredients as substitutes for milk-derived ingredients.
    A witness appearing on behalf of Ohio Farmers Union (OFU) testified 
in opposition to any change to the fluid milk product definition. The 
witness testified that the primary purpose of the Federal milk 
marketing order program was to provide consumers with a reliable supply 
of safe and wholesome milk. The witness asserted that MPC's, 
caseinates, whey proteins and other similar milk-derived ingredients 
have functional and nutritional characteristics different than fluid 
milk. Accounting for those ingredients in the fluid milk product 
definition, the witness said, would undermine the goal of the Federal 
milk order program. The witness stressed that if the fluid milk product 
definition was amended, consumer confidence in the long established 
perception of milk as a fresh, pure and wholesome beverage would be 
diminished and would thus threaten the economic viability of domestic 
producers.
    A witness appearing on behalf of the Milk Industry Foundation (MIF) 
testified in opposition to amending the fluid milk product definition. 
According to the witness, MIF is an organization

[[Page 28596]]

with over 100 member companies that process and market approximately 85 
percent of the fluid milk and fluid milk products consumed nationwide. 
The witness stated that simply because a beverage contains milk or 
other dairy-derived ingredients does not prove the proponents claim 
that those products compete with fluid milk or that such competition 
lowers producer revenue.
    The MIF witness asserted that previous Federal milk order 
rulemaking decisions have required data and analysis to prove that an 
amendment is warranted. According to the witness, the proponents of 
proposals for changing the fluid milk product definition did not 
provide such data and analysis. Along this theme, the witness said that 
proponents should have provided data such as the market share held by 
products that do not fall under the current fluid milk product 
definition but would be included under any proposed change, cross price 
elasticity of demand analysis of products which meet the existing fluid 
milk product definition and of products that would be classified as a 
fluid milk product if any of their proposals were adopted, and an own-
price elasticity of demand analysis for products that would be 
reclassified.
    A post-hearing brief submitted on behalf of MIF reiterated their 
opposition to any changes to the current fluid milk product definition. 
The brief urged that if the Department does amend the fluid milk 
product definition, it should exclude all whey-derived protein products 
in determining if a product meets the fluid milk product definition. 
The brief stated that MIF has continuously opposed a hearing to 
consider amending the fluid milk product definition because they are of 
the opinion that not enough evidence is available to warrant a change. 
The brief maintained that proponents did not offer adequate data at the 
hearing to demonstrate that there is disorder in the marketplace that 
can be remedied by adoption of a protein standard.
    The MIF brief expanded their testimony by citing numerous 
rulemaking decisions which denied proposals on the basis that adequate 
evidence was not presented to warrant amendments to order provisions. 
MIF stressed that the mere existence of beverages which contain dairy-
derived ingredients is not evidence of marketwide disorder
    A witness appearing on behalf of the National Family Farm Coalition 
(NFFC) testified in opposition to all proposals that would amend the 
fluid milk product definition. The witness testified that MPCs do not 
meet FDA's Generally Recognized as Safe (GRAS) standards as legal food 
ingredients. Furthermore, the witness said, MPCs have not been 
subjected to scientific testing to determine if they are safe for human 
consumption and should not be allowed in milk products.
    A witness appearing on behalf of Public Citizen testified in 
opposition to proposals that seek to amend the fluid milk product 
definition. According to the witness, Public Citizen is a non-profit 
consumer advocacy organization with approximately 150,000 members. The 
witness was opposed to any change in the fluid milk product definition 
that would, in the witnesses' opinion, encourage the use of MPCs.
    Two Pennsylvania dairy farmers testified in opposition to any 
change to the fluid milk product definition. The producers opposed all 
proposals that would allow the use of caseinates and MPCs in fluid milk 
products. They asserted that MPCs are not allowed in the production of 
standardized cheese and should also not be allowed in the production of 
fluid milk products.
    A post-hearing brief submitted on behalf of the American Dairy 
Products Institute (ADPI), an association representing manufacturers of 
dairy products, offered support for amending the fluid milk product 
definition to include milk beverages that compete directly with fluid 
milk. However, the brief cautioned against developing a fluid milk 
product definition that would include non-traditional beverages and 
smoothie type (yogurt-containing beverages) products. The brief 
recommended that an economic study be conducted to determine the 
possible impacts of the proposed changes before action is taken to 
amend the fluid milk product definition.
    A post-hearing brief submitted on behalf of General Mills contended 
that the fluid milk product definition should not be amended because 
proponents did not provide sufficient evidence or data that would 
justify the change. The brief maintained that the hearing record is not 
clear on how proposals would be implemented or on the impact to 
producers, manufacturers, and consumers if the protein standard was 
adopted. General Mills contended that before a change is made, the 
Department should conduct an economic analysis to evaluate how protein 
and products are competing in the marketplace and how the adoption of a 
protein standard would impact the marketplace. If a protein standard 
was recommended for adoption, General Mills recommended that whey not 
be included in the protein calculation, or if whey is included, that a 
2.8 percent protein standard be adopted in order to maintain the status 
quo.
    A post-hearing brief submitted on behalf of New York State Dairy 
Foods, Inc. (NYSDF) opposed amending the fluid milk product definition. 
According to their brief, NYSDF is a trade association representing 
dairy product processors, manufacturers, distributors, retailers and 
producers in the Northeast United States. The brief argued that 
products produced with the use of new fractionation technology are a 
small portion of the milk beverage market. They were of the opinion 
that such products are still too new to determine their impact on Class 
I sales and producer revenue. The brief also asserted that adoption of 
a protein standard as part of the fluid milk product definition would 
discourage new product development and would increase costs that would 
result in reduced sales of dairy-derived ingredients. The brief urged 
that the proceeding be terminated.
    A Professor from Cornell University testified regarding a research 
study, conducted by the Cornell Program on Dairy Markets and Policy, 
focusing on the demand elasticity's of various dairy products. The 
witness did not appear in support of or in opposition to any proposal 
presented at the hearing. The witness explained that the goal of the 
study was to ascertain the extent to which product innovation and 
classification decisions influence producer revenue. The study was 
designed to evaluate four hypothetical dairy products and test the 
effect that a range of classification determinations would have on 
producer revenue. The witness explained the study concluded that the 
impact on producer revenue of a new product being reclassified from 
Class II to Class I was likely to be small, plus-or-minus $0.01 per 
hundredweight (cwt.) However, the witness added, if non-dairy 
ingredients were substituted as a result of the reclassification, the 
study predicted that the effect on producer revenue would be lowered by 
$0.22 per cwt. The witness concluded that while the financial returns 
from product reclassification could be positive, the resulting 
ingredient substitution which could take place would result in a 
significant negative impact on producer revenue.
    The NMPF brief also addressed concerns articulated at the hearing 
regarding the need for a demand elasticity study to address the issue 
of product substitution before amending the fluid milk product 
definition. The brief asserted that a demand elasticity study would not 
take into account newly emerging products, changing

[[Page 28597]]

consumer preferences, and product innovations that could change the 
competitive relationships between products and therefore would not 
provide any relevant data. The brief also argued that the economic 
model created by Cornell University and discussed at the hearing 
contained many incorrect assumptions and thus concluded that the study 
results were flawed.
    The DFA/DLC brief also rebutted opposition to Proposal 7 that 
called for studies of product usage or demand elasticity's before 
considering amendments to the fluid milk product definition. The brief 
asserted the previous amendments to the classification system have been 
made without such economic studies and that this proceeding should be 
handled in the same manner.
    A witness appearing on behalf of Dannon testified in support of 
Proposal 8--the proposal that seeks to exclude yogurt containing 
beverages which contain at least 20 percent yogurt by weight from the 
fluid milk product definition. The witness argued that yogurt 
containing beverages are not similar in form and use to fluid milk 
products and should be excluded from the fluid milk product definition. 
The witness revealed that Dannon currently manufactures yogurt 
containing products which are classified as both fluid milk products 
and Class II products. Dannon maintained that regardless of the 
classification, none of their products compete with fluid milk. 
According to the witness these products should all be classified as 
Class II. The witness emphasized that unlike fluid milk, yogurt and 
yogurt-containing products use unique cultures, ingredients, and 
production technology that differentiate them from fluid milk products. 
Furthermore, the witness said, the products' packaging, taste, mouth 
feel, shelf-life and how they are marketed by their placement in the 
grocery store differentiates them from fluid milk.
    The witness presented market research conducted by Dannon which 
concluded that yogurt-containing beverages are consumed as a food 
product and not as an alternative to fluid milk. The witness claimed 
that less than one percent of potential consumers of a Dannon yogurt-
containing product consume the product as a substitute for fluid milk. 
Additionally, the witness noted that Dannon advertises its yogurt-
containing products as a substitute for snacks, not fluid milk. The 
witness concluded from this that yogurt-containing products are 
different than fluid milk, do not compete with fluid milk in the 
marketplace and therefore should not be classified as a fluid milk 
product. The Dannon witness urged the adoption of Proposal 8 to exclude 
yogurt containing beverages with at least 20 percent yogurt by weight 
from the fluid milk product definition.
    The Dannon witness also testified in opposition to Proposal 9 
because it proposes adoption of a protein standard that Dannon does not 
consider justified. The witness noted that Dannon does support the 
proposed 20 percent minimum yogurt content standard that a product 
should contain as a condition for being exempted from fluid milk 
product classification.
    A post-hearing brief submitted on behalf of Dannon reiterated their 
hearing testimony. The brief claimed that fluid milk products should 
only be those products that are closely related to, or compete with, 
fluid milk for sales. The brief stressed that yogurt-containing 
beverages are dissimilar to fluid milk beverages and are used as a food 
replacement, not as a beverage substitute. The brief noted that in 
2004, more than 37 percent of Dannon's sales were from products 
developed within the last 5 years and stressed that classifying all 
milk drinks with milk-derived ingredients as fluid milk products would 
result in decreased innovation for developing additional uses for milk.
    A witness appearing on behalf of General Mills testified in support 
of Proposal 9. The witness argued that the Department should classify 
products primarily on the basis of form and use and asserted that 
drinkable yogurt products, while containing milk ingredients, are food 
products and do not compete with fluid milk. The witness explained that 
drinkable yogurt products were created to meet a change in consumer 
preferences for convenience and portability. The witness presented 
market research conducted by Yoplait demonstrating that consumers view 
drinkable yogurt products as alternatives to traditionally packaged 
yogurt and other nutritional snacks, not fluid milk. The witness 
asserted that 80 percent of Yoplait drinkable yogurt smoothie consumers 
would substitute another yogurt product for the smoothie.
    The General Mills witness advocated that the current classification 
system be maintained. However, if the Department determined that a 
change to the fluid milk product definition is appropriate, the witness 
urged adoption of Proposal 9 to exclude drinkable yogurt products that 
contain at least 20 percent yogurt by weight and 2.2 percent skim milk 
protein from the fluid milk product definition. According to the 
witness, including drinkable yogurt products in the fluid milk product 
definition would increase costs to manufacturers resulting in stifled 
innovation and a shift towards using non-dairy ingredients. The witness 
said this would be financially detrimental to both dairy farmers and 
dairy product manufacturers.
    A post-hearing brief submitted on behalf of General Mills 
maintained that ample evidence regarding the fundamental differences of 
fluid milk and yogurt containing beverages was presented at the hearing 
to justify exempting yogurt containing products with more than 20 
percent yogurt from classification as a fluid milk product.
    Two witnesses appearing on behalf of the National Yogurt 
Association (NYA) testified in support of proposals that would exempt 
yogurt containing products from the fluid milk product definition. The 
witnesses testified that previous regulatory decisions made by the 
Department emphasized that products classified as fluid milk products 
should be intended to be consumed as beverages and compete with fluid 
milk. The witnesses expressed disagreement with a classification 
decision published in the 1990's that classified drinkable yogurt 
products as fluid milk products. The witnesses were of the opinion that 
in both form and use, yogurt and drinkable yogurt products compete with 
other food products, not fluid milk, and should accordingly be 
classified as Class II products. They explained that yogurt products 
are produced and shipped nationally by a few manufacturers, have a 
shelf-life averaging 30-60 days, have a texture and taste distinctly 
different than fluid milk and are positioned in retail stores separate 
from fluid milk. The witnesses noted that yogurt-containing beverages 
were developed as a substitute for spoonable yogurt products not fluid 
milk.
    The NYA witnesses asserted that if a protein standard was adopted 
that resulted in yogurt containing products being classified as fluid 
milk products, manufacturers would look for less expensive non-dairy 
proteins as substitute ingredients. Furthermore, the witnesses believed 
that the increase in producer revenue resulting from classifying 
drinkable yogurt products as fluid milk products would not overcome the 
decrease in revenue due to the loss of sales from an increase in the 
price of drinkable yogurt products.
    A post-hearing brief submitted on behalf of the NYA reiterated 
their support for excluding all products containing at least 20 percent 
yogurt

[[Page 28598]]

provided that the yogurt meets the standard of identity for yogurt. 
According to the brief, the 20 percent content requirement would ensure 
that only products whose characterizing ingredient is yogurt would be 
excluded from the fluid milk product definition. The brief also 
indicated that if the Department determines not to exclude yogurt 
containing products, then NYA strongly opposes any change to the 
current fluid milk product definition.
    The NYA brief argued that consumer surveys and marketplace data 
provided by Dannon and General Mills, explaining how yogurt-containing 
products are fundamentally different than fluid milk, was not 
contradicted at the hearing. The brief also noted that while DFA and 
NMPF testified that consumers are buying low-carbohydrate milk instead 
of fluid milk, they did not offer similar evidence for yogurt-
containing products.
    A witness appearing on behalf of Bravo!, et al., testified in 
support of amendments that would exempt yogurt containing products and 
drinkable kefir from the fluid milk product definition. The witness 
argued that both products are compositionally different than fluid milk 
and do not compete for sales with fluid milk. Furthermore, the witness 
noted that yogurt and kefir products are one of the fastest growing 
segments in the dairy industry, providing a large opportunity for the 
expanded use of dairy-derived ingredients which should not be hampered 
by the additional costs of such ingredients being priced at the Class I 
price.
    The witness appearing on behalf of Leprino testified that if the 
Department recommended amending the fluid milk product definition, then 
Leprino supported the adoption of Proposal 9 to exclude products 
containing at least 20 percent or more yogurt by weight from the fluid 
milk product definition. The witness also was of the opinion that 
yogurt containing products do not compete with fluid milk and should be 
classified as Class II products. The witness stressed that if these 
products are not excluded from the fluid milk product definition, then 
Leprino strongly opposed the adoption of a protein standard to be part 
of the fluid milk product definition.
    The witness appearing on behalf of NMPF testified in opposition to 
exempting yogurt-containing beverages from the fluid milk product 
definition. The witness believed that these products are similar in 
form and use to other flavored fluid milk products and should be 
considered a substitute for fluid milk. In its post-hearing brief, NMPF 
maintained its opposition to proposals that would exclude drinkable 
yogurt products from the fluid milk product definition.
    The witness appearing on behalf of DFA/DLC also testified in 
opposition to the adoption of Proposals 8 and 9. The witness claimed 
that adoption of these proposals would allow more products to be 
classified as Class II products, even though they compete with fluid 
milk for sales.
    The DFA/DLC brief further claimed that the growth of drinkable 
yogurt products in the market place has not been impeded by previous 
classification decisions and that such products should not be excluded 
from the fluid milk product definition because some hearing 
participants claimed it would harm the innovation of new dairy 
products.
    The witness appearing on behalf of Leprino testified in support of 
Proposal 10. The witness testified that only products that compete with 
fluid milk should be classified as fluid milk products; therefore meal 
replacements and nutritional drinks should remain exempted from the 
fluid milk product definition.
    A post-hearing brief submitted on behalf of Novartis stated that 
the Department should exempt special dietary need and nutritional 
beverages from the fluid milk product definition. The brief explained 
that Novartis' products are not currently classified as fluid milk 
products due to their nutritional nature, the level of nonfat milk 
solids contained in their product, and because their products are only 
available through foodservice and healthcare channels. The brief 
stressed that Novartis' health care products were never intended to 
compete with traditional fluid milk.
    The brief predicted that Novartis' products could possibly become 
reclassified as fluid milk products if a 2.25 percent protein standard 
were adopted as a part of the definition. The brief insisted that if 
these products are reclassified, it would result in higher costs for 
patients with special dietary and nutrition needs. If a protein 
standard was adopted as part of the fluid milk product definition, 
Novartis urged the Department to exempt nutritional products consumed 
for special dietary use from the fluid milk product definition.
    A witness appearing on behalf of Hormel testified in support of 
Proposal 11 seeking to exclude healthcare beverages from the fluid milk 
product definition. The witness testified that fluid milk products 
designed for the health care industry should be exempted because they 
do not compete with fluid milk for sales, their distribution is 
primarily to health care facilities, and they are targeted to a small 
segment of the population. The witness argued if products designed for 
the health care industry were classified as fluid milk products, it 
would have no effect on producer revenue because these products have 
extremely limited distribution. The witness explained that many 
products they manufacture are designed to help counter the effects of 
malnutrition in adults with a variety of medical conditions. These 
specially designed products are not marketed nor labeled as fluid milk, 
instead they are considered to be foods for special dietary use, the 
witness noted, and should be exempt from the fluid milk product 
definition.
    The Bravo!, et al., witness also testified in support of the 
continued exemption from the fluid milk product definition for products 
such as infant formula, meal replacements, products packaged in 
hermetically sealed containers, snack replacements, high protein 
drinks, and products that contain alcohol or are formulated for animal 
use. The witness explained that meal replacements and similar products 
have historically been exempted from the fluid milk product definition 
and that their regulatory status should not be changed.
    The NMPF witness testified in opposition to Proposal 10 arguing 
that its adoption would eliminate important factors in determining if a 
product was specially formulated for a specific dietary purpose that 
would warrant exemption from the fluid milk product definition. The 
witness was also opposed to Proposal 11 because the proposed language--
``nutrient enhanced fortified formulas''--was too broad and would not 
clearly distinguish such products from traditional fluid milk products.
    The DFA/DLA witness testified in opposition to Proposals 10 and 11. 
The witness was of the opinion that amending the fluid milk product 
definition to broaden the exemption of products such as infant formulas 
and meal replacements was not justified because doing so would 
significantly lower Class I use. This position was reiterated in their 
brief.
    The witness appearing on behalf of O-AT-KA testified that products 
packaged in hermetically-sealed containers or that are specialized for 
longer shelf life should remain exempt from fluid milk product 
classification because those products are used as meal replacements and 
meal supplements, not as alternatives to milk. The witness said that 
since the term ``meal replacement''

[[Page 28599]]

is not defined in the current definition, no change in the exemption of 
hermetically sealed containers should be made. The position was 
reiterated in their brief.
    The Dannon witness testified in opposition to the adoption of 
Proposal 10 because it would remove the 6.5 percent nonfat milk solids 
standard of the fluid milk product definition.
    Findings: This decision recommends that the fluid milk product 
definition for all Federal orders maintain the current 6.5 percent 
nonfat milk solids product content criteria and incorporate an 
equivalent true protein standard of 2.25 percent product content 
criteria for determining whether a product meets the fluid milk product 
definition. The 6.5 percent nonfat milk solids and the 2.25 percent 
true protein criteria are not intended to be absolute determinates of 
whether a product meets the fluid milk product definition. In 
determining if a product meets the fluid milk product definition, the 
Department's primary criteria will be the form and intended use of the 
product as required by the Agriculture Marketing Agreement Act. The 
calculation of the percent true protein and the percent nonfat milk 
solids contained in a product will be performed by measuring the true 
protein and nonfat milk solids of all milk-derived ingredients 
contained in the finished product.
    The primary goal of Federal milk marketing orders is to establish 
and maintain orderly marketing conditions. This is achieved primarily 
though the use of classified pricing (pricing milk based on its use) 
and the marketwide pooling of the proceeds of milk used in a marketing 
area among all classes of use. These two tools enable Federal orders to 
establish minimum prices that handlers must pay for milk based on use 
and return a weighted average or uniform price that dairy farmers 
receive for their milk. The AMAA specifies that Federal orders classify 
milk ``* * * in accordance with the form in which or the purpose for 
which it is used.'' With respect to milk products, there can be many 
forms. In most cases, the form of the milk product provides a 
reasonable basis upon which to differentiate the milk into different 
classes of use.
    Through classified pricing and marketwide pooling, Federal orders 
promote and maintain orderly marketing by equitably pricing milk used 
in the same class among competing handlers within a marketing area. 
This does not mean that handlers will necessarily have equal costs 
since differences in milk tests, procurement costs, and transportation 
will impact the final raw milk costs. However, it does allow handlers 
to have the same minimum regulated price for milk used in a particular 
category of products or class of products for which they compete for 
sales. The regulated minimum price is the class price for the 
respective class of use. Thus, it is reasonable and appropriate that 
milk used in identical or nearly identical products should therefore be 
placed in the same class of use. This tends to reduce the incidence of 
disorderly marketing that may arise because of price differences 
between competing handlers.
    Federal milk orders classify producer milk (skim milk and 
butterfat) disposed of or used to produce a product. Producer milk 
classified as Class I consists of those products that are intended to 
be used as beverages including, but not limited to, whole milk, skim 
milk, low fat milk, and flavored milk products like chocolate milk. 
Producer milk classified as Class II includes milk used in the 
production of soft or spoonable manufactured products such as sour 
cream, ice cream, cottage cheese, yogurt, and milk that is used to 
manufacture other food products. Producer milk classified as Class III 
includes, among other things, skim milk and butterfat used in the 
production of hard cheese products. The Class IV use of producer milk 
generally consists of milk used in the production of any dried milk 
product such as nonfat dry milk and butter.
    Federal orders provide a definition of a ``fluid milk product'' to 
identify the types of products that are intended to be consumed as 
beverages and to specify that the skim milk and butterfat in these 
types of milk products should be classified as Class I and priced 
accordingly. The current fluid milk product definition contained in all 
Federal milk orders provides a non-exhaustive list of products that are 
specifically identified as fluid milk products. The definition also 
specifies certain compositional criteria for fluid milk products--any 
product containing less than 9 percent butterfat and 6.5 percent or 
more milk solids nonfat. The definition also specifically exempts from 
the fluid milk product definition formulas especially prepared for 
infant feeding or dietary use (meal replacement) packaged in a 
hermetically-sealed container, any product that contains by weight less 
than 6.5 percent milk solids nonfat, and whey.
    Numerous witnesses urged that the definition of milk (standard of 
identity) not be changed. This decision does not change the definition 
of milk as defined by the Food and Drug Administration (FDA) in 21 CFR 
131.110. Some witnesses were of the opinion that the addition of 
various ingredients to milk would cause the resulting product to not 
meet the Grade A standard. Federal orders do not determine if milk is 
Grade A or what ingredients are allowed in milk. Federal orders do not 
establish standards of identity for milk. Such standards are 
established by other agencies such as a state board of health or the 
FDA. This decision does amend the definition of a fluid milk product in 
all marketing orders on the basis of form and intended use.
    Testimony given at the hearing and positions taken in post-hearing 
briefs discussed extensively the importance of form and intended use in 
determining whether a product should be defined as a fluid milk 
product. In this regard, the legislation providing for milk marketing 
orders, as already discussed, provides for milk to be classified in 
accordance with the form in which or purpose for which it is used. This 
requirement should be the primary basis for classifying milk. In 
identifying the form and intended use of milk, all Federal orders 
currently define a fluid milk product as a product intended to be used 
as a beverage.
    As in the 1974 uniform classification decision and subsequent 
classification decisions, this decision recommends that the primary 
criteria to be relied upon for determining whether or not a product 
should be considered a fluid milk product be its form and intended use. 
Fluid milk products are drinkable and are intended to be used as 
beverages. The fluid milk product definition also should continue to 
list the various products that are identified as fluid milk products 
and provide criteria to exclude those that are not. The identification 
of these various fluid milk products in the fluid milk product 
definition has not been, and is not now, intended to be an all 
inclusive list of products that are defined to be fluid milk products.
    Comparability to the products listed in the fluid milk product 
definition should also assist in determining if other products should 
be defined as a fluid milk product. If a product is not one of the 
listed products but is similar to a listed product, this decision 
recommends that the form in which and the intended purpose for which 
the product is used be considered together with the product's 
composition.
    Composition criteria, as currently provided, provides criteria to 
exclude products from the fluid milk product definition. The criteria 
that a fluid milk product must contain by weight more than 6.5 percent 
nonfat milk solids has

[[Page 28600]]

been a long-held criteria in defining and excluding products from the 
definition. However, Federal orders do not define nonfat milk solids. 
The record reveals that this has been administratively addressed in 
directives specifying which milk solids should be considered in 
determining the nonfat milk solids content of a product. Currently, not 
all nonfat milk solids are considered in this determination even though 
all of such solids are derived from milk.
    This decision recommends continuing to rely, in part, on 
compositional criteria in determining if a product meets the fluid milk 
product definition. The fluid milk product definition would continue to 
state that a product should contain less than 9 percent butterfat and 
contain more than 2.25 percent true protein or 6.5 percent nonfat 
solids, by weight. The 9 percent butterfat criteria is currently used 
as the maximum butterfat content to differentiate between fluid milk 
products and products that are fluid cream products (a Class II use of 
milk) and should remain unchanged.
    The 2.25 percent true protein criteria should, in most cases, be 
sufficient to distinguish if a product is a Class I or Class II use of 
milk. Nevertheless, products that may more closely resemble the listed 
fluid milk products in form and intended use but contain less than 2.25 
percent true protein, may be determined by the Department to meet the 
fluid milk product definition because the products are competing with 
fluid milk.
    The proposed composition criteria of the fluid milk product 
definition are not intended to be definitive in determining if a 
product meets the fluid milk product definition any more than the list 
of defined fluid milk products is definitive. Rather, the criteria are 
intended to assist in determining whether or not the product in 
question has the form and intended use as the listed fluid milk 
products. This gives first-priority consideration that the primary 
classification criteria be a product's form and intended use.
    Record evidence reveals criticism that the current fluid milk 
product definition has not changed to reflect the technological 
advances including the fractionation of milk. While the dairy industry 
has changed significantly, the principles of product classification on 
the form and intended use have remained relatively unchanged since 
1974. Technological advances that provide the ability to fractionate 
milk into its more basic components has given rise to the inadequacy of 
the current fluid milk product definition and the need for its 
revision. For example, the ability to separate proteins from the 
lactose and ash and to separate proteins between casein and ``whey 
proteins'' creates the opportunity to make new dairy-based beverages 
that may be similar to milk but are different in composition. A dairy-
based beverage could be made from microfiltered ``whey proteins'', 
butteroil, lactose and water that would have equivalent butterfat, true 
protein, and nonfat solids as milk. Fractionation technology creates 
the ability to produce dairy-based beverages of almost any composition.
    Several witnesses at the hearing addressed specific composition 
criteria that should be used for determining if a product meets the 
fluid milk product definition. Proponents of the 2.25 percent true 
protein criteria explained that with the technology to separate the 
lactose from the protein in milk, protein also should be used in 
determining if a product should be a fluid milk product because protein 
is the highest valued nonfat milk solid and because lactose is the 
component most often not used in the formulation of many manufactured 
dairy-based beverages. Under the current 6.5 percent nonfat milk solids 
criteria, a dairy-based beverage with lactose removed is generally 
determined to not be a fluid milk product. Milk, in either wet or dry 
form, that has lactose removed is generalized as ``milk protein 
concentrate (MPC.)'' MPC has administratively been excluded from being 
considered a nonfat milk solid even though it is derived from milk. 
Thus with lactose removed, a product closely resembling milk in form 
and intended use may contain less than the current 6.5 percent nonfat 
milk solids even though the protein content could exceed the protein 
content of milk.
    Other testimony contended that protein is not a significant 
component in fluid milk products and incorporating a protein criteria 
is therefore not appropriate. Contrary to the view that protein is not 
a significant component in fluid milk products, in whole milk protein 
is the third most abundant component following lactose and butterfat. 
In lowfat milk, protein is the second most abundant component.
    Even though the record and post hearing briefs contain considerable 
discussion concerning the possible substitution of nondairy ingredients 
in fluid milk products, no data was presented at the hearing to 
indicate at what price level or degree such substitution would take 
place. Testimony at the hearing speculated that handlers may use 
nondairy ingredients in the event that the fluid milk product 
definition were broadened, for example, by adoption of the 2.25 percent 
true protein criteria as an option to the current 6.5 percent nonfat 
milk solids criteria. Additionally, most handlers who are making new 
dairy-based beverages were of the opinion that broadening the fluid 
milk product definition would hinder innovation and new product 
development.
    The addition of a true protein criteria should assist in 
determining those products that should be considered fluid milk 
products. The inclusion of a true protein minimum criteria also would 
assure that products which are comparable to the products listed in the 
fluid milk product definition will be properly classified as Class I. 
The 2.25 percent true protein criteria is comparable to 6.5 percent 
nonfat milk solids.
    Proponent witnesses speculated that adoption of a 2.25 percent true 
protein criteria would not change the classification of products 
currently not determined to meet the fluid milk product definition. 
Classification determinations made by the Department are not available 
to the public because of the proprietary nature of the information; 
therefore the proponents have no basis to accurately conclude that 
adoption of a true protein standard would not alter any current 
products classification. To the extent that existing products meet the 
proposed fluid milk product definition, such products will be 
reclassified as fluid milk products.
    The Class I use of milk will continue to be priced on skim milk and 
butterfat. Skim milk and butterfat pricing does not distinguish what 
components or the level of components that are in the skim fraction. 
Therefore, even if there is a greater level of protein in the skim 
fraction, there is no greater value that will be assigned to the skim 
fraction. Producers may benefit from products being determined as 
meeting the fluid milk product definition if the dairy ingredients in 
these products are priced as Class I and not because of the adoption of 
a 2.25 percent true protein criteria.
    The true protein or nonfat milk solids contained in the finished 
product should be used to determine if the 2.25 percent true protein or 
the 6.5 percent nonfat solids criteria has been met. The composition of 
the finished product, including all milk-derived ingredients, will 
provide a clear comparison of the product in question to the products 
listed and defined in the fluid milk product definition. These 
ingredients include, but are not limited to, the specific products 
listed in the fluid milk definition, nonfat dry milk, milk protein

[[Page 28601]]

concentrate, casein, calcium and sodium caseinate, and whey. The 
compositional content will be computed by using the pounds of true 
protein or nonfat milk solids in the finished products. For all other 
purposes, such as pricing and pooling, the fluid equivalent of all 
dairy ingredients will be used except casein, sodium and calcium 
casienate and whey. These dairy ingredients may be used in some form to 
produce products that are substitutes for other fluid milk products.
    Nonfat dry milk is a storable product that is subsequently used in 
many other products. Nonfat dry milk can be mixed with water and the 
resulting product can be marketed as skim milk in competition with 
fresh skim milk or, with the addition of cream or butter, and water, a 
product could compete with fresh whole milk. Federal milk orders have 
long held, and this decision reaffirms, that nonfat dry milk 
reconstituted to make a fluid milk product or to fortify a fluid milk 
product should be assessed the Class I value because the reconstituted 
or fortified product competes against Class I fluid milk products. The 
Class I charge, commonly referred to as an ``up-charge'' or 
compensatory payment, is based on the difference between the current 
months Class I price and Class IV price. The compensatory payment is 
assessed on the volume of reconstituted milk in the modified product, 
up to the level of an unmodified product. The compensatory payment 
accounts for the difference from how the dry product was first priced 
(Class IV) and how the dry product was actually used (Class I.)'' The 
``up-charge'' assures equity between competing handlers on raw product 
cost. The ``up-charge'' also assures producers that they will receive 
the Class I value's contribution to a marketing order's blend price for 
milk marketed as a fluid milk product. Most importantly, it maintains 
the integrity of classified pricing.
    Milk protein concentrate (MPC) in both wet and dry (powdered) forms 
have similarities to nonfat dry milk even though MPC does not have the 
same component composition as skim milk or nonfat dry milk. Dry MPC, 
like nonfat dry milk, is the end result of a manufacturing process (the 
removal of water and lactose) to convert milk solids into a storable, 
easily transportable, and versatile product for use in the dairy and 
food industry. MPCs can be used as a substitute in drinkable/beverage 
products for the protein and some of the butterfat traditionally 
supplied by fresh milk, ultra-filtered skim milk, nonfat dry milk, or 
whole milk powder. These similarities in uses to nonfat dry milk 
support concluding that MPCs should be included in determining the 
nonfat milk solids or true protein content of a drinkable product and, 
on a fluid equivalent basis, be included in the allocation and pricing 
of producer milk contained in the fluid milk product.
    Because casein, calcium and sodium caseinates and whey are milk-
derived, they are recommended to be included in determining if a 
product is a fluid milk product. However, their use in fluid milk 
products will not be priced at the Class I price or be subject to an 
``up-charge'' as will nonfat dry milk and MPC. These products can not 
readily be substituted for a listed fluid milk product as can nonfat 
dry milk and MPC. For example, whey contains little or no casein and 
only some of the lactose and ash of milk. Similarly, calcium and sodium 
caseinates do not contain the whey proteins (whether derived from 
cheese making or some other process) as well as the lactose and ash 
found in milk. Therefore, these and similar milk-derived ingredients 
will not be priced in products that are determined to be fluid milk 
products.
    Milk-derived ingredients, except ingredients such as casein, 
calcium and sodium caseinate and whey, contained in a fluid milk 
product will be included in the allocation process of producer milk and 
the resulting classification and pricing on a fluid milk equivalent 
basis. Whey is intended to include whey, dry whey and whey protein 
concentrates. The fluid equivalent for those products in which the 
relationship between the protein and nonfat milk solids has not been 
altered will be computed using nonfat solids while the fluid equivalent 
for those products in which the relationship between the protein and 
nonfat milk solids has been altered will be determined on a true 
protein basis.
    The computation of a handler's cost under Federal milk orders is 
unchanged as a result of this decision. These included products, such 
as nonfat dry milk and MPC will be used to determine the quantity of 
the fluid milk equivalent in the modified fluid milk product that is 
greater than the volume of an unmodified fluid milk product of the same 
type and butterfat content. The equivalent volume will be Class I and 
charged the Class I price while the greater volume will be an ``other 
source receipt'' and be included in Class IV. Any of the excess that 
may be allocated to Class I will be subject to an upcharge--at the 
difference between the Class I and Class IV prices.
    Although the record lacks specific data concerning the possible 
changes in classification of current products as a result of adoption 
of this decision, the need for the continued use of the form and 
intended use criteria specified in the AMAA is clear. The record of 
this proceeding contains sufficient evidence to determine the criteria 
that can be relied upon for determining if a new product meets or does 
not meet the proposed fluid milk product definition. This is 
particularly evident since this decision does not recommend changing 
the primary criteria of classifying milk on the basis of its form and 
intended use.
    Even though whey should be included in determining if a product 
meets the fluid milk product definition, whey should not be included in 
the pricing and pooling of fluid milk product that contains whey. In 
this regard, opposition to the inclusion of whey as a determinate of 
whether or not a product meets the fluid milk product definition 
because it may cause processors to use alternative protein sources in 
manufactured beverages and reduce producer revenue is rendered moot.
    Since casein, sodium and calcium casinates and whey used in making 
a fluid milk product could have been previously priced under a Federal 
milk order, previous pricing should not be a criterion for determining 
if a dairy ingredient should continue to be included in pricing of the 
fluid milk product in which casein, sodium and calcium casinates and 
whey are contained. Other criteria, such as substitutability for fluid 
milk products, are better determinates for including a dairy ingredient 
in the computation of the criteria and the pricing of such products.
    Some witnesses testified that even though a product met the fluid 
milk product definition, the intended use of that product should be 
considered for assigning the milk in that product to the most 
appropriate class use. In this regard, if the intended use of the 
product is a food item that does not compete with traditional fluid 
milk in the market place, the product should be exempted from the fluid 
milk product definition. The most notable products of this 
characteristic are drinkable yogurts which contain yogurt and other 
dairy products that are drinkable but are not intended to be used as a 
beverage. The record reveals that drinkable yogurts are marketed as a 
food item to supplement or even replace a meal such as breakfast or 
lunch, and are a quick and easy to carry snack. This differentiates 
their intended use from fluid milk products consumed as beverages or as 
accompaniments to other mealtime foods.

[[Page 28602]]

    The record supports concluding that the intended use of drinkable 
yogurts are not for use as a beverage because they are marketed and 
positioned in the marketplace differently than fluid milk products. 
These products are not marketed along side milk in retail outlets. 
Instead, they are positioned alongside spoonable yogurts in cups. It is 
reasonable to conclude that drinkable yogurts do not compete with fluid 
milk products.
    Nevertheless, it is also reasonable to establish a minimum level of 
yogurt that needs to be contained in the finished product to separate 
them from other drinkable yogurt-containing beverages. The proposed 
minimum content of yogurt of 20 percent offered by proponents is 
reasonable and is recommended for adoption for excluding drinkable 
yogurt products from the fluid milk product definition. The yogurt 
contained in exempted drinkable yogurt products must meet the yogurt 
standard of identity as defined by the FDA.
    Opponents of excluding drinkable yogurts from the fluid milk 
products definition stress that these should not be excluded because 
they are beverages and are packaged similarly to other fluid milk 
products. Opponents are of the opinion that drinkable yogurts are fluid 
milk products because they are comparable to flavored or cultured fluid 
milk products. Drinkable yogurts do have several characteristics 
similar to listed fluid milk products--they can be used as a beverage 
and are similarly packaged. There are, however, other characteristics 
which differentiate drinkable yogurts from fluid milk products. These 
characteristics include, in most cases, a different consistency than 
the fluid milk products, a significant volume of added yogurt, the 
addition of fruit and not just flavorings, and live and active cultures 
supplied by the yogurt. These differences between listed fluid milk 
products and drinkable yogurts warrant the exclusion of drinkable 
yogurts containing at least 20 percent yogurt from being a fluid milk 
product. Drinkable products with less than 20 percent yogurt will be 
considered fluid milk products. The yogurt contained in those products 
with less than 20 percent yogurt will be priced at the Class II price 
and not be subject to an ``up charge'' as a result of their use in a 
fluid milk product.
    One proponent for excluding drinkable yogurts from the fluid milk 
product definition sought to also include kefir. The only evidence 
provided to support excluding kefir from the fluid milk product 
definition was identifying kefir as a cultured product similar to 
drinkable yogurt. Kefir is a cultured product that, like drinkable 
yogurts, contains active cultures. While cultured beverages are one of 
the listed products in the fluid milk product definition, kefir's 
similarities to drinkable yogurts provide a reasonable basis to 
conclude that the milk used in kefir products should be classified in 
the same way as milk used in drinkable yogurt products. As with 
drinkable yogurts containing at least 20 percent yogurt, kefir should 
be exempt from the fluid milk product definition.
    The exclusion of drinkable yogurts from the fluid milk product 
definition will have a minimal impact on the resulting uniform prices 
to producers. Less than one-half of one percent of the packaged fluid 
milk products distributed in 2004 were drinkable yogurt or kefir type 
beverages that are currently classified as fluid milk products. For 
2004, it is estimated that if all of the current yogurt and kefir 
beverages had been Class II, the impact on producers, either through 
the uniform price or producer price differential, would have been a 
$0.0026 per hundredweight reduction on the more than 103 billion pounds 
of producer milk pooled on Federal orders.
    Manufacturers of milk-based products that are intended to be used 
for dietary uses (meal replacements) testified that products sold for 
such dietary use in hermetically-sealed containers and the same product 
sold in other types of containers receive different regulatory 
classifications. Some products, such as those intended to be used for 
infant feeding and dietary needs (meal replacements), are currently 
considered Class II products if they are hermetically-sealed. However, 
the same product in a brick-pack or other types of packaging are 
considered fluid milk products. These products have a limited 
distribution and in the case of many of the dietary products, sales are 
only to health care facilities (such as hospitals and nursing homes) 
and they have a very long shelf life. The limited distribution and 
packaging these products indicates that they do not directly compete 
with Class I products. Most importantly, their intended use can be 
generalized as substitutes for meals by infants, the infirm and the 
elderly and not for use as a beverage.
    This decision, in the narrow context of a highly specialized and 
marketed drinkable product sold to the healthcare industry, finds that 
packaging is not a legitimate criterion for considering some meal 
replacement products as Class II products and others in Class I. 
Whether the dietary products (meal replacements) are in hermetically-
sealed containers or not, the dietary products (meal replacements) are 
intended to be used to replace the nutrition of normal meals in the 
health care industry and not intended to be used in the same manner as 
fluid milk. The dietary products packaged in other than hermetically-
sealed containers still have the same basic form and intended use as 
those in hermetically-sealed containers and it is therefore reasonable 
that they should be similarly classified. Dietary products (meal 
replacements) should be excluded from the fluid milk product definition 
and should be considered Class II products.
    To further clarify which products should be excluded from the fluid 
milk product definition, the term ``meal replacement'' is incorporated 
into the description detailing the intended meaning of dietary use. The 
term ``meal replacement'' will not include a fortified fluid milk 
product or fortified dairy beverage. The term ``meal replacement'' 
encompasses those dairy products that are truly intended to be a 
replacement for a meal. Meal replacements are categorized as those 
products sold to the health care industry and may include other 
products that are similar in form and intended use. This decision 
recommends adding the qualifier ``sold to the health care industry'' to 
the description of ``dietary use (meal replacement)'' and eliminating 
the need for dietary (meal replacement) products to be packaged in 
hermitically-sealed containers. By replacing ``hermitically-sealed'' 
with ``sold to the health care industry,'' competing products will 
receive equitable regulatory treatment. This change should have a 
deminimus impact on producer milk revenue because most products 
considered to be meal replacements are currently Class II products and 
because the quantity of milk in these products relative to all milk 
pooled under Federal orders is very small.
    In response to concerns that expanding exemptions of products from 
the fluid milk product definition would result in lower producer 
revenue, the record of this proceeding lacks the data to conclude that 
exempting certain milk-based products, or reclassifying current 
products from one class to another, will harm producer revenue. Any 
negative impact may be offset by other products that may be determined 
to meet the fluid milk product definition as a result of adoption of 
its recommended changes.
    Proposal 5 calls for, in part, retaining the 6.5 percent nonfat 
solids criteria and giving the Department the flexibility to include as 
fluid milk products other products that fell below 6.5 percent

[[Page 28603]]

nonfat solids. At the hearing, the proposal was modified to require the 
Department to make other determinations and to conduct studies before a 
product is determined to meet the fluid milk product definition. The 
modified proposals would require the Department to determine if a 
product competes directly and substantially with FDA defined milk 
products. The modified proposal included five criteria for making the 
required determination and would require the Department to provide 
written determination of classification prior to the product being 
included as a fluid milk product. The modified proposal would also 
require that the handler market more than three million pounds in a 
Federal order per month before the product could be considered a fluid 
milk product even if the product met the proposed five criteria.
    The criteria of Proposal 5, as modified, for determining if a 
product should be a fluid milk product are not reasonable and do not 
make the classification of milk on the basis of form and intended use. 
The additional criteria, including a comparison of retail prices, 
advertising, and substitutability between the new product and fluid 
milk products do not conform to the requirement of classification on 
the basis of form and intended use.
    In addition, the data collection and analysis called for in 
Proposal 5's modification would be unduly burdensome to both the dairy 
industry and to the Department. The burden is also without significant 
improvement to product classification determinations and the potential 
loss of revenue to producers who would never recover lost revenue in 
the event a new product is determined to meet the fluid milk product 
definition.
    A modification to Proposal 7 made at the hearing should not be 
adopted. This modification to require the Department to hold a hearing 
do determine the classification of a new product made by new technology 
is not necessary for the same reasons as in recommending that Proposal 
5 not be adopted. Furthermore, there is no need to incorporate a 
specific requirement in to the order to hold a hearing when such an 
option is already available.
    A number of opponents of proposals seeking to change the fluid milk 
product definition argued that there must necessarily exist a current 
problem in order to make amendments to the provisions of Federal milk 
marketing orders. This decision disagrees with such arguments. 
Anticipating problems and amending regulations to address anticipated 
changes in marketing conditions may be a valid action on the part of 
the Department to assure continued orderly marketing conditions and 
equity among producers and handlers. In this proceeding it is 
especially appropriate to have provisions that can address the future 
needs of a rapidly changing industry brought about by new technology.

Rulings on Proposed Findings and Conclusions

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

General Findings

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

Recommended Marketing Agreements and Order Amending the Orders

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

List of Subjects in 7 CFR Part 1000

    Milk marketing orders.

    For the reasons set forth in the preamble 7 CFR Part 1000 is 
proposed to be amended as follows:

PART 1000--GENERAL PROVISIONS OF FEDERAL MILK MARKETING ORDERS

    1. The authority citation for 7 CFR Part 1000 continues to read as 
follows:

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

    2. Amend Sec.  1000.15 by revising paragraphs (a), (b) introductory 
text, and (b)(1), redesignating paragraph (b)(2) as (b)(4) and adding 
new paragraphs (b)(2) and (b)(3), to read as follows:


Sec.  1000.15  Fluid milk product.

    (a) Fluid milk products shall include any milk products in fluid or 
frozen form intended to be used as beverages. Such products include, 
but are not limited to: Milk, fat-free milk, lowfat milk, light milk, 
reduced fat milk, milk drinks, eggnog and cultured buttermilk, 
including any such beverage products that are flavored; cultured; 
modified with added or reduced nonfat solids, milk proteins, or 
lactose; sterilized; concentrated; or, reconstituted. As used in this 
part, the term concentrated milk means milk that contains not less than 
25.5 percent, and not more than 50 percent, total milk solids:
    (b) Fluid milk products shall not include:
    (1) Plain or sweetened evaporated milk/skim milk, sweetened 
condensed milk/skim milk, yogurt containing beverages containing 20 
percent or more yogurt by weight, Kefir, formulas especially prepared 
for infant feeding or dietary use (meal replacement) sold to the health 
care industry, and whey;
    (2) Milk products containing more than 9 percent butterfat;
    (3) Milk products containing less than 2.25 percent true milk 
protein and less than 6.5 percent nonfat milk solids, by weight, unless 
their form and intended

[[Page 28604]]

use is comparable to the products contained in paragraph (a)(1) of this 
section; and
* * * * *


Sec.  1000.40  [Amended]

    3. Section 1000.40 is amended by revising paragraphs (b)(2)(iii) 
and (b)(2)(vi) to read as follows:
* * * * *
    (b) * * *
    (2) * * *
    (iii) Aerated cream, frozen cream, sour cream, sour half-and-half, 
sour cream mixtures containing nonmilk items, yogurt, including yogurt 
containing beverages with more than 20 percent yogurt by weight, Kefir, 
and any other semi-solid product resembling a Class II product;
* * * * *
    (vi) Formulas especially prepared for infant feeding or dietary use 
(meal replacement) that are sold to the health care industry;
* * * * *

    Dated: May 12, 2006.
Lloyd C. Day,
Administrator, Agricultural Marketing Service.
[FR Doc. 06-4591 Filed 5-16-06; 8:45 am]
BILLING CODE 3410-02-P