[Federal Register Volume 71, Number 225 (Wednesday, November 22, 2006)]
[Proposed Rules]
[Pages 67467-67489]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-9340]


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

  Federal Register / Vol. 71, No. 225 / Wednesday, November 22, 2006 / 
Proposed Rules  

[[Page 67467]]


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DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Parts 1000, 1001, 1005, 1006, 1007, 1030, 1032, 1033, 1124, 
1126, and 1131

[Docket no. AO-14-A74, et al.; DA-06-01]


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

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

ACTION: Proposed rule.

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SUMMARY: This tentative final decision proposes to adopt, on an interim 
final and emergency basis, changes to the manufacturing allowances 
contained in the Class III and Class IV product price formulas 
applicable to all Federal milk marketing orders. This decision is 
subject to producer approval.

DATES: Comments should be submitted on or before January 22, 2007.

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

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

SUPPLEMENTARY INFORMATION: This tentative final decision adopts on an 
interim final and emergency basis, amendments to the manufacturing 
(make) allowances for cheese, butter, nonfat dry milk (NFDM) and dry 
whey powder contained in the Class III and Class IV product price 
formulas. Specifically, this decision proposes the following 
manufacturing allowances:

------------------------------------------------------------------------
                                                           Adopted make
                                                             allowance
------------------------------------------------------------------------
Cheese..................................................      $0.1682/lb
Butter..................................................       0.1202/lb
NFDM....................................................       0.1570/lb
Dry whey................................................       0.1956/lb
------------------------------------------------------------------------

    This administrative action is governed by the provisions of 
Sections 556 and 557 of Title 5 of the United States Code and, 
therefore, is excluded from the requirements of Executive Order 12866.
    The amendments to the rules proposed herein have been reviewed 
under Executive Order 12988, Civil Justice Reform. They are not 
intended to have a retroactive effect. If adopted, the proposed 
amendments would not preempt any state or local laws, regulations, or 
policies, unless they present an irreconcilable conflict with this 
rule.
    The Agricultural Marketing Agreement Act of 1937 (Act), as amended 
(7 U.S.C. 604-674), provides that administrative proceedings must be 
exhausted before parties may file suit in court. Under Section 
608c(15)(A) of the Act, any handler subject to an order may request 
modification or exemption from such order by filing with the Department 
a petition stating that the order, any provision of the order, or any 
obligation imposed in connection with the order is not in accordance 
with the law. A handler is afforded the opportunity for a hearing on 
the petition. After a hearing, the Department would rule on the 
petition. The Act provides that the district court of the United States 
in any district in which the handler is an habitant, or has its 
principal place of business, has jurisdiction in equity to review the 
USDA's ruling on the petition, provided a bill in equity is filed not 
later than 20 days after the date of the entry of the ruling.

Regulatory Flexibility Act and Paperwork Reduction Act

    In accordance with the Regulatory Flexibility Act (5 U.S.C. 601 et 
seq.), the Agricultural Marketing Service has considered the economic 
impact of this action on small entities and has certified that this 
proposed rule will not have a significant economic impact on a 
substantial number of small entities. For the purpose of the Regulatory 
Flexibility Act, a dairy farm is considered a ``small business'' if it 
has an annual gross revenue of less than $750,000, and a dairy products 
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.
    For the month of January 2006, the month the initial public hearing 
was held, the milk of 52,570 dairy farmers was pooled on the Federal 
order system. Of the total, 49,153 dairy farmers, or 94 percent, were 
considered small businesses. During the same month, 536 plants were 
regulated by or reported their milk receipts to be pooled and price on 
a Federal order. Of the total, 286 plants, or 53 percent, were 
considered small businesses.
    This decision provides that all orders be amended by changing the 
make allowances contained in the formulas used to compute component 
prices and the minimum class prices in all Federal milk orders. 
Specifically, the make allowance for butter would increase from $0.1150 
to $0.1202 per pound; the

[[Page 67468]]

make allowance for cheese would increase from $0.1650 to $0.1682 per 
pound; the make allowance for NFDM would increase from $0.1400 to 
$0.1570 per pound; and the make allowance for dry whey would increase 
from $0.1590 to $0.1956 per pound.
    The adoption of these new make allowances serves to approximate the 
average cost of producing cheese, butter, NFDM and dry whey for 
manufacturing plants located in Federal milk marketing areas.
    The established criteria for the make allowance changes are applied 
in an identical fashion to both large and small businesses and will not 
have any different impact on those businesses producing manufactured 
milk products. The following economic analysis discusses impacts of the 
order amendments on order participants including producers and 
manufacturers. Based on the economic analysis we have concluded that 
the proposed amendments will not have a significant economic impact on 
a substantial number of small entities.
    The Agricultural Marketing Service is committed to complying with 
the E-Government Act, to promote the use of the Internet and other 
information technologies to provide increased opportunities for citizen 
access to Government information and services, and for other purposes.
    This tentative final decision does not require additional 
information collection that needs clearance by the Office of Management 
and Budget (OMB) beyond currently approved information collection. The 
primary sources of data used to complete the forms are routinely used 
in most business transactions. The forms require only a minimal amount 
of information that can be supplied without data processing equipment 
or a trained statistical staff. Thus, the information collection and 
reporting burden is relatively small. Requiring the same reports for 
all handlers does not significantly disadvantage any handler that is 
smaller than the industry average.
    Interested parties are invited to submit comments on the probable 
regulatory and informational impact of this proposed rule on small 
entities. Also, parties may suggest modifications of this proposed rule 
for the purpose of tailoring its applicability to small businesses.

Economic Analysis

Analysis

    In order to assess the impact of make allowance changes in Federal 
order product pricing formulas, the Department has conducted an 
economic analysis. While the primary purpose of this tentative final 
decision is to amend the product pricing formulas used to price milk 
regulated under Federal milk marketing orders and classified as either 
Class III or Class IV milk, these product price formulas also affect 
the prices of regulated milk classified as Class I and Class II.

Scope of Analysis

    Impacts of increasing make allowances were measured as changes from 
the USDA Agricultural Baseline Projections to 2015 (OCE-2006-1, http://www.usda.gov/oce/commodity/ag_baseline.htm). The 
baseline projections are ``a Departmental consensus on a long-run 
scenario for the agricultural sector.'' Included is a national, annual 
projection of the supply-demand-price situation for milk. The USDA 
baseline and the model baseline assume: (1) The Milk Price Support 
Program (MPSP) will continue unchanged; (2) The Dairy Export Incentive 
Program will be utilized to the maximum extent allowed beginning in the 
2006/07 fiscal year; (3) The Milk Income Loss Contract (MILC) program 
will continue through September 2007 \1\; and (4) The Federal Milk 
Marketing Order Program will continue unchanged. This analysis 
maintains the first three assumptions as unchanged. The only changes to 
the Federal Milk Marketing Order Program are those that are brought 
about by the changes in make allowances adopted in this decision. Since 
the model is an annual model, a simplifying assumption is made that the 
make allowance changes become effective January 1, 2007.
---------------------------------------------------------------------------

    \1\ Dairy producers are not eligible to choose September 2007 as 
a month for which MILC payments are to be applied. This provision 
was included so that it would not be necessary to include MILC 
payments in the Federal budget for fiscal year 2007-08.
---------------------------------------------------------------------------

    Demands for fluid milk and manufactured dairy products are 
functions of per capita consumption and population. Per capita 
consumption for the major milk and dairy products are estimated as 
functions of own prices, substitute prices, and income. Retail margins 
are assumed unchanged from the baseline. The demands for fluid milk and 
soft manufactured products are satisfied first by the eligible supply 
of milk. The milk supply for manufactured hard products is the volume 
of milk marketings remaining after satisfying the volumes demanded for 
fluid and soft manufactured products. Milk is manufactured into cheese, 
butter or nonfat dry milk (NFDM) according to returns to manufacturing 
in each class. Wholesale prices for cheese, butter, NFDM and dry whey 
reflect supply and demand for these products. These manufactured dairy 
product prices underlie the Federal order pricing system.

Summary of Results

    The impacts of the changes to the Class III and Class IV formulas 
that are set forth in this tentative final decision are summarized 
using annual and nine-year, 2007-2015, average changes from the model 
baseline. The results presented for the Federal order system are in the 
context of the larger U.S. market. In particular, the Federal order 
price formulas use national manufactured dairy product prices.
    Producers. Over the nine-year period, the average Federal order 
minimum blend price for milk at test decreases $0.08 (0.55 percent) 
from a baseline level of $14.71 per hundredweight (cwt). The average 
U.S. all-milk price decreases by about $0.05 (0.35 percent) from a 
baseline level of 14.79 per cwt. Federal order marketings decrease by 
an average 136 million pounds annually due to the production decrease 
in response to lower producer milk prices. Federal order milk cash 
receipts decrease by an average $125 million annually (0.65 percent) 
from baseline receipts of $19,165 million. U.S. milk marketings 
decrease by an average 206 million pounds annually (0.11 percent), 
yielding an average producer revenue decrease of $125 million annually 
(0.44 percent) from average baseline receipts of $28,396 million.
    Milk Manufacturers and Processors. Increasing Federal order make 
allowances benefits dairy manufacturers by widening the spread between 
Federal order minimum prices and the prices that they receive for 
manufactured dairy products. While prices paid for milk are lower, 
prices received for dairy products are higher due to the tighter milk 
supply. Over the nine year projection period, wholesale dairy product 
prices increase as follows: $0.0119 per pound (0.82 percent) for 
cheddar cheese, $0.0305 (1.99 percent) for butter, $0.0012 (0.14 
percent) for NFDM, and $0.0015 (0.56 percent) for dry whey.
    With the proposed increases in make allowances, most Federal order 
component prices decrease on average over the nine-year projection 
period: $0.0038 per pound (0.16 percent) for protein, $0.0156 (2.24 
percent) for nonfat solids, and $0.0361 (30.22 percent) for other 
solids. For the butterfat price, the increase in the butter price more 
than offsets the increase in the butter make allowance, resulting in

[[Page 67469]]

an average increase of $0.0303 per pound (1.78 percent) over the 
projection period. Changes in Federal order component prices translate 
into reductions for Federal order skim milk pricing factors at 3.5 
percent butterfat over the nine-year period: $0.22 per cwt for Class I 
and Class III, $0.14 per cwt for Class II and Class IV. Federal order 
Class I and III average prices decrease by $0.11 per cwt over the 
projection period, while Class II and IV prices decrease by $0.03 per 
cwt.
    There are notable differences between changes in Federal order 
class prices at 3.5 percent butterfat and changes in Federal order 
class prices at class butterfat percentages. Butterfat tests for the 
four Federal order milk classes differ from one class to another due to 
the mix of products within each class. Butterfat proportions are higher 
for Class II and IV milk than for Class I and III milk. Average Class I 
and III prices at test are below baseline levels over the nine-year 
period: $0.16 per cwt (1.12 percent) for Class I and $0.11 per cwt 
(0.83 percent) for Class III. For Class II and Class IV prices at test, 
the increase in the butterfat price more than offsets the increase in 
the make allowances, resulting in prices above baseline levels for the 
nine-year period: $0.12 per cwt (0.58 percent) for Class II and $0.03 
per cwt (0.20 percent) for Class IV.
    Consumers. The expected $0.16 per cwt (1.12 percent) decrease in 
the minimum nine-year average Class I price at test results in an 
average $0.0137 per gallon decrease in the price of fluid milk for 
consumers. Consumers increase consumption of fluid milk products 
slightly, resulting in an increase of 17 million pounds (0.04 percent) 
in Federal order Class I marketings. Consumers reduce consumption of 
manufactured dairy products in response to higher dairy product prices. 
All of the manufacturing Federal order class marketings decrease as 
follows: 26 million pounds (0.15 percent) for Class II, 30 million 
pounds (0.06 percent) for Class III and 97 million pounds (0.62 
percent) for Class IV.
    Government Outlays. In 2007, with lower milk prices, MILC payments 
increase by $25 million (12.94 percent) above the baseline level of 
$190 million. This impact rounds to approximately $0.01 per cwt 
averaged over all of the milk production.
    With an increase in Federal order make allowances, dairy product 
prices increase, milk production declines and government removals 
decrease relative to baseline levels. The analysis assumes that current 
MPSP make allowances will remain in effect throughout the projection 
period. Over the projection period government removals of NFDM decrease 
by an average of 9 million pounds (2.95 percent) per year. This reduces 
government outlays by an average $7 million per year over the 
projection period.

Detailed Analysis Information

    A complete Economic Analysis, Class III and IV Make Allowances, 
Tentative Final Decision is available on the Internet at http://www.ams.usda.gov/dairy/proposals/classIII_IV_make_all.htm. For 
further information contact Howard McDowell, Senior Economist, USDA/
AMS/Dairy Programs, Office of the Chief Economist, Room 2753, South 
Building, U.S. Department of Agriculture, Washington, DC 20250, (202) 
720-7091, e-mail address [email protected].

Prior Documents in This Proceeding

    Notice of Hearing: Issued December 30, 2005; published January 5, 
2006 (71 FR 545).
    Notice of Intent to Reconvene Hearing: Issued June 28, 2006; 
published June 23, 2006 (71 FR 36715).
    Notice to Reconvene Hearing: Issued August 31, 2006; published 
September 6, 2006 (71 FR 52502).

Preliminary Statement

    Notice is hereby given of the filing with the Hearing Clerk of this 
tentative final decision with respect to the proposed amendments to the 
tentative marketing agreements and the orders regulating the handling 
of milk in the Northeast and other marketing areas. This notice is 
issued pursuant to the provisions of the Agricultural Marketing 
Agreement Act (AMAA) and applicable rules of practice and procedure 
governing the formulation of marketing agreements and marketing orders 
(7 CFR Part 900).
    Interested parties may file written exceptions to this decision 
with the Hearing Clerk, United States Department of Agriculture, Room 
1031-Stop 9200, 1400 Independence Avenue, SW., Washington, DC 20250-
9200, by the January 22, 2007. Four (4) copies of the exceptions should 
be filed. All written submissions made pursuant to this notice will be 
made available for public inspection at the office of the Hearing Clerk 
during regular business hours (7 CFR 1.27(b)).
    A public hearing was held upon proposed amendments to the marketing 
agreement and the orders regulating the handling of milk in the 
Northeast and other marketing areas. The hearing was held, pursuant to 
the provisions of the Agricultural Marketing Agreement Act of 1937 
(AMAA), as amended (7 U.S.C. 601-674), and the applicable rules of 
practice and procedure governing the formulation of marketing 
agreements and marketing orders (7 CFR Part 900).
    The hearing notice specifically invited interested persons to 
present evidence concerning the probable regulatory and informational 
impact of the proposals on small businesses. Some evidence was received 
that specifically addressed these issues, and some of the evidence 
encompassed entities of various sizes.
    The proposed amendments set forth below are based on the record of 
the first session of a public hearing held in Alexandria, Virginia, on 
January 24-27, 2006, pursuant to a notice of a hearing issued December 
30, 2005; published January 5, 2006 (71 FR 545) and a second session of 
a public hearing held in Strongsville, Ohio, on September 14-15, 2006, 
pursuant to a reconvened hearing notice issued August 31, 2006; 
published September 6, 2006 (71 FR 52502).
    The material issues on the record of the hearing relate to:
    1. Amending the manufacturing allowances.
    2. Determination of emergency marketing conditions.

Findings and Conclusions

1. Amending the Manufacturing Allowances
    This tentative final decision adopts on an interim basis, a 
proposal published in the hearing notice as Proposal 1 which seeks to 
amend the manufacturing allowances for butter, cheese, NFDM and dry 
whey. Specifically, this decision adopts the following manufacturing 
allowances: cheese--$0.1682 per pound, butter--$0.1202 per pound, 
NFDM--$0.1570 per pound and dry whey--$0.1956 per pound.
    The Federal Milk order system currently uses product price formulas 
to compute prices handlers must account for in the marketwide pooling 
of milk used in Class III and Class IV products. Class III and Class IV 
prices form the base from which Class I and Class II prices are 
determined.
    The price formulas used to compute Class III and Class IV prices 
contain a factor called a manufacturing (make) allowance. The make 
allowance factor represents the cost manufacturers incur in making raw 
milk into one pound of product. Federal milk order pricing formulas 
currently contain the following make allowances: cheese--$0.1650 per 
pound, butter--$0.1150 per pound, NFDM--$0.1400 per pound and dry

[[Page 67470]]

whey--$0.1590 per pound. These make allowances were last amended in 
2003 and were determined on the basis of a California Department of 
Food and Agriculture (CDFA) and a USDA Rural Business Cooperative 
Service (RBCS) survey of 1998 manufacturing costs. The current make 
allowances were computed by taking a weighted average of the CDFA and 
RBCS surveys and adjusting for return on investment, general and 
administrative costs and marketing costs.
    a. The following summary of testimony and post-hearing briefs 
pertains to the first session of the public hearing held January 24-27, 
2006, in Alexandria, Virginia.
    A proposal published in the hearing notice as Proposal 1 seeking to 
amend the current make allowances was offered by Agri-Mark Dairy 
Cooperative (Agri-Mark). Agri-Mark is a Capper-Volstead cooperative 
with approximately 1300 member-owners located throughout New England 
and New York and operates 4 manufacturing plants. Proposal 1 seeks to 
amend the make allowances for cheese, butter, NFDM and dry whey powder 
contained in the Class III and Class IV price formulas based upon the 
results of the California State 2004 dairy products manufacturing cost 
survey conducted by the CDFA and a 2004 manufacturing cost survey 
conducted by the RBCS. The results of these surveys, reported in 
dollars per pound, are as follows:

----------------------------------------------------------------------------------------------------------------
                                                   40-lb. block      Dry whey
                                    All cheese        cheese          powder          Butter           NDFM
----------------------------------------------------------------------------------------------------------------
RBCS \2\........................        $0.13295        $0.15136        $0.11409        $0.16588        $0.16816
CDFA............................    Not reported          0.1769          0.2673          0.1368          0.1543
----------------------------------------------------------------------------------------------------------------
\2\ Results do not include factors for return on investment, general and administrative costs, marketing costs
  and milk transportation and procurement costs.

    A witness from the RBCS testified regarding the methodology used by 
RBCS in conducting the 2004 Dairy Product Plant Costs Survey. The 
witness did not testify in either support of or in opposition to 
Proposal 1. The witness said the study was conducted at the request of 
dairy-farmer owned cooperatives as a technical assistance project from 
which cooperatives could compare their costs to average costs of all 
participating cooperatives. The witness stated that 9 cooperatives 
voluntarily submitted 2004 cost data for 17 cheese plants, 8 butter 
plants and 16 NFDM plants. Due to data incompatibility, the witness 
said that one butter plant and two NFDM plants were not included in the 
final study. The witness noted that the number of plants surveyed in 
2004 was greater than the number of plants surveyed in 1998. The 
witness testified that the study represents the second time that this 
technical assistance project collected and analyzed cost data for dried 
and condensed dry whey processing. The witness reported that the data 
collected did not include costs from privately owned manufacturing 
plants and that none of the plants surveyed were located in the State 
of California.
    The RBCS witness testified that the plant data represented each 
plant's cost of producing butter, NFDM, commodity cheese and condensed 
dry whey or dried dry whey depending on the product(s) produced at the 
individual plants. The RBCS witness explained the basic data collection 
methodology used in requesting data from individual plants and 
testified that the manufacturing costs provided by the cooperatives 
represented only those costs incurred by the plant from the receiving 
deck to the shipping deck of the plant. The witness testified that milk 
procurement, milk transportation, as well as plant administrative and 
management overhead, return on investment costs and marketing costs 
were not included in the data collected. The witness also noted that 
the cost of producing dry whey was excluded from the cost of cheese 
manufacturing. According to the witness, the data provided were not 
audited or verified by an independent party. The witness explained that 
the cost data were aggregated by product category and a weighted 
average cost of production for each product type was then calculated. 
The witness said that the RBCS data did not support concluding that as 
plant size increased, costs of production decreased on a per unit 
basis.
    Two witnesses from CDFA testified regarding the methodology used in 
conducting a 2004 processing costs survey for cheddar cheese, butter, 
NFDM and dry whey powder for manufacturing plants located in the State 
of California. The witnesses noted that 2003 was the first year that 
CDFA included dry whey processing costs in their manufacturing cost 
survey. The witnesses did not testify in either support of or in 
opposition to Proposal 1.
    The CDFA witnesses explained that plant participation in the cost 
survey is voluntary and that the 2004 survey represented 99.9 percent 
of butter production, 98.5 percent of Cheddar and Monterey Jack 
production, 99.17 percent of NFDM production and 79 percent of dry whey 
powder production in the State of California. The witnesses testified 
that all cost survey data collected is from audited plant cost records. 
The CDFA witnesses noted that the audited costs for California plants 
demonstrated that costs per unit of output are inversely related to 
plant size. The witnesses elaborated that as plant size increases, the 
costs of production on a per unit basis decrease consistently across 
manufacturing product categories.
    A witness appearing on behalf of Agri-Mark testified in support of 
Proposal 1. The witness testified that the costs of manufacturing dairy 
products have increased since the make allowances were amended in 2003 
by relying on cost data from 1998 and 1999. The witness asserted that 
many manufacturing plants are unable to recoup their increased costs in 
the marketplace and, the witness asserted, caused some plants located 
in the Northeast marketing area to cease operating. The witness argued 
that the Class III and Class IV make allowances should be updated using 
2004 data contained in the CDFA and RBCS surveys to reflect current 
manufacturing costs.
    The Agri-Mark witness asserted that the role of Class III and Class 
IV plants is to balance the milk needs of the Class I and II markets. 
According to the witness, monthly Class III milk volumes as a 
percentage of the annual average monthly volume in the Northeast order 
for 2005 ranged from a high of 107 percent in May to a low of 92 
percent in October. Class IV usage for that same time period ranged 
from 145 percent in May to 48 percent in September, said the witness. 
The witness also stated that when milk production in the Northeast 
marketing area increased in 2000, it was primarily Class IV plants that 
balanced the increased supply.
    The Agri-Mark witness stressed that even though Class IV plants are

[[Page 67471]]

balancing the market by processing the additional producer milk supply, 
they are not profitable in the Northeast marketing area. The witness 
explained that one dairy processor attempted to recoup their increased 
energy costs in the market through an energy surcharge on its finished 
products. However, stated the witness, the surcharge was captured in 
the NASS survey price and subsequently the Class IV milk price paid by 
manufacturing plants also increased.
    The Agri-Mark witness estimated that its members lost $15.5 million 
in 2004 because manufacturing costs were not adequately covered in the 
pricing formula for cheese. According to the witness, this resulted in 
a loss of $0.6500 per hundredweight (cwt) on all its producer-member 
milk. In this regard, the witness asserted that Agri-Mark members were 
subsidizing the Northeast order blend price because they are paying a 
classified price for Class III and Class IV milk that is higher than 
the value of the milk used to make these products. The witness 
conceded, however, that despite incurring a loss on its producer-member 
milk Agri-Mark does pay premiums for milk it purchases for processing 
into Class III and Class IV products.
    The Agri-Mark witness proposed that the updated cheese make 
allowance is computed by taking a weighted average of the RBCS 40-pound 
block cheddar and the all California total cheese manufacturing plant 
costs. The witness calculated this value to be $0.1794 per pound. The 
witness was of the opinion that the RBCS 40 pound block cost should be 
used because the CDFA survey had standardized its reported costs to 
plants that produce 40 pound blocks.
    The Agri-Mark witness proposed that the butter make allowance 
should be computed by using the weighted average cost for all RBCS 
butter plants with the weighted average costs of all CDFA butter 
plants. The witness calculated this value to be $0.1515 per pound. The 
witness explained that only the high cost sub-group of CDFA butter 
plants was used in 2003 when the current make allowances were adopted. 
The witness was of the opinion that using only the high cost sub-group 
would now be inappropriate because those plants were not similar in 
size to the RBCS butter plants.
    The Agri-Mark witness proposed that the NFDM make allowance should 
be computed using the RBCS weighted average cost for all NFDM plants 
and the weighted average cost of the medium cost sub-group of CDFA NFDM 
plants. The witness calculated this value to be $0.1867 per pound. The 
witness was of the opinion that this methodology and value was 
appropriate because of the comparable plant volumes between the two 
groups. The low cost plants in the CDFA survey produce a large volume 
of NFDM, the witness said, and including those plants in the 
calculation would distort the average costs of the plants in the RBCS 
study. The witness explained that using a weighted average by product 
volume implies that half of the product will be produced at a cost 
lower than the weighted average and half of the product would be 
produced at a cost higher than the weighted average. If the low cost 
CDFA plants were included in the make allowance calculation, the 
witness concluded that because of their high product volume more than 
half of the product and a majority of plants regulated by the Federal 
order system would not be able to cover their manufacturing costs.
    The Agri-Mark witness expressed concern regarding the large 
variation in the CDFA survey cost of dry whey ($0.2673 per pound) and 
the RBCS survey cost of dry whey ($0.11409 per pound). According to the 
witness, CDFA has only collected data on dry whey processing for two 
years and during that same time period the survey cost of dry whey 
($0.2670 per pound) was not recommended as the appropriate make 
allowance--instead, a make allowance of $0.2000 per pound was adopted. 
This was also the second time the RBCS survey collected data for dry 
whey production and the witness was of the opinion that there may have 
been problems regarding the reporting and allocation of dry whey costs 
that resulted in the RBCS survey product cost far below the CDFA cost. 
The witness insisted that because dry whey cost accounting methodology 
is new and not standardized, the Department should not rely on, or 
adopt the RBCS or CDFA survey costs for dry whey. Rather, the witness 
asserted that it would be more appropriate to use the methodology 
adopted when make allowances were last amended which added a factor of 
$0.0190 to the NFDM make allowance. The witness was of the opinion that 
either a $0.0190 or $0.0250 factor would be appropriate and would 
result in a dry whey make allowance of either $0.2057 or $0.2117 per 
pound.
    The Agri-Mark witness also supported updating the return on 
investment, administrative and marketing cost factors that are 
incorporated into the make allowance calculations. The previous 
Department decision amending the make allowances adopted the cost 
factors that were contained in the CDFA survey, and the witness was of 
the opinion that the same cost factors contained in the 2004 CDFA 
survey should again be used.
    The Agri-Mark witness submitted data estimating the impact the 
proposed make allowances would have on class and component prices. 
According to the witness, the price of butterfat would fall $0.0440 per 
pound, the price of protein would remain the same, the price of nonfat 
solids would fall $0.0460 per pound, and the price of other solids 
would fall either $0.0480 per pound or $0.0540 per pound depending on 
the factor used to calculate the dry whey powder make allowance. 
Additionally, the witness predicted that the Class III price would fall 
either $0.4300 per cwt or $0.4600 per cwt (depending on the dry whey 
powder factor) and the Class IV price would fall $0.5500 per cwt.
    The Agri-Mark witness also offered data regarding increased energy 
costs that have occurred over the past 4 years. Referring to U.S. 
Department of Energy data, the witness asserted that crude oil prices 
increased 33 percent in 2004 and 36 percent in 2005, and those prices 
are expected to increase 52 percent and 45 percent above 2004 levels in 
2006 and 2007, respectively. Other similar increases were seen in 
natural gas prices, the witness noted. In this regard, the witness 
offered a modification to Proposal 1 to include an energy adjustment 
for 2005 using the Producer Price Indexes for Industrial Natural Gas 
and Industrial Electric Power Distribution. According to the witness, 
those indexes recorded a 6 percent increase in electric power costs and 
a 23.8 percent increase in industrial natural gas costs from 2004 to 
2005.
    If the energy adjustment were incorporated into the make allowance, 
the Agri-Mark witness proposed that the make allowances be set at 
$0.1815 per pound for cheese, $0.1543 per pound for butter, $0.1965 per 
pound for NFDM, and either $0.2155 per pound or $0.2117 per pound for 
dry whey powder. This set of proposed make allowances would result in a 
decrease of the Class III price of either $0.5100 or $0.5400 per cwt 
and a decrease in the Class IV price by $0.6500 per cwt.
    The Agri-Mark witness conceded that adoption of Proposal 1 would 
decrease the blend prices paid to all dairy farmers. The witness was of 
the opinion that their proposed higher make allowances would lead to 
lowering blend prices by $0.09 to $0.13 per cwt over 5 years. However, 
the witness said, if the make allowances are not amended to reflect 
current costs, manufacturing plants that are unable to recoup their 
increased costs would go out of business

[[Page 67472]]

causing disorderly marketing conditions because there would be fewer 
local outlets for producer milk. The witness claimed that some 
cooperatives are currently decreasing the price paid to their members 
in an effort to recoup some of their increased manufacturing costs. The 
witness said that while Agri-Mark pays premiums above the minimum 
Federal order blend price to its members, they also are collecting a 
$0.15 per cwt assessment on all of their members' milk to offset some 
of the cooperative's losses. The witness said that if the make 
allowances were not increased, dairy farmers who are members of 
cooperatives would continue to lose money as cooperatives that operate 
manufacturing plants would further need to decrease the price they pay 
to their members in an effort to recoup additional loses. The Agri-Mark 
witness strongly urged the Department to expedite the rulemaking 
process by eliminating a recommended decision.
    A second witness appearing on behalf of Agri-Mark offered testimony 
regarding the production costs experienced at Agri-Mark plants. The 
witness asserted that their production costs have steadily increased 
since 1998 when that cost data was used in establishing current make 
allowances. According to the witness, Agri-Mark has taken many steps to 
increase efficiency and to lower costs, such as installing more 
efficient equipment, purchasing supplies in bulk quantities and forward 
pricing their energy needs. Despite these efforts, explained the 
witness, Agri-Mark has still been unable to offset increases in most 
production costs. To support their claim of increased production costs, 
the witness provided data which listed various costs experienced at 
Agri-Mark manufacturing plants from 2001 to 2005.
    A post-hearing brief submitted on behalf of Agri-Mark; Northwest 
Dairy Association; Foremost Farms USA Cooperative; Associated Milk 
Producers, Inc.; and Land O'Lakes, Inc. expressed support for updating 
the make allowances. Hereinafter, these entities will be referred to as 
``Agri-Mark, et al.'' The brief argued that the hearing record clearly 
establishes that manufacturers are incurring higher processing costs 
since current make allowances were adopted. The brief asserted that the 
current make allowances force many manufacturers to operate at a 
financial loss. The brief estimated that Agri-Mark members alone are 
incurring losses in excess of $700,000 per month.
    The Agri-Mark, et al., brief stated that unlike the competitive 
pricing system, the current pricing system does not give manufacturers 
the ability to recoup increased processing costs from the marketplace. 
The current set of fixed make allowances, wrote Agri-Mark, et al., do 
not reflect current manufacturing costs which are shown in the most 
current CDFA and RBCS surveys. The brief asserted that the inadequate 
make allowances have played a role in many manufacturing plant closures 
in recent years, and claimed that more plants would be forced out of 
business if the make allowances were not updated as quickly as 
possible.
    The Agri-Mark, et al., brief asserted that the RBCS and CDFA 
surveys are reliable and representative of manufacturing costs 
throughout the country. The brief also stressed the importance of 
including a 2005 energy adjuster in determining any amended make 
allowances. The brief reiterated Agri-Mark's concern with the dry whey 
cost data contained in both the RBCS and CDFA surveys and advocated 
deriving the dry whey make allowance by adding a 1.9 cent per pound 
factor to the NFDM make allowance, noting that the same methodology was 
used to derive the current dry whey make allowance.
    The Agri-Mark brief conceded that any increase in the make 
allowances will reduce producer income. However, the brief stated that 
the Department did not account for the current loss of revenue by 
cooperative members whose manufacturing plants are currently operating 
at a financial loss in their baseline analysis. The brief also asserted 
that the baseline analysis did not include the impact on producer 
revenue due to closures which might result from fewer local outlets for 
their milk supply. The brief concluded that if these and other factors 
were included in the baseline analysis, the reduction in producer 
revenue would not be as large as projected.
    A witness appearing on behalf of National Milk Producers Federation 
(NMPF) testified in support of Proposal 1. According to the witness, 
NMPF consists of 33 dairy-farmer cooperative associations that 
represent 75 percent of the country's dairy farmers. The witness said 
that NMPF supports updating the make allowances to reflect current 
manufacturing costs to provide needed cost relief to the dairy product 
manufacturing industry. The witness stated that the current make 
allowances were derived from manufacturing cost data collected in 1998 
and that costs have increased making the current make allowances 
obsolete. The witness maintained that the updated CDFA and RBCS survey 
data should be combined according to the same basic methodology used by 
the Department when the current make allowances were established. The 
witness urged the Department to implement these changes on an emergency 
basis and omit a recommended decision.
    The NMPF witness explained that make allowances set the maximum 
margin a manufacturer can earn for its products. According to the 
witness, if a manufacturer is able to produce at a per unit cost less 
the make allowance, then they generate a processing premium. However, 
the witness said, if a manufacturer's per unit cost is greater than the 
make allowance they do not earn a processing premium and have no method 
under the current pricing formulas to recoup those costs from the 
marketplace. The witness asserted that this undermines the ability of 
manufacturing plants to provide market balancing services and the 
Federal orders the ability to provide for orderly marketing conditions.
    The NMPF witness testified that the CDFA and RBCS surveys together 
represent a large portion of the domestic manufacturing industry--41 
percent of cheddar cheese production, 51 percent of butter production, 
81 percent of NFDM production and 45 percent of dry whey production. 
While the witness supported using the Department's methodology for 
establishing the current make allowances, NMPF proposed a modification. 
The current butter make allowance was determined after excluding the 
lower-cost CDFA butter plants from the calculation of the average plant 
cost, the witness explained. According to the witness, this exclusion 
is no longer justified because that group represents a large share of 
U.S. butter production and should now be included.
    The NMPF witness also explained that the most volatile input cost 
of manufacturing is energy and asserted that recent increases in energy 
costs have countered many cost reducing measures undertaken by 
manufacturers to increase productivity or efficiency. The witness was 
of the opinion that the energy cost factor contained in the make 
allowances should be indexed and adjusted monthly to take into account 
the volatile energy market. The witness insisted that this was an 
appropriate way to maintain equity between producers and manufacturers 
explaining that processors would not be unduly harmed when energy 
prices rise and producers would not be harmed when energy prices fall. 
Therefore, the witness said, the Department should adopt a monthly 
energy price adjuster using the monthly Bureau of Labor Statistics

[[Page 67473]]

Producer Price Indexes for Industrial Electricity and Industrial 
Natural Gas, and use the weighted average 2004 electricity and fuels 
costs from the RBCS and CDFA surveys as the initial base for the 
adjuster. The witness added that if an energy index is not adopted, the 
make allowances that are determined as a result of the proceeding may 
become obsolete before they are implemented if there are large 
fluctuations in energy prices. The witness supported delaying 
implementation of an energy cost factor until the issuance of a final 
decision if its consideration would delay adopting adjustments in the 
make allowances. A post-hearing brief submitted on behalf of NMPF 
reiterated their support for updating the make allowances.
    A witness appearing on behalf of Land O' Lakes (LOL) testified in 
support of Proposal 1. According to the witness, LOL is a Capper-
Volstead cooperative with more than 4,000 members that owns 
manufacturing plants located throughout the United States. The witness 
explained that Class III and Class IV prices are determined in part by 
taking the market price of various manufactured goods and subtracting 
the cost of converting milk into that specific commodity (make 
allowance). The witness said that the current classified pricing system 
was implemented in 2000 and the current make allowances were last 
adopted in 2003 relying on data that was collected in 1998. The LOL 
witness stated that all of LOL's plants have experienced increased 
manufacturing costs since 1998. The witness emphasized that despite 
efforts by LOL to reduce costs increase in processing costs could not 
be completely offset.
    The LOL witness stressed that relative plant size, comparable per 
unit costs and recognition of balancing costs should be criteria used 
by the Department in appropriately weighting the CDFA and RBCS surveys 
to determine the make allowances. The witness further suggested that 
when establishing the butter make allowance, the weighted average of 
the CDFA and RBCS butter plants should be used because the costs of the 
average plant size measured by both surveys are comparable. According 
to the witness, this would result in a butter make allowance of $0.1515 
per pound. The NFDM make allowance should be computed using the 
weighted average of the RBCS NFDM plants and Group II of the CDFA NFDM 
plants, the witness stated. The costs of those two groups, after 
adjusting the RBCS data for return on investment, general and 
administrative costs and marketing expenses, are similar, the witness 
said, and would result in a NFDM make allowance of $0.1867 per pound.
    For determining the cheese make allowance, the LOL witness 
advocated using the weighted average RBCS cost with the weighted 
average CDFA cost because those costs are similar. The witness asserted 
that the resulting cheese make allowance should be $0.1710 per pound. 
The witness also insisted that the RBCS and CDFA survey costs for dry 
whey processing are counter-intuitive and supported Agri-Mark's 
modification to add a factor to the NFDM make allowance to determine 
the dry whey make allowance.
    The LOL witness maintained that the make allowances need to be 
amended to reflect current manufacturing and to remedy an error in the 
RBCS cost data presented at a 2000 hearing on Federal order product 
price formulas that contained some California plants. The witness also 
recognized that lower blend prices would result if Proposal 1 is 
adopted. However, the witness said, LOL cooperative members are 
currently bearing the additional cost of processing manufactured 
products which the witness asserted should be born by all producers. 
The witness emphasized that all of the LOL butter, cheese, and NFDM 
plants that participated in the RBCS survey lost money in 2004 even 
though the average selling price for the products were above the NASS 
average price for the year. The witness urged the Department to 
expedite the hearing process and omit a recommended decision to provide 
cost relief to manufacturing operations.
    A post-hearing brief submitted on behalf of LOL reiterated their 
support of adoption of Proposal 1. The brief supported adoption of the 
specific make allowances advanced by Agri-Mark including a 2005 energy 
adjuster and adoption of an energy index in the calculation of the make 
allowances that would be updated quarterly. The brief expressed 
opposition to reopening the hearing record to take evidence regarding 
the proper make allowances to be included in the Class I and Class II 
price formulas.
    A witness appearing on behalf of the National Cheese Institute 
(NCI) testified in support of Proposal 1. NCI is a trade association 
with 70 member companies representing manufacturers, marketers, 
distributors and suppliers of cheese. The witness said that the make 
allowances should be updated with the 2004 CDFA and RBCS survey data 
using the methodology that established the current make allowances and 
that they be adjusted for 2005 energy cost increases. The witness 
specified that after adding an energy adjustment the make allowance 
should be set no lower than the following: $0.1810 per pound for 
cheese, $0.2220 per pound for dry whey, $0.1540 per pound for butter 
and $0.1970 per pound for NFDM.
    The NCI witness explained that the Federal order pricing system 
prior to Federal order reform was based on the competitive market 
prices paid for unregulated milk in the Upper Midwest region. The 
witness asserted that this pricing scheme reacted to changes in 
manufacturing costs and therefore manufacturers did not need to seek 
government intervention to recover any cost increases. However, the 
current pricing system determines the classified prices received by 
farmers based on the products' finished wholesale prices minus fixed 
make allowances that represents the handlers' costs incurred to make 
the finished products, explained the witness. The current system, the 
witness said, does not react to cost changes. If a manufacturer's costs 
of production increases, the plant still only receives the fixed make 
allowance to produce that specific product, the witness said even if 
this does not cover all of its processing costs. The witness noted that 
while a plant could increase its finished product prices to recover 
additional expenses, the higher prices would be included in the NASS 
product price survey and would consequently increase their cost for raw 
milk. According to the witness this circularity in price determination 
undercuts market forces and justifies increasing the make allowances.
    The NCI witness maintained that manufacturing costs have increased 
substantially since RBCS and CDFA survey data for 1998 was used to 
establish the current make allowances. The witness asserted that if the 
make allowances are not updated, cheese manufacturers will either have 
to decide to lose money on each pound of product or stop production 
entirely. While the witness supported the methodology used by the 
Department to set the current make allowances, NCI offered their views 
regarding what CDFA cost sub-groups should be used in establishing new 
make allowances. The witness also insisted that because the 2004 CDFA 
and RBCS survey results do not include 2005 energy cost increases, an 
adjustment as proposed by Agri-Mark, to reflect these increases, is 
justified. The witness testified that a 2.5 cent factor should be added 
to the NFDM make allowance to establish the dry whey make allowance. 
The NCI witness concluded that the increasing differences between 
current make allowances and actual manufacturing

[[Page 67474]]

costs justifies the need for emergency action by the Department through 
the omission of a recommended decision.
    A post-hearing brief submitted on behalf of NCI reiterated their 
support for updating the make allowances using CDFA and RBCS 2004 
survey data, adjusted for 2005 energy costs, on an emergency basis. The 
brief stated that such an update should result in new make allowances 
that would be set no lower than the following: $0.1810 per pound for 
cheese, $0.1540 per pound for butter, $0.1970 per pound for NFDM and 
$0.2220 per pound for dry whey. The brief stated that the hearing 
record is replete with evidence demonstrating a significant increase in 
manufacturing costs and the manufacturers' inability to recoup those 
costs though the marketplace. The brief also argued that the RBCS data 
regarding the costs of producing dry whey do not include all input 
costs and are not representative of typical U.S. dry whey drying 
plants. Therefore, the brief said, the Department should continue the 
methodology used in the past and establish a dry whey make allowance by 
adding a differential to the NFDM make allowance.
    A witness appearing on behalf of Lactalis America Group (Lactalis) 
testified in support of Proposal 1. According to the witness, Lactalis 
produces and markets a variety of cheeses across the United States. The 
witness testified that their manufacturing costs of production have 
increased 14 percent since 1998 even though their plant capacity had 
increase by 25 percent during that time frame. The witness projected 
that Lactalis' costs of production would increase 16 percent in 2006 as 
compared to 2005. The witness urged the Department to expedite the 
rulemaking process and omit a recommended decision.
    A witness appearing on behalf of Alto Dairy Cooperative (Alto) 
testified in support of Proposal 1. According to the witness, Alto is a 
Capper-Volstead cooperative located in Wisconsin that markets over 1.5 
billion pounds of milk annually and operates 2 manufacturing plants. 
The witness stated that a financially stable dairy manufacturing 
industry which provides numerous local outlets for milk is vital to 
maintaining a stable market for dairy farmers. The witness was of the 
opinion that the current make allowances disadvantage cheese 
manufacturers because they do not adequately account for the current 
costs of manufacturing. The witness stated that even though Alto has 
become more efficient, their costs of production still increased 3 
cents per pound because of increases in costs for natural gas, 
packaging materials and transportation. The witness urged the adoption 
of Proposal 1 on an expedited basis.
    A witness appearing on behalf of Associated Milk Producers, Inc. 
(AMPI) testified in support of Proposal 1. According to the witness, 
AMPI is a Capper-Volstead cooperative that represents 4,000 dairy 
farmers in 7 Midwestern states and whose milk is pooled on the Upper 
Midwest and Central orders. The witness expressed support for 
increasing the make allowances because of increased manufacturing 
costs, particularly for energy, that have occurred since 2001. The 
witness was of the opinion that adequate make allowances are critical 
in allowing a manufacturing plant to cover their processing costs and 
earn a competitive rate of return on equity. The witness said that if 
the make allowances remained too low plant profitability will continue 
to erode and investment in plants and manufacturing equipment will 
decrease. The witness emphasized that manufactured dairy products 
compete in a national market against other unregulated or state-
regulated plants that either have no regulated pricing system or have a 
make allowance that more accurately reflects current marketing 
conditions.
    The AMPI witness also supported the inclusion of a 2005 energy 
adjustor as advanced by Agri-Mark. The witness said that AMPI 
experienced 31 percent higher average natural gas costs in 2005 than in 
2004. The witness noted that for the months of September through 
December 2005, AMPI's natural gas costs were on average 65 percent 
higher than during the same time period in 2004. The witness asserted 
that the steep increases in energy prices that occurred in 2005 need to 
be reflected in any update of the make allowances. The witness also 
supported indexing energy costs as proposed by NMPF, provided its 
inclusion would not delay the issuance of a decision, and that its 
inclusion should be contained in a later decision. The witness urged 
the Department to expedite the hearing process and omit a recommended 
decision.
    A witness appearing on behalf of Foremost Farms USA Cooperative 
(Foremost) testified in support of Proposal 1. According to the 
witness, Foremost is a Capper-Volstead cooperative with 3,476 members 
that markets 5.05 billion pounds of milk and operates 15 manufacturing 
plants and 2 distributing plants. The witness said the current make 
allowances have dramatically risen since 1998 and is causing 
manufacturing plants to lose substantial amounts of money.
    The witness explained that Foremost has taken numerous steps since 
2000 to increase their competitiveness and efficiency by reconfiguring 
their product mix, closing numerous plants and a storage and 
distribution facility, increasing employee health care contributions, 
and purchasing packaging, ingredients, and other supplies in bulk. 
Despite these efforts Foremost has been unable to completely offset as 
the cost increases in energy, employee healthcare, and packaging 
materials, the witness stated. The witness claimed that at their 
Lancaster, Wisconsin, cheese plant, 2004 manufacturing costs per pound 
for cheese had increased 25.6 percent since 1999. According to the 
witness, the increased costs were linked to higher natural gas, 
electricity, and employee fringe benefits. The witness added that the 
2005 manufacturing costs per pound of cheese at the same plant was 14.1 
percent higher than 2004. The witness also emphasized that Foremost has 
attempted to raise its product prices and premiums but those increases 
were incorporated into the NASS Dairy Product Price survey that in 
turn, resulted in higher Federal order minimum class prices for their 
raw milk.
    The Foremost witness stressed that make allowances need to be 
increased quickly; otherwise they will be unable to continue absorbing 
cost increases without paying their members less for their milk. The 
witness supported adoption of Proposal 1 with an energy adjustor and 
urged its adoption on an emergency basis.
    A witness appearing on behalf of Davisco Foods International 
(Davisco) testified in support of Proposal 1. According to the witness, 
Davisco operates three manufacturing plants that collectively produce 1 
million pounds of cheese per day. The witness offered support for the 
testimony offered by the NCI. The witness stated that the price Davisco 
is able to charge for products is not high enough to return the 
classified price to the marketwide pool and cover their manufacturing 
costs. According to the witness, many of Davisco's processing costs 
have increased from 1998 to 2004. During this time period, the witness 
explained, labor costs have increased 25 percent per man hour, employee 
benefits have increased 92 percent and natural gas costs have increase 
149 percent per therm. The witness said energy costs increased 
substantially again in 2005. The witness insisted that in order to 
maintain a viable dairy manufacturing industry, make allowances need to 
be amended

[[Page 67475]]

on an emergency basis to reflect current market conditions.
    A witness appearing on behalf of Michigan Milk Producers 
Association (MMPA) testified in support of Proposal 1. According to the 
witness, MMPA is a Capper-Volstead cooperative with approximately 2,400 
members that markets over 3.3 billion pounds of milk per year and 
operates 2 manufacturing plants. The witness said that MMPA 
participated in the 1998 and 2004 RBCS manufacturing cost surveys and 
presented data revealing their cost increases during that time period. 
According to the witness, MMPA's manufacturing costs per pound of NFDM 
were 54 percent higher in 2004 than in 1998 and represent $2.1 million 
in additional processing costs that they were unable to recoup from the 
marketplace. During that same period, the witness noted, the 
manufacturing costs per pound of butter increased 14.3 percent, 
reducing their profit margin by $207,000. The witness insisted that 
energy costs have been the major driver of cost increases and said that 
in 2006 MMPA forecasts their gas costs to increase by nearly $1.3 
million. The witness stressed that MMPA tried to increase their product 
prices but those higher prices were captured by the NASS product price 
survey which in turn resulted in higher raw milk costs.
    The MMPA witness emphasized the need for increasing make allowances 
to reflect current manufacturing costs and urged the Department to act 
on an emergency basis. The witness also offered support for indexing 
fuel costs and periodically adjusting make allowances to reflect 
changes in energy costs.
    A post-hearing brief submitted on behalf of MMPA reiterated support 
for adoption of Proposal 1. The brief stated that MMPA manufacturing 
plants have been incurring financial losses because processing costs 
are not fully recovered by current make allowances. The brief supported 
the make allowances advanced by Agri-Mark and NMPF. The brief also 
advocated that the make allowances be adjusted for 2005 energy cost 
increases and that the new allowances include a monthly energy 
adjuster. MMPA wrote that by indexing energy costs in the make 
allowances, manufacturers would not be harmed if future energy costs 
continue to increase and if energy costs decrease producers would share 
in the additional revenue resulting from lower processing costs. The 
brief described large financial losses that MMPA member-owned plants 
would incur if make allowances are not adjusted as quickly as possible.
    A witness appearing on behalf of Northwest Dairy Association (NDA) 
testified in support of Proposal 1. According to the witness, NDA is a 
Capper-Volstead cooperative with approximately 640 dairy-farmer 
members, of which 520 pool their milk on the Pacific Northwest order 
and also operates manufacturing plants in the northwest through its 
subsidiary, WestFarm Foods. The witness said that make allowances need 
to be updated to reflect the current marketing conditions. The witness 
insisted that the current make allowances do not reflect the higher 
costs of energy, labor and packaging and that efforts to recoup these 
costs from the marketplace have been unsuccessful. Therefore, the 
witness asserted that updating the make allowances is a logical step to 
ensure that manufacturing plants do not continue to lose money from 
higher costs that cannot be recouped.
    The NDA witness stressed that balancing costs should be considered 
as part of determining the appropriate make allowances for Class IV 
products--butter and NFDM. The witness claimed that NDA's NFDM 
processing costs were 2 to 5 cents per pound higher in their NFDM 
plants that specifically are used to balance the market. The witness 
said that NDA provided dry whey cost data for the RBCS survey and noted 
an error in their data--NDA did not include the purchase of a large 
amount of condensed dry whey in their total dry whey processing cost. 
The witness claimed that after accounting for this purchase, their dry 
whey processing cost increased 1.969 cents per pound for all dry whey 
manufactured by NDA.
    The NDA witness offered support for adjusting the make allowances 
to reflect 2005 energy costs and for indexing energy costs to 
periodically adjust the make allowances as proposed by NMPF. However, 
the witness insisted that manufacturing plants need immediate cost 
relief. The witness urged the Department to first amend the make 
allowances on an emergency basis and by including a 2005 energy 
adjuster. Then if necessary, the witness added, consider the NMPF 
proposal to index energy costs.
    A post-hearing brief submitted on behalf of NDA reiterated support 
for emergency action by the Department. The NDA brief focused on the 
appropriate level on the appropriate make allowance for dry whey. The 
brief expressed concern over the large cost difference in CDFA and RBCS 
dry whey cost survey data and the unintended exclusion of some input 
costs for dry whey processing by some of the RBCS survey participants. 
The brief recommended that the dry whey make allowance be derived by 
adding a factor to the NFDM make allowance.
    A witness appearing on behalf of WestFarm Foods (WestFarm) 
testified in support of Proposal 1 and offered testimony explaining the 
processing differences and related manufacturing cost differences 
between NFDM and dry whey powder. According to the witness, WestFarm 
performs the processing and marketing operations for NDA. The witness 
reviewed the testimony contained in a 2000 hearing record on make 
allowances and concluded that the assumptions made about dry whey 
processing are still valid. The witness updated the 2000 testimony with 
costs from the RBCS study, described the process of dry whey processing 
using reverse osmosis, and compared those costs to manufacturing NFDM. 
The witness concluded that in 2004 the additional cost of producing a 
pound of dry whey powder was 2.905 cents higher than producing a pound 
of NFDM with energy costs accounting for 1.120 cents. The witness 
attributed the higher cost of producing dry whey powder partly to the 
larger volume of milk needed to produce a pound of dry whey powder than 
a pound of NFDM. The witness noted that WestFarm uses reverse osmosis 
technology to produce dry whey, and in 2004 their additional production 
costs were 2.7151 cents higher than producing NFDM. The witness 
concluded that regardless of the process used to produce dry whey, the 
cost of dry whey production is higher than that of NFDM production and 
urged the Department to take this into consideration when setting a 
make allowance for dry whey.
    A witness appearing on behalf of O-AT-KA Milk Products Cooperative, 
Inc. (O-AT-KA) testified in support of Proposal 1. According to the 
witness, O-AT-KA is owned by three producer-owned cooperatives--Upstate 
Farms Cooperative, Inc.; Niagara Milk Cooperative, Inc.; and Dairy 
Farmers of America, Inc.--and which operates manufacturing plants that 
produce a variety of manufactured milk products. The witness stated 
that O-AT-KA plants provide a vital balancing function to maintain 
orderly marketing of milk in the Northeast order. However, the witness 
said, the current fixed make allowances do not reflect the increased 
manufacturing costs that O-AT-KA members have had to bear and as a 
result, O-AT-KA producers are not being adequately compensated for the 
service they provide to the entire market. The witness asserted that 
efforts to recoup their increased costs by

[[Page 67476]]

increasing their product prices would only result in an increase in 
their raw milk costs. Accordingly, the witness concluded that updating 
the make allowances remains the only method to provide manufacturers 
with cost relief.
    The O-AT-KA witness explained that after adjusting their 2005 
manufacturing costs to include a return on investment factor, their 
cost of producing NFDM was $0.2218 per pound ($0.0818 more than the 
current NFDM make allowance) and their cost of producing butter was 
$0.1497 per pound ($0.0347 per pound more than the current butter make 
allowance.) The witness concluded that these higher manufacturing costs 
resulted in a $1.9 million loss in revenue for O-AT-KA members in 2005. 
The witness expressed concern with O-AT-KA's ability to continue 
manufacturing milk products while continuously experiencing financial 
losses.
    The O-AT-KA witness offered support for adoption of Proposal 1 and 
the specific make allowances proposed by Agri-Mark. The witness was 
also of the opinion that the make allowances should be updated to 
include an energy adjustor to reflect the large changes in 2005 energy 
costs. The witness offered support for a monthly energy cost adjustment 
to ensure that energy price changes are reflected in make allowances.
    The O-AT-KA witness recognized that increasing make allowances 
reduces producer income but asserted that not updating the make 
allowances would result in more plant closings, increased hauling 
costs, and lower producer premiums. The witness urged the Department to 
take emergency action and omit a recommended decision.
    A post-hearing brief submitted on behalf of O-AT-KA and Upstate 
Farms Cooperative, Inc. reiterated their support for updating the make 
allowances on an emergency basis. The brief stated that the make 
allowances should be updated with data from the CDFA and RBCS 2004 
costs surveys, include an adjustment for 2005 energy costs and adjust 
make allowances by changes in energy.
    A witness appearing on behalf of Saputo Cheese USA, Inc. (Saputo) 
testified in support of Proposal 1. According to the witness, Saputo 
owns and operates 15 manufacturing plants throughout the United States 
and purchases 3 to 4 billion pounds of milk annually. The witness 
stated that the current make allowances are causing cheese 
manufacturers to operate their plants at a financial loss because of 
dramatic increases in manufacturing costs. The witness explained that 
Saputo has experienced a 96 percent increase in electricity costs, a 
125 percent increase in natural gas costs and an increase in excess of 
150 percent in packaging costs from March 31, 2000, to December 31, 
2005. The witness admitted that Saputo does not produce cheddar cheese 
but claimed that they are still unable to recoup their increased costs 
in the marketplace because of the competitive environment. The witness 
stated that manufacturing costs have increased since the 1998 cost data 
was used to establish the current make allowances. The witness urged 
the Department to take emergency action to provide manufacturers with 
some cost relief and omit issuing a recommended decision.
    A witness appearing on behalf of Glanbia Foods, Inc. (Glanbia) 
testified in support of Proposal 1. According to the witness, Glanbia 
operates three manufacturing plants in Idaho and the milk that they 
purchase is not pooled on any Federal order. The witness said that even 
though they are not Federally regulated they still pay prices for their 
milk supply that must be competitive with Federal order class prices. 
The witness said that Glanbia has experienced significant increases in 
manufacturing costs since 1999 and particularly so over the past 12-18 
months. The witness said that Glanbia's electricity costs from 1999-
2005 increased by 34 percent; 370 percent for natural gas; 111 percent 
for diesel; 44 percent for labor and 90 percent for employee health 
insurance. The witness expressed the opinion that the Department should 
act swiftly to update the make allowances.
    A witness appearing on behalf of Hilmar Cheese Company, Inc. 
(Hilmar) testified in support of Proposal 1. According to the witness, 
Hilmar operates a cheese and dry whey manufacturing plant in California 
and is currently building a cheese plant in Texas that will be 
receiving Federal marketing order priced milk. The witness stated that 
Hilmar has increased its efficiency between 1998 and 2004 but those 
gains have not fully compensated for increased manufacturing costs. The 
witness attributed increased manufacturing costs to, among other 
things, packaging--an increase of 56 percent, supplies--an increase of 
11 percent, and repairs and maintenance--an increase of 113 percent. 
The witness stressed that their cost increases from 2004 to 2005 alone 
were higher than the total increase in costs for the entire period of 
1998 to 2004. The witness was of the opinion that the make allowances 
should be updated and adjusted for higher 2005 energy costs as proposed 
and modified by Agri-Mark.
    A witness appearing on behalf of Kraft Foods (Kraft) testified in 
support of Proposal 1. According to the witness, Kraft owns and 
operates numerous manufacturing plants throughout the United States and 
also purchases dairy products as ingredients for other products. The 
witness said the long-run viability of the dairy industry depends on 
both the profitability of the dairy farm sector and the manufacturing 
sector. Current make allowances do not accurately represent current 
manufacturing costs and attempts to increase the price of finished 
products to recoup some of the increased costs have proved futile, the 
witness emphasized. The witness said that this situation hampers 
manufacturer's efforts to operate profitably. The witness explained 
that manufacturing input costs have dramatically increased since the 
1997-1999 time period when manufacturing cost data was collected to 
determine the current make allowances. Relying on Department of Energy 
and Department of Labor data, the witness claimed that from 1998 to 
October 2005, electricity prices increased 24 percent per kilowatt 
hour, natural gas prices increased 155 percent per thousand cubic feet 
and labor costs increased 32 percent per hour. The witness concluded 
that these cost increases demonstrate the higher costs manufacturers 
face in operating and the need for higher make allowances to be adopted 
on an emergency basis.
    A witness appearing on behalf of the Association of Dairy 
Cooperatives in the Northeast (ADCNE) testified in support of Proposal 
1. According to the witness, ADCNE members include Agri-Mark; Dairylea 
Cooperative, Inc.; Dairy Farmers of America, Inc.; Land O'Lakes, Inc.; 
Maryland and Virginia Milk Producers Cooperative Association, Inc.; O-
AT-KA Milk Products Cooperative, Inc.; St. Albans Cooperative Creamery, 
Inc. and Upstate Farms Cooperative, Inc. and collectively represent 
more than 65 percent of the milk pooled on the Northeast order. The 
ADCNE witness offered support for testimony given by NMPF regarding the 
need to raise make allowances. The witness was of the opinion that the 
make allowances should be updated using the CDFA and RBCS 2004 survey 
data and should contain a monthly energy cost adjustor to reflect price 
fluctuations in the energy market. Dairy Farmers of America, Inc. and 
Dairylea Cooperative, Inc. withdrew their support for increasing the 
make allowances during

[[Page 67477]]

the hearing and in their post-hearing brief.
    The ADCNE witness asserted that because the Northeast marketing 
area has the largest Class IV utilization in the Federal order system, 
marketing 2.9 billion pounds of milk in 2005, Northeast order Class IV 
plants play a vital role in balancing the market's fluid needs. In this 
regard, the witness stressed that make allowances need to be amended on 
an emergency basis to ensure that Northeast order Class IV plants are 
able to recover their processing costs and continue their important 
role in balancing the fluid needs of the marketing area.
    A post-hearing brief submitted on behalf of ADCNE reiterated their 
support for adoption of Proposal 1. The brief stated that current make 
allowances are not equitable to manufacturers because individual plant 
processing costs have significantly increased since the current make 
allowances were set using 1998 costs. The brief also argued that the 
CDFA and RBCS survey data are reliable and together represent a wide 
variety of plant sizes located throughout the United States. The ADCNE 
brief supported using the methodology proposed by NMPF as the best 
approach for updating the make allowances.
    A witness appearing on behalf of Leprino Foods Company (Leprino) 
testified in support of Proposal 1. According to the witness, Leprino 
operates nine manufacturing plants in the United States, of which 
receive milk pooled on the Federal order system. The witness said that 
the current make allowances no longer accurately reflect the 
manufacturing costs to produce cheese and urgently need to be updated. 
The witness was of the opinion that the RBCS, adjusted for return on 
investment, general and administrative costs and marketing costs, 
together with CDFA survey results should be used to update the make 
allowances.
    However, the Leprino witness believed that the RBCS results for dry 
whey costs were not accurate and should not be relied upon in setting 
the make allowance for dry whey. The witness explained that the average 
dry whey plant size in the RBCS survey was much larger than the average 
size of all U.S. dry whey plants which, because of economies of scale 
inherent in larger plants, could have caused the RBCS survey result for 
dry whey to be too low. The witness also expressed concern that some 
input costs relevant for producing dry whey were not included in the 
RBCS survey such as the cost of condensing dry whey in other plants and 
transporting the condensed dry whey to a drying facility. Had these 
factors been included, the witness speculated, the RBCS dry whey 
processing cost may have been higher. The Leprino witness supported 
adding a factor to the NFDM make allowance to set the dry whey make 
allowance and concluded that a dry whey make allowance of $0.2215 per 
pound was appropriate.
    A post-hearing brief filed on behalf of Leprino reiterated their 
support for updating the make allowances. The brief stated that the 
hearing record contains voluminous amounts of evidence to demonstrate 
that manufacturing costs have significantly increased from the base 
period of 1997-1999 relied upon to set the current make allowances. The 
Leprino brief offered specific justification to set each of the make 
allowances to: 18.1 cents per pound for cheese, 22.22 cents per pound 
for dry whey, 15.4 cents per pound for butter and 19.7 cents per pound 
for NFDM. The brief urged the Department to take emergency action.
    A dairy-farmer member of Agri-Mark whose milk is pooled on the 
Northeast order testified in support of Proposal 1. The witness 
testified that while Agri-Mark producer members do not like paying an 
assessment on their production, they recognize that their manufacturing 
plants are in need of immediate cost relief due to increased processing 
costs. The witness said that Agri-Mark members are currently incurring 
a 15-cent per cwt assessment on their milk checks in order to cover 
some of the operating losses of the cooperative. The witness noted that 
unless the make allowances are updated, the assessment could soon be 
raised to 30 cents per cwt. The witness insisted that having a strong 
dairy processing sector is important to ensure that all producers have 
a market for their milk. Therefore, the witness urged the Department to 
update the make allowances to provide some cost relief to dairy 
manufacturers.
    A witness appearing on behalf of Rich Dairy Products (RDP) 
testified in support of Proposal 1. According to the witness, RDP buys 
and sells a variety of dairy products but does not own any 
manufacturing facilities. The witness supported updating the make 
allowances to reflect cost increases that have occurred since the 
establishment of the current make allowances.
    A dairy farmer witness appearing on behalf of Select Milk Producers 
(Select), Lone Star Milk Producers (Lone Star) and Zia Milk Producers 
(Zia), testified in opposition to Proposal 1. Hereinafter, these 
entities will be referred to as ``Select, et al.'' Select, et al., are 
Capper-Volstead cooperatives who collectively market approximately 40 
percent of the milk pooled on the Southwest order. The witness stated 
that dairy farmers have also been experiencing rising costs for inputs 
such as fertilizer, fuel and electricity. To recoup these costs, the 
witness asserted that dairy farmers and their cooperatives have to 
become more efficient to lower their manufacturing costs.
    The Select, et al., witness cited consolidated hauling routes, 
building reverse osmosis plants and only shipping full tanker loads of 
milk as steps Select and other cooperatives have taken to lower their 
costs. The witness insisted that processors should seek out similar 
processing efficiencies instead of seeking to raise manufacturing 
allowances which would lower producer milk prices paid to dairy 
farmers. The witness claimed that if the blend price is reduced 25 
cents per cwt as a result of raising the make allowances, Select, et 
al. farm revenue would be reduced by $300,000 to $400,000 a year. The 
witness also added that Select has long term contracts with its buyers 
that are based on the Class III price. If the make allowances were 
raised, the witness claimed that Select producers would be unable to 
recover lost revenue.
    A dairy farmer witness appearing on behalf of Continental Dairy 
Products, Inc. (Continental) testified in opposition to Proposal 1. 
According to the witness, Continental is a dairy-farmer owned 
cooperative with 21 producers located in Indiana, Michigan and Ohio. 
The witness was opposed to increasing make allowances because it would 
result in lower prices paid to dairy farmers. The witness stressed that 
farmers have also experienced higher costs for inputs such as energy, 
fertilizer and labor, and have had to either absorb these costs by 
becoming more efficient. Like processors, the witness said that dairy 
farmers similarly have no recourse for recouping cost increases from 
the marketplace. The witness insisted that instead of reducing producer 
revenue to pay for increased make allowances, manufacturing plants 
should seek out efficiencies to lower their processing costs.
    A brief submitted on behalf of Select, et al., Continental and the 
Dairy Producers of New Mexico (DPNM) opposed the adoption of Proposal 
1. The brief stated that the DPNM is a trade association of producers 
located in New Mexico and Texas. Hereinafter, these entities will be 
referred to as ``Continental, et al.''
    The Continental, et al., brief argued that while supporters of 
Proposal 1

[[Page 67478]]

claimed that the 2004 RBCS study was an update of the 1998 study, it 
was actually a completely different study. The brief stated that the 
2004 study differed from the 1998 survey because it surveyed twice as 
many plants, was designed specifically for the purpose being used as a 
basis for changing the make allowances and contained cost information 
for a different set of commodities. The brief claimed that because the 
2004 RBCS survey is fundamentally different than the 1998 survey, 
relying on the 2004 data to update the make allowances is not 
appropriate.
    The Continental, et al., brief also noted the lack of plant 
profitability information in the RBCS survey. While the CDFA survey 
results contained information regarding the percentage of plants that 
produce at costs above or below the average cost, the brief stated that 
similar information is not available in the RBCS survey. Continental, 
et al., wrote that plant profitability should be taken into account 
when determining make allowances or, as a result, the Department could 
set make allowances at a rate that would guarantee profitability for 
some inefficient plants at the expense of producer revenue.
    The Continental, et al., brief also insisted that the make 
allowances should not be changed because no consideration was given to 
changing the yield factors contained in the Class III and Class IV 
price formulas. The brief claimed that product yields by plants 
included in the cost surveys are significantly higher than the yield 
factors contained in the current product price formulas. Continental, 
et al., was of the opinion that changing make allowances without taking 
into account product yields could result in manufacturers receiving 
higher returns and further reduce producer revenue.
    The Continental, et al., brief also opposed using an energy cost 
adjustor in the make allowances. The brief stated that adjusting make 
allowances by changes in energy costs was not a proposal noticed in the 
hearing notice. The brief also questioned the accuracy of the proposed 
method for adjustments on changes in energy costs. The brief noted that 
such adjustments would make it difficult for handlers and producers to 
minimize their price risk of monthly changing make allowances.
    The Continental, et al., brief stated that supporters for 
increasing make allowances argued that they have been unable to recoup 
their higher processing costs from the marketplace because any increase 
to the price of their finished products is captured by the NASS price 
survey which, in turn, results in higher raw milk costs. The brief 
argued that instead of changing the make allowances, proponents should 
seek to fix what Continental, et al. considers as the root of the 
problem--the NASS survey. The brief also claimed that over 75 percent 
of the cheese sold in the United States is not included in the NASS 
survey and therefore those plants can raise the price of their finished 
product prices to offset higher manufacturing costs without increasing 
the cost of raw milk.
    The Continental, et al., brief asserted that increasing the make 
allowances to any of the levels proposed could, on average, reduce the 
blend price paid to dairy farmers by 19 cents to as much as 59 cents 
per cwt. The brief stressed that this would cost dairy farmers millions 
of dollars in lost revenue and would cause many family farms to go out 
of business. Increasing the make allowances, the brief concluded, would 
not provide manufacturing plants with an incentive to become more 
efficient because they their higher costs are financed by lower prices 
paid to dairy farmers.
    The Continental, et al., brief stated that after the past few years 
of high producer prices, milk prices are declining and predicted that 
this trend would continue for the next few years. The brief asserted 
that any further decline in prices paid to dairy farmers would only 
cause market instability and requested that the proceeding be 
terminated.
    The Continental, et al., brief said that if the Department chose to 
increase the make allowances, the new make allowances should not apply 
to the minimum prices for the Southwest order because manufacturing 
plants regulated by that order are able to manufacture profitably under 
the current set of make allowances. The brief argued that producers 
pooled on the Southwest order should not have their revenue decreased 
because of inefficient plants located in other parts of the country.
    A witness appearing on behalf of the National Farmers Union (NFU) 
testified in opposition to Proposal 1. The witness said that NFU has 
over 250,000 members nationwide. The witness was of the opinion that 
increasing make allowances would essentially guarantee manufacturers a 
profit. The witness was opposed to manufacturers having a guaranteed 
profit because dairy farmers are not assured of a profitable milk price 
under the Federal milk order system. The witness testified that the 
current milk pricing system does not include dairy farmers' costs of 
production and that the adoption of Proposal 1 would only financially 
harm dairy farmers. The witness urged the Department to deny Proposal 1 
and instead, adopt make allowances that would also take into account 
dairy farmer costs of production.
    A witness appearing on behalf of Family Dairies USA (Family 
Dairies) testified in opposition to Proposal 1. According to the 
witness, Family Dairies is a Capper-Volstead cooperative located in 
Wisconsin with 3,700 dairy farmer-members. The witness testified that 
while manufacturing costs have increased, dairy farmers are similarly 
coping with increased production costs and cannot increase the price 
they receive for their milk.
    A witness appearing on behalf of Southeast Milk, Inc. (SMI) 
testified in opposition to Proposal 1. According to the witness SMI is 
a Capper-Volstead cooperative that markets milk for approximately 300 
dairy farmers located in Florida, Georgia, Alabama and Tennessee. The 
witness said that SMI sells most of its milk to Class I plants and 
insisted that if make allowances are increased, their producers' income 
will needlessly decline even though they sell little milk for 
manufacturing. According to the witness, SMI producers could 
collectively lose $6.3 million to $14 million of revenue in a single 
year if the make allowances are increased. SMI producers do receive 
over-order premiums but the witness claimed that SMI would be unable to 
recover any lost revenue through additional premiums. The witness 
insisted that the number of Southeast and Florida dairy producers has 
been declining rapidly and the remaining dairy farmers in these regions 
are already struggling to produce enough local milk just to meet fluid 
demands. The witness claimed that any reduction in the Class I price 
would only accelerate the loss of dairy farmers in these areas. The 
witness also insisted that dairy farmers who supply primarily Class I 
plants should not have their income reduced by subsidizing the 
manufacturing market by providing larger make allowances.
    A post-hearing brief submitted on behalf of SMI reiterated their 
opposition increasing make allowances. The brief asserted that the 
competitive pay price in the Upper Midwest marketing area is above the 
announced blend price and claimed that if manufacturers are able to pay 
above the blend price for their raw milk, an increase in the make 
allowances is unwarranted. The brief also asserted that dairy farmers 
located in high Class I utilization markets would bear an inequitable 
loss in revenue if make allowances are increased.

[[Page 67479]]

    A witness appearing on behalf of Dairy Farmers of America (DFA) and 
Dairylea Cooperative (DLC) testified in opposition to Proposal 1. The 
DFA/DLC witness stated that if the Department found it appropriate to 
update the make allowances, that an energy cost adjuster should be 
included to ensure that as energy prices change, that make allowance 
formula would also change.
    A post-hearing brief submitted on behalf of DFA/DLC supported 
updating the make allowances contingent that any changes apply only to 
the Class III and Class IV price formulas. The brief argued that unlike 
Class III and Class IV processors, manufacturers of Class I and Class 
II products have the ability to recoup higher processing costs from the 
marketplace. The brief stated that if higher make allowances are used 
in setting Class I and Class II, then prices processors of those 
products will receive a financial windfall for costs that they do not 
incur. The brief stressed that this would cause extreme financial harm 
to dairy farmers nationwide.
    A witness appearing on behalf of the Progressive Agriculture 
Organization, Faithopity Farms, Farm Wives United, Tioga Valley Milk 
Cooperative, Family Farm Defenders, American Raw Milk Producers 
Association, Pennsylvania Farmers Union, National Family Farm Coalition 
and the South Auburn Grange testified in opposition to raising make 
allowances. The witness testified that dairy farmer income should not 
be reduced to cover higher process costs of manufacturers of Class III 
and Class IV products. The witness stressed that dairy farmers have 
also experienced higher production costs and that dairy farmers cannot 
raise their price as a means to offset higher costs.
    An independent dairy farmer witness appearing on behalf of the 
Progressive Agriculture Organization, Pennsylvania Farmers Union and 
the National Family Farm Coalition Dairy subcommittee, testified in 
opposition to Proposal 1. The witness was opposed to raising make 
allowances because it will result in lower dairy farmer income. The 
witness also emphasized that dairy farmers cannot raise their milk 
price when their costs of production increase. The witness stressed 
that instead of decreasing farmer income, manufacturers should strive 
to recoup their costs through the marketplace or by becoming more 
efficient.
    An independent dairy farmer witness, whose milk is pooled on the 
Northeast order, testified in opposition to increasing make allowances. 
The witness stated that their farm is burdened with higher production 
costs and that any reduction in the blend price they receive would 
injure their farming operation. According to the witness, if higher 
make allowances are adopted, their farm income would be reduced 
approximately $3,000 to $5,500 per year. The witness was of the opinion 
that manufacturers should recover their increased costs from the 
marketplace and not by reducing the income of dairy farmers who have no 
milk order provisions by which to recover higher costs.
    A second independent dairy farmer whose milk is pooled on the 
Northeast order testified in opposition to increasing make allowances. 
The witness was of the opinion that dairy manufacturers should recoup 
their processing costs from the marketplace or become more efficient to 
lower their production costs. The witness said that dairy farmers have 
also faced higher production costs for items such as fuel and health 
insurance. The witness said that dairy farmers do not have the ability 
to pass their higher costs on to their customers. The witness estimated 
that if higher make allowances are adopted, their farm income would be 
reduced to between $7,500 and $13,000 per year.
    A dairy farmer from Tennessee whose milk is pooled on the Southeast 
order testified in opposition to increasing make allowances. The 
witness was opposed to increasing the make allowances because it will 
lower producer revenue. The witness said that the Southeast marketing 
area has declining dairy farm numbers and any decrease in the revenue 
they receive would only serve to accelerate the decline.
    A post-hearing brief submitted on behalf of the Kentucky Dairy 
Development Council (KDDC) expressed opposition to increasing the make 
allowances. According to the brief, KDDC represents approximately 300 
dairy farmers located in the State of Kentucky. The brief claimed that 
if the make allowances are adopted at levels proposed by Agri-Mark, 
Kentucky dairy farmers would lose an estimated $426,000 to $1.28 
million a month. The brief stated that Kentucky milk production has 
been declining and any decrease in producer revenue would only hasten 
that decline.
    b. The following summary of testimony and post-hearing briefs 
pertains to the second session of the public hearing held September 14-
15, 2006, in Strongsville, Ohio.
    A professor from Cornell University testified regarding a research 
study conducted by the Cornell Program on Dairy Markets and Policy 
(CPDMP), to assess the cost of processing cheddar cheese, dry whey, 
butter and nonfat dry milk. The witness did not testify in support of 
or in opposition to any proposal presented at the hearing. The witness 
offered a working paper of the CPDMP study that explained the 
methodology and results.
    The CPDMP witness explained that the number of plants surveyed in 
the study were drawn from the AMS list of Dairy Plants Surveyed and 
Approved for Grading and a separate plant list maintained by CPDMP. The 
witness explained that plants eligible to participate in the survey 
were selected on the basis that they had to produce one of the four 
commodity products (cheddar cheese, dry whey, NFDM or butter) but the 
plant also had to produce their product(s) in one or more of the 
package sizes surveyed by NASS. The witness said that each plant 
surveyed was asked to provide cost data for a recent 12-month period 
including fiscal year data. The witness explained that the plants 
participating in the cost survey were geographically dispersed 
throughout the country, though none were located in the State of 
California.
    The CPDMP witness testified that a sample of cheese plants was 
selected by size and represented both cooperatively owned and 
proprietary plants. Five plants were randomly selected from the largest 
ten percent of cheese plants by volume and all five plants opted to 
participate in the study, the witness said. The witness explained other 
cheese plants were selected randomly; however, only 11 of these cheese 
plants had submitted complete cost data. The other four plants had 
either submitted incomplete cost data or had problems with their data 
and therefore were not included in the study. The witness emphasized 
that the sample of cheese plants purposely over-represented large sized 
plants. The witness explained that large plants would have been 
underrepresented on a cost basis if the survey had relied on a purely 
random draw of cheese plants.
    A total of 12 dry whey plants surveyed were a subset of the cheese 
plant sample and were all proprietary plants, said the witness. 
According to the witness, 8 NFDM plants and 10 butter plants were 
selected by a non-stratified random draw of the population. While all 8 
of the NFDM plants selected opted to participate in the study, only 4 
butter plants selected opted to participate, noted the witness.
    The CPDMP witness described the cost accounting methodology used in 
the CPDMP study as very similar to the methodology used by CDFA's study 
of manufacturing costs. There are differences, the witness noted, in 
that

[[Page 67480]]

CPDMP did not have the authority to audit data collected from the 
plants, that CPDMP did not calculate a current value of assets from 
schedules of economic depreciation, and that the sample of plants used 
in the CPDMP study was a less than the total number of plants. The 
witness added that the manufacturing costs contained in the CPDMP study 
contain a ROI allowance, but do not include marketing costs. The 
witness noted that the ROI factor used in the CPDMP study differs from 
that in the CDFA study. According to the witness, the CDFA data used 
detailed accounting records and depreciation schedules for plant and 
equipment while the CPDMP study relied on plant estimates of fair 
market value for plant and equipment.
    The witness concluded that the cost of processing, given in cost 
per pound of product, for the sample of plants in the CPDMP study was 
as follows:

----------------------------------------------------------------------------------------------------------------
                                                      Cheese         Dry whey          NFDM           Butter
----------------------------------------------------------------------------------------------------------------
Simple Average..................................         $0.2065         $0.2282         $0.1484         $0.1492
Weighted Average................................          0.1638          0.1941          0.1423          0.1108
----------------------------------------------------------------------------------------------------------------

    The CPDMP witness noted that the study, as well as previous cost of 
processing studies conducted by CPDMP, indicated that economies of 
scale are evident across all dairy manufacturing plant types.
    The CPDMP witness explained that the 16 cheese plants participating 
in the study enabled CPDMP to perform a nonlinear regression in a study 
addendum to make inferences of the cost of processing cheese for the 
entire survey population of 53 cheese plants. According to the witness, 
the CPDMP study estimates that the weighted average cost of processing 
cheese for the 53 cheese plants is $0.2028 per pound. The witness 
estimated that if the cheese make allowance was set at this level, 82 
percent of the volume of cheddar cheese made in the country and 33 
percent of the cheese plants in the country would be able to cover 
their processing costs. The witness explained that the weighted average 
costs of processing for dry whey, NFDM and butter could not be made 
because of the small number of plants and not knowing the volume of 
production.
    The CPDMP witness further explained that the nonlinear regression 
used the manufacturing cost data submitted by the 16 cheese plants to 
generate a cost curve and cost equation for the 53 plants that comprise 
the number of cheese plants for the study. According to the witness, 
the derived cost equation suggests that a plant producing an amount of 
cheese approaching an infinite number of pounds per year would have an 
estimated manufacturing cost per pound approaching $0.170028 which 
represents the lowest calculated cost per pound of cheese produced. On 
the other hand, a plant producing approximately 683,000 pounds of 
cheese per year would have a manufacturing cost per pound approaching 
$1.170028 and represents the highest calculated cost per pound of 
cheese produced. The witness reported that, based on the regression 
analysis, 87 percent of the variability observed in the cost of making 
cheese can be explained by the volume of cheese production.
    The CPDMP witness also testified from another study addendum that 
during the time period that manufacturing plants offered cost data, the 
cost of energy had increased significantly. The witness attempted to 
index the cost of energy using Producer Price Indexes for natural gas 
and industrial electric from the Bureau of Labor Statistics and from 
this adjust manufacturing cost information to capture energy cost 
increases. According to the witness, to index the costs of processing 
to 2005 energy costs, the following amounts would need to be added to 
the make allowances--$0.0034 for cheese, $0.0070 for NFDM, $0.0076 for 
dry whey and $0.0029 for butter.
    A dairy farmer appearing on behalf of Select, et al., testified in 
opposition to changing the make allowances. According to the witness, 
Continental Milk Producers, Inc. and Dairy Producers of New Mexico 
endorsed the CPDMP witness's testimony. The witness asserted that the 
weighted average costs contained in the CPDMP study were very similar 
(with the exception of dry whey) to the make allowances used in the 
current Class III and Class IV product price formulas. From this, the 
witness concluded that the current make allowances for cheese, NFDM and 
butter should not be increased. In the witness's opinion, if the 
Department chooses to change the dry whey make allowance, it should be 
based on the NFDM make allowance plus an energy cost adjustment to 
account for the additional energy needed to produce dry whey.
    The Select, et al., witness testified that there are four cheese 
plants located in the Southwest region of the country and asserted that 
all but one of those plants are able to operate profitably under the 
current make allowances. The witness testified that the cheese plants 
in the Southwest have taken many steps to lower their manufacturing 
costs. The witness was of the opinion that other cheese plants need to 
also take steps to improve their efficiency instead of seeking to 
increase the make allowances to cover their costs. The witness asserted 
that some producers in the Southwest region are receiving $1.50 below 
the Class III price for their milk because of the abundant supply of 
milk in the region and the higher cost of transporting milk to market. 
The witness estimated that if make allowances were increased such that 
the blend price to farmers was lowered by $0.50 per cwt, dairy farmers 
in the Southwest region would lose between $3 to $5 million dollars per 
month.
    A post-hearing brief submitted on behalf of Select, et al., 
reiterated their opposition to increasing make allowances and appealed 
to terminate the proceeding. Select, et al., was of the opinion that 
the CPDMP study is the only valid data that the Department should 
consider in whether or not make allowances should be changed. They 
asserted that the CPDMP study weighted average make allowances are so 
similar to the current make allowances that making any changes would be 
unjustified. If the Department determines that make allowances should 
be changed, Select, et al., proposed using the CPDMP study weighted 
average costs for butter, NFDM and cheese, but that the NFDM make 
allowance for dry whey be adjusted for additional energy costs. They 
also opposed the inclusion of an energy adjustor or the consideration 
of plant balancing costs in setting new make allowances.
    Select, et al., wrote that the adjusted NFDM weighted average of 
$0.1423 offered by the CPDMP witness is not reliable because all of the 
CDMP study data was not audited. Select, et al., also elaborated that 
the CPDMP weighted average cost for dry whey is not reliable because of 
the small number of plants represented in the study and because most 
industry participants testified that the dry whey make allowance should 
be set at the NFDM make allowance plus an adjustment for additional 
energy costs. Additionally, the brief argued that

[[Page 67481]]

the CPDMP cost estimate derived for the 53 cheese plants should not be 
used because the estimates for butter, NFDM and dry whey could not also 
be derived. Select, et al., wrote that the data used to derive the 
cheese manufacturing cost estimate is not current because it does not 
contain 2 new large cheese plants in the southwest region that produce 
in excess of 10 percent of the cheese volume represented by the total 
53 cheese plants of the study.
    Select, et al., also argued that the Department should not make any 
changes to the make allowances without first considering changes to the 
other parts of the price formulas, specifically factors for shrinkage 
and product yields.
    The Select, et al., brief characterized the underlying problem 
facing manufacturers is the ``circularity'' of price changes that are 
reflected in the NASS price survey. If manufacturers are able to 
recover their higher cost from the marketplace by increasing the price 
of the product, the NASS survey, in turn, reflects these higher prices 
and the formula, in turn, will result in a higher value for raw milk. 
They were of the opinion that if the circularity problem is addressed 
by the Department, manufacturers will be able to recoup their 
additional costs in the marketplace thus negating any need for raising 
the make allowances and lowering producer revenue.
    The Select, et al., brief claimed that the cheese manufacturers 
seeking higher make allowances account for less than 20 percent of the 
producer milk pooled on the Federal Order system. The brief also stated 
that there is no evidence to establish a measure of efficiency for 
these manufacturers or if there are other factors affecting or inherent 
in their businesses which cause them to be unable to produce cheese at 
or below the current make allowance. The brief also stressed that 
although cheese manufacturers say they are unable to produce cheese at 
the current make allowances, one can not simultaneously conclude if a 
plant is not profitable because the hearing record has no data 
regarding product selling prices.
    A witness appearing on behalf of NMPF testified in support of 
increasing the make allowances and incorporating a monthly energy cost 
adjustor. The NMPF witness reiterated testimony given at the first 
public hearing regarding that the volatility of energy costs make an 
energy adjustor necessary to ensure that energy cost swings are 
reflected in the make allowances. The witness stated that energy costs 
have fallen since January 2006 and surmised that if new fixed make 
allowances had been implemented in late 2005, they would now be too 
high manufacturing costs have decreased due to lower energy prices. The 
witness warned that if the Department recommends a change in the make 
allowances without containing a monthly energy cost adjustor, the new 
make allowances could become outdated before they are implemented.
    A post-hearing brief submitted on behalf of NMPF reiterated their 
proposal for the inclusion of a monthly energy cost adjustor in the 
updated make allowances. NMPF wrote that the inclusion of a monthly 
energy cost adjustor would be the only way to ensure that make 
allowances do not quickly become outdated due to fluctuating energy 
costs.
    The Secretary of Agriculture for the Commonwealth of Pennsylvania 
(Secretary) testified in opposition to increasing the make allowances. 
The Secretary claimed that within the past 10 years Pennsylvania has 
lost over 2,000 dairy farms and 75,000 dairy cows because of low milk 
prices. The Secretary was of the opinion that any change in the make 
allowances that would result in a lower milk price would hurt dairy 
farmers in Pennsylvania and would further cause a decline in the number 
of dairy farmers and cows.
    An associate professor from Penn State University (PSU) testified 
regarding a study conducted by the witness to estimate the impacts of 
changing make allowances on class prices, blend prices, and 2006 and 
2007 Federal order pool values. The witness did not testify either in 
support of or in opposition to any proposal at the hearing and did not 
testify as a representative of PSU. The witness explained the study 
relied on the manufacturing cost estimates of the CPDMP study to 
analyze six different make allowance scenarios. According to the 
witness, the weighted average make allowances contained in the CPDMP 
study were very similar to the make allowances used in the current 
Class III and Class IV product price formulas with the exception of dry 
whey.
    The witness testified that of the six different make allowance 
scenarios analyzed in the witness' study only the scenario relying on 
the weighted average manufacturing cost of the low cost plants from the 
CPDMP study resulted in higher estimated uniform prices to producers. 
The remaining five scenarios resulted in lower estimated uniform 
prices, ranging from $1.26 per cwt lower (using the weighted average 
manufacturing costs of the high cost plants in the CPDMP study) to 
$0.02 per cwt lower using weighted average manufacturing costs of all 
plants in the CPDMP study for butter, cheese, NFDM, and the dry whey 
weighted average manufacturing costs plus $0.0256.
    The witness was of the opinion that the current make allowances 
adequately cover manufacturing costs and allow processors to expand 
their plant capacities and production levels. The witness added that 
with current low prices, any increase in make allowances would 
financially harm dairy farmers.
    A post-hearing brief submitted on behalf of NCI supported using the 
CPDMP study as a basis for calculating new make allowances. NCI was of 
the opinion that the CPDMP study is the only publicly available data 
that accurately represents costs of processing for manufacturing plants 
located outside California. NCI wrote that a marketing cost factor of 
$0.0015 per pound and an adjustment for the higher energy cost observed 
in 2005 should be included in any new make allowances proposed by the 
Department.
    NCI was also of the opinion that the cheese manufacturing cost 
estimate of $0.2028 per pound for all 53 cheese plants should be used 
as the basis for determining the cheese make allowance. NCI asserted 
that the stratified cheese plant sample used in the CPDMP survey was 
weighted heavily towards large, low cost plants and as a result the 
weighted average manufacturing cost is not representative of the cost 
of making cheese throughout the country. Because CPDMP was unable to 
derive manufacturing cost estimates for butter, NDFM and dry whey, as 
CPDMP had for cheese, NCI wrote that relying on the manufacturing costs 
of the surveyed plants weighted average of those products as a basis 
for new make allowances. The NCI brief offered that make allowances be 
set no lower than the following: cheese--$0.2077 per pound, dry whey--
$0.2032 per pound, butter--$0.1152 per pound and NFDM--$0.1508 per 
pound.
    Post-hearing briefs submitted separately by Lactalis, Kraft, 
Grande, Saputo and Glanbia also supported the use of the CPDMP study as 
the basis for setting new make allowances. Each company expressed the 
opinion that any make allowances proposed by the Department should 
include a marketing cost factor of $0.0015 per pound and be adjusted 
for 2005 energy costs. They argued that the manufacturing cost estimate 
for the 53 cheese plants should be used as the basis for determining a 
new cheese make allowance because it accounts for the entire population 
of cheese plants and not solely the surveyed plants that are weighted 
towards large, low cost plants.

[[Page 67482]]

According to their briefs, the lack of plant data for butter, NFDM and 
dry whey, each of the companies supported the use of the CPDMP surveyed 
plant's weighted average manufacturing costs as the starting point for 
determining make allowances.
    A post-hearing brief submitted on behalf of Leprino supported the 
use of the CPDMP study in determining make allowances for cheese and 
dry whey. Leprino was of the opinion that the CPDMP study accurately 
reflects the cheese manufacturing costs of both proprietary and 
cooperative-owned plants. Beginning with the CPDMP cheese manufacturing 
cost estimate of $0.2028 per pound, adding a $0.0034 per pound to 
adjust for 2005 energy costs, and a $0.0015 marking cost factor, 
Leprino proposed that the cheese make allowance be set no lower than 
$0.2077 per pound. Leprino was of the opinion that the CPDMP cheese 
sample-weighted average manufacturing cost should not be used because 
it over-represents large, low-cost cheese manufacturing plants.
    Leprino was of the opinion that the dry whey make allowance should 
be set no lower than $0.2032 per pound. Leprino computed this make 
allowance by starting with the CPDMP dry whey sample weighted average 
cost of $0.1941 per pound, adding a $0.0076 to adjust for 2005 energy 
costs and a $0.0015 marketing cost factor. Leprino further argued that 
the CPDMP dry whey weighted average manufacturing cost is most likely 
skewed in over representing large, low-cost plants because the dry whey 
plants surveyed is a subset of the cheese plant survey which is skewed 
towards large low-cost plants. Leprino asserted that the Department 
would be justified in setting the dry whey make allowance higher than 
$0.2032 per pound because the CPDMP study does not provide dry whey 
cost estimates for all dry whey plants.
    A post-hearing brief submitted on behalf of Agri-Mark, et al., 
offered varying combinations of the CDFA, RBCS and CPCMP study results 
to determine new make allowances. They emphasized that make allowances 
should be set at a level that would cover manufacturing costs for most 
plants. They are was of the opinion that the Department should consider 
the strengths and weaknesses of each manufacturing cost survey to 
determine what information should be relied upon in establishing new 
make allowances. They wrote that any new make allowances should be 
updated to reflect higher 2005 energy costs and that an adjustment 
factor of $0.0015 per pound be added to reflect marketing costs.
    Although the CPDMP cheese plant survey is weighted heavily towards 
large, low-cost plants, Agri-Mark, et al., wrote that this information 
can be relied upon to make inferences about all cheese plants and is 
the best data available. By relying on the CPDMP survey of the average 
annual plant volume by region, and the manufacturing cost equation 
generated to determine manufacturing costs of all plants, Agri-Mark, et 
al., inferred that the average manufacturing cost per pound of cheese 
in various regions of the country should be varied and be as follows: 
Eastern--$0.2920, Upper Midwest--$0.2100 and Western--$0.1860. 
According to their brief, it was concluded that if the CPDMP surveyed 
plant's average manufacturing cost for cheese of $0.1638 is adopted, 
all average cost and higher than average cost plants in these regions 
would not be able to recover their manufacturing costs. The brief 
expressed the opinion that the manufacturing cost estimate for all 
cheese plants should be a starting point for updating the cheese make 
allowance. After incorporating a $0.0015 marketing cost factor and 
adjusting for 2005 energy costs, Agri-mark, et al., offered that the 
cheese make allowance be set no lower than $0.2077 per pound.
    Agri-mark, et al., was of the opinion that because the CPDMP dry 
whey plants surveyed are a subset of the cheese plants surveyed, it 
would be appropriate to use the CPDMP sample average dry whey 
manufacturing cost of surveyed plants as a starting point for setting a 
new dry whey make allowance because as with the cheese plants surveyed, 
the dry whey plant surveys are also heavily weighted toward large, low-
cost plants. The brief claimed that many small cheese plants incur 
transportation and loading costs for delivering dry whey to other 
plants for processing. The brief estimated this cost at $0.0249 per 
pound and that it be included in the manufacturing cost of producing 
dry whey. Including an adjustment factor to reflect higher energy 
costs, the brief offered that a new dry whey make allowance be set no 
lower than $0.2281 per pound.
    The Agri-Mark, et al., brief said that using the CPDMP study for 
determining a butter make allowance would not be appropriate because 
the sample of the 4 plants surveyed only represent approximately 13 
percent of the butter volume surveyed by NASS. They wrote also that the 
surveyed butter plants manufacturing costs are skewed because the 4 
plants surveyed account for 75 percent of California's butter 
production. Instead, the brief offered using the weighted average 
manufacturing costs of the RBCS and CDFA study (after adjusting for 
inclusions of a marketing cost factor and a ROI factor to the RBCS 
study). After adjusting for higher 2005 energy costs, the brief offered 
that the butter make allowance be set no lower than $0.1554 per pound.
    The Agri-Mark, et al., brief also argued that the CPDMP study 
should not be relied upon for determining a new NFDM make allowance 
because it also over-represents large, low-cost plants. The brief 
explained that because NFDM is a byproduct of the butter making 
process, the same method for computing the butter make allowance also 
should be applied in determining a make allowance for NFDM. 
Specifically, the brief offered that the CDFA medium-cost NFDM sub-
group should be weighted with the RBCS NFDM weighted average 
manufacturing cost. After including an adjustment for higher 2005 
energy costs and a marketing cost factor, the brief offered that the 
NFDM make allowance be set no lower than $0.1848 per pound.
    The Agri-Mark, et al., brief maintained that lower producer prices 
resulting from higher make allowances should not be a factor in 
determining new make allowance levels. The brief expressed the opinion 
that if processing plants continue to close because they are unable to 
recoup their manufacturing costs, plants will cease operations and that 
lost market revenues would far outweigh producer revenue losses due to 
higher make allowances. In this regard, the brief stressed that the 
purpose of the Federal milk orders are to set minimum milk prices and 
other government programs such as the Price Support Program and the 
Milk Income Loss Program are designed to protect producer prices.
    A brief submitted on behalf of O-AT-KA and Upstate Farms 
Cooperative, Inc. (O-AT-KA, et al.) expressed support for the brief 
submitted by Agri-Mark for the reconvened hearing. O-AT-KA, et al., was 
of the opinion that the CPDMP plants surveyed for butter and NFDM is 
too small and biased toward large, low-cost plants and do not 
accurately reflect the manufacturing costs of plants not surveyed 
throughout the country. The brief maintains that because not all 
surveyed plants had been given the opportunity to review their 
submitted data that cost errors, similar to those found by a NFDM plant 
that did review their submitted costs, could be contained in the study.
    A post-hearing brief submitted on behalf of MMPA opposed the use of 
the CPDMP study in calculating new make allowances. MMPA was of the 
opinion

[[Page 67483]]

that some of the surveyed plants had difficulty accurately completing 
the survey because it was administered electronically and not by 
submission of cost information on paper. Therefore, MMPA offered that 
the study results may not accurately reflect current manufacturing 
costs. The brief said that new make allowances should be calculated 
relying on the RBCS and CDFA surveys and supported the specific make 
allowances offered by Agri-Mark. The brief expressed continued support 
to include a monthly energy cost adjustor as proposed by NMPF.
    A post-hearing brief submitted on behalf of DFA proposed that only 
minimal adjustments be made to increase the current make allowances 
because of the impact higher make allowances have on reducing producer 
revenue. DFA wrote that because only a portion of manufactured dairy 
products are surveyed by NASS, those other plants producing products 
not surveyed by NASS have the ability to pass on higher processing 
costs to their customers. Their brief indicated support for a monthly 
energy cost adjustor.
    A post-hearing brief submitted on behalf of Dairylea argued that 
instead of increasing make allowances, the Department should hold a 
hearing to address the price circularity issue inherent in the NASS 
price survey. In relating production cost increases for dairy farmers, 
Dairylea wrote that farm input costs are higher, but dairy farmers are 
not able to receive regulatory relief similar to what processors are 
seeking through higher make allowances. Dairylea estimated that the 
average cost of producing milk has increased by at least $1.00 per cwt 
since 2002 and 2003 and that during the middle of 2006 prices to dairy 
farmers declined approximately $2.00 per cwt.
    Dairylea was of the opinion that the Federal milk order system was 
created to improve milk prices to farmers and to protect the viability 
of dairy farms. Dairylea argued that the law providing for milk orders 
does not support the lowering of blend prices to producers by the use 
of higher make allowances without simultaneously considering higher 
farm input costs borne by dairy farmers. Dairylea also was of the 
opinion that Class I and II prices should not be lowered due to higher 
make allowances for the Class III and Class IV product pricing 
formulas.
    If the Department concludes that make allowances should be 
increased, Dairylea proposed that an increase should be reduced by 52 
percent (to be reflective of the 2005 Federal order system average 
Class I and Class II utilization); and an emergency hearing be held to 
consider if Class I and Class II prices should not change resulting 
from changes to the make allowances. Only after such implementation 
preventing changes to Class I and Class II prices, the new make 
allowances should be restored to 100 percent of recommended increases.
    A post-hearing brief submitted on behalf of Family Dairies opposed 
increasing all current make allowances. They contended that dairy 
farmers also have higher production costs but do not have the ability 
to appeal to the Government for regulatory relief. They asserted that 
if make allowances are increased, dairy farmer income will be reduced 
by $300 million in the first year. They also noted while manufacturers 
claim they have incurred extremely high energy costs, the cost of 
natural gas has declined significantly from its high in 2005.

Discussion and Findings

Discussion
    At issue in this proceeding is whether the make allowance factors 
of the product price formulas used in setting Class III and Class IV 
milk prices should be changed and how they should be changed. In the 
context of this proceeding, make allowances reflect the cost that 
manufacturers incur in processing raw milk into cheese, butter, NFDM 
and dry whey. The Class III and Class IV milk prices are also used to 
compute component prices for butterfat, protein, nonfat solids, and 
other solids.\4\
---------------------------------------------------------------------------

    \4\ Other solids are defined as nonfat solids less protein.
---------------------------------------------------------------------------

    As proposed by Agri-Mark, et al., revised make allowances would 
rely on the recent 2004 CDFA survey and the 2004 RBCS survey. The 
revised make allowances would be established by using the same 
methodology (a weighted average of the RBCS and CDFA manufacturing 
costs) used in establishing current make allowances (67 FR 67906, 
published November 7, 2002, and Final Rule, 68 FR 7063, published 
February 12, 2003). Agri-Mark, et al., contended that by substituting 
the original cost data with the most current data available from the 
2004 RBCS and CDFA surveys, make allowances would reflect cost 
increases that manufacturers incur but cannot recover from the 
marketplace. Additionally, Agri-Mark, et al., proposed that a make 
allowance for dry whey would be based on the cost of manufacturing 
NFDM.
    The Agri-Mark, et al., proposal was modified by NMPF to adjust 
Class III and Class IV pricing formulas by including a monthly energy 
adjustment based on monthly changes in the prices of industrial 
electricity and industrial natural gas. The monthly energy adjustments 
would be calculated as percentage changes in current month prices for 
industrial electricity and natural gas components from the 2004 
Producer Price Index (PPI) for natural gas and electricity. The PPIs 
for natural gas and electricity items are published monthly by the U.S. 
Department of Labor's Bureau of Labor Statistics (www.bls.gov.) A 
separate modification offered by Agri-Mark, et al., would similarly 
account for changes in electricity and natural gas prices but do so on 
an annual basis. While the issues concerning how volatile input costs 
should be handled in the product price formulas have been raised in 
these modifications, the scope of this proceeding is limited to 
considering updating the costs associated with make allowances. In this 
regard, the broader consideration of using indices in accounting for 
energy price fluctuations would be more appropriately considered as 
part of a separate rulemaking to consider all aspects of the Class III 
and Class IV product price formulas.
    Opponents to increasing make allowances include independent dairy 
farmers from the Northeast and Appalachian marketing areas, and 
cooperatives representing a significant volume of the milk marketed via 
Federal orders--DFA, Dairylea, SMI, Family Dairies, Select, 
Continental, Lone Star, and Zia. These cooperatives view increasing 
make allowances as a benefit for regulated handlers at the expense of 
dairy farmers and assert that there is no industry consensus to support 
increasing make allowances. It is notable that DFA is an owner and 
operator of manufacturing plants that produce cheese, dry whey, and 
NFDM. Select, a cooperative that is a part owner and supplier of two 
major cheese plants in the southwestern U.S., testified that their 
plants do not require increased make allowances to operate 
successfully. DFA, Dairylea, and SMI, also opposed increasing make 
allowances because doing so would result in lower Class I and Class II 
prices and lower dairy farmer income.
    Independent dairy farmers who pool their milk on the Northeast and 
Appalachian orders oppose increasing make allowances under any 
circumstances. These dairy farmers who testified are of the opinion 
that increasing make allowances will lower milk prices received by 
dairy farmers who also are experiencing similar increases in their 
operating costs for

[[Page 67484]]

energy and other inputs. SMI similarly argues that dairy farmers who 
supply the high Class I utilization markets of the Southeast and 
Florida milk marketing areas will needlessly suffer reduced income. 
They argue that Class III and Class IV milk costs are essentially 
unrelated to their businesses as suppliers of milk for fluid uses.
    Continental and Select oppose increasing make allowances without 
also considering potential changes in yield factors for cheese, NFDM, 
and dry whey that are an important part of the Class III and Class IV 
product pricing formulas. They argue that failure to simultaneously 
consider higher yields and productivity changes would essentially be 
the same as overstating manufacturing costs and would result in a 
financial windfall for the most efficient manufacturing plants. They 
also argue that if manufacturers are able to pay premiums for producer 
milk, then existing make allowances should be considered adequate in 
accounting for all manufacturing costs. This argument is countered by 
proponents who note that paying premiums is necessary to compete with 
Class I handlers for a milk supply. Proponents argue that paying such 
premiums requires make allowances be increased to recover these 
additional milk costs.
    The argument that higher yield factors will offset lower Class III 
and Class IV milk prices and producer blend prices resulting from 
increased make allowances may be important. However, this proceeding 
was limited to make allowance factors only and as a result the record 
evidence on yield factors is limited. Consequently, yield factors may 
need to be addressed in the broader, more inclusive Class III and Class 
IV product price formula proceeding. Likewise, consideration of farm-
to-plant loss as a component of the product price formulas may need to 
be considered but only in a separate proceeding of broader scope that 
considers the Class III and Class IV price formulas in their entirety. 
Most importantly, the scope of this proceeding has been limited to 
consideration of the cost elements comprising make allowances.
    Three manufacturing cost surveys were considered in this proceeding 
to determine if make allowances for cheese, dry whey, nonfat dry milk, 
and butter should be changed and by what amounts. The CDFA 2004 
manufacturing cost survey collects and reports the costs of producing 
these commodities for nearly all plants located in California. The RBCS 
survey of dairy manufacturing costs collects and reports a summary of 
the plant costs for certain plants of participating cooperatives 
located in areas regulated by the Federal milk order program. The CPDMP 
manufacturing cost study examines the processing costs of plants 
selectively sampled to be reflective of costs for plants of various 
sizes that are located in areas regulated by Federal milk marketing 
orders (FMMOs.)
    The CDFA and RBCS surveys have been conducted for more than 20 
years. The RBCS survey was designed and implemented to allow 
participating cooperatives to compare their operating costs to an 
average cost basis. It does not provide a comprehensive view of 
manufacturing costs across plants in the Federal order system nor 
exclusively relied upon to establish manufacturing allowances. The RBCS 
survey was used in combination with the CDFA cost survey results to 
establish current make allowances because at the time, no other cost 
information was available from which to assess manufacturing costs for 
FMMO plants.
    The CPDMP study is based on a voluntary structured survey of 
participating manufacturing plants selected to represent a cross 
sectional view of manufacturing costs for cheese, dry whey, butter, and 
NFDM outside of California. The CPDMP study is a first time survey and 
study of plant manufacturing costs designed to be relied upon in 
establishing make allowances.
    The CDFA survey collects and reports plant manufacturing costs from 
audited financial records provided voluntarily to establish aggregated 
costs by commodity type for plants located in California. This survey 
is a continuation of annual surveys whose purpose and design includes 
setting of manufacturing allowances by the State of California for 
their manufactured dairy products. The CDFA methodology is 
comprehensive, representing manufacturing cost data for almost all 
plants located in California and organizing that data into the well-
defined categories that include high and low (and in some cases medium) 
cost plants. Total plant manufacturing cost categories include: 
processing labor costs, processing non-labor costs, packaging costs, 
other ingredient costs, general and administrative costs, and a return 
on investment (ROI) cost element. It includes data for both 
cooperative-owned and proprietary plants.
    A total cost for each industry category (e.g., cheese) in the CDFA 
survey is reported as a weighted average for each of these cost 
elements by high or low (and medium for NFDM) cost plant sizes and a 
total weighted average for all plants. Where the collection and 
reporting of plant manufacturing costs for CDFA are in commodity 
categories for which five or fewer plants are surveyed, separate 
defined high and low cost plant calculations are omitted with only a 
weighted average manufacturing cost reported. This was the case for dry 
whey in the January 12, 2006, CDFA publication of costs and make 
allowances that are based on 2004 cost survey data. Because the CDFA 
survey comprehensively reports manufacturing costs for nearly all 
plants located in California producing the four commodities, there is 
no need to estimate costs of all plants from the cost data of surveyed 
plants.
    The CDFA data specifically establishes that economies of scale are 
evident for California processing plants for all four commodity types. 
The data demonstrate that plant size is a major determinant of plant 
costs, with larger plants having significantly lower per unit costs of 
processing than smaller plants. A major difference between the RBCS 
survey and both the CDFA survey and the CPDMP study is that the RBCS 
survey does not demonstrate that larger plants have lower per unit 
costs when compared with smaller plants.
    Demonstrable economies of scale as shown in the CDFA survey for 
California manufacturing plants and by the CPDMP study for 
manufacturing plants located outside of California meet the 
expectations of economic theory and provide evidence that the CDFA and 
CPDMP survey results are reasonable and comparable. The fact that the 
RBCS survey does not reveal plant size as an important determinant of 
processing costs supports concluding that the RBCS survey does not 
reasonably reflect costs across the four commodity plant types for 
plants located outside California. This also provides a basis to 
conclude that the RBCS survey costs are not comparable to costs 
measured and reported by the CDFA survey and CPDMP study. In addition, 
the RBCS survey costs do not conform to reasonable expectations of 
economic theory that predicts declining average costs where production 
volume increases directly with plant size.
    The CDFA plant cost data, considered in isolation, have somewhat 
limited utility for considering manufacturing costs for plants located 
in all FMMO areas because all of the plants are located in California. 
This comprehensive collection and reporting of manufacturing costs 
includes costs experienced by plants in California for processing non-
labor, processing labor, and packaging categories that do not 
necessarily reflect costs experienced by manufacturing plants located 
beyond

[[Page 67485]]

California. Because of the comprehensiveness of CDFA's coverage and 
California's importance to national dairy markets and dairy product 
manufacturing, the CDFA survey of plant manufacturing costs provides an 
important reference for considering and calibrating the costs of 
similarly-sized and operated plants located outside of California. For 
example, record evidence shows that California's NFDM production can 
account for more than half of all U.S. NFDM production.
    According to the record, the RBCS survey is based on data provided 
on a voluntary basis by participating cooperatives but not audited as 
are CDFA survey data. The RBCS survey does not include manufacturing 
cost information from proprietary plants. The RBCS survey released in 
2006 contained manufacturing costs for producing condensed and dry whey 
for the first time in the 20-year presentation of the manufacturing 
cost survey.
    Other cost comparability differences between the three surveys 
include data on handling costs associated with dry whey and methodology 
differences in defining and establishing appropriate manufacturing 
costs for dry whey. The differences in costs collected and allocated 
are so significant between the CDFA and RBCS surveys that the 
proponents for increasing make allowances concluded that the dry whey 
manufacturing costs from either survey should not be relied on to 
establish a make allowance. In the CDFA survey, dry whey drying costs 
may be unreasonably high because California has only three dry whey 
processing plants where high cost plants appear to skew the costs 
dramatically. Alternatively, the CPDMP study reports a relatively large 
sample of 12 plants that provides a more reasonable estimate of dry 
whey processing costs for plants outside California.
    The record reveals that balancing functions and balancing costs 
differ between California and non-California butter and NFDM plants 
contained in the CPDMP study and the RBCS cost survey. Plants producing 
butter and NFDM products in California that perform balancing functions 
are not explicitly identified as having disparate costs due to 
balancing compared to other similarly situated plants in California 
that do not perform market balancing. The CPDMP study does not 
explicitly allocate balancing costs either but the RBCS survey is 
largely represented by balancing plants. The CPDMP study noted that 
seasonal fluctuations in utilizing plant capacity affects costs, but 
these costs are not allocated separately as ``balancing cost'' line 
items. In addition, the cost of fuels (specifically natural gas and 
electricity) is not clearly represented in the RBCS survey compared 
with the CPDMP study or the CDFA survey. Record evidence reveals that 
an unknown portion of the RBCS fuels cost data is combined with water 
and sewer costs and not allocated separately. Accordingly, the record 
does not support concluding that the cost of fuels as reported in the 
RBCS survey reasonably represents the costs of fuels experienced by 
manufacturing plants.
    The CPDMP study and the RBCS survey differ in how cost data was 
collected and verified. The CPDMP study for example, relied upon 
electronic data entry from a computerized data collection system that 
aggregated and produced reports detailing the cost information. RBCS 
collected plant costs through a mail-in survey form that was reviewed 
and aggregated by the RBCS coordinator. CPDMP followed its data 
collection with actual plant visits designed to give the researcher 
context within which to consider the reasonableness of data collected 
and cost allocations for each plant were surveyed. The CPDMP study, 
while not providing audited data, does provide improvement in data 
collection and data verification.
    A comparison of the CPDMP study to the CDFA cost survey data does 
illustrate significant differences but the data are more similar than 
is a comparison of CDFA's survey data with the RBCS survey data. The 
CPDMP survey does not include dairy manufacturing plants located in 
California. It uses a cost accounting reporting format that is very 
similar to that used by CDFA. The record shows that the CPDMP survey 
differs from CDFA's in that CPDMP did not have audit authority to 
verify records and only a fraction of manufacturing plants outside of 
California participated in the survey. While CDFA's data represents the 
manufacturing costs of producing dairy products for almost all plants 
in California, the record indicates that the CPDMP study sampled the 
costs of 16 cheese plants, 12 dry whey plants, 8 NFDM plants, and 4 
butter plants. However, unlike the RBCS survey, the CPDMP study data 
includes manufacturing costs of both proprietary and cooperative-owned 
plants for cheese and dry whey, demonstrates evidence of economies of 
scale, and better allocates fuel costs.
    The CPDMP study presents the weighted average manufacturing costs 
for high and low cost plants in each of the four commodity product 
categories, as well as weighted average costs for high cost and low 
cost plants, in a format very similar to CDFA. The CPDMP study of 
surveyed plants consists of eight high cost and eight low cost cheddar 
cheese plants, six low cost and six high cost dry whey processing 
plants, four high cost and four low cost NFDM plants, and four butter 
plants. High and low cost plant categories could not be reported for 
the small sample of butter plants without risking disclosure of 
confidential business information of individual plants.
    The CPDMP study sample of cheese plants is not a random sample. It 
is a stratified random sample where randomness only applies to strata 
(size related groupings) of the surveyed plants. The sample universe 
for cheese plants include only plants that chose to participate in the 
survey and represent processing volumes that fit the cross-sectional 
sample design. For cheese, a sample of 20 plants was planned but only 
16 plants participated, with 5 plants from the largest plant size, 6 
plants from medium sized plants and 5 plants representing smaller 
cheese plants. This sample design was intentionally biased to over-
represent large, lower cost plants. The record shows that large plant 
costs otherwise would have been seriously underrepresented if the 
survey had relied on a truly random selection of cheese plants. Random 
selection of plants from the total number of plants that produce 
cheddar cheese would have over-represented small plants and been 
``size-biased'' downward because of the relatively large number of 
small scale plants producing cheddar cheese outside of California. 
While the plants selected for inclusion in the survey changes the 
applicability of statistical methods, the record supports concluding 
that this stratified selection of cheese plants, according to size, is 
reasonable for cost data collection because record evidence shows that 
48 percent of all American cheese produced outside of California is 
produced by these large, low-cost plants. The CPDMP survey design 
sought an additional four plants from the smaller-plant category but 
plants of that size did not participate in a manner meeting the survey 
time requirements.
    Importantly, 7 of 16 cheese plants that participated in the CPDMP 
survey were proprietary plants and these plants also have an 
accompanying dry whey processing plant represented in the survey. Thus, 
7 of the 12 dry whey plants for which data is reported in the CPDMP 
study are proprietary plants. Unlike the RBCS survey, the inclusion of 
proprietary plants in the CPDMP study more accurately represents cheese 
and dry whey manufacturing costs for

[[Page 67486]]

plants outside of California because large proprietary plants represent 
a preponderance of cheese volumes produced in all locations.
    The record reveals that the CDFA, CPDMP, and RBCS surveys do not 
include a marketing cost recovery factor. However, record evidence 
provided by proponents indicates that a marketing factor is appropriate 
to account for sales costs incurred as part of the manufacturing 
process. The record supports concluding that a marketing cost recovery 
factor, as contained in the existing make allowances, should be 
continued to account for sales costs at processing plants. A fixed 
factor of $0.0015 will apply identically to the make allowances for 
cheese, dry whey, NFDM, and butter.
    The methods and means used by CDFA and CPDMP cost data differ in 
accounting for ROI. CDFA uses detailed accounting records and 
depreciation schedules to compute a ROI cost factor for plants and 
equipment. The CPDMP study relies on plant estimates of the fair market 
value for plants and equipment used in product processing for its ROI 
estimate. From the record evidence it is reasonable to conclude that an 
ROI cost factor should be part of all make allowances even though the 
ROI value for each of the four commodity categories in the CPDMP study 
is different than the values included in the CDFA survey. The RBCS cost 
survey does not include a ROI cost category.
    A reasonable conclusion finds that the CPDMP survey provides more 
comprehensive information on the cost of processing by manufacturing 
plants in the Federal milk order program than does the RBCS survey. The 
fact that economies of scale are evident in the CPDMP study is a marked 
improvement which can be used to support using these costs of 
processing dairy products over the RBCS survey costs. The inclusion of 
proprietary plant manufacturing costs, representing a preponderance of 
cheese processor volume outside of California, provides broader and 
improved information on the costs of processing because the RBCS survey 
is limited by design and purpose to survey costs of cooperative-owned 
plants. The CPDMP study was designed, in part, to consider the costs 
that should be relied upon in establishing make allowances used in 
Federal order product price formulas.
    The format that the cost data is reported by the CPDMP study 
enables more direct comparisons with the CDFA survey than does the RBCS 
survey. The enhanced verification of plant manufacturing costs and cost 
allocations in the CPDMP study represents a significant improvement to 
the RBCS cost survey. The costs attributable to ROI, despite 
differences between the CPDMP study and CDFA's survey, is another 
improvement because this factor is not included in the RBCS survey. The 
record therefore supports finding that the CPDMP study is preferred to 
the RBCS survey for the purpose of determining make allowances for 
cheese, dry whey, NFDM and butter.
    While CPDMP's study provides improved manufacturing cost data for 
plants in the Federal milk order program, combining it with the 
additional information available in the CDFA survey establishes a 
superior set of data on which to determine revised make allowances. 
Specifically, this tentative final decision finds agreement with the 
proponents of Proposal 1 that combining the CDFA survey with costs 
representative of Federal order manufacturing costs for cheese, NFDM, 
and butter (except dry whey) is the most reasonable approach for 
determining changes to the make allowances. CDFA survey data should be 
combined with the CPDMP study results because California's production 
volumes of cheese, dry whey, NFDM and butter are of such national 
significance it would be unreasonable to ignore California plant's 
manufacturing costs in the Class III and Class IV product price 
formulas.
    CPDMP's data gathering was designed to collect average 
manufacturing costs from groups of dairy manufacturing plants so that 
representative average cost estimates could be used in developing make 
allowances. Butter manufacturing costs were estimated from 4 plants. 
NFDM costs were estimated from 8 plants reporting average costs for 4 
high cost and 4 low cost plants. In the case of cheese, CPDMP used 
regression techniques to derive an average manufacturing cost that 
could be used to estimate the costs of cheese plants that were not 
surveyed. The record does not support a finding for using the 
estimation results reported by CPDMP that proponents for increasing 
make allowances have based their arguments because the CPDMP results 
are based on the estimation of an equation which generates an estimated 
cost curve based on the cost survey of 16 cheese plants.
    CPDMP's estimated equation coupled with cheese production volume 
estimates from 53 plants yields a low manufacturing cost of $0.17 per 
pound and a high manufacturing cost of $1.17 per pound. The estimated 
low cost of $0.17 per pound is higher than the $0.1459 per pound 
average of the 8 low cost-plants of the study sample. Using the 
equation and the 53 plants' volumes yields a weighted average 
manufacturing cost of $0.2028 per pound which is 94.7 percent of the 
$0.2140 per pound average manufacturing cost of high cost cheese plants 
from the plant sample, and 23.8 percent higher than the weighted 
average cost of $0.1638 per pound for the survey sample of plants. 
These comparisons raise questions about the representativeness of the 
results of this simple regression analysis. However, the 16 plant 
sample observations are sufficient for estimating a representative 
average manufacturing cost for plants in both the high cost and low 
cost strata, and for estimating a weighted average cost across all 
sampled plants.
    It is useful to consider the sample weighted average cost of 
$0.1638 per pound in terms of the 8 plant high-cost average of $0.2140 
per pound and 8 plant low-cost average of $0.1459 per pound. The low-
cost and high-cost production volume shares as provided in the record 
show about 74 percent of production volume is produced at the low 
average cost of $0.1459 per pound and about 26 percent of the volume is 
produced at the higher average cost of $0.2140 per pound. Based on the 
shape of the curve represented in the record, it appears that 74 
percent is a conservative estimate of low-cost production volume.
    In their post-hearing briefs proponents for raising the cheese make 
allowance seek to use this estimation as justification for increasing 
it to $0.2028 per pound or higher. Based on the preceding analysis, 
increasing the cheese make allowance from the current $0.1650 per pound 
to $0.2028 per pound is not reasonable.
    Even if the methodology used to calculate the estimated make 
allowance of $0.2028 per pound of cheese was statistically acceptable, 
the Department would not use it as the new make allowance for cheese. 
The use of different methodologies to establish make allowances for 
different products likely would result in unintended consequences that 
could distort the competitive situation between cheese plants and 
butter-NFDM plants. CPDMP did not have similar population data 
available to do comparable regression analyses for butter, NFDM and dry 
whey. For cheese, the regression methodology resulted in a make 
allowance estimate that was $0.039 per pound higher than the weighted 
average cost of the sample. It is possible that if the regression 
methodology could be used for butter, NFDM and dry whey that estimated 
average make allowances

[[Page 67487]]

for those products also would be higher than the weighted average costs 
from the plant samples. Therefore, if comparable increases in make 
allowances would result for the other products, the use of this 
different methodology only for cheese could give cheese plants a $0.39 
per cwt of milk advantage as it competes for a supply of milk.
    The CPDMP study contains an addendum concerning the cost of natural 
gas and electricity in dairy manufacturing. This addendum uses a 
specific time period for estimating these costs for each of the four 
dairy commodity categories. The collection of cost data for 
manufacturing occurred during a 26 month period that does not 
correspond to the 12 month period for which these energy cost estimates 
were derived from data available from the Bureau of Labor Statistics. 
While proponents advance that this energy cost data should be included 
in the manufacturing costs of producing cheese, dry whey, NFDM, and 
butter, the periods for which the costs should be applied and whether 
these costs are already captured in the cost survey data of the CPDMP 
study are not clearly stated in the addendum. The volatility of energy 
costs, revealed by the record, is important in considering total 
manufacturing costs. As presented in the addendum to the CPDMP study, 
the energy cost information cannot be relied upon to consider changes 
to make allowances.
Findings
    This tentative final decision finds that combining the weighted 
average manufacturing costs of the CDFA survey and CPDMP study for 
cheese, nonfat dry milk and butter into a single weighted average is 
appropriate for updating make allowances for those three products. The 
CPDMP study weighted average manufacturing cost of dry whey (without 
California) should be used for the dry whey make allowance. All four 
adopted make allowances include an additional factor of $0.0015 per 
pound to account for product marketing costs. The make allowances are 
weighted by the processing volumes reported in the 2005 NASS Dairy 
Product Summary and applied to the manufacturing costs of plants in 
California (for CDFA total average manufacturing costs) and those 
States outside of California (for CPDMP total average manufacturing 
costs), respectively.
    This tentative final decision finds that the CPDMP survey of four 
butter plants is half of the survey size that would have been 
acceptable as representing the butter manufacturing costs for butter 
plants located outside of California. The eight butter plants appearing 
in the CDFA survey located in California provide a reasonable basis on 
which to reinforce and improve estimating the cost of manufacturing 
butter outside of California because no other better source of cost 
data is available on which such costs can be reasonably based. In this 
regard, there is merit that CDFA cost data accurately represents costs 
for butter plants outside of California and should be combined with 
CPDMP cost data on a weighted average basis to provide an updated make 
allowance for butter.
    This tentative final decision finds agreement with proponents such 
as Kraft, Glanbia, Lactalis, Saputo, and Leprino, that the CPDMP 
study's weighted average manufacturing cost of dry whey plus a 
marketing cost factor of $0.0015 per pound best represents the cost of 
dry whey for plants outside of California. Three of CDFA's dry whey 
plants have a manufacturing cost variance so large that it would be 
unreasonable to combine the total weighted CDFA value with the 12 plant 
CPDMP sample. The make allowance adopted for dry whey plus a marketing 
factor is $0.1956 per pound.
    This tentative final decision finds agreement with the Agri-Mark, 
et al., proponents' contention that medium-sized California NFDM plants 
are representative of Federal order NFDM plants. CDFA medium sized 
plant weighted total average manufacturing costs are combined with the 
CPDMP eight plant sample total weighted average manufacturing costs 
plus a marketing factor. The NFDM make allowance adopted is $0.1570 per 
pound.
    The CDFA weighted average cost for cheese of $0.1769 is combined 
with the CPDMP total weighted average cost for cheese of $0.1638 plus a 
marketing factor to compute a cheese make allowance. The make allowance 
for cheese is weighted by the California and non-California volumes of 
American cheese. The cheese make allowance adopted is $0.1682 per 
pound.
    The following table summarizes the proposed changes:

                                        Summary of Make Allowance Changes
----------------------------------------------------------------------------------------------------------------
                                                                     Proposed         Current         Change
----------------------------------------------------------------------------------------------------------------
Cheese..........................................................         $0.1682         $0.1650         $0.0032
Dry whey........................................................          0.1956          0.1590          0.0366
NFDM............................................................          0.1570          0.1400          0.0170
Butter..........................................................          0.1202          0.1150          0.0052
----------------------------------------------------------------------------------------------------------------

2. Determining whether emergency marketing conditions exist that would 
warrant omission of a Recommended Decision and opportunity to file 
written exceptions
    Evidence presented at the hearing and in post-hearing briefs 
establishes that current manufacturing allowances contained in the 
product price formulas do not reflect the current costs of 
manufacturing milk into cheese, butter, NFDM and dry whey. Data 
presented at the hearing demonstrates that manufacturing costs have 
increased since manufacturing allowances were last updated in 2003, 
relying upon 1998 manufacturing cost data. The record contains requests 
by numerous parties that the rule should be implemented on an emergency 
basis.
    Consequently, it is determined that emergency marketing conditions 
exist that warrant omitting the issuance of a recommended decision. The 
record clearly establishes a basis as noted above for amending the 
orders on an interim basis. The opportunity to file written exceptions 
to the proposed amended orders remains.
    In view of these findings, an interim final rule amending the 
orders will be issued as soon as the procedures to determine the 
approval of producers are completed.

Rulings on Proposed Findings and Conclusions

    Briefs and proposed findings and conclusions were filed on behalf 
of certain interested parties. These briefs, proposed findings and 
conclusions, and the evidence in the record were considered in making 
the findings and conclusions set forth above. To the

[[Page 67488]]

extent that the suggested findings and conclusions filed by interested 
parties are inconsistent with the findings and conclusions set forth 
herein, the requests to make such findings or reach such conclusions 
are denied for the reasons previously stated in this decision.

General Findings

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

Interim Marketing Agreements and Interim Order Amending the Orders

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

Referendum Order To Determine Producer Approval; Determination of 
Representative Period; and Designation of Referendum Agent

    It is hereby directed that referenda be conducted and completed on 
or before the 30th day from the date this decision is published in the 
Federal Register, in accordance with the procedure for the conduct of 
referenda (7 CFR 900.300-311), to determine whether the issuance of the 
orders as amended and as hereby proposed to be amended, regulating the 
handling of milk in the Northeast and Mideast marketing areas is 
approved or favored by producers, as defined under the terms of the 
orders (as amended and as hereby proposed to be amended), who during 
such representative period were engaged in the production of milk for 
sale within the aforesaid marketing areas.
    The representative period for the conduct of such referenda is 
hereby determined to be July 2006.
    The agents of the Secretary to conduct such referenda are hereby 
designated to be the respective market administrators of the aforesaid 
orders.

Determination of Producer Approval and Representative Period

    The month of July 2006 is hereby determined to be the 
representative period for the purpose of ascertaining whether the 
issuance of the order, as amended and as hereby proposed to be amended, 
regulating the handling of milk in the Appalachian, Florida, Southeast, 
Upper Midwest, Central, Pacific Northwest, Southwest and Arizona 
marketing areas is approved or favored by producers, as defined under 
the terms of the orders as hereby proposed to be amended, who during 
such representative period were engaged in the production of milk for 
sale within the aforesaid marketing areas.

List of Subjects in 7 CFR Parts 1000, 1001, 1005, 1006, 1007, 1030, 
1032, 1033, 1124, 1126, and 1131

    Milk marketing orders.

    Dated: November 17, 2006.
Lloyd C. Day,
Administrator, Agricultural Marketing Service.

Interim Order Amending the Orders Regulating the Handling of Milk in 
the Northeast and Other Marketing Areas

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

Findings and Determinations

    The findings and determinations hereinafter set forth supplement 
those that were made when the orders were first issued and when they 
were amended. The previous findings and determinations are hereby 
ratified and confirmed, except where they may conflict with those set 
forth herein.
    (a) Findings. A public hearing was held upon certain proposed 
amendments to the tentative marketing agreements and to the orders 
regulating the handling of milk in the Northeast and other marketing 
areas. The hearing was held pursuant to the provisions of the 
Agricultural Marketing Agreement Act of 1937, as amended (7 U.S.C. 601-
674), and the applicable rules of practice and procedure (7 CFR Part 
900).
    Upon the basis of the evidence introduced at such hearing and the 
record thereof, it is found that:
    (1) The said orders as hereby amended, and all of the terms and 
conditions thereof, will tend to effectuate the declared policy of the 
Act;
    (2) The parity prices of milk, as determined pursuant to Section 2 
of the Act, are not reasonable in view of the price of feeds, available 
supplies of feeds, and other economic conditions which affect market 
supply and demand for milk in the aforesaid marketing area. The minimum 
prices specified in the order as hereby 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
    (3) The said orders as hereby amended regulate the handling of milk 
in the same manner as, and is applicable only to persons in the 
respective classes of industrial or commercial activity specified in, 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 Northeast and other marketing areas 
shall be in conformity to and in compliance with the terms and 
conditions of the order, as amended, and as hereby amended, as follows:
    1. The authority citation for 7 CFR parts 1000, 1001, 1005, 1006, 
1007, 1030, 1032, 1033, 1124, 1126 and 1131, is amended to read as 
follows:

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

PART 1000--GENERAL PROVISIONS OF FEDERAL MILK MARKETING ORDERS

    1. Section 1000.50 is amended by:
    a. Revising paragraph (l);

[[Page 67489]]

    b. Revising paragraph (m);
    c. Revising paragraph (n)(2);
    d. Revising paragraph (n)(3)(i); and
    e. Revising paragraph (o).
    The revisions read as follows:

Section 1000.50 Class Prices, Component Prices, and Advanced Pricing 
Factors.

* * * * *
    (l) Butterfat price. The butterfat price per pound, rounded to the 
nearest one-hundredth cent, shall be the U.S. average NASS AA Butter 
survey price reported by the Department for the month, less 12.02 
cents, with the result multiplied by 1.20.
    (m) Nonfat solids price. The nonfat solids price per pound, rounded 
to the nearest one-hundredth cent, shall be the U.S. average NASS 
nonfat dry milk survey price reported by the Department for the month, 
less 15.70 and multiplying the result by 0.99.
    (n) * * *
    (1) * * *
    (2) Subtract 16.82 cents from the price computed pursuant to 
paragraph (n)(1) of this section and multiply the result by 1.383;
    (3) * * *
    (i) Subtract 16.82 cents from the price computed pursuant to 
paragraph (n)(1) of this section and multiply the result by 1.572; and
    * * *
    (o) Other solids price. The other solids price per pound, rounded 
to the nearest one-hundredth cent, shall be the U.S. average NASS dry 
whey survey price reported by the Department for the month minus 19.56 
cents, with the result multiplied by 1.03.
    * * *
    (q) * * *
    (3) An advanced butterfat price per pound, rounded to the nearest 
one-hundredth cent, shall be calculated by computing a weighted average 
of the 2 most recent U.S. average NASS AA Butter survey prices 
announced before the 24th day of the month, subtracting 12.02 cents 
from this average, and multiplying the result by 1.20.

Marketing Agreement Regulating the Handling of Milk in Certain 
Marketing Areas

    The parties hereto, in order to effectuate the declared policy of 
the Act, and in accordance with the rules of practice and procedure 
effective thereunder (7 CFR part 900), desire to enter into this 
marketing agreement and do hereby agree that the provisions referred to 
in paragraph I hereof, as augmented by the provisions specified in 
paragraph II hereof, shall be and are the provisions of this marketing 
agreement as if set out in full herein.
    I. The findings and determinations, order relative to handling, and 
the provisions of Sec.  ------ to ------\5\ all inclusive, of the order 
regulating the handling of milk in the --------\6\ marketing area (7 
CFR Part ------\7\) which is annexed hereto; and
---------------------------------------------------------------------------

    \5\ First and last section of order.
    \6\ Name of order.
    \7\ Appropriate Part number.
---------------------------------------------------------------------------

    II. The following provisions: Sec.  --------\8\ Record of milk 
handled and authorization to correct typographical errors.
---------------------------------------------------------------------------

    \8\ Next consecutive section number.
---------------------------------------------------------------------------

    (a) Record of milk handled. The undersigned certifies that he/she 
handled during the month of --------\9\, -------- hundredweight of milk 
covered by this marketing agreement.
---------------------------------------------------------------------------

    \9\ Appropriate representative period for the order.
---------------------------------------------------------------------------

    (b) Authorization to correct typographical errors. The undersigned 
hereby authorizes the Deputy Administrator, or Acting Deputy 
Administrator, Dairy Programs, Agricultural Marketing Service, to 
correct any typographical errors which may have been made in this 
marketing agreement.
    Effective date. This marketing agreement shall become effective 
upon the execution of a counterpart hereof by the Department in 
accordance with Sec. 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. 06-9340 Filed 11-20-06; 3:01 pm]
BILLING CODE 3410-02-P