[Federal Register Volume 71, Number 177 (Wednesday, September 13, 2006)]
[Proposed Rules]
[Pages 54152-54170]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-7498]



[[Page 54151]]

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Part IV





Department of Agriculture





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Agricultural Marketing Service



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7 CFR Part 1032



Milk in the Central Marketing Area; Final Decision on Proposed 
Amendments to Marketing Agreement and to Order; Proposed Rule

  Federal Register / Vol. 71, No. 177 / Wednesday, September 13, 2006 / 
Proposed Rules  

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DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Part 1032

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


Milk in the Central Marketing Area; Final Decision on Proposed 
Amendments to Marketing Agreement and to Order

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Proposed rule; final decision.

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SUMMARY: This document is the final decision proposing to adopt 
amendments that increase supply plant performance standards, amend 
features of the ``touch-base'' provision, amend certain features of the 
``split plant'' provision and decrease the diversion limit standards of 
the order. This decision also limits the volume of milk a handler can 
pool to 125 percent of the total volume of milk pooled in the previous 
month. This final decision is subject to producer approval.

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

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

Regulatory Flexibility Act and Paperwork Reduction Act

    In accordance with the Regulatory Flexibility Act (5 U.S.C. 601 et 
seq.), the Agricultural Marketing Service has considered the economic 
impact of this action on small entities and has certified that this 
proposed rule will not have a significant economic impact on a 
substantial number of small entities. For the purpose of the Regulatory 
Flexibility Act, a dairy farm is considered a ``small business'' if it 
has an annual gross revenue of less than $750,000, and a dairy products 
manufacturer is a ``small business'' if it has fewer than 500 
employees.
    For the purposes of determining which dairy farms are ``small 
businesses,'' the $750,000 per year criterion was used to establish a 
production guideline of 500,000 pounds per month. Although this 
guideline does not factor in additional monies that may be received by 
dairy producers, it should be an inclusive standard for most ``small'' 
dairy farmers. For purposes of determining a handler's size, if the 
plant is part of a larger company operating multiple plants that 
collectively exceed the 500-employee limit, the plant will be 
considered a large business even if the local plant has fewer than 500 
employees.
    During January 2005, the time of the hearing, there were 5,778 
dairy producers pooled on, and 23 handlers regulated by, the Central 
order. Approximately 5,365 producers, or 92.9 percent, were considered 
``small businesses'' based on the above criteria. Of the 23 handlers 
regulated by the Central order during January 2005, 11 handlers, or 
47.8 percent, were considered ``small businesses.''
    The adopted amendments regarding the pooling standards serve to 
revise established criteria that determine those producers, producer 
milk, and plants that have a reasonable association with and 
consistently serve the fluid needs of the Central milk marketing area. 
Criteria for pooling are established on the basis of performance levels 
that are considered adequate to meet the Class I fluid needs of the 
market and, by doing so, determine those producers who are eligible to 
share in the revenue that arises from the classified pricing of milk.
    Criteria for pooling are established without regard to the size of 
any dairy industry organization or entity. Therefore, the proposed 
amendments will not have a significant economic impact on a substantial 
number of small entities.
    A review of reporting requirements was completed under the 
Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35). It was 
determined that these proposed amendments would have no impact on 
reporting, record keeping, or other compliance requirements because 
they would remain identical to the current requirements. No new forms 
are proposed and no additional reporting requirements would be 
necessary.
    This action does not require additional information collection that 
requires clearance by the Office of Management and Budget (OMB) beyond 
currently approved information collection. The primary sources of data 
used to complete the forms are routinely used in most business 
transactions. Forms require only a minimal amount of information which 
can be supplied without data processing equipment or a trained 
statistical staff. Thus, the information collection and reporting 
burden is relatively small. Requiring the same reports for all handlers 
does not significantly disadvantage any handler that is smaller than 
the industry average.
    No other burdens are expected to fall on the dairy industry as a 
result of overlapping Federal rules. This rulemaking proceeding does 
not

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duplicate, overlap, or conflict with any existing Federal rules.
    Prior documents in this proceeding:
    Notice of Hearing: Issued September 17, 2004; published September 
22, 2004 (69 FR 56725).
    Notice of Hearing Delay: Issued October 18, 2004; published October 
13, 2004 (69 FR 61323).
    Recommended Decision: Issued February 15, 2006; published February 
22, 2006 (71 FR 9015).

Preliminary Statement

    A public hearing was held upon proposed amendments to the marketing 
agreement and the order regulating the handling of milk in the Central 
marketing area. The hearing was held, pursuant to the provisions of the 
Agricultural Marketing Agreement Act of 1937, as amended (7 U.S.C. 601-
674), and the applicable rules of practice and procedure governing the 
formulation of marketing agreements and marketing orders (7 CFR Part 
900).
    The amendments set forth below are based on the record of a public 
hearing held in Kansas City, Missouri, on December 6-8, 2004, pursuant 
to a notice of hearing issued September 17, 2004, published September 
22, 2004 (69 FR 56725), and a notice of a hearing delay issued October 
13, 2004, published October 18, 2004 (69 FR 61323).
    Upon the basis of the evidence introduced at the hearing and the 
record thereof, the Administrator, on February 15, 2006, issued a 
Recommended Decision containing notice of the opportunity to file 
written exceptions thereto.
    The material issues, findings, conclusions and rulings of the 
Recommended Decision, with one minor modification, are hereby approved, 
adopted and are set forth herein. The material issues on the hearing 
record relate to:

1. Pooling Standards
    A. Performance standards for supply plants.
    B. The ``Split plant'' provision.
    C. System pooling for supply plants.
    D. Elimination of the supply plant provision.
    E. Standards for producer milk.
2. Establishing pooling limits.
3. Transportation and assembly credits.

Findings and Conclusions

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

1. Pooling Standards

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

[[Page 54154]]

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

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

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

    \1\ Amendments to the pooling provisions of the Upper Midwest 
order were implemented on February 1, 2006 (70 FR 73126). See Final 
Partial Decision published in the Federal Register, October 5, 2005 
(70 FR 58086).
---------------------------------------------------------------------------

    The DFA/PF witness illustrated that milk produced in Idaho, for 
example, cannot profitably be delivered to distributing plants located 
in the Central marketing area. According to the witness, milk produced 
in this region would need to travel more than 680 miles for delivery at 
the nearest distributing plant of the order located in Denver. The 
witness asserted that the current one-time touch-base standard combined 
with the existing diversion limit standards of the order provide the 
incentive for milk located far from the marketing area to be profitably 
pooled on the order which otherwise would not be economically feasible.
    The witness provided a scenario where a single 50,000-pound load of 
milk delivered once to Denver could cause one million pounds of milk to 
be pooled on the Central order through the diversion process but 
delivered to plants far from the marketing area. According to the 
witness' calculations, a 50,000-pound load of milk delivered once to a 
pool plant located in Denver would incur a loss $4,640. However, the 
witness explained that each additional load of milk, up to one million 
pounds now qualified for diversion to nonpool plants located near 
producers farms, would return an additional $7,081. The witness 
emphasized that the milk portrayed in this example would rely solely on 
the liberal pooling standards of the order. The milk would never 
consistently and reliably supply the Central marketing area.
    In another scenario, the DFA/PF witness illustrated the impact of 
25 million pounds of milk a month shipped from southern Idaho that 
would be pooled on the Central order through the diversion process by 
meeting the one-time touch-base standard during the months of November 
2003-January 2004. The witness explained that pooling this volume of 
milk would have reduced the Central order's blend price by $0.25 per 
cwt.
    In a third scenario, the DFA/PF witness demonstrated how milk 
located in southern Idaho can be pooled every month through the 
diversion process by meeting the one-time touch-base standard of the 
Central order. The

[[Page 54157]]

witness said that this scenario was based on the 58-month period of 
January 2000 to October 2004. The witness explained that this scenario 
assumes that a single 50,000-pound load of milk was shipped to a 
distributing plant located in the Central marketing area and all other 
milk diverted to nonpool plants are located in Idaho. The witness 
testified that the shipping handler would receive a positive return 
averaging $0.348 per cwt per month ($201,000 over the 58-month period) 
on the total volume of milk pooled. The DFA/PF witness concluded that 
from their scenarios, the current Central order diversion limit and 
touch-base standards encourage pooling of milk that can not and does 
not regularly and consistently supply the Class I needs of the market.
    A brief submitted by Select and Continental supported the producer 
milk amendments called for in Proposal 1, except for limiting 
diversions to nonpool plants that are located in the States comprising 
the Central marketing area. The brief noted that the goal of the 
Federal order program should be to ensure that milk pooled on the order 
actually serves the Class I market.
    Features of Proposal 5, offered by Dean, regarding diversion limits 
and touch-base standards are not adopted. Proposal 5 seeks to raise the 
touch-base standard to 4 days in each month of the year and decrease 
diversion limits to 65 percent for the months of July through January, 
and 75 percent during the months of February through June. A Dean 
witness stated that increasing the touch base requirement would ensure 
the increased availability of milk to serve the needs of the fluid 
market. The witness testified that adopting higher touch-base and lower 
diversion limit standards would ensure that pool plants would keep 
their facilities operating at a higher level of output than would be 
the case if more milk were diverted.
    The diversion limit standard feature of Proposal 5 was modified by 
Dean on brief. The modification specified that milk would not be 
eligible for diversion ``unless'' (instead of ``until'') milk has been 
physically received as producer milk at a pool plant, and the exception 
for a loss of Grade A status was changed to a period not to exceed 21 
rather than 10 days in a calendar year.
    The witness from NAJ, on behalf of AMPI, et al., testified in 
opposition to increasing the touch-base and lowering the diversion 
limit standards as advanced. The witness stated that the proposed 
lowering of diversion limits together with increasing supply plant 
performance standards as called for in Proposal 5 would have negative 
consequences for dairy farmer income, if adopted. The NAJ witness was 
of the opinion that the aim of Proposal 5 was to deter milk from being 
pooled on the order. It was the witness' opinion that the adoption of 
Proposal 5 would create marketing inefficiencies and additional costs 
for members of NAJ. The witness also was of the opinion that the 
adoption of Proposal 5 would discourage available milk supplies in the 
milkshed from pooling on the Central order.
    NAJ and AMPI, et al., also submitted exceptions to increasing the 
touch-base standard and lowering the diversion limit standards in the 
recommended decision. NAJ and AMPI, et al., reaffirmed their opinion 
that adoption of a one day touch-base standard along with a decrease in 
diversion limits would unnecessarily burden their members.
    Central Equity, a dairy farmer cooperative located in Missouri, 
also took exception to increasing the touch-base standard. One hundred 
and fourteen Central Equity dairy farmer members submitted a form-
letter detailing the difficulties the cooperative would endure in 
meeting the increased touch-base standard. The cooperative members were 
of the opinion that the recommended touch-base standard would 
significantly increase hauling costs and require the cooperative to pay 
pooling fees for access to pool plants. The cooperative added that they 
are not opposed to increased performance standards in general, but are 
concerned with difficulties that small cooperatives and independent 
dairy farmers face in obtaining access to pool facilities.
    Exceptions to increasing the touch-base standard and lowering the 
diversion limit standard were also received from Wells Dairy (Wells). 
Wells Dairy is an Iowa based dairy products manufacturer. Wells was of 
the opinion that the recommended touch-base standard would be difficult 
for certain dairy farmers and dairy farmer cooperatives to meet. Wells 
noted that increasing the touch-base standard and lowering the 
diversion limit standard will unduly burden dairy farmers and 
cooperatives that have limited access to pooling facilities served 
under full-supply contracts.
    The record reveals that distributing plants in certain areas of the 
marketing area are having difficulty obtaining reliable milk supplies. 
Because this decision does not adopt transportation credits (discussed 
later in this decision) for the movement of milk to distributing 
plants, increasing the performance standards for supply plants is a 
reasonable measure to better assure that all distributing plants of the 
order are adequately supplied. Additionally, other measures are being 
taken to prevent the pooling of milk which can not demonstrate regular 
and consistent service in supplying the Class I needs of the marketing 
area. The pooling of such milk results in an unwarranted lowering of 
the blend price returned to those producers who demonstrate regular and 
consistent service in supplying the Class I needs of the market.
    The pooling standards of all Federal milk marketing orders, 
including the Central order, are intended to ensure that an adequate 
supply of milk is available to meet the Class I needs of the market and 
provide the criteria for determining the producer milk that has 
demonstrated service in meeting the Class I needs of the market and 
thereby receive the order's blend price. The pooling standards of the 
Central order are represented in the Pool plant, Producer, and the 
Producer milk provisions of the order and are based on performance, 
specifying standards that if met, qualify a producer, the milk of a 
producer, or a plant to share in the benefits arising from the 
classified pricing of milk.
    Pooling standards that are performance-based provide the only 
viable method for determining those producers eligible to share in the 
marketwide pool. It is usually the additional revenue generated from 
the higher-valued Class I use of milk that adds additional income to 
producers, and it is reasonable to expect that only those producers who 
consistently bear the costs of supplying the market's fluid needs 
should share in the returns arising from higher-valued Class I sales. 
An important objective of pooling standards is identifying the milk 
that serves the fluid milk needs of the market, a feature which if 
ineffective can result in pooling milk that is not providing such 
service
    Record evidence supports finding that certain features of pooling 
standards of the Central order relating to performance standards for 
supply plants, diversion limits, touch-base, and split plants need to 
be amended given the pooling of milk that does not regularly and 
consistently serve the Class I needs of the Central marketing area.
    The most recent amendments to the Central order (published in the 
August 27, 2003, Final Decision (68 FR 51640)) intended to correct 
similar inadequacies of the supply plant pooling provisions and 
diversion limit standards for the consolidated Central order. However, 
the record reveals that the combination and features adopted for pool 
plants in

[[Page 54158]]

2003 have not been as effective as intended to reasonably assure that 
only milk of producers who regularly and consistently serve the Class I 
market is pooled on the order.
    Record evidence reveals that the performance and pooling standards 
of the Central order are inadequate to ensure that the benefits of 
consistently and reliably servicing the Class I market are shared 
equitably among those producers who actually bear the costs of serving 
that market. The record evidence demonstrates that milk distant from 
the Central marketing area does not provide reasonable service to the 
Class I market but can be pooled on the order because of current 
pooling standards. This evidence shows that pooling large volumes of 
milk at lower class-use values has lowered the order's blend price. 
Specifically, the record shows that the current one-time touch-base 
standard and the diversion limit standard of the order do not properly 
identify the milk of producers who reliably and consistently serve the 
Class I market.
    The record demonstrates that current pooling standards of the 
Central order make it the most logical order for distant milk--such as 
in Southern Idaho--to be pooled. The record shows that the current 
performance standards of the Central order are insufficient to prevent 
milk from qualifying for pooling while not performing service to the 
Class I market.
    In addition, the record provides evidence that milk produced in 
areas distant from the marketing area cannot profitably be delivered to 
distributing plants in the Central marketing area. However, the current 
liberal touch-base and diversion limit standards make pooling on the 
Central order attractive while reducing the blend price of the order 
for those producers who actually provide service to the Class I market.
    Record evidence reveals the continued importance of supply plants 
for producers whose milk provides consistent and reliable service to 
the Class I market. According to the record, opposition to restrictive 
supply plant standards beyond those advanced in Proposals 1 and 10 was 
based on the continued need for supply plant service to distributing 
plants in the marketing area. Similarly, the record reveals a consensus 
among producers concerning their continued support for supply plant 
systems as an integral part of milk supply networks in the Central 
marketing area. Opposition to the elimination or additional restriction 
of supply plants and supply plant systems in Proposals 4, 11, 12, and 
13, is revealed by the record to be based on the continued importance 
of supply plant systems to supplying the Class I market.
    Record evidence from proponents and opponents of limiting 
diversions to supply plants located in the marketing area or New Mexico 
supports concluding that dairy farmers in some regions of the Central 
marketing area rely on supply plants to market their milk. In addition, 
the record contains evidence that supply plants and supply plant 
systems continue to provide necessary service to the Class I market 
without regard to the location of those plants or plant systems. 
According to the record, distant milk may use the pooling standards of 
the Central order as a means to pool milk that will never perform 
service to the Class I market. However, the record does not show 
clearly that milk diverted to supply plants outside the marketing area 
or New Mexico cannot be part of the legitimate reserve of the market 
which may require additional pooling safeguards. Performance rather 
than plant location continues to be the standard for identifying the 
milk of producers who should share in the benefits of pooling. In that 
regard, this decision finds agreement with the opponents of limiting 
diversions to supply plants located within the marketing area or New 
Mexico, as sought in Proposal 1.
    Despite the comments by AMPI et al., NAJ, Central Equity and Wells 
Dairy, this decision continues to find that several of the performance 
standards advanced in Proposal 1 are reasonable in light of other 
adopted changes to the order's pooling provisions. The combination of 
amendments increasing supply plant performance standards, modifying the 
split plant provision, reducing diversion limit standards and 
increasing the touch-base standard are appropriate in light of denying 
proposals to establish transportation and assembly credits. The adopted 
amendments should more accurately identify the milk of those producers 
that provide a consistent and reliable supply of milk to the Class I 
needs of the Central marketing area and assure that distributing plants 
are adequately supplied.
    The record indicates that milk located either inside or outside the 
marketing area can be reported as diverted milk by a pooled handler. 
This milk is eligible to receive the order's blend price. Under the 
current pooling provisions, this can occur after a one-time delivery to 
a Central marketing area pool plant. After the initial delivery, 
however, such milk need never again be physically delivered to a 
Central marketing area pool plant. The record evidence confirms that 
usually this milk is delivered to a nonpool plant located nearer the 
farms of producers located far from the marketing area who cannot serve 
the Class I market. It is therefore appropriate to amend the order's 
diversion provisions to ensure that milk pooled through the diversion 
process is part of the legitimate reserve supply of the pool plant from 
which it was diverted. This standard is a necessary safeguard against 
excessive milk supplies becoming associated with the market through the 
diversion process to prevent the unwarranted reduction of the order's 
blend price.
    However, the record does not support finding that diversions to 
plants not located within the marketing area or New Mexico cannot be 
part of the legitimate reserve supply for the marketing area. In this 
regard, the proposed limitation on diversions based on plant location 
is not reasonable. Based on the record, the proposed increase in the 
touch-base standard and lowering of the diversion limitation standard 
is adequate to ensure that milk consistently and reliably serving the 
Class I market is properly identified. Accordingly, the portion of 
Proposal 1 seeking to limit diversions to plants located in the 
marketing area or New Mexico is not adopted.
    Exceptions received by AMPI, et al., NAJ, Central Equity and Wells 
Dairy opined the difficulties that certain cooperatives and independent 
dairy farmers face in meeting an increased touch-base standard. 
However, this decision continues to find that that the touch-base 
standard should be amended so that at least one days' milk production 
of a dairy farmer is physically received at a pool plant during 
January, February, and August through November for the milk of the 
dairy farmer to be eligible for diversion to a nonpool plant. Amending 
the touch-base standard is widely supported by the record and should 
reduce the ability of milk not performing a consistent and reliable 
service to the Class I market from being pooled. The months of January, 
February, and August through November are, according to the record, the 
high demand months for fluid milk. Adoption of the one-day touch base 
standard for each of these six months will more properly identify the 
milk of those producers serving the market's Class I needs. 
Accordingly, exceptions received from AMPI, et al., NAJ, Central Equity 
and Wells Dairy are found to not be compelling.
    Record evidence does not support finding that the 4-day touch base

[[Page 54159]]

standard advanced by Dean would improve the identification of dairy 
farmers whose milk serves beyond what a 1-day standard would provide 
within the context of current marketing conditions. This will be 
reinforced by the other adopted amendments to the order's pooling 
standards.
    The amendment requiring a handler to make a 12-month commitment if 
opting to create a split plant will ensure that the milk shipped from 
the pool side of a split-plant serves the Class I market. This 
amendment (Proposal 10, advanced by Dean) is a reasonable modification 
of the split plant feature for supply plants to provide for orderly 
marketing and maintain the integrity and intent of the order's 
performance standards. The proposal retains the principle that milk 
regularly and consistently demonstrating service to the Class I needs 
of the market should benefit from being pooled on the order. 
Accordingly, Proposal 10 is adopted.
    The Federal milk order system recognizes that there are costs 
incurred by producers in servicing an order's Class I market. The 
primary reward to producers for performing such service is receiving 
the order's blend price. Taken as a whole, the amended pooling 
provisions will ensure that milk seeking to be pooled consistently 
demonstrates service in meeting the marketing area's Class I needs. 
Consequently, adoption of these amended pooling provisions will provide 
for more equitable sharing of revenue generated from Class I sales 
among those producers who bear those costs and assure Class I handlers 
of a regular and reliable supply for fluid use.

2. Establishing Pooling Limits

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

[[Page 54160]]

proposals. The first approach, published in the hearing notice as 
Proposals 2 and 8, addresses de-pooling by limiting the volume of milk 
a handler can pool in a month to a specified percentage of what the 
handler pooled in the prior month. The second approach, published in 
the hearing notice as Proposals 6 and 7, addresses de-pooling by 
establishing what is commonly referred to as a ``dairy farmer for other 
markets'' provision. These proposals would require milk of a producer 
that was de-pooled to not be able to be re-pooled by that producer for 
a defined time period. All proponents agreed that while none of the 
proposals would completely eliminate de-pooling, they would likely 
deter the practice.
    Of the four proposals received that would limit de-pooling, this 
decision adopts Proposal 2, offered by DFA/PF. Specifically, adoption 
of the proposal will limit the volume of milk a handler can pool in a 
month to no more than 125 percent of the volume of milk pooled in the 
prior month. Milk diverted to nonpool plants in excess of this limit 
would not be pooled, and milk shipped to pool distributing plants and 
allocated as Class I in excess of the volume shipped to pool 
distributing plants in the prior month will not be subject to the 125 
percent limitation. The 125 percent limitation may be waived at the 
discretion of the Market Administrator for a new handler on the order 
or for an existing handler whose milk supply changes due to unusual 
circumstances.
    As published in the hearing notice, Proposal 8, offered by Dean 
Foods, addresses de-pooling in a similar manner as Proposal 2, but 
would establish a limit on the total volume of milk a handler could 
pool in a given month to 115 percent of the volume that was pooled in 
the prior month. This proposal was modified at the hearing to allow for 
pooling the milk receipts of a new handler on the order without volume 
restrictions.
    As published in the hearing notice, Proposals 6 and 7, also offered 
by Dean Foods would address de-pooling by establishing defined time 
periods during which de-pooled milk could not be pooled. Proposal 6 
essentially would require an annual pooling commitment by handler to 
the market. Under Proposal 6, if the milk of a producer is de-pooled in 
a month, then the milk of the producer could not re-establish 
eligibility for pooling on the order during the following eleven months 
unless ten days milk production was delivered to a pool distributing 
plant. Under Proposal 6, handlers that de-pool milk have limited 
options to return milk to the pool, either shipping ten days milk 
production of a producer to a pool distributing plant or waiting eleven 
months for eligibility to re-pool.
    Under Dean's Proposal 7, a handler that de-pools milk cannot re-
pool for a 2 to 4 month time period, depending on the month in which 
de-pooling occurred. Proposal 7 also provides the option to return milk 
to the pool by shipping ten days milk production of a producer to a 
pool distributing plant. Proposals 6 and 7 were modified at the 
hearing.
    A witness appearing on behalf of DFA/PF testified in support of 
Proposal 2 and in general opposition to the practice of de-pooling. The 
witness testified that adoption of Proposal 2 would minimize the 
practice of de-pooling since not all the milk that was de-pooled could 
immediately return to the pool in the following month. The witness 
noted that both DFA and Prairie Farms de-pool milk when advantageous 
but stressed that the practice of de-pooling and re-pooling is 
detrimental to the Federal order system.
    The DFA/PF witness testified that restricting the pooling of milk 
on the basis of prior performance is not a new concept in Federal milk 
marketing order provisions. The witness referenced the ``dairy farmer 
for other markets'' provision currently in place in the Northeast order 
as an example of pooling provisions based on prior performance. The 
witness noted that Proposal 2 is similar to a ``dairy farmer for other 
markets'' provision as it limits pooling based on the handler's 
previous month's pooled volume. The DFA/PF witness speculated that the 
manner in which Proposal 2 attempts to reduce the practice of de-
pooling is too drastic for some and not strong enough for others. 
Nevertheless, adoption of Proposal 2, the witness stressed, would 
provide an appropriate economic consequence to discourage those 
entities that might otherwise choose to de-pool.
    The DFA/PF witness was of the opinion that since the purpose of 
Federal milk marketing orders are to ensure an adequate supply of milk 
for the fluid market, equitably share pool proceeds, and promote 
orderly marketing, milk order provisions should attract milk to its 
highest valued use when needed and provide for milk to clear the market 
when not needed in higher-class uses. Since Class I milk cannot be de-
pooled, the witness noted, Class I handlers can be at a disadvantage to 
handlers who can de-pool during periods of price inversions. Class I 
handlers are unable to maintain a competitive pay price for their milk 
supply, the witness explained, since Class II, III or IV handlers who 
de-pool may pay dairy farmers a higher price for their milk. The 
witness stressed that when the Class I price is not high enough to 
attract milk from other uses, disorderly conditions arise in the 
marketplace.
    The DFA/PF witness asserted that when a Class II, III or IV handler 
de-pools milk, inequities arise for the dairy farmers who supplied the 
de-pooling handler. In the absence of provisions to discourage de-
pooling, the witness explained, de-pooling becomes a rational economic 
practice since only Class I milk is required to be pooled and its value 
shared through the order's blend price.
    The DFA/PF witness testified that the combination of de-pooling 
with recent increasingly volatile milk prices requires immediate 
regulatory measures to mitigate the disorderly effects that de-pooling 
has on market participants. The witness cited market administrator data 
showing that since implementation of Federal order reform in 2000 there 
have been 43 months when opportunities to de-pool existed for the 
Central order.
    Relying on statistics provided by the market administrator, the 
witness illustrated that in April 2004 a handler in the Central order 
choosing to de-pool was able to pay over $4.00 per hundredweight (cwt) 
more for milk than a Class I handler unable to de-pool because the 
Class III price was $19.66 and the uniform price was $15.64. The 
witness characterized pricing differences of this magnitude as 
disruptive, disorderly and a competitive disadvantage for any Class I 
handler. When similarly situated handlers face disparate costs in 
procuring a supply of milk, the witness added, producers in common 
procurement areas are negatively affected. The witness asserted that 
this is a disorderly marketing condition.
    Two DFA member dairy farmers from Nebraska testified in support of 
Proposal 2. Both witnesses maintained that they received smaller milk 
checks than they otherwise would have received if milk had not been de-
pooled. The witnesses added that when fluid milk bottlers experience 
difficulties in obtaining a milk supply, the costs to supply that milk 
should be passed on to consumers, not dairy farmers. The witnesses also 
stated that in order to equalize returns from all classified uses of 
milk, there needs to be a commitment to have all milk pooled every 
month of the year.
    Two DFA member dairy farmers from Missouri also testified in 
support of Proposal 2. The witnesses noted that de-pooling amplifies 
the problem of

[[Page 54161]]

negative PPD's. The witnesses were of the opinion that de-pooling 
creates differences in pay prices among similarly located dairy farmers 
whose milk is pooled in the Central market, and that different pay 
prices represent a disorderly marketing condition. The witnesses stated 
that in order to enjoy the additional funds usually generated by the 
Class I market, handlers should be required to demonstrate that their 
milk is available for the Class I market by not de-pooling.
    A dairy farmer from Kansas testified in opposition to the practice 
of de-pooling. The witness was of the opinion that a commitment to 
serve the Class I market should be required in order to share in the 
blend price. The witness stressed that in order to share in the returns 
generated from the marketwide pool handlers and cooperatives should 
participate in the pool every day not only when it may be profitable.
    A witness testified on behalf of Dean in support of Proposal 8. The 
witness explained that Proposal 8 addresses the practice of de-pooling 
in a similar manner as Proposal 2 but would limit the pooling of milk 
to 115 percent of the volume that was pooled in the prior month. The 
witness was of the opinion that a monthly pooling limit would 
discourage the de-pooling of milk since the greater the proportion of a 
handler's milk that is de-pooled, the longer it will take to re-pool 
that milk. Accordingly, the witness concluded, those who benefit the 
most from de-pooling also would have the most difficulty in attempting 
to regain pool status.
    A witness for Dean also testified in support of Proposals 6 and 7 
which would establish defined time periods during which de-pooled milk 
could not be re-pooled. The witness testified that Dean prefers 
adoption of Proposal 6 over Proposal 7. Proposal 6 would impose a 12-
month period during which de-pooled milk could not again be pooled 
while Proposal 7 would establish a 2 to 4 month period during which de-
pooled milk could not again be pooled. Under Proposal 6, the witness 
explained, if the milk of a producer were de-pooled, the milk could 
only reassociate before the annual commitment period if ten days 
production of the milk of the producer was delivered to a pool 
distributing plant. According to the witness, Proposal 7 would provide 
an option for milk that had been de-pooled to return to the pool during 
certain specified months of the year depending on when the milk was de-
pooled or by shipping ten days production of the milk of a producer to 
a pool distributing plant.
    The Dean witness testified that a similar provision to those 
contained in Proposals 6 and 7 is currently in place in the Northeast 
order. The witness was of the opinion that defined time periods during 
which de-pooled milk cannot again become pooled causes handlers to 
behave differently by taking a longer term view of pooling. The witness 
explained that handlers in the Northeast order need to evaluate more 
than the current month's economic impacts of pooling or not pooling 
milk, along with possible future missed opportunities.
    The Dean witness further contrasted the current ``dairy farmer for 
other markets'' provision effective in the Northeast to the standards 
proposed in Proposals 6 and 7. The witness testified that in the 
Northeast order, July is a month when de-pooled milk can return to the 
pool regardless of when the milk had been de-pooled during the previous 
year. Relying on market administrator data, the witness related that 
during the months of February through July 2004, large volumes of milk 
were de-pooled from the Northeast order. Because of the ``dairy farmer 
for other markets'' provision, the witness explained, milk that was de-
pooled during the months of February through June could not return to 
the pool until July. During this period, noted the Dean witness, a 
large volume of milk usually pooled on the Northeast order was pooled 
on the Mideast order.
    The Dean witness testified that Proposal 6 would require a handler 
that de-pooled milk in a month to remain off the pool for eleven 
additional months or ship 10 days milk production of a producer to a 
pool distributing plant in order for all milk of a producer to return 
to the pool, while Proposal 7 would provide the option to either return 
during designated months depending on the month in which milk was de-
pooled, or ship 10 days milk production of a producer to a pool 
distributing plant in order for all milk of a producer to return to the 
pool.
    A second Dean witness offered additional testimony in support of 
Proposal 6. The witness testified that Proposal 6 would exclude from 
the pool the milk of any dairy farmer not continuously pooled under a 
Federal milk order during the previous twelve months. The only 
exception to this exclusion would be a dairy farmer who temporarily 
lost Grade A status but was reinstated as a Grade A producer within 21 
days, noted the additional Dean witness. The witness emphasized that 
the portion of Proposal 6 that would require delivery of 10 days milk 
production of a dairy farmer to a pool distributing plant in order for 
all milk of a producer to re-join the pool would discourage de-pooling. 
The 10 day delivery requirement would insure that participation in the 
pool was open to any dairy farmer for whom it was technically and 
economically feasible to supply milk for fluid use. According to the 
witness, Proposals 6 and 7 also would make more milk readily available 
to service the fluid needs of the market.
    The additional Dean witness also stressed that adoption of Proposal 
6 would not totally eliminate de-pooling but would make it more 
difficult to re-pool milk after it had been de-pooled. The Dean witness 
testified that producer milk continuously pooled on the Central, or any 
other Federal milk order, which shares in both the costs and benefits 
of pool participation on a continuous basis would not be affected by 
adoption of Proposal 6.
    The second Dean witness added that adoption of Proposal 6 would 
increase returns to producers and provide for more orderly marketing 
conditions. The witness was of the opinion that adoption of Proposal 6 
would cause Class II, III or IV milk to remain pooled during times when 
the blend price was lower than the respective class price. This would 
increase the PPD, by making it less negative, and raise the blend price 
received by all producers, the witness concluded. Adoption of Proposal 
6 also would cause some Class III milk that is de-pooled to never 
return to the pool, the witness noted, since it would no longer be 
financially advantageous.
    A Kansas dairy farmer testified in support of Proposal 6. The 
witness stated that de-pooling cost Kansas dairymen who supplied the 
needs of the fluid market $6.2 million between March 2004 and October 
2004. The witness spoke in favor of any proposal that would require 
greater commitment to servicing the Class I needs of the Central 
marketing area.
    A DFA member dairy farmer from Missouri testified that de-pooling 
hurts dairy farmers and was in favor of any proposal that would limit 
the ability for milk to return to the pool the immediate month after 
de-pooling. The witness stated that there should be a waiting period of 
at least 2 or 3 months to pool milk after the milk had been de-pooled 
or a limit on the milk volume that could return to the pool the month 
after de-pooling.
    Land O' Lakes (LOL), initially a member of AMPI, et al., opposing 
adoption of Proposals 2, 6, 7 or 8, submitted a comment to the 
recommended decision in support of adoption of Proposal 2. LOL 
suggested, however, a 135 percent pooling limit for

[[Page 54162]]

the month of March to compensate for 28 days in the month of February 
and the increases in milk production typically seen during the spring 
months.
    A witness appearing on behalf of Dean testified in opposition to 
Proposal 2. The witness was of the opinion that limiting pooling to 125 
percent of receipts pooled during the previous month was too loose of a 
standard and urged the adoption of Proposal 6 or Proposal 8.
    A witness appearing on behalf of AMPI, et al., testified in 
opposition to Proposals 2, 6, 7, and 8. The witness was of the opinion 
that de-pooling was an issue that was national in scope, and should be 
addressed in a national hearing. The witness testified that the 
voluntary option of pooling or not pooling milk delivered to a nonpool 
plant has been a mainstay of the Federal order system and should not be 
amended. The witness was of the opinion that Proposals 2, 6, 7, and 8 
do not address the root cause of price inversions--advance Class I 
pricing--but rather only treats the symptom of the problem. Class I 
prices are announced by the USDA in advance, noted the witness, while 
milk prices for manufactured uses are announced after the month has 
passed. This can cause a lag between changes in the value of milk and 
changes in the advanced Class I price, added the witness, sometimes 
resulting in a Class III price that exceeds the uniform and Class I 
price, otherwise known as a price inversion. The witness added that it 
would be appropriate to reconsider whether advanced pricing remains 
sound regulatory policy.
    The AMPI, et al., witness was also of the opinion that Federal 
order Class I price differentials are artificially high. Milk used to 
produce cheese, the witness noted, is priced entirely through the 
marketplace and receives benefit from the Federal order system only 
when the uniform price is higher than the Class III price. Adoption of 
Proposals 2, 6, 7 or 8, the witness noted, would penalize milk used in 
the production of cheese by limiting the amount of milk that could be 
pooled and was a radical change in Federal order pooling philosophy. 
The witness added that adoption of these proposals would require cheese 
manufacturers to estimate Federal order blend prices and PPDs in an 
effort to decide whether it was more profitable to de-pool, remain 
pooled or a combination of both.
    The AMPI, et al., witness testified that the de-pooling of milk 
does not cause any reduction to the amount of milk available to serve 
the fluid market. The witness was of the opinion that when milk was de-
pooled there was not a reduction in the amount of milk made available 
to service the fluid market since the de-pooled milk may rejoin the 
pool the next month. The AMPI, et al., witness added that the Federal 
order system should be sharing money derived from Class I handlers, not 
taking money from dairy farmers whose milk is used in the production of 
cheese simply to offset a low Class I price created by the timing of 
announcing Class prices.
    The AMPI, et al., witness was also of the opinion that the 
Department should not consider Proposals 2, 6, 7 and 8 on an emergency 
basis. The witness testified that the proposed shift in regulatory 
policy as contained within these proposals should require the issuance 
of a recommended decision with opportunity for public comment.
    A witness representing NAJ testified that the problems arising from 
de-pooling are a result of the timing of price announcements. The 
witness also stated that the de-pooling issue would best be addressed 
at a national hearing.
    In a post hearing brief, DFA/PF reiterated the position that the 
pooling of milk in any month should not exceed 125 percent of the milk 
volume pooled in the previous month. The brief indicated that the 
pooling proposals (Proposals 6, 7, and 8) advanced by Dean are too 
restrictive for the current marketing conditions in the Central 
marketing area. According to the brief, Proposal 2 represents the least 
restrictive pooling proposal that could be supported by current 
marketing conditions while providing a reasonable deterrent to de-
pooling.
    A brief on behalf of AMPI, et al., reiterated the view that de-
pooling and re-pooling should be addressed on a national basis and that 
pooling decisions should continue to be based on immediate market 
conditions. The brief expressed the view that the ability to de-pool 
continues to be unrelated to the willingness to serve the needs of the 
Class I market.
    A brief by Select/Continental supported Proposal 6 as advanced by 
Dean. The brief noted that this ``dairy farmer for other markets'' 
proposal offered the most comprehensive means to eliminate the 
inequities of de-pooling while maintaining the strongest possible 
support for producers continuously and reliably serving the needs of 
the Class I market. The brief noted that Proposals 2 and 8, seeking to 
restrict the ability to pool to 125 percent and 115 percent of the 
previous month's volume respectively, was an improvement over current 
conditions but was not as robust as Proposal 6 which would require a 
12-month pooling commitment by handlers. The brief found agreement with 
AMPI, et al., that de-pooling is an issue that should be addressed on a 
national basis.
    The brief by Dean reiterated support for Proposals 6, 7 or 8, in 
order of preference, seeking to restrict the ability of handlers to de-
pool and re-pool milk in the Central marketing area. The brief 
expressed the view that Class I handlers who are required to pool their 
milk receipts are at a constant financial disadvantage to those 
handlers who may opt to pool or not pool.
    Dean, in comments to the Recommended Decision, supported adoption 
of Proposal 2, but was of the opinion that the adopted amendments may 
not go far enough in preventing de-pooling.
    AMPI, along with First District Association (AMPI Group), took 
exception to the adoption of any proposals that would deter the 
practice of de-pooling. The AMPI Group reiterated their position that 
Proposals 2, 6, 7 and 8 do not address the root cause of price 
inversions--advance Class I pricing--but rather only treats the symptom 
of the problem.
    Family Dairies, a dairy farmer cooperative that pools milk on the 
Central order, took exception to adopting any proposals that would 
deter the practice of de-pooling. The comment suggested that price 
inversions and negative PPDs should be the focus of any regulatory 
change.
    All Federal milk marketing orders require the pooling of milk 
received at pool distributing plants--which is predominantly Class I 
milk--and all pooled producers and handlers on an order share in the 
additional revenue arising from higher valued Class I sales. 
Manufacturing handlers and cooperatives of Class II, III and IV uses of 
milk who meet the pooling and performance standards make all of their 
milk receipts eligible to be pooled and usually find it advantageous. 
Manufacturing handlers and cooperatives who supply a portion of their 
total milk receipts to Class I distributing plants receive the 
difference between their use-value of milk and the order's blend price. 
Federal milk orders, including the Central order, establish limits on 
the volume of milk eligible to be pooled that is not for fluid uses 
primarily through diversion limit standards. However, manufacturing 
handlers and cooperatives are not required, as are Class I handlers, to 
pool all their eligible milk receipts.
    According to the record, manufacturing handlers and cooperatives 
have opted to not pool their milk receipts when the manufacturing class 
prices of milk are

[[Page 54163]]

higher than the order's blend price--commonly referred to as being 
``inverted.'' During such months, manufacturing handlers and 
cooperatives have elected to not pool all of their eligible milk 
receipts because doing so would require them to pay into the PSF of the 
order, the mechanism through which handler and producer prices are 
equalized. When prices are not inverted, handlers would pool all of 
their eligible receipts and receive a payment or draw from the PSF. In 
receiving a draw from the PSF, such handlers will have sufficient money 
to pay at least the order's blend price to their supplying dairy 
farmers.
    When manufacturing handlers and cooperatives opt to not pool all of 
their eligible milk receipts in a month, they are essentially avoiding 
a payment to the PSF. This, in turn, enables them to avoid the 
marketwide sharing of the additional value of milk that accrues in the 
higher-valued uses of milk other than Class I. When the Class I price 
again becomes the highest valued use of milk, or when other class-price 
relationships become favorable, the record reveals that these same 
handlers opt to again pool their eligible milk receipts and draw money 
from the PSF. It is the ability of manufacturing handlers and 
cooperatives opting to not pool milk and thereby avoid the marketwide 
sharing of the revenue accruing from non-Class I milk sales that is 
viewed by proponents as giving rise to disorderly marketing conditions. 
According to proponents, producers and handlers who cannot escape being 
pooled and priced under the order are not assured of equitable prices.
    The record reveals that since the implementation of Federal milk 
marketing order reform in January 2000, and especially in more recent 
years, large and rapid increases in manufactured product prices during 
certain months have provided the economic incentives for manufacturing 
handlers to opt not to pool eligible milk on the Central order. For 
example, during the three month period of February to April 2004, the 
Class III price increased over 65 percent from $11.89 per cwt to $19.66 
per cwt. During the same time period, total producer milk pooled on the 
Central order decreased by nearly 50 percent from 1.16 billion pounds 
to 612 million pounds. When milk volumes of this magnitude are not 
pooled the impacts on producer blend prices are significant. Producers 
who incur the additional costs of consistently servicing the Class I 
needs of the market receive a lower return than would otherwise have 
been received if they did not continue to service the Class I market. 
Prices received by dairy farmers who supplied the other milk needs of 
the market are not known. However, it is reasonable to conclude that 
prices received by dairy farmers were not equitable or uniform.
    The record reveals that ``inverted'' prices of milk are generally 
the result of the timing of Class price announcements. Despite changes 
made as part of Federal milk order reform to shorten the time period of 
setting and announcing Class I milk prices and basing the Class I price 
on the higher of the Class III or Class IV price to avoid price 
inversions, large month-to-month price increases in Class III and Class 
IV product prices sometimes trumped the intent of better assuring that 
the Class I price for the month would be the highest-valued use of 
milk. In all orders, the Class I price (and the Class II skim price) is 
announced prior to or in advance of the month for which it will apply. 
The Class I price is calculated by using the National Agricultural 
Statistics Service (NASS) surveyed cheese, butter, nonfat dry milk and 
dry whey prices for the two most current weeks prior to the 24th day of 
the preceding month and then adding a differential value to the higher 
of either the advanced Class III or Class IV price.
    Historically, the advance pricing of Class I milk has been used in 
all Federal orders because Class I handlers cannot avoid regulation and 
are required to pool all of their Class I milk receipts, they should 
know their product costs in advance of notifying their customers of 
price. However, milk receipts for Class III and IV uses are not 
required to be pooled; thus, Class III and IV product prices (and the 
Class II butterfat value) are not announced in advance. These prices 
are announced on or before the 5th of the following month. Of 
importance here is that manufacturing plant operators and cooperatives 
have the benefit of knowing all the classified prices of milk before 
making a decision to pool or not pool eligible receipts.
    The record reveals that the decision of manufacturing handlers or 
cooperatives to pool or not pool milk is made on a month-to-month basis 
and is generally independent of past pooling decisions. Manufacturing 
handlers and cooperatives that elected to not pool their milk receipts 
did so to avoid making payments to the PSF and they anticipated that 
all other manufacturing handlers and cooperatives would do the same. 
However, the record indicates that normally pooled manufacturing 
handlers and cooperatives met the pooling standards of the order to 
ensure that the Class I market was adequately supplied and that they 
established eligibility to pool their physical receipts, including 
diversions to nonpool plants. Opponents to proposals to deter de-
pooling are of the view that meeting the pooling standards of the order 
and deciding how much milk to pool are unrelated events. Proponents 
took the view that participation in the marketwide pool should be based 
on a long-term commitment to supply the market because in the long-term 
it is the sales of higher priced Class I milk that adds additional 
revenue to the pool.
    The producer price differential, or PPD, is the difference between 
the Class III price and the weighted average value of all Class I, II 
and IV milk pooled. In essence, the PPD is the residual revenue 
remaining after all butterfat, protein and other solids values are paid 
to producers. If the pooled value of Class I, II and IV milk is greater 
than the Class III value, dairy farmers receive a positive PPD. While 
the PPD is usually positive, a negative PPD can occur when class prices 
rise rapidly during the six-week period between the time the Class I 
price is announced and the time the Class II butterfat and III and IV 
milk prices are announced. When manufacturing prices fall, this same 
lag in the announcement of class prices yields a positive PPD.
    As revealed by the record, when manufacturing plants and 
cooperatives opted to not pool milk because of inverted price 
relationships, PPD's were much more negative. When this milk is not 
pooled, a larger percentage of the milk remaining pooled will be 
``lower'' priced Class I milk. When manufacturing milk is not pooled, 
the weighted average value of milk decreases relative to the Class II, 
III or IV value making the PPD more negative. For example, record 
evidence demonstrated that in April 2004, a month when a sizeable 
volume of milk was not pooled, the PPD was a negative $3.97 per cwt. If 
all eligible milk had been pooled, the PPD would have been $.87 per cwt 
higher or a negative $3.10 per cwt. This $0.87 per cwt represents the 
additional burden borne by those producers who remained pooled.
    The record reveals that when manufacturing handlers and 
cooperatives opt to not pool milk, unequal pay prices may result to 
similarly located dairy farmers. For example, Dean noted that when a 
cooperative delivers a high percentage of their milk receipts to a 
distributing plant, it lessens their ability to not pool milk, making 
them less competitive in a marketplace relative to other producers and 
handlers. Other evidence in the record supports conclusions identical 
to Dean that when a dairy

[[Page 54164]]

farmer or cooperative is able to receive increased returns from 
shipping milk to a manufacturing handler during times of price 
inversions, other dairy farmers or cooperatives who may have shipped 
more milk to a pool distributing plant are competitively disadvantaged.
    The record of this proceeding reveals that the ability of 
manufacturing handlers and cooperatives to not pool all of their 
eligible milk receipts gives rise to disorderly marketing conditions 
and warrants the establishment of additional pooling standards to 
safeguard marketwide pooling. Current pooling provisions do not require 
or prohibit handlers and cooperatives from pooling all eligible milk 
receipts. However, the record reveals that when handlers and 
cooperatives opt to not pool milk inequities arise among producers and 
handlers that are contrary to the intent of the Federal milk marketing 
order program--maintaining orderly marketing conditions.
    The record contains extensive testimony regarding the effects on 
the milk order program resulting from advance pricing and the priority 
the milk order program has placed on the Class I price being the 
highest valued use of milk. It remains true that the Class I use of 
milk is still the highest valued use of milk notwithstanding those 
occasional months when milk used in usually lower-valued classes may be 
higher. This has been demonstrated by an analysis of the effective 
Class I differential values--the difference in the Class I price at the 
base zone of Jackson County, Missouri, and the higher of the Class III 
or Class IV price--for the 65 month period of January 2000 through May 
2005 performed by USDA.\2\ These computations reveal that the effective 
monthly Class I differential averaged $1.97 per cwt. Accordingly, it 
can only be concluded that in the longer-term Class I sales continue to 
be the source of additional revenue accruing to the pool even when, in 
some months, the effective differential is negative.
---------------------------------------------------------------------------

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

    Price inversions occur when the wholesale price for manufactured 
products rises rapidly indicating a tightening of milk supplies to 
produce those products. It is for this reason that the Department chose 
the higher of the Class III and Class IV prices as the mover of the 
Class I price. Distributing plants must have a price high enough to 
attract milk away from manufacturing uses to meet Class I demands. As 
revealed by the record, this method has not been sufficient to provide 
the appropriate price signals to assure an adequate supply of milk for 
the Class I market. Accordingly, additional measures are needed as a 
means of assuring that milk remains pooled and thus available to the 
Class I market. Adoption of Proposal 2 is a reasonable measure to meet 
the objectives of orderly marketing.
    This decision does find that disorderly marketing conditions are 
present when producers do not receive uniform prices. Handlers and 
cooperatives opting to not pool milk do not account to the pool at the 
classified use-values of those milk receipts. They do not share in all 
the additional costs and burdens with those producers who are pooled 
and who are incurring the costs of servicing the Class I needs of the 
market. This is not a desired or reasonable outcome especially when the 
same handlers and cooperatives will again pool all of their eligible 
receipts when class-price relationships change in a subsequent month. 
These inequities borne by the market's producers are contrary to the 
intent of the Federal order program's reliance on marketwide pooling--
ensuring that all producers supplying the market are paid uniform 
prices for their milk regardless of how the milk of any single producer 
is used.
    Despite the exceptions submitted by AMPI Group and Family Dairies, 
it is reasonable that the order contain pooling provisions intended to 
deter the disorderly conditions that arise when de-pooling occurs. Such 
provisions maintain and enhance orderly marketing. Accordingly, this 
decision finds it reasonable to adopt provisions that limit the volume 
of milk a handler or cooperative may pool in a month to 125 percent of 
the total volume pooled by the handler or cooperative in the prior 
month. Adoption of this standard will not prevent manufacturing 
handlers or cooperatives from electing to not pool milk. However, it 
should serve to maintain and enhance orderly marketing by encouraging 
participation in the marketwide pooling of all classified uses of milk.
    This decision does not adopt a 135 percent pooling limit for the 
month of March as suggested by LOL in their comments and exceptions to 
the recommended decision. A 135 percent standard applicable for the 
month of March was not considered and examined at the hearing.
    Consideration was given on whether de-pooling should be considered 
at a national hearing with other, broader national issues of milk 
marketing. However each marketing area has unique marketing conditions 
and characteristics which have area-specific pooling provisions to 
address those specific conditions. Because of this, pooling issues are 
considered unique to each order. This decision finds that it would be 
unreasonable to address pooling issues, including de-pooling, on a 
national basis.
    Some manufacturing handlers and cooperatives argued at the hearing, 
and noted in exceptions to the Recommended Decision, that their milk 
did perform in meeting the Class I needs during the month and this 
occurred before making their pooling decisions. They argue that the 
Class I market is therefore not harmed and that the intents and goals 
of the order program are satisfied. With respect to this proceeding and 
in response to these arguments, this decision finds that the practice 
of de-pooling undermines the intent of the Federal order program to 
assure producers uniform prices across all uses of milk normally 
associated with the market as a critical indicator of orderly marketing 
conditions. Similarly, handlers and cooperatives who de-pool purposely 
do so to gain a momentary financial benefit (by avoiding making 
payments to the PSF) which would otherwise be equitably shared among 
all market participants. While the order's performance standards tend 
to assure that distributing plants are adequately supplied with fresh, 
fluid milk, the goals of marketwide pooling are undermined by the 
practice of de-pooling. Producers and handlers who regularly and 
consistently bear the costs of serving the Class I needs of the market 
will not equitably share in the additional value arising momentarily 
from non-fluid uses of milk. These same producers and handlers will, in 
turn, be required to share the additional revenue arising from higher-
valued Class I sales in a subsequent month when class-price 
relationships change.
    The four proposals considered in this proceeding to deter the 
practice of de-pooling in the Central order have differences. They all 
seek to address market disorder arising from the practice of de-
pooling. However, this decision does not find adoption of the two 
``dairy farmer for other markets'' proposals--Proposals 6 and 7--
reasonable because they would make it needlessly difficult for milk to 
be re-pooled and because their adoption may disrupt prevailing 
marketing channels or cause the inefficient movement of milk. Likewise, 
Proposal 8, to restrict pooling in a month to 115 percent of the prior 
month's volume pooled by the handler, is not adopted. Adoption of

[[Page 54165]]

this proposal would disrupt current marketing conditions beyond what 
the record justifies. Therefore, this decision adopts Proposal 2 to 
limit the pooling of milk in any month by a handler to 125 percent of 
the handler's pooled receipts in the prior month because it provides 
the most reasonable measure to deter the practice of de-pooling.

3. Transportation and Assembly Credits

    A proposal, published in the hearing notice as Proposal 3 and 
modified at the hearing, seeking establishment of transportation and 
assembly credits in the Central Order is not adopted. The published 
proposal seeks to provide a credit for the shipment of milk from supply 
plants to distributing plants. The proposal was modified at the hearing 
to expand the transportation credit to include milk shipped directly 
from dairy farms to distributing plants. In addition, the modified 
proposal would provide an assembly credit for milk shipped directly 
from dairy farms to distributing plants.
    The proposal would provide a credit for the shipment of milk from 
supply plants and dairy farms to distributing plants at a rate of 
$0.003 per cwt per mile, excluding the first 25 miles of shipment and 
all shipments farther than 500 miles. In addition, the proposal would 
provide for a credit of $0.10 per cwt for the assembly of milk from 
dairy farms to distributing plants. The Central order does not 
currently have transportation or assembly credit provisions.
    As published in the hearing notice, Proposal 3 was advanced by 
AMPI, et al. The modification to Proposal 3, presented at the hearing 
to include transportation credits for shipments from dairy farms 
directly to distributing plants was advanced by DFA/PF.
    On behalf of all proponents of Proposal 3, the Foremost, et al., 
witness requested that the proposal be modified to remove all 
references to ``milk reload stations'' as originally offered in the 
proposal. Accordingly, no additional references will be made concerning 
re-load stations in this decision.
    A witness appearing on behalf of AMPI, et al., testified that 
transportation and assembly credits are needed in the Central marketing 
area to allow transporting handlers to recover costs of assembling and 
transporting milk to serve the Class I needs of the market.
    The AMPI, et al., witness was of the opinion that the rates and 
distance limitations proposed for the transportation and assembly 
credits would compensate handlers for approximately 75 percent of the 
cost of moving milk from supply plants to distributing plants within 
the marketing area. The witness asserted that this was reasonable 
because it would keep transportation and assembly cost recovery at less 
than full cost. According to the witness, the proposed rates and 
distance limitations would tend to discourage inefficient movements of 
milk by handlers from seeking transportation and assembly credits.
    The AMPI, et al., witness expressed the opinion that all producers 
receiving the benefits of marketwide pooling should contribute to the 
recovery of costs associated with moving milk within the marketing area 
to serve the Class I needs of the market. The witness provided examples 
of milk movements where supply plant handlers moving milk to 
distributing plants were unable to recover the full costs of assembling 
and transporting milk at Federal order minimum prices. The witness 
testified that because handlers transporting milk directly from dairy 
farms to distributing plants incur costs similar to the overhead costs 
incurred by handlers transporting milk from supply plants, the 
proponents seek an assembly credit for all milk that serves the Class I 
market. The AMPI, et al., witness testified that even though dairy 
farmers currently are charged for the cost of assembling their milk 
into loads and transporting the milk to distributing plants, the 
charges are insufficient to completely recoup the costs incurred by 
handlers.
    A witness representing DFA/PF testified in support of Proposal 3 
and modified the proposal to include the transportation and assembly 
credits for milk shipped directly from farms to distributing plants. 
The witness asserted that the costs of assembly and transportation of 
milk in the Central marketing area are not fully recouped in the market 
by handlers. The witness noted that the $0.003 per mile transportation 
credit rate would apply to milk shipped to a distributing plant.
    The DFA/PF witness testified that additional compensation for the 
transportation and assembly of milk for fluid use is needed in 
particular areas of the Central marketing area because the order's 
blend price is insufficient to keep milk produced in the marketing area 
within the marketing area. The witness noted this was specifically 
apparent in the southeastern portion of the marketing area that borders 
portions of the Southeast and Appalachian orders. In addition, the 
witness testified that the location values of milk for markets within 
the Central marketing area, for example in St. Louis, Missouri, and 
areas of southern Illinois, are similarly insufficient to attract milk. 
According to the witness, this causes milk procurement problems for 
some distributing plants in this localized portion of the Central 
marketing area.
    The DFA/PF witness testified that marketwide service payments are 
authorized in the legislation that provides for Federal milk orders. 
The witness explained that payments for services not elsewhere 
compensated can be taken from producer revenue to compensate providers 
of services that are of marketwide benefit. The witness asserted that 
transportation and assembly operations performed in the Central 
marketing area meet the general objectives of providing marketwide 
service for marketwide benefit. According to the witness, Proposal 3, 
as modified, describes a set of services that benefit the entire 
market. The witness was of the opinion that the marketwide services 
include: marketing of milk, farm pick-up of milk, off-load and re-load 
of milk, procurement of milk, selling milking equipment, disseminating 
information and prices to producers, milk testing, delivery to 
distributing plants, and other field services.
    According to the DFA/PF witness, inclusion of milk shipped directly 
from dairy farms to distributing plants for transportation and assembly 
credits would be more representative of how the majority of milk is 
transported to distributing plants regulated by the order. The witness 
noted that in the Central marketing area distributing plants receive 
only about 4.5 percent of their milk from supply plants. The witness 
testified that the modification of Proposal 3 to include milk shipped 
from farms to distributing plants would more accurately represent the 
transportation compensation requirements needed to ensure delivery of 
milk for fluid use.
    According to the DFA/PF witness, the inclusion of farm to 
distributing plant shipments would require the Market Administrator of 
the Central order to verify handler claims for receiving credits. The 
witness indicated that least-distance routes for delivery from each 
point of origin to the destination distributing plants would need to be 
determined. According to the witness, the additional cost that would be 
borne by the Market Administrator in administering transportation and 
assembly provisions would be negligible and should not require a higher 
administrative assessment. However, the witness acknowledged that 
proponents had not consulted the Market Administrator's office for an 
estimate of additional administrative costs that may be borne in 
operating a

[[Page 54166]]

transportation and assembly credit provision.
    The DFA/PF witness testified that the St. Louis area market is 
unable to consistently and successfully attract milk from the Central 
order's milkshed because the order's Class I price and the blend price 
are lower than those in the nearby Appalachian and Southeast marketing 
areas. According to the witness, marketwide service payments for 
transportation and assembly of milk to serve markets such as St. Louis 
would provide sufficient financial incentive to offset the higher blend 
prices of these bordering Federal milk marketing areas. Additionally, 
it would ensure a consistent and reliable supply of milk to meet the 
needs of that portion of the Central marketing area's Class I market, 
the witness said.
    A witness for Prairie Farms (PF) testified in support of the 
adoption of Proposal 3 as modified at the hearing. The witness was of 
the opinion that without expansion of transportation and assembly 
credits that included direct shipped milk, the ability to serve the 
Class I needs of all locations in the Central marketing area would not 
be achieved because milk would seek the higher blend prices available 
in the nearby markets of the Appalachian and Southeast orders. The 
witness from Prairie Farms provided example scenarios of actual and 
hypothetical net returns possible for handlers shipping milk to 
distributing plants in the Central, Appalachian, and Southeast 
marketing areas. The witness compared these returns to net returns 
available from shipping to distributing plants in Illinois and St. 
Louis within the Central marketing area. According to the witness, 
these example scenarios reinforced the assertion that milk is attracted 
by higher Class I prices in localized areas of the Appalachian and 
Southeast marketing areas.
    The PF witness was of the opinion that inappropriate Class I 
differential levels, as in the St Louis area example, were the root 
cause of the market's inability to attract sufficient fluid milk; 
however, modifications to the Class I price surface are not currently 
feasible. In light of this, the witness stated that obtaining the 
needed financial incentives to ensure delivery of milk to this deficit 
portion of the marketing area by the use of transportation and assembly 
credits is a reasonable alternative to changing the Class I 
differentials.
    The DFA/PF witness estimated that providing credits for milk 
transported from farms to distributing plants would reduce the Central 
order's blend price to dairy farmers by $0.045 per cwt per month. The 
Foremost, et al., witness testified that the impact of providing 
credits for assembly would reduce the Central order's blend price by 
$0.036-$0.040 per cwt per month. The DFA/PF witness testified that the 
combined impact of transportation credits for the supply plant to 
distributing plant movements, direct delivery from farms to 
distributing plants, and assembly credits would reduce the Central 
marketing area's blend price by a total of $0.081-$0.085 per cwt per 
month.
    DFA/PF took exception to the Recommended Decision and reiterated 
their support for the adoption of transportation and assembly credits. 
DFA/PF again noted that transportation and assembly credits, as 
proposed, were designed to reward those who supply the fluid milk needs 
of the entire market and are necessary to facilitate the orderly 
movement of milk.
    A witness for Dean testified in support of Proposal 3 as modified 
by DFA/PF. The Dean witness expressed a preference for the DFA/PF 
modification to include direct farm milk shipments to distributing 
plants but did not support adoption of assembly credits. The witness 
noted that Dean would consider the entire Proposal 3, including the 
DFA/PF modification, if the assembly credit feature were retained. The 
witness was of the opinion that adopting the proposal would increase 
equity among handlers and producers who supply the Class I market. 
However, the witness was unable to identify distributing plants in the 
St. Louis and southern Illinois portions of the marketing area that did 
not or could not receive sufficient milk supplies. In addition, the 
witness was unable to recall if handlers had asked or relied on the 
Central marketing area's Market Administrator to increase the Central 
order's performance standards to bring forth milk to meet the market's 
Class I needs.
    Dean reiterated support for adoption of transportation and assembly 
credits in exceptions to the Recommended Decision. Dean noted that 
handlers face higher costs in procuring milk supplies in the St. Louis 
area, and that adoption of transportation and assembly credits would 
help reduce those costs.
    In a post hearing brief, Select/Continental indicated general 
opposition to adopting transportation and assembly credits for milk 
movements from supply plants to distributing plants. The brief 
expressed support for a transportation and assembly credit provision 
that would be limited to milk shipped directly from dairy farms to 
distributing plants. According to the brief, milk should be attracted 
to markets for specific use through classified pricing. Fluid milk, 
according to the brief, should be attracted to distributing plants by 
appropriate location values. According to the brief, implementing 
transportation and assembly credits in the Central marketing area would 
be an admission that the Class I price surface was no longer successful 
in meeting the Class I needs of the marketing area.
    In a post hearing brief, DFA/PF reiterated their support for 
transportation and assembly credits as modified. The brief reiterated 
support and reinforcement of the testimony offered to expand the scope 
for transportation and assembly credits to include direct farm-to-plant 
milk movements. Likewise, Dean Foods reiterated its support in a post-
hearing brief for expanding transportation and assembly credits to 
include direct farm-to-plant milk movements as a means to improve the 
available milk supply for its distributing plant operations in the 
southeastern portion of the Central order.
    Geographically, the Central marketing area is the largest Federal 
milk marketing area, spanning the distance from eastern Illinois to 
western Colorado. It is bordered by the Upper Midwest, Mideast, 
Appalachian, Southeast, and Southwest marketing areas. The marketing 
area also is bordered by unregulated areas on the west including Utah, 
portions of western South Dakota, western portions of Nebraska, and all 
of Wyoming. In addition the Central marketing area completely surrounds 
a large unregulated area in central Missouri.
    Proposal 3 as advanced by AMPI, et al., seeks to establish a 
marketwide service payment in the form of a transportation credit for 
the movement of milk from supply plants to distributing plants at a 
rate of $0.003 per cwt per mile. The proposal provides for a distance 
limit for receipt of the credit for milk movements between 25 to 500 
miles from the supply plants to distributing plants. The proposal also 
seeks the establishment of an assembly credit feature for which 
handlers would collect $0.10 per cwt for the assembly of loads of milk 
within the marketing area.
    The modification to Proposal 3, advanced by DFA/PF, seeks expansion 
of the transportation credit to include milk shipped directly from 
dairy farms to distributing plants. The modification would establish a 
transportation credit rate of $0.003 per cwt per mile for milk shipped 
directly from dairy farms to distributing plants. The combination of 
the two proposals effectively seeks transportation and assembly credits 
for

[[Page 54167]]

all Class I milk pooled on the Central order. The rationale for the 
modification to Proposal 3 is that milk shipped directly from farms to 
distributing plants represents more than 95 percent of all milk shipped 
to distributing plants. Milk shipped from supply plants represents 
about 5 percent of all milk shipped to distributing plants.
    Proponents estimate that the Central order blend price would be 
lowered in the range of $0.036-$0.040 per cwt per month by the assembly 
credit feature for all Class I milk, if adopted. The proponents 
estimate that the impact of the transportation credit for all Class I 
milk pooled on the Central order would be a blend price reduction of 
approximately $0.045 per cwt, if adopted. The combined reduction to the 
Central order blend price per month would be $0.081-$0.085 per cwt.
    The transportation and assembly credits advanced by the proponents 
are similar to the transportation and assembly credits implemented in 
the Chicago Regional order, a predecessor order of the current Upper 
Midwest order. The transportation and assembly credit provisions of the 
Chicago Regional order were carried forward into the provisions of the 
current Upper Midwest order as a part of Federal milk order reform. 
These provisions were first implemented in 1987 to ensure that the 
costs of serving the Class I market of the Chicago Regional marketing 
area were shared by all market participants that benefited from the 
revenue generated from Class I sales. The impact on producer revenue 
was expected to be minimal according to the Final Decision published 
October 15, 1987, (7 CFR 10130).
    The transportation credit provisions of the Upper Midwest order 
provide a credit of $0.028 cents per mile for bulk milk delivered from 
pool plants to distributing plants. The assembly credit provisions of 
the Upper Midwest order provide a credit of $0.08 cents per cwt to the 
operator of a distributing plant for milk received from dairy farms and 
pool plants. The credits are computed by the Market Administrator and 
are deducted from the marketwide value of milk before calculation of 
the order's blend price. The impact of these credits on the Upper 
Midwest blend price ($0.02-$0.03 per cwt) are one fourth to one third 
the magnitude of impact that proponents expect the proposed 
transportation and assembly credits would have on the Central order 
blend price, if adopted.
    The transportation and assembly credit features of the current 
Upper Midwest order and the pre-reform Chicago Regional order are 
similar in the magnitudes of their costs per mile and per hundredweight 
of milk handled. The transportation and assembly credit provisions of 
the Chicago Regional order applied to a geographically compact milkshed 
with the emphasis on encouraging milk movements to the single urban 
market of Chicago. The Chicago Regional marketing area (and the Chicago 
metropolitan area of the current Upper Midwest marketing area) was 
supplied with milk primarily from southern and central Wisconsin. The 
transportation and assembly credit feature of the current Upper Midwest 
marketing order provides pool plants that serve the Class I market with 
some recovery of assembly and transportation costs incurred in 
transferring milk to distributing plants.
    In contrast, the Central marketing area is geographically much 
larger and handlers with Class I route disposition serve multiple urban 
centers in a variety of States located from Illinois to Colorado. 
Despite exceptions to the Recommended Decision from DFA, the record 
reveals that the area of concern to the proponents is a relatively 
limited area of St. Louis and portions of southern Illinois. The record 
does not reveal that there are other portions of the marketing area 
where problems have been identified in procuring milk supplies for 
Class I use. Accordingly, it is reasonable to conclude that marketwide 
service payments in the form of transportation and assembly credits on 
all Class I milk may only solve a localized problem while all dairy 
farmers would receive a lower blend price for their milk.
    The impact of transportation and assembly credits on dairy farmer 
income is far lower in the Upper Midwest marketing area than that 
proposed for the Central order. For example, according to Market 
Administrator data, the reduction to the Upper Midwest blend price in 
October 2004 was $ 0.015 per cwt and $0.0125 per cwt for the assembly 
and transportation credits, respectively. This represents an overall 
reduction of $0.0275 per cwt to the Upper Midwest blend price in that 
month. Market Administrator data shows that during May 2005 the 
reduction to the Upper Midwest blend price attributable to the combined 
impact of the transportation and assembly credit features was $0.020 
per cwt.
    The record reveals that the impact anticipated by proponents of 
transportation and assembly credits on the Central order blend price 
would be a reduction of as much as $0.081-$0.085 per cwt. The reduction 
in blend prices and dairy farmer income that would result from the 
adoption of a transportation and assembly credit of this magnitude 
would be 3-4 times the magnitude of the blend price reduction that 
dairy farmers experience in the Upper Midwest. According to Market 
Administrator information, the average sized producer in the Central 
marketing area produces and markets about 200,000 pounds of milk per 
month. The average reduction in income for such an average producer per 
month would be $160-$170 per month, or about $2000 per year. A similar 
sized producer in the Upper Midwest marketing area would experience a 
reduction in income of $40-$57 per month or about $500-$680 per year. 
The differences in magnitudes are interesting but germane only to the 
extent that transportation and assembly credits are justified.
    The proposed transportation and assembly credits are justified by 
proponents on the basis that the movement of milk to serve the Class I 
market is a marketwide service of marketwide benefit and credits for 
providing marketwide services are authorized in the Agricultural 
Marketing Agreement Act of 1937, (AMAA) as amended. However, the focus 
of the record evidence is on the marketing conditions in the southern 
Illinois and St. Louis regions of the Central marketing area. However, 
the record does not indicate that price differences as noted in 
proponent testimony concerning the eastern portion of the marketing 
area occur elsewhere in the Central marketing area. The record does not 
support concluding that handlers serving major urban areas in other 
regions of the marketing area (such as, Denver, Oklahoma City, or 
Tulsa) experience difficulty in attracting milk supplies. This supports 
concluding that the issues raised by the proponents are at best 
localized in nature rather than marketwide.
    In addition, the record reveals in the testimony of the AMPI, et 
al., witness that some transportation and assembly costs incurred by 
handlers for milk delivered to distributing plants are recovered by the 
marketplace. While proponents have asserted that the recovery of costs 
for assembly by handlers is incomplete, the record contains 
insufficient information upon which to judge if lowering producer blend 
prices by as much as $.08 per cwt is reasonable. The size of the likely 
blend price reduction is important but not the critical factor in 
determining whether transportation and assembly credits are reasonable 
for the Central marketing area. The most important factor in that 
regard is whether the

[[Page 54168]]

marketwide costs would provide marketwide rather than local benefits.
    Contrary to exceptions to the Recommended Decision from Dean, 
record evidence supplied by a Class I handler located in St. Louis 
indicates that the firm is able to continue receiving, bottling, and 
selling milk in the St. Louis area. This evidence suggests that milk 
movements to handlers in the St. Louis area are occurring and meet the 
order's Class I needs. This evidence provides a basis to conclude that 
the order provisions attract sufficient milk for fluid use. In this 
regard, the need for additional government intervention beyond what the 
order currently provides in meeting the market's fluid demands is not 
warranted.
    The record evidence concerning challenges faced by handlers in 
moving milk within the Central marketing area to distributing plants in 
St. Louis and Illinois indicates that there may be, at best, localized 
issues in supplying the Class I needs of these plants. The proponents 
for transportation and assembly credits attribute these difficulties to 
the higher location values and blend prices of nearby or bordering 
portions of the Southeast and Appalachian orders. However, the record 
reveals that handlers have not sought alternative actions to bring 
forth additional milk supplies to meet Class I demands. For example, 
there is no record evidence illustrating that the Market Administrator 
has been called upon to change performance standards or diversion 
limits which would better ensure that the Class I needs of any of the 
Central marketing area's distributing plants would be met.
    This decision finds that adoption of the proposed transportation 
and assembly credit provision is not supported by record evidence. 
Accordingly, this decision does not find agreement with the rationale 
advanced by proponents that marketwide service payments in the form of 
transportation and assembly credits for milk are needed to overcome 
deficiencies of the Central order. At best, record evidence 
demonstrates that if there are difficulties in procuring milk for Class 
I use, they are isolated to a fraction of the marketing area. Adopting 
transportation and assembly credits would unreasonably lower the 
returns to all dairy farmers pooled on the order to address a localized 
issue.

Withdrawn Proposal

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

Rulings on Proposed Findings and Conclusions

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

General Findings

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

Rulings on Exceptions

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

Marketing Agreement and Order

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

Determination of Producer Approval and Representative Period

    March 2006 is hereby determined to be the representative period for 
the purpose of ascertaining whether the issuance of the order, as 
amended in the Recommended Decision published in the Federal Register 
on February 22, 2006 (71 FR 9015), regulating the handling of milk in 
the Central marketing area is approved or favored by producers, as 
defined under the terms of the order (as amended and as hereby proposed 
to be amended) who during such representative period were engaged in 
the production of milk for sale within the aforesaid marketing area.

List of Subjects in 7 CFR Part 1032

    Milk marketing orders.

    Dated: September 1, 2006.
Lloyd C. Day,
Administrator, Agricultural Marketing Service.

Order Amending the Order Regulating the Handling of Milk in the Central 
Marketing Area

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

Findings and Determinations

    The findings and determinations hereinafter set forth supplement 
those that were made when the order was first issued and when it was 
amended. The previous findings and determinations are hereby ratified 
and confirmed, except where they may conflict with those set forth 
herein.

[[Page 54169]]

    (a) Findings. A public hearing was held upon certain proposed 
amendments to the tentative marketing agreement and to the order 
regulating the handling of milk in the Central marketing area. The 
hearing was held pursuant to the provisions of the Agricultural 
Marketing Agreement Act of 1937, as amended (7 U.S.C. 601-674), and the 
applicable rules of practice and procedure (7 CFR part 900).
    Upon the basis of the evidence introduced at such hearing and the 
record thereof, it is found that:
    (1) The said order as hereby amended, and all of the terms and 
conditions thereof, will tend to effectuate the declared policy of the 
Act;
    (2) The parity prices of milk, as determined pursuant to Section 2 
of the Act, are not reasonable in view of the price of feeds, available 
supplies of feeds, and other economic conditions which affect market 
supply and demand for milk in the aforesaid marketing area. The minimum 
prices specified in the order as hereby amended are such prices as will 
reflect the aforesaid factors, insure a sufficient quantity of pure and 
wholesome milk, and be in the public interest; and
    (3) The said order as hereby amended regulates the handling of milk 
in the same manner as, and is applicable only to persons in the 
respective classes of industrial or commercial activity specified in, a 
marketing agreement upon which a hearing has been held.

Order Relative to Handling

    It is therefore ordered, that on and after the effective date 
hereof, the handling of milk in the Central marketing area shall be in 
conformity to and in compliance with the terms and conditions of the 
order, as amended, and as hereby amended, as follows:
    The provisions of the order amending the order contained in the 
Recommended Decision issued by the Administrator, Agricultural 
Marketing Service, on February 15, 2006, and published in the Federal 
Register on February 22, 2006 (71 FR 9015), are adopted and shall be 
the terms and provisions of this order. The revised order follows.

PART 1032--MILK IN THE CENTRAL MARKETING AREA

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

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

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


Sec.  1032.7  Pool plant.

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


Sec.  1032.13  Producer milk.

* * * * *
    (d) * * *
    (1) Milk of a dairy farmer shall not be eligible for diversion 
until milk of such dairy farmer has been physically received as 
producer milk at a pool plant and the dairy farmer has continuously 
retained producer status since that time. If a dairy farmer loses 
producer status under the order in this part (except as a result of a 
temporary loss of Grade A approval), the dairy farmer's milk shall not 
be eligible for diversion until milk of the dairy farmer has been 
physically received as producer milk at a pool plant;
    (2) The equivalent of at least one day's milk production is caused 
by the handler to be physically received at a pool plant in each of the 
months of January and February, and August through November;
    (3) The equivalent of at least one day's milk production is caused 
by the handler to be physically received at a pool plant in each of the 
months of March through July and December if the requirement of 
paragraph (d)(2) of this section (Sec.  1032.13) in each of the prior 
months of August through November and January through February are not 
met, except in the case of a dairy farmer who marketed no Grade A milk 
during each of the prior months of August through November or January 
through February;
    (4) Of the quantity of producer milk received during the month 
(including diversions, but excluding the quantity of producer milk 
received from a handler described in Sec.  1000.9(c)) the handler 
diverts to nonpool plants not more than 75 percent during the months of 
August through February, and not more than 80 percent during the months 
of March through July, provided that not less than 25 percent of such 
receipts in the months of August through February and 20 percent of the 
remaining months' receipts are delivered to plants described in Sec.  
1032.7(a), (b) or (i);
* * * * *
    (f) The quantity of milk reported by a handler pursuant to either 
Sec.  1032.30(a)(1) or Sec.  032.30(c)(1) for the current month may not 
exceed 125 percent of the producer milk receipts pooled by the handler 
during the prior month. Milk diverted to nonpool plants reported in 
excess of this limit shall be removed from the pool. Milk received at 
pool plants in excess of the 125 percent limit, other than pool 
distributing plants, shall be classified pursuant to Sec.  
1000.44(a)(3)(v). The handler must designate, by producer pick-up, 
which milk is to be removed from the pool. If the handler fails to 
provide this information the provisions of paragraph (d)(5) of this 
provision shall apply. The following provisions apply:
    (1) Milk shipped to and physically received at pool distributing 
plants shall not be subject to the 125 percent limitation;
    (2) Producer milk qualified pursuant to Sec.  ----.13 of any other 
Federal Order in the previous month shall not be included in the 
computation of the 125 percent limitation; provided that the producers 
comprising the milk supply have been continuously pooled on any Federal 
Order for the entirety of the most recent three consecutive months.
    (3) The market administrator may waive the 125 percent limitation:

[[Page 54170]]

    (i) For a new handler on the order, subject to the provisions of 
paragraph (f)(3) of this section, or
    (ii) For an existing handler with significantly changed milk supply 
conditions due to unusual circumstances;
    (4) A bloc of milk may be considered ineligible for pooling if the 
market administrator determines that handlers altered the reporting of 
such milk for the purpose of evading the provisions of this paragraph.

Marketing Agreement Regulating the Handling of Milk in the Central 
Marketing Area

    The parties hereto, in order to effectuate the declared policy 
of the Act, and in accordance with the rules of practice and 
procedure effective thereunder (7 CFR Part 900), desire to enter 
into this marketing agreement and do hereby agree that the 
provisions referred to in paragraph I hereof as augmented by the 
provisions specified in paragraph II hereof, shall be and are the 
provisions of this marketing agreement as if set out in full herein.
    I. The findings and determinations, order relative to handling, 
and the provisions of Sec. Sec.  1032.1 to 1032.86 all inclusive, of 
the order regulating the handling of milk in the Central marketing 
area (7 CFR Part 1032 which is annexed hereto); and
    II. The following provisions: Record of milk handled and 
authorization to correct typographical errors.
    (a) Record of milk handled. The undersigned certifies that he/
she handled during the month of January 2005,--hundredweight of milk 
covered by this marketing agreement.
    (b) Authorization to correct typographical errors. The 
undersigned hereby authorizes the Deputy Administrator, or Acting 
Deputy Administrator, Dairy Programs, Agricultural Marketing 
Service, to correct any typographical errors which may have been 
made in this marketing agreement.
    Effective date. This marketing agreement shall become effective 
upon the execution of a counterpart hereof by the Department in 
accordance with Section 900.14(a) of the aforesaid rules of practice 
and procedure.
    In witness whereof, the contracting handlers, acting under the 
provisions of the Act, for the purposes and subject to the 
limitations herein contained and not otherwise, have hereunto set 
their respective hands and seals.

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

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

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

(Seal)

Attest

[FR Doc. 06-7498 Filed 9-6-06; 8:45 am]
BILLING CODE 3410-02-P