[Federal Register Volume 73, Number 120 (Friday, June 20, 2008)]
[Proposed Rules]
[Pages 35306-35331]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-13943]



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Part IV





Department of Agriculture





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Agricultural Marketing Service



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7 CFR Part 1000



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

  Federal Register / Vol. 73, No. 120 / Friday, June 20, 2008 / 
Proposed Rules  

[[Page 35306]]


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DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Part 1000

[Docket No. AMS-DA-07-0026; AO-14-A77, et al.; DA-07-02-A]


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

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Proposed rule; tentative partial final decision.

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SUMMARY: This tentative partial final decision proposes to adopt 
changes to the manufacturing cost allowances and the butterfat yield 
factor used in Class III and Class IV product-price formulas applicable 
to all Federal milk marketing orders on an interim basis. A separate 
decision regarding the collection of manufacturing cost information, 
the use of an energy cost adjustor and providing for a cost add-on 
feature to Class III and Class IV product-pricing formulas will be 
addressed in a separate decision. This tentative partial decision 
requires determining if producers approve the issuance of the amended 
orders on an interim basis.

DATES: Comments should be submitted on or before August 19, 2008.

ADDRESSES: Comments (six copies) should be filed with the Hearing 
Clerk, Stop 9200--Room 1031, United States Department of Agriculture, 
1400 Independence Avenue, SW., Washington, DC 20250-9200. Comments may 
also be submitted at the Federal eRulemaking portal: http://www.regulations.gov.

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 partial final decision 
proposes to adopt 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 to adopt 
the following make allowances: Cheese--$0.2003 per pound; butter--
$0.1715 per pound; NFDM--$0.1678 per pound; and dry whey--$0.1991 per 
pound. This decision also proposes increasing the butterfat yield 
factor in the butterfat price formula from 1.20 to 1.211.
    This decision also addresses proposals published in the hearing 
notice as Proposals 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16 and 
18 that seek to change various features of the Class III and Class IV 
product-price formulas. Proposals seeking to establish a manufacturing 
cost survey (Proposal 2), establish an energy cost adjustor (Proposal 
17) and establish a cost add-on (Proposal 20), will be addressed in a 
separate recommended decision.
    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 U.S. 
Department of Agriculture (USDA) 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, USDA 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-
612), 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 February 2007, the month the initial public 
hearing was held, the milk of 49,712 dairy farmers was pooled on the 
Federal order system. Of the total, 46,729 dairy farmers, or 94 
percent, were considered small businesses. During the same month, 352 
plants were regulated by or reported their milk receipts to be pooled 
and priced on a Federal order. Of the total, 186 plants, or 53 percent, 
were considered small businesses.
    This decision proposes 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 increases from $0.1202 to 
$0.1715 per pound; the make allowance for cheese increases from $0.1682 
to $0.2003 per pound; the make allowance for NFDM increases from 
$0.1570 to $0.1678 per pound; and the make allowance for dry whey 
increases from $0.1956 to $0.1991 per pound. The butterfat yield factor 
in the butterfat price formulas is increased from 1.20 to 1.211.
    The proposed 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.
    An economic analysis has been performed that discusses impacts of 
the proposed amendments on industry

[[Page 35307]]

participants including producers and manufacturers. It can be found on 
the AMS Dairy Web site at http://www.ams.usda.gov/dairy. 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 (AMS) 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 partial 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 were invited to submit comments on the probable 
regulatory and informational impact of this proposed rule on small 
entities.

Economic Analysis

    In order to assess the impact of the proposed changes in Federal 
order producer price formulas, the Department conducted an economic 
analysis. The complete analysis is available at on the Dairy Programs 
Web site which can be accessed through http://www.ams.usda.gov.
    The impacts of the proposed changes to the Class III and Class IV 
pricing formulas contained in the tentative final decision are 
summarized as changes from the USDA baseline on an annual basis and as 
a nine-year average change from 2008-2016. Impacts on the Federal order 
system are considered to be in the context of the broader U.S. market 
for milk and dairy products.
    Producers: The U.S. all-milk price falls an average $0.06 per cwt 
(0.39 percent) from a baseline level of $16.22 per cwt over the nine-
year projection period. The average Federal order minimum blend price 
at test averages $0.11 per cwt (0.68 percent) below the baseline level 
of $16.43 per cwt. The lower milk prices result in a tightening of 
production. In turn, Federal order marketings fall an average 145 
million pounds (0.11 percent) below the baseline average of 126.5 
billion pounds. Federal order cash receipts decrease an average $165 
million (0.79 percent) from the $20.8 billion baseline receipts. U.S. 
marketings come in an average 240 million pounds (0.13 percent) per 
year below the baseline average of 187.8 billion pounds. The lower 
marketings coupled with lower prices across the board result in an 
average decline of $156 million (0.51 percent) in producer revenue from 
the baseline average of $30.4 billion.
    Milk Manufacturers and Processors: Increases to the make allowances 
in Federal order minimum price formulas are advantageous for dairy 
product manufacturers. Average wholesale prices over the projection 
period exceed baseline by the following: Cheddar cheese by $0.0176 per 
pound (1.14 percent), butter by $0.0346 per pound (1.89 percent), 
nonfat dry milk by $0.0090 per pound (0.88 percent), and dry whey by 
$0.0034 per pound (0.94 percent).
    In spite of the higher product prices, the make allowance changes 
are substantial enough that the nine-year average component prices fall 
from baseline levels. The changes are as follows: Butterfat by $0.0014 
per pound (0.07 percent), protein by $0.0451 per pound (1.96 percent), 
nonfat solids by $0.0018 per pound (0.22 percent) and the other solids 
price by $0.001 per pound (0.05 percent). Lower component prices are 
carried through to lower skim milk pricing factors. The Class III skim 
price falls an average $0.14 per cwt (1.72 percent) from a baseline 
average level of $8.16 per cwt and remains the Class I price mover.
    Consumers: The retail price of fluid milk is expected to decrease 
an average of $0.0094 per gallon (0.27 percent) from the baseline 
average price of $3.4135 over the nine-year projection period due to 
the lower Class I price. Consumers respond, albeit modestly, to the 
decreased prices as evidenced by the average 32 million pound (0.07 
percent) increase in Class I marketings from a baseline average of 45 
billion pounds over the projection period. Class II marketings increase 
overall, indicating an increase in consumption of soft products 
consistent with the slight decline in Class II prices. At the same 
time, consumers face higher prices for hard manufactured dairy products 
such as cheese, butter and nonfat dry milk and as a result, Class III 
and Class IV marketings fall from baseline levels. Consumer demand for 
hard manufactured dairy products is more elastic than for fluid milk 
and soft products; consumers are more responsive to changes in price.
    Government Outlays: With the expiration of the Milk Income Loss 
Contract (MILC) program, and no activity under Dairy Export Incentive 
Program (DEIP), any change to government outlays occurs through Milk 
Price Support Program (MPSP) purchases. Baseline level prices are high 
enough that few government purchases are expected. Under the proposed 
changes, removals change only slightly at the beginning of the 
projection period; remaining unchanged in from baseline in the long run 
projection.
    The proposed changes to Class III and Class IV pricing formulas 
result in lower Federal order prices as well as higher manufactured 
product prices. Thus, the gap between the price of milk and the 
wholesale prices received by processors widens. At the same time, milk 
producers face lower prices and respond by cutting back on production, 
leading to lower marketings and producer revenue losses.
    The decrease in the Federal minimum price for Class I milk is 
passed on to consumers in the form of a slightly lower retail price for 
fluid milk which increases consumption. However, tighter milk supply 
bolsters manufactured product prices and in turn lowers consumption of 
cheese, butter, and NDFM. Class I and Class II marketings increase, but 
not enough to counteract the lower prices, allowing average receipts to 
fall across all classes. Though prices for Class III and Class IV milk 
decrease under the proposed changes, the decreased consumption of the 
associated dairy products and the increase in Class I and Class II 
product consumption causes a shift in dairy product allocation, 
increasing the amount of milk allocated to Class II production.

Prior Documents in This Proceeding

    Notice of Hearing: Issued February 5, 2007; published February 9, 
2007 (72 FR 6179).
    Supplemental Notice of Hearing: Issued February 14, 2007; published 
February 20, 2007 (72 FR 7753).
    Notice To Reconvene Hearing: Issued March 15, 2007; published March 
21, 2007 (72 FR 13219).
    Notice To Reconvene Hearing: Issued May 2, 2007; published May 8, 
2007 (72 FR 25986).

Preliminary Statement

    Notice is hereby given of the filing with the Hearing Clerk of this 
tentative partial final decision with respect to the proposed 
amendments to the tentative marketing agreements and the orders

[[Page 35308]]

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 August 19, 2008, deadline. Six (6) copies of the 
exceptions should be filed. Comments may also be submitted at the 
Federal eRulemaking portal: http://www.regulations.gov.
    A public hearing was held upon proposed amendments to the marketing 
agreements 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 proposed amendments set forth below are based on the record of 
the first session of a public hearing held in Strongsville, Ohio, on 
February 26-March 2, 2007, pursuant to a notice of hearing issued 
February 5, 2007, published March 21, 2007 (72 FR 13219); a second 
session of a public hearing held in Indianapolis, Indiana, on April 9-
13, 2007, pursuant to a reconvened hearing notice issued March 15, 
2007, published March 21, 2007 (72 FR 13219); and a third session of a 
public hearing held in Pittsburgh, Pennsylvania, on July 9-11, 2007, 
pursuant to a reconvened hearing notice issued May 2, 2007, published 
May 8, 2007 (72 FR 25986).
    The material issues on the record of the hearing relate to:
    1. Amending the product-price formulas used to compute Class III 
and Class IV prices.
    2. Determination of Emergency Marketing Conditions.

Findings and Conclusions

1. Amending the product-price formulas used to compute Class III and 
Class IV prices
    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, nonfat dry milk 
(NFDM) and dry whey using the most currently available data, and a 
portion of Proposal 6 that increases the butterfat yield in the 
butterfat price formula. Specifically, this decision adopts the 
following manufacturing allowances: Cheese--$0.2003 per pound, butter--
$0.1715 per pound, NFDM--$0.1678 per pound and dry whey--$0.1991 per 
pound. This decision also increases the butterfat yield factor in the 
butterfat price formula from 1.20 to 1.211.
    The Federal Milk Marketing Order (FMMO) program currently uses 
product-price formulas to compute prices handlers must account for in 
the marketwide pooling of milk used in the four classes of products. 
These formulas rely on the price of finished products to determine the 
minimum classified prices handlers pay for raw milk. In addition, the 
Class III and Class IV prices form the base from which Class I and 
Class II prices are determined. This end-product pricing system was 
implemented on January 1, 2000 (published February 12, 1999; 64 FR 
70868).
    The product-price formulas are computed by using component values 
from National Agricultural Statistic Service (NASS) surveyed prices of 
manufactured dairy products. The pricing system determines butterfat 
prices for milk used in products in each of the four classes from a 
surveyed butter price; protein and other solids prices for milk used in 
Class III products from surveyed cheese and dry whey prices; and a 
nonfat solids price for milk used in Class II and Class IV products 
from surveyed nonfat dry milk product prices. The skim milk portion of 
the Class I price may be derived from either the protein and other 
solids price, or from the nonfat dry milk price depending on the price 
relationships. The butterfat, protein, other solids and nonfat solids 
prices are all derived in a similar manner: Average NASS survey price 
minus a manufacturing (make) allowance times a yield factor. The yield 
factor is an approximation of the quantity of a specific product that 
can be made from a hundredweight (cwt) of milk. The yield factors were 
last amended on April 1, 2003 (published February 12, 2003; 68 FR 
7063).
    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--$0.1682 per pound, butter--$0.1202 per pound, NFDM--$0.1570 per 
pound and dry whey--$0.1956 per pound. These make allowances were 
adopted in 2006 (71 FR 78333) and became effective on March 1, 2007, 
and were determined on the basis of a California Department of Food and 
Agriculture (CDFA) and a Cornell Program on Dairy Markets and Policy 
(CPDMP) survey of manufacturing costs. The current make allowances, 
except dry whey, were computed by taking a weighted average of the CDFA 
and CPDMP surveys using National commodity production as the weights, 
and adjusting for marketing costs. The dry whey make allowance was 
computed by relying solely on the CPDMP 2005 survey and adjusting for 
marketing costs.
    Nineteen proposals were published in the hearing notice for this 
proceeding. Proposals 4, 5 and 11 were withdrawn at the hearing by 
proponents in support of other noticed proposals. No further reference 
to these proposals will be made.
    A proposal published in the hearing notice as Proposal 1, offered 
by Agri-Mark Cooperative (Agri-Mark), seeks to amend the Class III and 
Class IV make allowances by using the most current plant cost survey 
data available. Agri-Mark is a Capper-Volstead cooperative with 
approximately 1,400 member-owners throughout New England and New York, 
and operates four manufacturing plants.
    Agri-Mark is also the proponent of Proposal 2 that seeks to amend 
the Class III and Class IV product price formulas to annually update 
the manufacturing allowances using an annual manufacturing cost survey 
of cheese, whey powder, butter, and nonfat dry milk plants (located 
outside of California.) The proposed amendments would grant authority 
to the Market Administrator to administer the survey, select the sample 
plants, and collect, audit, and assemble cost information. This 
proposal will also be addressed in a separate decision.
    A proposal published in the hearing notice as Proposal 3, offered 
by Dairy Producers of New Mexico (DPNM), seeks to amend the 
manufacturing allowances contained in the Class III and Class IV 
product price formulas. Specifically, this proposal seeks to set the 
make allowances at the following levels: $0.1108 per pound for butter; 
$0.1638 per pound for cheese; $0.1410 per pound for NFDM; and $0.1500 
per pound for dry whey. DPNM is an association of dairy producers 
located in New Mexico and West Texas.
    DPNM is the proponent of Proposals 6, 7 and 8 that seek to amend 
the yield factors and the butterfat recovery rate of the Class III and 
Class IV product price formulas. Proposal 6 seeks to amend the butter 
price formula by increasing the butterfat yield factor from 1.20 to 
1.211

[[Page 35309]]

and to amend the protein price formula by increasing the butterfat 
recovery rate from 90 percent to 94 percent. Proposal 7 seeks to 
eliminate the farm-to-plant shrink and butterfat shrink adjustments of 
all yield factors. Proposal 8 seeks to increase the nonfat solids yield 
factor from 0.99 to 1.02, and increase the protein price yield factor 
for cheese from 1.383 to 1.405 and for butter from 1.572 to 1.653.
    Proposal 9 was offered by the International Dairy Foods Association 
(IDFA). Proposal 9 seeks to amend the Class III and Class IV product-
price formulas by adjusting the protein price formula to reflect the 
lower value and reduced volume of butterfat recoverable as whey cream. 
IDFA is a trade association with 530 members representing 
manufacturers, marketers, distributors, and suppliers of fluid milk and 
related products.
    Proposal 10 was submitted on behalf of Agri-Mark. Proposal 10 seeks 
to amend the Class III and Class IV product-price formulas by reducing 
the protein price to reflect the lower selling price of whey butter.
    Proposal 12 was offered by IDFA. Proposal 12 seeks to amend the 
Class III and Class IV product price formulas by eliminating the 3-cent 
cost adjustment for cheese manufacturing of 500-pound barrels contained 
in the protein price formula.
    Proposal 13 was offered by Dairy Farmers of America, Inc. (DFA) and 
the Northwest Dairy Association (NDA). Proposal 13 seeks to amend the 
Class III and Class IV product-price formulas by removing the barrel 
cheese price as a cost component of the protein price formula. DFA is a 
Capper-Volstead cooperative with 13,500 member-owners producing milk in 
40 states. NDA is a Capper-Volstead cooperative with approximately 610 
member-owners, and operates 6 manufacturing plants and 4 distributing 
plants in the western United States.
    Proposal 14 was advanced by Agri-Mark. Proposal 14 seeks to amend 
the Class III and Class IV product price formulas by using a 
combination of the weekly NASS and CME cheese price series to determine 
the cheese price contained in the Class III and Class IV product-price 
formulas.
    Proposal 15 also was offered by DPNM. This proposal seeks to 
replace the NASS commodity price surveys with CME commodity prices in 
each of the price formulas except for the other solids formula. The dry 
whey price in the other solids formulas would continue to be derived 
from the NASS dry whey price survey.
    Proposal 16 was offered by National All-Jersey, Inc. (NAJ). 
Proposal 16 seeks to amend the Class III and Class IV product-price 
formulas by eliminating the other solids price and adding the 
equivalent value of dry whey to the protein price formula. NAJ is a 
breed organization with more than 1,000 members.
    Proposal 17 was offered by the National Milk Producers Federation 
(NMPF). The proposal seeks to amend the Class III and Class IV product-
price formulas to incorporate a monthly energy cost adjustment based on 
monthly changes in the manufacturing price indices for industrial 
natural gas and industrial electricity as published by the Bureau of 
Labor Statistics. NMPF is an association consisting of 33 dairy-farmer 
cooperative members representing nearly three-quarters of U.S. dairy 
farmers. This proposal will be addressed in a separate decision.
    Proposal 18 was offered by the Maine Dairy Industry Association 
(MDIA). Proposal 18 seeks to amend the Class III and Class IV product-
price formulas by incorporating a factor to account for any monthly 
spread between component price calculations for milk and a competitive 
pay price for equivalent Grade A milk. MDIA is an association that 
represents all of Maine's 350 dairy farmers.
    A proposal published in a supplemental hearing notice as Proposal 
20 was submitted on behalf of Dairylea Cooperative, Inc. (Dairylea). 
Proposal 20 seeks to amend the Class III and Class IV price formulas by 
establishing cost-of-production add-ons that manufacturers could 
include in the selling price of their products but would not be 
included in the determination of the NASS survey prices. Dairylea is a 
Capper-Volstead cooperative with 2,400 member-owners located in seven 
states. This proposal also will be addressed in a separate decision.
    To provide order to the volume of hearing testimony and post-
hearing briefs, the summary of testimony is organized as follows:
    1. Make Allowances: Proposals 1, 2 and 3
    2. Product Yields and Butterfat Recovery Percentage: Proposals 6, 7 
and 8
    3. Value of Butterfat in Whey: Proposals 9 and 10
    4. Barrel Cheese Price: Proposals 12 and 13
    5. Product Price Series: Proposals 14, 15 and 18
    6. Other Solids Price: Proposal 16
1. Make Allowances
    A witness from Cornell University (Cornell witness) testified 
regarding the 2006 manufacturing cost survey (2006 survey) conducted by 
the Cornell Program on Dairy Markets and Policy (CPDMP), to assess the 
manufacturing costs of plants producing cheddar cheese, dry whey, 
butter and NFDM. The witness did not testify in support or opposition 
to any proposal presented at the hearing. The witness explained that an 
earlier study, the CPDMP 2005 manufacturing cost survey (2005 survey), 
was contracted in part by USDA and was presented at a 2006 rulemaking 
hearing (71 FR 52502), and were factors considered by USDA in 
developing the make allowances that became effective March 1, 2007 (71 
FR 78333). The witness said that some manufacturing plants that 
participated in the 2005 survey requested a new survey to reflect more 
current cost information.
    The Cornell witness said that each of the plants that participated 
in the 2005 survey were asked to participate in the 2006 survey. The 
witness stated that 21 plants agreed to participate and of those plants 
19 were deemed to have acceptable data to be included in the 2006 
survey. Plants submitted data corresponding to their most recent fiscal 
year; most of the data observations occurred in calendar year 2006, the 
witness said. The data was not audited by the witness. The witness 
explained that if a plant produced multiple products they were asked to 
allocate manufacturing costs for each product. However, if they failed 
to do so the witness allocated costs on a per pound of solids basis in 
the finished product. The average manufacturing costs detailed in the 
study were on a per pound of finished product basis and were not 
adjusted for moisture content, the witness said.
    The Cornell witness said that 11 cheese plants participated in the 
2006 survey compared with 16 cheese plants in the 2005 survey. Eight of 
those plants (one classified as a large plant and the other seven as 
small plants) also participated in the 2005 survey; the three remaining 
plants that participated in the 2006 survey were asked to participate 
in 2005 but submitted data too late for its inclusion. The witness 
testified that five small cheese plants that were included in the 2005 
survey opted not to participate in the 2006 survey. Of the eleven 
plants, the witness classified seven as small plants and the remaining 
four as large volume plants. The witness testified that the weighted 
average manufacturing cost of the 2006

[[Page 35310]]

cheese plant sample was $0.1584 per pound, a decrease of $0.0054 per 
pound from 2005. The witness said that comparing the costs for the 
eight plants that participated in both surveys revealed a weighted 
average cost increase of $0.017 per pound between the 2005 and 2006 
surveys. The total pounds covered by the 2006 survey increased from 
approximately 60 million pounds in 2005 to nearly 119 million pounds in 
2006. The Cornell witness asserted that the 2005 survey over-sampled 
small plants while the 2006 survey over-sampled large plants. The 
witness noted that the average packaging cost for cheese in the 2006 
survey was only for 40-pound block production. If a plant produced 
barrel cheese the witness assigned it an average 40-pound block 
packaging cost before computing the average manufacturing costs for the 
entire sample.
    The Cornell witness said that seven whey plants participated in the 
2006 survey and their weighted average cost was $0.1976 per pound--an 
increase of $0.0035 per pound from the 2005 survey. According to the 
witness, the seven participating whey plants were associated with a 
cheese plant that was also included in the 2006 survey. The witness 
noted that 12 whey plants participated in the 2005 survey.
    The Cornell witness said that four butter plants participated in 
the 2006 survey; three of the plants also participated in the 2005 
survey. The weighted average cost of the four plants was $0.1846 per 
pound, an increase of $0.0738 per pound over the 2005 survey. The 
survey accounted for 57.6 million pounds of butter. The witness 
testified that significant cost allocation problems and data quality 
problems with the 2005 butter data were major reasons for the large 
increase in the weighted average cost from 2005 to 2006. The witness 
testified that the 2005 survey butter data was not accurate, but 
asserted that the allocation problems were corrected in the 2006 
survey. While maintaining that the 2006 survey data was reliable, the 
witness said that a larger sample size would have been preferred. The 
witness also noted that the manufacturing costs submitted by one of the 
butter plants in the 2006 survey did include the cost of transporting 
cream from its drying plant to its butter plant.
    The Cornell witness said that the 2006 survey for NFDM consisted of 
seven of the eight NFDM plants that participated in the 2005 survey. 
According to the witness, the weighted average cost of the seven plants 
was $0.1662 per pound, an increase of $0.0239 per pound from 2005. The 
witness explained that the weighted average cost increase is partially 
explained by increases in real costs (labor, packaging, etc.), but also 
partly because of a change in the methodology of indirectly allocating 
costs between butter and NFDM. According to the witness, there were 
flaws in the method used to indirectly allocate costs for NFDM in the 
2005 study that resulted in understating the cost of processing NFDM. 
The witness claimed that an attempt was made in the 2006 survey to 
correct this understated processing cost. The witness did not explain 
the reported flawed methodology or the methodological changes for 2006. 
According to the witness, the 2006 survey accounted for 70.1 million 
pounds of NFDM, an increase of 15 million pounds.
    A witness appearing on behalf of Agri-Mark testified in support of 
Proposals 1 and 2. The witness explained that Proposal 1 seeks to 
update the make allowances adopted on an interim final basis (71 FR 
78333), effective March 1, 2007, using 2005 CDFA data. The witness 
asserted that this update would increase the butter, NFDM and cheese 
make allowances by $0.0014, $0.0092 and $0.0029 per pound, 
respectively. The witness was of the opinion that the dry whey make 
allowance should incorporate the 2005 CDFA data which reflects an 
average cost of $0.2851 per pound.
    The witness reiterated Agri-Mark's position expressed in comments 
to the tentative final decision (71 FR 67467) that proposed adoption of 
the current make allowances. The witness concluded that using this 
weighting methodology (including a $0.0015 per pound marketing cost 
factor) the resulting make allowances should be: $0.1780 per pound for 
cheese, $0.1351 per pound for butter, $0.1510 for NFDM and $0.2090 per 
pound for dry whey.
    The Agri-Mark witness conceded that increasing the make allowances 
would assist high-cost plants in covering their costs while creating a 
financial windfall for low-cost plants. In turn, the witness said, the 
low-cost plants could use the additional revenue to sell products at a 
lower cost, pay producers a higher price, or increase their financial 
returns. The witness said that any financial gains low-cost plants in 
the Southwest earn from a high make allowance would not harm high-cost 
plants in the Northeast because it is too costly to transport milk from 
the Southwest to the Northeast. The witness believed that competitive 
issues resulting from high make allowances would only arise if a low-
cost plant was located next door to a high-cost plant that competes for 
the same milk supply.
    The Agri-Mark witness advanced Proposal 2 seeking to establish an 
annual manufacturing cost survey, administered by USDA that would 
automatically update make allowances without requiring a rulemaking 
proceeding. On brief, Agri-Mark withdrew the automatic updating portion 
of this proposal. The witness explained that manufacturing input prices 
fluctuate in the short-run and an annual survey would ensure the 
timelier recognition of these fluctuations in make allowances. The 
witness said that the CPDMP survey should provide the basic methodology 
needed to conduct the survey and that any changes to the methodology 
should be done through the formal rulemaking process. The witness 
asserted that the survey should be administered by market administrator 
audit personnel and the plant sample, preferably larger than the CPDMP 
sample, should be selected by random sampling. The witness also 
supported auditing surveyed plants and asserted that this function 
should be funded by payments from the Market Administrator's 
administrative assessment fund. The witness said that if the survey was 
audited, the use of CDFA cost data would no longer be necessary in 
determining make allowances. The witness also supported addressing the 
proposed manufacturing cost survey in a recommended decision to allow 
for public comments.
    The Agri-Mark witness was of the opinion that based on the new 
CPDMP survey the make allowances should be set at the higher of: (1) A 
level that would allow a minimum of 80 percent of the producer milk 
used by Class III and Class IV plants to cover their costs; or (2) a 
level that would allow a minimum of 25 percent of the producer milk 
volume used by Class III and Class IV plants in any specific Federal 
order annually pooling at least 4 billion pounds of milk to cover their 
costs. The Agri-Mark witness opposed Proposal 3.
    A witness appearing on behalf of Land O'Lakes (LOL) testified in 
support of Proposals 1 and 2. According to the witness, LOL is a 
Capper-Volstead cooperative with over 3,000 members that own 4 
manufacturing plants in the United States. The witness supported 
updating the current make allowances with 2005 CDFA manufacturing cost 
data as advanced in Proposal 1. The witness advocated that the audited 
CDFA whey manufacturing cost data be included in the whey make 
allowance computation. The witness asserted that the make allowances 
should be recalculated by weighting the CDFA and

[[Page 35311]]

CPDMP data by the survey sample volumes, not national product volumes 
which the witness argued was not statistically valid. The witness 
concluded that the new make allowances (using LOL's proposed weighting) 
should be as follows: $0.1780 for cheese; $0.2090 for dry whey; $0.1560 
for NFDM; and $0.1351 for butter.
    The LOL witness supported the annual cost survey offered in 
Proposal 2, with technical modifications. The witness stated that the 
authority for collecting plant cost data should be granted to the AMS 
Administrator, that the plant sample be limited to plants located 
outside of California that receive pooled (producer) milk, and that the 
survey results are combined with the CDFA data to determine appropriate 
Federal order make allowance levels. The witness opposed the portion of 
Proposal 2 that would set make allowances at a level that would cover 
the cost of manufacturing for the highest cost Federal order marketing 
area. The witness said that classified prices are determined on a 
national, not a regional basis, and therefore relying on regional costs 
is inappropriate. The witness was of the opinion that USDA should 
clearly identify the target product volume and percentage of plants 
that should be covered by new make allowances that result from this 
proceeding.
    The LOL witness opposed Proposal 3 seeking to exclude CDFA 
manufacturing cost data when computing new make allowances. The witness 
argued that since 2000 the Department has continuously considered CDFA 
manufacturing cost data when determining new make allowance levels and 
asserted that there is no justification to modify that policy. The 
witness elaborated that classified prices are determined using a 
national survey that includes California plants and therefore including 
California plant costs when determining make allowance levels is 
appropriate.
    A witness testifying on behalf of Michigan Milk Producers 
Association (MMPA) testified in support of Proposals 1 and 2, and in 
opposition to Proposal 3. According to the witness, MMPA is a Capper-
Volstead cooperative with approximately 2,400 members that markets 3.5 
billion pounds of milk annually and operates 2 manufacturing plants. 
The witness offered support for Proposal 1 to update the make 
allowances based on the most currently available data, specifically the 
2005 CDFA manufacturing cost data. The MMPA witness stressed support 
for Proposal 2's annual survey of manufacturing costs that would be 
administered by AMS through its market administrators.
    A witness appearing on behalf of NDA testified regarding the CPDMP 
2005 survey that was used to determine current make allowance levels. 
The witness said that NDA participated in the study and that costs for 
its NFDM plants were incorrectly allocated. The witness estimated that 
NDA's NFDM production represented approximately 54 percent of the total 
volume contained in the CPDMP 2005 survey for NFDM. In the survey, 
cream costs were allocated on a butterfat solids basis rather than as a 
percent of total solids, the witness said. However, according to the 
witness NDA's NFDM plants separate the cream that is stored in silos to 
be sold or transported to its butter manufacturing plant resulting in 
an over-allocation of costs to cream in the CPDMP 2005 survey. 
According to the witness, this misallocation inaccurately lowered NDA's 
NFDM manufacturing costs by $0.036 per pound. The witness asserted that 
after correcting for this error, the CPDMP 2005 survey for NFDM 
weighted average cost should been $0.019 per pound higher. The witness 
urged USDA to issue an emergency decision addressing make allowances 
because of the errors contained in the CPDMP 2005 survey.
    A post-hearing brief was filed on behalf of Agri-Mark, Foremost 
Farms USA, LOL, MMPA, NDA and Associated Milk Producers, Inc., 
hereinafter referred to as Agri-Mark, et al. The members of Agri-Mark, 
et al., are all Capper-Volstead cooperatives who market their members' 
milk in the Federal order system and operate manufacturing plants.
    The Agri-Mark, et al., brief emphasized its support for product-
price formulas because, in their opinion, no truly independent 
competitive price series exists to determine milk prices. The brief 
summarized the evolution of the Federal order pricing system and 
asserted that USDA's past policy has been to set make allowances at 
levels that cover the processing costs for most Federal order plants. 
The brief expressed the opinion that USDA deviated from this policy 
when determining current make allowance levels.
    The Agri-Mark, et al., brief supported adoption of Proposal 1 and 
argued that make allowances should be updated using the 2005 CDFA and 
the CPDMP 2006 surveys. Agri-Mark, et al., was of the opinion that USDA 
should continue to use the same national product volume weighting 
methodology that determined the current make allowances, incorporate 
CDFA whey cost data, use the CPDMP 2005 survey cheese plant population 
average cost instead of the sample average cost and continue to include 
a marketing cost factor of $0.0015 per pound in each make allowance.
    In their post-hearing brief, Agri-Mark, et al., proposed that the 
cheese make allowance be set at $0.2154 per pound. Agri-Mark, et al., 
wrote that the CPDMP 2005 survey cheese plant population average of 
$0.2028 per pound was the most representative of average size plants 
and therefore it is the best available information to determine an 
appropriate cheese make allowance. Agri-Mark, et al., endorsed the 
methodology explained in the IDFA brief that derived a cheese make 
allowance of $0.2154 per pound.
    The Agri-Mark, et al., brief proposed a dry whey make allowance of 
$0.2080 per pound by combining the 2005 CDFA and the CPDMP survey of 
2006 weighted average costs. Using this same methodology, the brief 
proposed a butter make allowance of $0.1725 per pound and the NFDM make 
allowance of $0.1782 per pound (though stipulating that the CDFA 
medium-sized plant cost should be used for NFDM.) The brief summarized 
the Cornell witness' testimony regarding the errors with the 2005 
butter and NFDM survey methodology and concluded that the current make 
allowances that were determined with this data are unrepresentative of 
actual costs. Agri-Mark, et al., requested that Proposal 1 be adopted 
on an emergency basis to rectify the current unrepresentative make 
allowances.
    In their brief, Agri-Mark, et al., expressed support for the 
portion of Proposal 2 that would authorize USDA to develop and conduct 
periodic manufacturing cost surveys of plants located outside of 
California. The brief explained that this data could then be relied 
upon in future rulemaking proceedings to amend the product price 
formulas.
    A witness testified on behalf of DPNM, Select Milk Producers, Inc. 
(Select), and Continental Dairy Producers, Inc. (Continental). 
Hereinafter, these entities will be referred to as DPNM, et al. The 
witness said that Select and Continental are Capper-Volstead 
cooperatives whose members are located in New Mexico, Texas, Kansas, 
Ohio, Michigan and Indiana. According to the witness, the DPNM, et al., 
testimony was endorsed by Lone Star Milk Producers and Zia Milk 
Producers, Inc., who are also Capper-Volstead cooperatives.
    The DPNM, et al., witness testified in support of Proposal 3. The 
witness was

[[Page 35312]]

of the opinion that CDFA cost data should not be used to determine new 
make allowance levels because the data are only representative of 
California manufacturing plants which the witness asserted have higher 
manufacturing costs than the rest of the country. The witness testified 
that CDFA data had been utilized in the past when make allowances were 
determined using Rural Business Cooperative Service (RBCS) cost data 
because the audited CDFA data broadened the available data and was used 
to verify the information contained in the RBCS study. However, the 
witness insisted that the CPDMP cost surveys are far more 
representative of the population of manufacturing plants and should now 
be relied upon as the sole determinant of make allowances.
    The DPNM, et al., witness testified that make allowances should be 
set at the following levels: $0.1108 per pound for butter; $0.1638 per 
pound for cheese; $0.1410 per pound for NFDM; and $0.1500 per pound for 
dry whey. The witness stated that except for dry whey, the proposed 
make allowances are identical to the weighted average costs contained 
in the CPDMP 2005 survey. The witness proposed that the dry whey make 
allowance be determined by adding $0.0090 per pound to the NFDM make 
allowance to account for the additional energy needed to produce dry 
whey. The witness estimated that if the DPNM, et al's., proposed make 
allowances are adopted, blend prices would increase by $0.22 per cwt.
    A second witness, a dairy accountant and dairy farmer appearing on 
behalf of DPNM, et al., testified regarding dairy farm operating costs, 
accounting, and business analysis of large modern dairy farm 
operations. According to the witness, the firm provides accounting and 
other business services to dairy producer operations in 27 states whose 
production volume represents about 10 percent of the milk produced in 
the United States. The witness testified that based on data collected 
during the 1990's, large dairy farms in six Western states had an 
average annual net profit per cwt of $1.31. The witness testified that 
based on 10 years' worth of client data, dairy farms in the west and 
eastern states must earn a net income of $1.50 and $2.00 per cwt, 
respectively, for a dairy farmer to collect a salary and retire debt. 
The witness predicted that for 2007 producer client average gross 
income of $15.51 per cwt and an average cost of production of $15.17 
per cwt, would yield an average net profit of $0.34 per cwt. The 
witness said that this was far from the $1.50 per cwt net profit needed 
for their clients to reduce debt or cover living expenses.
    The second DPNM, et al., witness stated that low milk prices in 
2005 reduced dairy farm client income to an average of $206 per cow. 
The witness noted that during the 1990s, average production cost per 
cwt in western states was $11.87 but this has risen to $13.50 for 2004-
2005. The witness testified that rising input costs combined with lower 
milk prices in 2004-2005 made large-scale, highly efficient dairy 
farming unprofitable, even in low-cost operating areas such as west 
Texas and New Mexico. The witness provided additional testimony to show 
that increasing make allowances depressed dairy farmer income during a 
period of increasing costs and reduced opportunities for profitability. 
The witness supported this testimony with 2006 client data showing that 
a farm milking 1,800 cows would have lost $284,000. The witness 
provided detailed client data showing that the major higher-cost milk 
production factors during 2005 and 2006 were increased energy and feed 
costs.
    A third witness, a dairy farmer, appearing on behalf of DPNM, et 
al., testified in support of Proposal 3. The witness operates a farm in 
New Mexico that milks approximately 3,800 cows and testified that they 
have been receiving $1.50 cwt below the Southwest order's blend price 
because of hauling costs. The witness said that over the last few years 
any increase in producer milk prices has been consumed by rapidly 
increasing production costs. The witness supported all proposals 
submitted by DPNM and articulated opposition to adoption of Proposals 1 
and 2.
    The DPNM, et al., post-hearing brief explained its opposition to 
all other proposals included in the hearing to adjust the make 
allowances was based on three principles: (1) The data used to 
determine the appropriate level of manufacturing allowances for 
establishing Federal order prices should be drawn from plants operating 
within the Federal order system; (2) adjustments to Federal order 
pricing regulations should always be subject to formal rulemaking; and 
(3) make allowances should be set at a level deemed appropriate by 
USDA, after taking into consideration all statutorily required factors 
and current milk marketing conditions, rather than prescribed 
geographic or volumetric factors. The brief explained why the CPDMP 
2005 survey is the best data available and met their criteria for use 
in establishing Federal order make allowances and why the 2006 survey 
is flawed and should not be relied upon in determining make allowances.
    A witness appearing on behalf of IDFA testified in support of 
Proposal 1 and the annual manufacturing cost survey advanced in 
Proposal 2. However, the witness did not support adoption of the 
portion of Proposal 2 that would result in the automatic update of make 
allowances. The witness requested emergency adoption of Proposal 1 and 
this request was reiterated in IDFA's post-hearing brief.
    The IDFA witness testified that the product-price formulas 
determine the minimum prices manufacturers must pay for their raw milk 
and that those whose costs exceed the fixed make allowances in the 
price formulas are unable to recoup their higher costs. The witness 
asserted that any increase in the manufacturer's end product prices 
would only result in an increase in the minimum raw milk price they 
must pay. According to the witness, manufacturers also face financial 
problems if any of the product-price formula factors are incorrect. The 
witness illustrated by example the impacts of both inaccurate product 
prices and inaccurate make allowances on manufacturers.
    The IDFA witness testified that before January 1, 2000, the Federal 
order system utilized a market-based pricing system which automatically 
reflected current market conditions. However, under the end product 
pricing system, market factors (e.g. yields, butterfat retention) are 
set at a point in time and can only be changed through the formal 
rulemaking process, the witness said.
    The IDFA witness espoused that setting make allowances too high or 
yield factors too low may result in low milk prices but that should not 
be of concern to USDA. In this regard, the witness was of the opinion 
that the Federal order system should only determine minimum prices and 
allow market responses through over-order premiums to remedy any 
regulated prices that are too low. However, the witness conceded that 
if a plant can manufacture products at costs lower than those reflected 
by the price formula make allowance levels then the difference could be 
used to make plant investments, secure a larger milk supply to the 
detriment of higher-cost plants or return higher margins to plant 
owners.
    The IDFA witness testified in support of updating the current make 
allowances with the most current cost data available (Proposal 1). The 
witness was of the opinion that the CDFA dry whey cost data should be a 
factor in determining a new dry whey make allowance for Federal orders. 
The

[[Page 35313]]

witness asserted that the CDFA average dry whey plant size more closely 
resembled the NASS average dry whey plant size than did the CPDMP 
survey. Furthermore, the witness asserted that the CDFA dry whey data 
was skewed toward low cost plants, not high cost plants as asserted by 
USDA. The witness maintained that using the CDFA data in determining 
the dry whey make allowance would not cause the make allowance to be 
set too high. The witness concluded that both the CDFA and CPDMP dry 
whey weighted average costs should be used to determine the dry whey 
make allowance and reiterated this position in its post-hearing brief.
    Also in its post-hearing brief, IDFA stated that any decision made 
by USDA on the Class III and Class IV pricing formulas should not 
directly consider hearing testimony regarding dairy farmer cost-of-
production. The brief asserted that it is already captured indirectly 
through the supply and demand for manufactured products and therefore 
should not be given additional consideration in this proceeding.
    The IDFA witness testified that USDA needs to correct for CPDMP's 
stratified cheese plant sampling which in IDFA's opinion over-
represents low-cost cheese plants. The witness highlighted testimony of 
the Cornell witness which compared the eight cheese plants that 
participated in both surveys revealing an average manufacturing cost 
increase of 1.7 cents per pound. IDFA was of the opinion that since the 
same cheese plant sample was not used in the two CPDMP surveys, the 
most appropriate method for determining a new cheese make allowance 
would be to use the weighted average cost from the 2005 survey 
($0.2028) plus 1.7 cents for a total of $0.2198 per pound. In its 
brief, IDFA concluded that the new make allowances should be set no 
lower than the following: $0.2154 per pound for cheese; $0.1725 per 
pound for butter; $0.1782 for NFDM; and $0.2080 for dry whey.
    The IDFA witness supported adopting an annual manufacturing cost 
survey as contained in Proposal 2 but opposed any automatic updating of 
make allowances. The witness said that an annual survey would provide 
industry participants information regarding trends in plant costs and 
such information could be used in future hearings to adjust make 
allowances. However, the witness did not support automatically updating 
make allowances outside of the hearing process because it would 
prohibit industry input regarding how the data should be utilized. IDFA 
reiterated these views in its post-hearing brief.
    The IDFA witness testified in opposition to Proposal 3. The witness 
argued that audited CDFA data should continue to be included when 
determining new make allowance levels. The witness asserted that the 
elimination of the CDFA data would result in lower make allowances that 
in their opinion are already too low. In its post-hearing brief, IDFA 
asserted that the proponents of Proposal 3 had presented no evidence 
that manufacturing costs have decreased to levels similar to the 
manufacturing costs reflected in make allowances that were effective 
prior to February 1, 2007.
    A witness appearing on behalf of Lactalis American Group, Inc. 
(Lactalis) testified in support of Proposal 1 and in opposition to 
Proposal 3. According to the witness, Lactalis operates six cheese 
plants in the United States. The witness expressed support for IDFA's 
positions. The witness said that the Class III and Class IV product-
price formulas should be amended to give more flexibility to market 
participants in establishing market prices. The witness was of the 
opinion that increasing make allowances by adopting Proposal 1 would 
give processors the flexibility to make short-term adjustments in 
response to changing market conditions. The witness argued that the 
increasing milk supply, not make allowances which are too high, is the 
cause of low milk prices received by dairy farmers. Therefore, the 
witness opposed any proposals that would result in lower make 
allowances.
    A witness appearing on behalf of Leprino testified in opposition to 
Proposal 3 stating that there is no basis to set make allowances below 
current levels. According to the witness, Leprino operates nine 
manufacturing plants throughout the United States that produce Italian 
style cheeses. The post-hearing brief filed by Leprino expressed 
support for the make allowances proposed in IDFA's post-hearing brief. 
Leprino was of the opinion that make allowances should be set no lower 
than the following: $0.2154 for cheese; $0.2080 for dry whey; $0.1725 
for butter; and $0.1782 for NFDM.
    A witness appearing on behalf of Saputo Cheese USA (Saputo), a 
dairy manufacturer, testified in support of IDFA's positions. The 
witness testified that Saputo opposed any proposal which would add 
complexity to the Federal milk order system. The witness supported 
updating the current make allowances to reflect the most current 
available data as sought in Proposal 1 and that updated make allowances 
for dry whey should use CDFA data.
    A post-hearing brief filed on behalf of Twin County Dairy (Twin 
County), an Iowa-based cheese manufacturer, expressed support for the 
proposals offered by IDFA and Agri-Mark that seek to increase make 
allowances. However, the brief asserted that the proposals do not go 
far enough to ensure that medium-sized plants such as those operated by 
Twin County remain profitable. The brief argued that the proposed make 
allowances are heavily weighted toward large, low-cost plants and their 
adoption, especially the dry whey make allowance, would cause financial 
hardship on many cheese manufacturing plants that are similar in size 
to Twin County. Twin County insisted that even though product-price 
formulas are applied identically to large and small plants, USDA should 
conduct a regulatory impact analysis because in Twin County's opinion, 
product-price formulas have a disproportionate impact on small 
businesses compared with larger entities that may benefit from 
advantages of economies of scale.
    A witness appearing on behalf of HP Hood LLC (HP Hood) testified in 
opposition to Proposals 1, 2 and 3. According to the witness, HP Hood 
is a manufacturer of Class I and Class II dairy products that are 
distributed nationally. The witness opposed Proposals 1, 2 and 3 
because their adoption would change the Class III and Class IV milk 
pricing formulas that in turn are used to determine the Class I and 
Class II prices that HP Hood pays for its raw milk supply. The witness 
opposed adoption of any proposal that would result in the automatic or 
periodic updating of the Class III and Class IV pricing formulas 
arguing that such updates should be made through the formal rulemaking 
process.
    A witness appearing on behalf of NAJ offered an amendment to 
Proposal 2. The witness said the amendment would expand the 
manufacturing cost survey to include gathering manufacturing cost data 
for whey protein concentrates (WPC's) and lactose. This inclusion was 
reiterated in NAJ's post-hearing brief.
    A Michigan dairy farmer testified regarding the profitability of 
dairy farmers and in opposition to adopting any proposals that would 
increase make allowances. The witness was opposed to increasing make 
allowances until the price formulas are amended to recognize a farmer's 
cost of production. The witness stated that on-farm fuel costs were 
$35,000 in 2004 and had risen to $70,000 in 2006. The witness asserted 
that there are many Michigan dairy farmers considering leaving the 
dairy industry because of increased costs and low milk prices. The 
witness also

[[Page 35314]]

expressed the opinion that NASS NFDM prices were misreported or under-
reported during the prior 12 months.
    A post-hearing brief submitted on behalf of O-AT-KA Milk Products 
Cooperative, Inc., (O-AT-KA) expressed support for Proposals 1 and 2, 
and opposition to Proposal 3. According to the brief, O-AT-KA is a 
Capper-Volstead cooperative located in New York and its plant 
manufactures 600 million pounds of milk annually into butter and NFDM. 
The brief stressed that changes to the make allowances and other 
factors of the product price formulas need to accurately represent the 
current manufacturing market. O-AT-KA expressed support for Proposal 1 
and was of the opinion that the CPDMP 2006 survey should be considered 
a minimum when setting make allowances. According to the brief, O-AT-
KA's plant manufacturing costs are higher than the CPDMP 2006 survey 
weighted average NFDM cost. O-AT-KA also wrote that they compete 
directly with California plants and requested that USDA should keep the 
Class IV and California Class 4a prices aligned if it recommends any 
changes to the product price formulas. O-AT-KA noted support for 
Proposal 2, but not the portion that calls for automatically updating 
make allowances. The O-AT-KA brief opposed adoption of Proposal 3 
because it would inhibit their ability to provide balancing services to 
the market and a fair return to its member-owners.
    A joint post-hearing brief filed on behalf of Dairylea and DFA, 
hereinafter referred to as Dairylea, et al., opposed adoption of 
Proposals 1 and 2. The brief opined that the current make allowances 
should be used with the addition of the energy adjustor advanced in 
Proposal 17 and cost add-ons described in Proposal 20. The Dairylea, et 
al., brief supported the NAJ modification of Proposal 2 to expand the 
NASS product price survey to include information on whey protein 
concentrates.
2. Product Yields and Butterfat Recovery Percentage
    A witness appearing on behalf of DPNM, et al., testified in support 
of Proposals 6, 7 and 8. The witness testified that before January 1, 
2000, the Federal milk order price discovery mechanism took into 
account dairy farmers' cost of production when determining minimum 
regulated prices. If farmers' costs of production increased, the 
witness said that manufacturers were able to pay farmers higher prices 
because on-farm production costs could be passed on to their customers. 
However, under the current pricing system, the witness argued, minimum 
prices to dairy farmers are based on the average prices of dairy 
products sold nationally during the month. As a result, the witness 
asserted, dairy farmers have experienced financial hardship because 
they are unable to pass on their higher costs to the marketplace.
    The DPNM, et al., witness was of the opinion that Proposals 6, 7 
and 8 should be considered jointly as coordinated adjustments to the 
various yield factors to ensure that dairy farmers receive a fair 
minimum price. In its post-hearing brief, DPNM, et al., added that 
Proposals 3 and 15 also should be considered in conjunction with 
Proposals 6, 7 and 8 because together they address all parts of the 
current product price formulas.
    The DPNM, et al., witness testified in support of Proposal 6 
seeking to increase the butterfat yield factor from 1.20 to 1.211. The 
witness said that this change would correct for a mathematical error in 
calculating farm-to-plant shrinkage. The witness explained that in the 
2002 final decision that established the current farm-to-plant 
shrinkage factor, shrinkage allocated to butterfat loss should have 
been calculated on a per cwt of milk basis, not on a per pound of 
butterfat basis. DPNM, et al., noted on brief that no witnesses at the 
hearing disagreed with this assertion.
    The DPNM, et al., witness also offered a modification to Proposal 6 
seeking to amend the butterfat credit in the protein price. The witness 
explained that when USDA adjusted the butterfat yield factor in the 
protein price formula to 1.572 in 2002 to account for farm-to-plant 
shrinkage, the butterfat credit portion of the protein formula was not 
adjusted to an equivalent of 89.4 percent. The witness estimated that 
increasing the butterfat yield factor from 1.20 to 1.211 and decreasing 
the butterfat credit portion of the protein formula from 90 to 89.4 
percent would, on average, have increased blend prices by $0.07 per 
cwt.
    The DPNM, et al., witness testified in support of Proposal 7 
seeking to eliminate the farm-to-plant shrinkage factor. The witness 
was of the opinion that accounting for farm-to-plant shrinkage allows 
producers and processors to mask inefficiencies. According to the 
witness, DPNM, et al., farm-to-plant shrinkage is well below the 0.25 
percent assumed in the pricing formulas. The witness attributed lower 
farm-to-plant shrinkage to large producers who ship tanker loads of 
milk. The witness insisted that shrinkage is not a result of milk 
solids being unrecoverable from the milk tanker and hoses but rather 
the result of imprecise measuring at the farm.
    The DPNM, et al., witness testified that the yield factors in the 
product pricing formulas should be amended to reflect current 
technology. The witness proposed that the protein price formula be 
changed to reflect a 94 percent butterfat recovery in cheese 
manufacturing, that the casein percentage in milk be increased to 83.25 
percent, and that the butterfat-to-protein ratio in cheese be changed 
to 1.214 to reflect average producer tests. According to the witness, 
the adoption of a 94 percent butterfat recovery rate also implies that 
the butterfat yield factor in the protein price should be increased 
from 1.587 to 1.653 as proposed in Proposal 8.
    The DPNM, et al., witness estimated that increasing the butterfat 
recovery rate from 90 to 94 percent would result in a 10.5-cent 
increase in producer blend prices. The witness said that the currently 
assumed 90 percent butterfat recovery rate is based on technology that 
is more than 20 years old while new technology enables manufacturers to 
achieve a much higher recovery rate. Using CDFA plant cost survey data 
for 2002 through 2005, the witness used a mass balance analysis to 
estimate the flow of milk components through a cheddar cheese plant and 
the allocation of milk components to products and by-products. Through 
this analysis the witness derived a 94 percent butterfat recovery rate 
for plants participating in the CDFA cost survey. The witness estimated 
the butterfat recovery rate for cheese plants that participated in the 
2004 RBCS cost study to be 95.25 percent for all cheeses.
    The DPNM, et al., witness testified in support of Proposal 8. The 
witness argued that the percentage recovery factor for casein in milk 
should be increased from 82.2 to 83.2, to reflect average producer 
tests, which would result in a 2.3-cent per cwt increase in producer 
blend prices. However, in their post-hearing brief, DPNM, et al., 
stipulated that a casein recovery factor of 83.10 percent was 
appropriate. DPNM, et al., explained in brief that changing the casein 
recovery factor would raise the protein yield factor from 1.383 to 
1.405; and increasing the butterfat recovery rate to 94 percent would 
change protein price formulas by increasing the protein to butterfat 
ratio from 1.17 to 1.214 and increasing the butterfat yield from 1.587 
to 1.653. These changes would update the protein price formula to 
reflect current industry recovery standards and return revenue to 
producers who, according to the

[[Page 35315]]

DPNM brief, et al., have received lower pay prices.
    The DPNM, et al., witness estimated that increasing the butterfat-
to-protein ratio from 1.17 to 1.24 would result in a 3.7-cent increase 
in producer blend prices. The witness said that the current butterfat-
to-protein ration of 1.17 represents standardized milk tests at 3.5 
percent butterfat and 2.9915 percent true protein. However, according 
to the witness the 2004 average producer milk test for milk contained 
in the 2004 RBCS study was 3.69 percent butterfat and 3.04 percent true 
protein which more accurately represents' a butterfat-to-protein ratio 
of 1.214.
    The DPNM, et al., witness concluded that the current butterfat to 
protein ratio of standardized milk undervalues more than one half of 
the producer milk marketed on Federal orders. The witness also stated 
that since plants purchase milk at test, not at the standardized 
values, it is more appropriate to use weighted average milk tests in 
the pricing formulas. In brief, DPNM asserted that standardized milk 
tests are lower than average producer tests and result in yield factors 
in the protein price formula that are artificially low which in turn 
understates what the protein price paid to producers should be.
    The DPNM, et al., witness concluded that if the DPNM, et al., 
proposals to change the butterfat recovery percentage, butterfat-to-
protein ratio, and true protein in casein percentage are adopted, 
producer blend prices would increase by $0.20 per cwt.
    The DPNM, et al., witness also testified that the NFDM yield factor 
should be increased from .99 pounds of NFDM per pound of solids nonfat 
(SNF) to 1.02 pounds of NFDM per pound of SNF. The witness stressed 
that according to current FDA standards of identity, one pound of SNF 
can produce as much as 1.05 pounds of NFDM. The witness elaborated that 
NFDM is often sold with approximately 5 percent moisture, whereas SNF 
is assumed to contain zero percent moisture. Therefore, concluded the 
witness, the current formula is incorrect in assuming that one pound of 
SNF actually produces less than one pound of NFDM. The witness referred 
to various studies conducted by CDFA and CPDMP that demonstrated a 
combined NFDM and buttermilk powder yield in excess of 1.025 pounds per 
pound of SNF. The witness was of the opinion that after taking into 
account the lower market value of buttermilk powder, a NFDM yield of 
1.02 is appropriate. The witness estimated that this proposed change 
would increase producer blend prices by 4 cents.
    The witness concluded that if all the DPNM yield changes were 
adopted, blend prices would increase by $0.42 per cwt and on average, 
producers would receive $9,787 in additional income per year. The 
witness was of the opinion that any adjustment in yield factors should 
also be accompanied by an adjustment in make allowances because the two 
are inherently linked.
    A witness appearing on behalf of Leprino testified in opposition to 
Proposals 6, 7 and 8. The witness opposed the portion of Proposal 6 
seeking to increase the butterfat recovery rate in cheese manufacturing 
from 90 to 94 percent. In the witness' opinion, the proponents for 
increasing the butterfat recovery rate provided no evidence to support 
this increase aside from hypothetical examples. The witness also 
opposed the amendment to Proposal 6 to decrease the butterfat credit in 
the protein formula below the 90 percent butterfat recovery rate that 
is assumed in the cheese yield formula. The witness explained that this 
would cause cheese manufacturers to pay for more butterfat than is 
actually contained in the raw milk. The witness agreed that there is an 
error regarding how butterfat shrink is applied in the cheese yield 
formula. However, the Leprino witness did not support increasing the 
cheese butterfat yield factor to 1.211 because of milk component losses 
that occur in cheesemaking that are not recognized in the formula.
    The Leprino witness testified in opposition to elimination of the 
farm-to-plant shrinkage factor advanced by Proposal 7. The witness said 
that the loss of milk when shipping from the farm to the plant is well 
documented and adjusting the Class III price to reflect this loss is 
appropriate. The witness said that Leprino experiences farm-to-plant 
milk losses of approximately 0.25 percent. The witness disagreed with 
the rationale offered by the proponent that increasing farm sizes and 
single producers shipping whole tanker loads of milk has remedied farm-
to-plant shrinkage. The Leprino witness testified that deliveries to 
the Leprino plant in Waverly, New York, often have the milk of 15 to 18 
producers per tanker. The witness argued that milk losses from farm-to-
plant remain a reality that should continue to be acknowledged in the 
Class III price formula.
    The Leprino witness testified in opposition to increasing the 
cheese protein yield factor from 1.383 to 1.405 (Proposal 8.) The 
witness said that the proponent's assumption of an 83.25 percent casein 
in true protein content that would lead to a cheese protein yield 
factor of 1.405 was not based on actual laboratory casein tests. 
Leprino's post-hearing brief reiterated its opposition to Proposals 6, 
7 and 8.
    A witness appearing on behalf of IDFA testified in opposition to 
proposals seeking to increase yield factors (Proposals 6, 7 and 8). The 
witness was of the opinion that the yield factors should actually be 
decreased to reflect in-plant shrinkage and the sale of lower-valued 
products such as whey cream and buttermilk. In its post-hearing brief, 
IDFA espoused that proponents of increasing yield factors made 
erroneous assumptions. The brief stated that hearing evidence documents 
that farm-to-plant losses are a marketplace reality and should continue 
to be recognized in the product price formulas. The brief also argued 
that hearing evidence does not support proponent's claim that a 94 
percent butterfat recovery rate is achievable by most cheese 
manufacturing plants. Lastly, the brief insisted that the 83.25 percent 
casein in true protein assumed by the proponents is not based on any 
actual milk tests.
    A food technologist witness appearing on behalf IDFA testified 
regarding the cheese manufacturing process and specifically about 
cheese production at Alto Dairy Cooperative (Alto Dairy) during 1985--
2003. The witness discussed the evolution of cheese processing 
technology and testified that the greatest loss of milkfat during the 
cheese making process occurs during the cutting of the coagulum. The 
witness estimated that in moving from using traditional open vats to 
newer horizontal enclosed vats, the loss of milkfat during the cutting 
of the coagulum was reduced from 9.6 percent to 6 percent. However, the 
witness said, this does not account for losses during other stages of 
the cheesemaking process. The witness was of the opinion that the 
industry average butterfat recovery rate in cheddar cheese is 
approximately 90 percent.
    A witness appearing on behalf of Kraft Foods (Kraft) testified in 
support of the positions and proposals advocated by IDFA. According to 
the witness, Kraft purchases and manufacturers dairy products and 
operates numerous plants located throughout the country.
    The Kraft witness opposed eliminating the farm-to-plant shrinkage 
factor in the Class III price formula (Proposals 7 and 8). The witness 
said that Kraft manufacturing plants experience farm-to-plant milk 
shrinkage and that this factor should continue to be acknowledged in 
the price formulas

[[Page 35316]]

so the butterfat recovery percentages and yields are not arbitrarily 
inflated.
    A witness appearing on behalf of Davisco Foods (Davisco) testified 
as being unable to use whey cream in standardized full-fat cheddar 
production. The witness explained Davisco sells whey cream to a butter 
manufacturer at a price lower than that reflected in the Class III 
pricing formula. According to the witness, Davisco owns and operates 
manufacturing plants in Idaho, Minnesota and South Dakota.
    A witness appearing on behalf HP Hood opposed adoption of 
increasing yield factors. According to the witness, the proposed yield 
factors are not reflective of industry data provided in record 
testimony. Furthermore, the witness said, the shrinkage factor should 
remain in the pricing formulas and claimed that HP Hood experiences an 
average total shrinkage (farm-to-plant and in-plant loss) of 1.5 
percent.
    A witness appearing on behalf of LOL testified in opposition to 
Proposal 6. The witness asserted that when determining the current 
farm-to-plant shrinkage factor USDA did not clearly state if the 
butterfat loss was based on product pounds or cwt of milk. The witness 
said that an increase in the butterfat yield would increase the raw 
milk costs of manufacturers who already contend with a make allowance 
that does not cover their cost of processing. The witness opposed 
increasing the butterfat recovery percentage to 94 percent and revealed 
that the LOL cheese plant in Kiel, Wisconsin, recently experienced an 
average annual cheese yield of 10.21 pounds per cwt. According to the 
witness, assuming a 90 percent butterfat recovery rate and applying the 
plant's average milk tests, the Van Slyke formula estimates a cheese 
yield of 10.16 pounds. The witness indicated that the theoretical Van 
Slyke result and observed plant yield validates the continued use of 
the 90 percent butterfat recovery rate in the Class III price formula.
    The LOL witness also testified in opposition to Proposals 7 and 8 
seeking to amend the yield factors by eliminating farm-to-plant and 
butterfat shrinkage factors. The witness said proponents' claim that 
minimal comingled milk in the Florida, Southwest, Arizona and Pacific 
Northwest orders fails to recognize that comingled milk in the 
Northeast and Upper Midwest is commonplace as the milk of 10 or more 
producers is commonly comingled on a single load. According to the 
witness, this makes farm-to-plant shrinkage between farm and plant 
weights inevitable. The witness indicated that in 2006, the LOL butter 
and NFDM plant in Carlisle, Pennsylvania, experienced an average 
difference of 0.343 percent between farm and plant weights and an 0.511 
percent butterfat shrinkage. The witness insisted that the LOL 
shrinkage percentages validate the continued incorporation of farm-to-
plant and butterfat shrinkage factors in the pricing formulas.
    A witness appearing on behalf of MMPA testified in opposition to 
Proposal 7 seeking to eliminate the farm-to-plant shrinkage factor. The 
witness elaborated that even though MMPA pays its farmers based on farm 
weights and tests, some milk solids are lost during transportation of 
milk from the farm to the plant. According to the witness, MMPA plants 
experience approximately a 0.3 percent loss of milk from farm-to-plant. 
Without the farm-to-plant shrinkage factor in the product price 
formulas, the witness said that MMPA would have to pay farmers for milk 
that is lost in transport and cannot be manufactured into a saleable 
product.
    The MMPA witness also opposed Proposals 6 and 8 that seek to amend 
the Class IV NFDM and butter yield factors. The witness provided 
evidence that MMPA experiences butter and NFDM plant yields that are 
slightly lower than those used by the Class IV formula. The MMPA 
witness claimed that their yields typically generate a milk value of 
$11.11 per cwt, while the assumed yields in the product price formulas 
generate a milk value of $11.06 per cwt. The witness asserted that this 
$0.05 per cwt advantage is eliminated because of the off-grade products 
it produces and sells at discounted prices. The witness concluded that 
the current Class IV yield factors are appropriate and that the current 
calculation is superior to the complicated alternatives in Proposals 6, 
7 and 8.
    A witness appearing on behalf of Foremost testified regarding 
cheese production at Foremost's manufacturing plants. The witness 
entered a declaration for the record describing the types of cheese 
produced by Foremost and the specific butterfat retention rate achieved 
at its cheese manufacturing plant in Marshfield, Wisconsin. Using a 
mass balance analysis, the witness stated that in 2006 the Marshfield 
plant had an average butterfat retention rate of 90.25 percent. The 
witness said that Foremost considered investing in more modern cheese 
vats that would yield a higher butterfat retention rate but chose not 
to do so because it would take at least 13 years to recoup any return 
on such a large investment.
    The Agri-Mark, et al. post-hearing brief expressed opposition to 
the adoption of Proposals 6, 7 and 8. The brief argued that the 
proponent's methodology in computing product yields was flawed because 
it ignored that milk solids and/or cream are sometimes added to farm 
milk during processing resulting in increased vat yields. Therefore, 
Agri-Mark, et al., concluded that the product yields advanced in 
Proposals 6 through 8 are not representative of the volume of products 
that can be produced from a hundredweight of milk. Agri-Mark, et al., 
also took exception to proponent's statements that dairy farmers are 
paying for the costs of new plant equipment designed to increase yields 
through increased make allowances and reduced producer income. Agri-
Mark, et al., argued that enhanced yields increase production thus 
lower manufacturing costs per pound of product from which make 
allowances are derived. Agri-Mark, et al., also opposed the elimination 
of a farm-to-plant shrinkage factor used in the product price formulas.
    The Agri-Mark, et al., brief stated that increasing the butterfat 
recovery rate from 90 percent to 94 percent is not justified. Agri-
Mark, et al., insisted that the proponent's claim that cheese plants 
recycle their whey cream into the cheese vat and are then able to 
achieve a 94 percent butterfat recovery was contradicted by many 
witnesses at the hearing. Agri-Mark, et al., also wrote that the record 
lacks sufficient evidence to justify increasing the NFDM yield factor 
from .99 to 1.02. The brief supported USDA's reasoning for relying on 
the current NFDM yield factor and said that the farm-to-plant shrinkage 
factor is still valid.
    The post-hearing brief filed on behalf of Dairylea, et al., agreed 
with proponents of Proposal 6 that an arithmetic error in calculating 
the shrinkage factor in the butterfat yield had been made by USDA. 
Therefore, the brief advocated that the butterfat yield factor in the 
butterfat price formula be increased to 1.211. The brief also discussed 
the butterfat recovery percentage in the protein price formula and 
supported increasing the butterfat retention factor in cheese 
manufacturing but did not specify a factor. The brief explained that 
currently the formula assumes that 90 percent of the butterfat in the 
cheese vat ends up in the finished product. The brief emphasized the 
importance of recognizing that the butterfat retention is based on 
butterfat going into the vat, not butterfat coming from the farm. The 
brief asserted that a 90 percent recovery rate of butterfat

[[Page 35317]]

going into the cheese vat is equivalent to 89.4 percent of the 
butterfat coming from farms going into the finished product after 
accounting for farm-to-plant shrinkage. The brief detailed that cheese 
manufacturers that testified achieving a fat recovery percentage of 
90.25 percent on the basis of farm tests actually experienced a 
butterfat recovery of 90.9 percent of fat that entered the cheese vat. 
The brief concluded that this evidence, combined with additional 
testimony regarding available technology, makes higher butterfat 
recovery possible and should be reflected in the protein price formula.
    The Dairylea, et al., brief opposed the elimination of the farm-to-
plant shrinkage factor as advanced in Proposal 7. The brief asserted 
that while some production areas are dominated by large farms, a large 
portion of the country is dominated by small farms where farm-to-plant 
shrinkage is prevalent. However, the brief noted that farm-to-plant 
shrinkage is reflected in the product-price formulas because yield data 
provided by manufacturers are commonly based on farm weights and tests.
    The post-hearing brief submitted on behalf of O-AT-KA stated the 
hearing record does not justify adoption of Proposals 6, 7 and 8, and 
that the proposed changes to yield factors would increase its raw milk 
costs and inhibit its ability to provide balancing services to the 
market. O-AT-KA was of the opinion that Proposal 6 should only be 
adopted if USDA simultaneously amends the product-price formulas to 
account for in-plant losses and off-grade products that are sold at a 
discount.
3. Value of Butterfat in Whey
    A witness appearing on behalf of IDFA testified in support of 
Proposal 9 seeking to adjust the protein price formula to reflect the 
lower value and volume of butterfat recoverable from whey cream and was 
of the opinion that it was superior to Proposal 10. The witness 
asserted that the current Class III price formula values the butterfat 
not captured in the cheese at the Grade AA butter price even though it 
is sold as whey butter which has a lower value in the marketplace. In 
its brief, IDFA supported the testimony of the Leprino witness 
regarding saleable volume and the value whey cream in the marketplace. 
The brief also highlighted testimony that some processors do not return 
whey cream back into its cheese vats. The brief concluded that the 
butterfat adjustment contained in the protein price formula should be 
reduced by $0.016 to account for the lower value and saleable volume of 
whey cream.
    The witness appearing on behalf of Agri-Mark supported adoption of 
adjusting the Class III protein price component to account for the 
lower value of whey butter (Proposal 10). The witness estimated that 
0.42 pounds of whey butter is made from a hundredweight of milk and is 
sold at a price below the Grade AA butter price. According to the 
witness, Agri-Mark sells its whey butter for $0.074 per pound less than 
its Grade AA butter. The witness was unaware of any public data or 
published reports on market prices for whey butter and was of the 
opinion that there were very few manufacturers making whey butter in 
the United States.
    The post-hearing brief filed on behalf of Agri-Mark, et al., 
contended that the product price formulas should recognize the lower 
value and saleable volume of whey cream and urged the adoption of 
Proposal 9. The brief summarized record evidence regarding plant whey 
cream prices and volumes and insisted that lower whey cream values are 
a market reality that should be reflected in the product-price 
formulas.
    A witness appearing on behalf of Leprino testified in support of 
Proposal 9. The Leprino witness reviewed the derivation of the current 
cheese yield per pound of fat in the Class III product-price formula 
using a Van Slyke formula with an assumed butterfat recovery rate of 90 
percent and a moisture content of 38 percent. The witness asserted that 
the Class III formula implies that 0.035 pounds of butterfat per cwt of 
milk is recoverable as whey cream but is valued in the Class III 
pricing formula as if it was used to produce 0.042 pounds of Grade AA 
butter. However, the witness asserted that all whey cream is used to 
produce Grade B butter which has a lower value than Grade AA butter. 
Based on testimony from Agri-Mark, LOL and NDA, the witness estimated 
that under the Class III price formula, cheese manufacturers in the 
Northeast and Pacific Northwest are being charged 12.5 and 20.4 cents, 
respectively, per pound of butterfat in the whey cream more than what 
these products can be sold for in the marketplace. The witness was 
unaware of any publicly available data on national whey cream 
production volumes and prices. The witness conceded that Leprino does 
not make cheddar cheese and uses all its whey cream in its 
cheesemaking.
    The Leprino witness testified that the Class III formula also 
overestimates the volume of butterfat recoverable as whey cream. With 
an assumed 90 percent butterfat recovery rate, the witness said that 
the formulas infer the remaining 10 percent of butterfat is captured as 
whey cream. However, the witness explained that only 7.8 percent of the 
butterfat is actually recoverable because some butterfat is 
incorporated into dry whey or with the skim portion of the salt whey 
that must be disposed.
    The Leprino witness testified that Proposal 9 would amend the Class 
III formula to better account for overvaluing the theoretical volumes 
and market values of whey cream. The witness explained that the 
butterfat credit in the protein portion of the Class III formula should 
be increased from 90 to 92.20 percent to acknowledge and correct for 
the 7.8 percent of butterfat that is recoverable as whey cream. In 
addition, the witness maintained that the butterfat portion of the 
Class III formula should be reduced by $0.016 to account for the lower 
price manufacturers receive for Grade B butter. The witness estimated 
that these changes would have lowered the Class III price by $0.169 per 
cwt over the last five years. The witness revealed that Leprino uses 
all of its whey cream in its cheese production and therefore is able to 
recoup the cheese value for all its milk components.
    A post-hearing brief filed on behalf of Leprino stressed that the 
butterfat portion of the Class III formula should actually be reduced 
by $0.021 because hearing testimony from other witnesses revealed that 
2007 whey prices in the Pacific Northwest were significantly lower than 
those in 2005 and 2006. The brief highlighted testimony that the 2005-
2006 Pacific Northwest average whey cream sale price was 94.4 percent 
of the average Grade AA butter price while the 2005-2007 average whey 
price fell to 89.4 percent of the Grade AA butter price.
    A witness appearing on behalf of Kraft supported adoption of 
Proposal 9. The witness indicated that on average, Kraft receives $0.10 
per pound less for whey butter than for Grade AA butter.
    A witness appearing on behalf of Saputo testified that the Class 
III pricing formula wrongly presumes that all cheese manufacturers have 
dry whey processing capabilities and can obtain a high value for dry 
whey in the marketplace. In reality, the witness said, manufacturers 
sell whey as whey protein concentrates, whey protein isolates or in 
liquid form that have widely disparate market values. According to the 
witness, assumptions regarding the production of dry whey may 
financially harm cheese manufacturers and could result in the 
accelerated consolidation in milk manufacturing. For these reasons, the 
witness supported the adoption of Proposal 9.

[[Page 35318]]

    A witness appearing on behalf of Great Lakes Cheese (GLC) testified 
in support of adoption of Proposal 9. According to the witness, GLC is 
a cheese manufacturer whose plant in Adams, New York, processes 410 
million pounds of milk annually into American style cheeses and by-
products. The witness said that because milk components are lost in 
many stages of the cheesemaking process, the Federal order system 
should not have class prices that require manufacturers to pay for milk 
components that they are unable to use and sell. The witness 
illustrated by example the in-plant milk losses incurred from 
sanitizing equipment and removing sludge from the whey separator. In 
the example, the witness estimated that in 2006, GLC lost $23,770 worth 
of whey solids in the desludging process.
    The GLC witness said that GLC's Adams facility produces one million 
pounds of whey cream annually which usually can be sold at the Grade AA 
butter market price. In 2006, the witness stated, GLC received $1.2425 
per pound of whey cream fat and the average CME AA butter price was 
$1.2405. However, the witness explained, because the average Class III 
butterfat price was $1.3185 per pound (a $0.076 price difference), it 
had to pay a higher price for the butterfat in raw milk than it could 
recover in the market.
    A witness appearing on behalf of NDA testified that Federal orders 
should establish fair minimum prices for producer milk while ensuring 
that the product-price formulas reflect the true value of dairy 
products in the market. The witness stated that NDA receives 
significantly less for its whey cream sales than it does for sweet 
cream sales and that Proposal 9 or Proposal 10 should be adopted to 
reflect this reality in the product-price formulas. The witness 
estimated that on average from 2005 through 2007, on a butterfat basis, 
NDA sold its whey cream for 36 percent less than it sold its sweet 
cream and $0.0244 per pound less than the Class III butterfat price. 
Therefore, the witness said, NDA supports IDFA's proposal to adjust the 
protein price to reflect the lower value of whey cream.
    The NDA witness also explained that its average selling price for 
manufactured products is less than its reported prices to NASS because 
some of its production does not meet NASS specifications. The witness 
testified that products not meeting NASS specifications are either 
products made to meet specific customer orders or off-grade production 
such as cheese fines. The witness said that in fiscal year 2007, 3.98 
percent of NDA's cheese production did not meet NASS specifications 
either by design or error. The volume was sold for a weighted average 
price of $0.0218 per pound less than its NASS reported cheddar--
lowering NDA's total average cheese price for the year by $0.009 per 
pound, the witness said. The witness described similar scenarios for 
NDA's whey, NFDM and buttermilk production.
    The NDA witness revealed that in fiscal year 2007, NDA's Sunnyside, 
Washington, plant, which uses modern horizontal cheese vats, 
experienced a cheese yield of 10.22 pounds of cheese per cwt of milk 
with an average moisture content of 38 percent and a butterfat recovery 
rate of 92 percent. The witness noted that NDA's yield reflects the use 
of whey cream added to the cheese vats.
    A witness for Twin County testified in support of adopting Proposal 
9. The witness asserted that the Class III price formula and current 
make allowances for cheese and dry whey overvalues milk components, 
particularly other solids, leading to reduced plant profitability. As a 
result, explained the witness, manufacturers are required to account to 
the marketwide pool for some components at the Class III price of milk 
even though they receive less than the Class III price for them in the 
marketplace.
    The witness explained that Twin County produces cheddar cheese that 
meets particular customer specifications which do not allow for 
returning whey cream into its cheese-making process. Consequently, the 
witness said that Twin County invested in a whey processing facility to 
process its skim whey into whey protein concentrates (WPC), ultra 
filtered milk and permeate. According to the witness, Twin County sells 
all of its whey cream in the marketplace for approximately the Grade AA 
butter prices times a multiplier of 1.12. The witness said that Twin 
County does fortify its cheese vats with additional milk solids when it 
is economically feasible and its average cheese yield (including 
fortification) is seasonal and ranges from nine to ten pounds of cheese 
per cwt. The witness said that while Twin County is required to account 
to the marketwide pool for all milk components at the Class III price, 
it sells the whey produced at a reduced price in the market resulting 
in a net loss to the company for those components. Additionally, while 
the current make allowances effective March 2007 did improve the 
profitability of Twin County, the witness insisted that the whey make 
allowance is still inadequate to cover the whey manufacturing costs of 
the plant.
    The Twin County witness conceded that the premiums it pays for milk 
could be adjusted downward to offset revenue losses. However, the 
witness indicated, renegotiating premiums with suppliers may have the 
unintended consequence of impeding or damaging long-standing 
relationships with suppliers and disrupt the ability to procure milk as 
needed.
    The witness appearing on behalf of HP Hood also supported adoption 
of Proposal 9 or 10.
    The post-hearing brief submitted on behalf of Dairylea, et al., 
opposed the adoption of Proposals 9 or 10. The brief did not dispute 
that whey cream has a lower value in the marketplace, but noted that 
there are also higher valued uses for butterfat that are not recognized 
in the butterfat price. The brief concluded that it would be 
inappropriate to amend the butterfat value to recognize lower-valued 
whey cream without also recognizing higher-valued butterfat uses.
    The post-hearing brief submitted on behalf of DPNM, et al., opposed 
adoption of Proposals 9 or 10. The brief stressed that there is no 
publicly announced information regarding prices and volumes for whey 
cream or whey butter. The brief argued that record evidence 
demonstrates that a significant portion of whey cream is returned to 
the cheese vat and not sold as whey cream in the market.
    The post-hearing brief submitted on behalf of NAJ also expressed 
opposition to the adoption of Proposals 9 or 10. The brief said that if 
value of whey butter is as low as the proponents claim, then a separate 
whey butterfat price should be established instead of lowering the 
protein price.
4. Barrel-Block Cheese Price
    The witness appearing on behalf of IDFA testified in support of 
eliminating the current 3-cent barrel-block price adjustment (Proposal 
12). The witness maintained that there is no cost difference between 
block and barrel production and therefore the 3-cent adjustment should 
be eliminated. Furthermore, the witness said, the CPDMP data used to 
determine the current make allowances takes into account the 
manufacturing cost difference between barrels and blocks. Maintaining 
the 3-cent adjustment would, the witness said, result in double 
counting of any purported cost difference. In its post-hearing brief, 
IDFA reiterated the need to eliminate the 3-cent barrel-block price 
adjustment.
    A witness appearing on behalf of Davisco testified in support of 
Proposal

[[Page 35319]]

12. The witness offered evidence on Davisco's manufacturing costs for 
40-pound block and 500-pound barrel cheese production at its LeSueur, 
Minnesota, plant. The witness explained that the LeSueur plant has 
separate block and barrel production lines that enable Davisco to 
easily isolate and compare packaging and capital costs. After 
discussing the differences in packaging and equipment needed to produce 
block cheese and barrel cheese, the witness testified that Davisco 
spends $0.0012 per pound more to produce block cheese. According to the 
witness, its de minimis cost differences in producing block and barrel 
cheese warrant eliminating the 3-cent adjustment.
    The witnesses appearing on behalf of Kraft, NDA and Saputo 
expressed support for adoption of Proposal 12. The Kraft witness 
testified that the 3-cent adjustment historically represented the 
additional cost of producing blocks instead of barrels. However, the 
Kraft witness asserted, the gross return between blocks and barrels 
(adjusted to 38 percent moisture) is approximately $0.0075 per pound. 
Therefore, concluded the Kraft witness, it is no longer necessary to 
add 3-cents to the barrel cheese price because that cost difference is 
being recouped in the marketplace.
    No proponent testimony was received regarding Proposal 13.
    The Kraft witness opposed eliminating the barrel cheese price from 
the Class III price formula (Proposal 13). The witness asserted that 
since 2000, the NASS cheese price survey represented approximately 57 
percent barrels and 43 percent blocks. Therefore, the witness insisted 
that it would be inappropriate to eliminate the barrel price from the 
Class III price formula because it would not reflect the actual prices 
of such a large part of the national cheese market.
    The witness appearing on behalf of Leprino supported eliminating 
the 3-cent block-barrel adjustment. The witness asserted that the 
adjustment was originally added to the barrel cheese price because it 
was considered the standard cost difference between producing block and 
barrel cheese. The witness testified that the 3-cent adjustment was no 
longer necessary because the CPDMP cheese manufacturing cost survey 
used to derive the current make allowances already accounts for the 
cost difference. The witness explained that keeping the 3-cent 
adjustment would be double counting cost differences that may exist. 
According to the witness, the 3-cent adjustment was never based on 
actual cost data; rather it was a generally accepted valuation of the 
average production cost difference between producing 40 pound blocks 
and 500 pound barrel cheese at 39 percent moisture standard. However, 
the witness noted that after January 2001 the barrel cheese price was 
adjusted to 38 percent moisture standard. The witness asserted that 
this moisture standard change on average increased the barrel cheese 
price 2.2 cents per pound during the last five years. The witness 
estimated that eliminating the 3-cent barrel-block adjustment would 
reduce the Class III price by $0.1624 per cwt.
    The Leprino witness also opposed adoption of Proposal 13 because it 
would reduce the amount of data used to compute the classified milk 
prices. The witness said that the barrel cheese price should continue 
as a factor in computing the Class III price because of the additional 
cheese volume for which it accounts.
    The post-hearing brief submitted on behalf of Agri-Mark, et al., 
maintained that the 3-cent barrel adjustment should be eliminated and 
supported the views of the IDFA witness and its post-hearing brief 
urging the adoption of Proposal 12.
    The post-hearing brief submitted on behalf of Dairylea, et al., 
opposed eliminating the 3-cent per pound barrel-block cheese adjustment 
as advanced in Proposal 12. The brief expressed the opinion that cost 
data from one cheese plant offered by Davisco Foods is not adequate to 
support adopting the proposed change. According to the brief, cost data 
presented by Davisco Foods only compared packaging and capital costs 
for producing barrel and block cheese. The brief argued that despite 
Davisco's belief that total manufacturing costs before packaging were 
the same, there may be differences in other processing costs because 
block and barrels are produced at different moisture contents. The 
brief asserted that if Davisco Foods cost data is adjusted to reflect 
average moisture content for blocks (37.75 percent) and barrels (34 
percent), the cost of capital and packaging for blocks would be 10 
percent higher than for barrels.
    The Dairylea, et al., brief also addressed the proponents' 
assertion that incorporating CPDMP data into determining new make 
allowances provides the necessary recognition of the cost difference 
between block and barrel production. The brief argued that CDFA data in 
fact only includes cost data from block production and its continued 
use would mean that new make allowances would be too heavily weighted 
towards block production. The brief also asserted that evidence showing 
the market price relationship between blocks and barrels does not 
provide a basis to conclude that similar cost changes have occurred in 
the manufacturing costs of block and barrel cheese.
    In its brief, DPNM, et al., opposed the reduction or elimination of 
the 3-cent barrel price adjustment (Proposal 12) unless Proposal 15 was 
adopted. The brief explained that Proposal 15 (using the CME to 
determine product prices) is intended to use only the CME block cheese 
price, not an average of the 500-pound barrel and 40-pound block 
prices. If Proposal 15 is adopted as intended, DPNM, et al. wrote, the 
3-cent barrel adjustment would no longer be necessary.
5. Product Price Series
    The witness appearing on behalf of Agri-Mark testified in support 
of Proposal 14. The witness said that the proposed price series would 
use a combination of the NASS and CME cheese prices in the Class III 
product-price formula. The witness said that Proposal 14 seeks to 
incorporate current CME data to reduce the monthly differences between 
prices that most manufacturers sell their cheese and the cheese price 
from which the manufacturers' cost of raw milk is determined. The 
witness said that cheese manufacturers use the CME cheese price to set 
their base cheese price which becomes reflected in the NASS cheese 
price announced two weeks later. The witness explained by example that 
the two week lag between CME and NASS price releases was a problem in 
2004 when cheese prices were rapidly changing from week-to-week causing 
the two price series to vary by more than 10 cents per pound in seven 
months of the year. According to analysis conducted by the witness from 
January 2000 until February 2007, 98 percent of the variation in the 
NASS block cheese price and 87 percent of the variation of the NASS 
barrel cheese price could be explained by the CME price.
    The Agri-Mark witness hypothesized by example how Proposal 14 could 
be administered. The witness explained that the cheese price in the 
Class III formula for April 2007 would be calculated as follows: (1) 
Compute the average CME cheese price for the four weeks in April; (2) 
add the average NASS cheese price for the last two weeks of March and 
the first two weeks of April; and (3) subtract the average CME cheese 
price for the four weeks of March. The Agri-Mark witness explained that 
the cheese price used to

[[Page 35320]]

determine the advanced Class I price should be as follows: (1) Compute 
the average CME cheese price for the second and third weeks of March; 
(2) add the average NASS cheese price for the first and second weeks of 
March; and (3) subtract the average CME cheese price for the last two 
weeks of February. The witness was of the opinion that these new 
formulas would enable USDA to use current CME prices while in the long-
run the NASS price series would continue as the primary determinant of 
cheese prices. The witness was of the opinion that the resulting 
``hybrid price'' would reduce large monthly price variations like those 
experienced in 2004. The witness said that Agri-Mark does not support 
the sole use of CME prices in the price formulas because of the low 
volume of trades and the possibility of price manipulation.
    The Agri-Mark witness indicated that adopting this hybrid price 
would not significantly change the average USDA cheese prices or FMMO 
producer blend prices. The witness estimated that the average Class III 
prices would have been approximately $0.005 per pound less and the 
Northeast order producer blend prices would have averaged $0.003 per 
cwt less using this hybrid price during 2003-2006. The witness did not 
see a need to compute a hybrid price for butter because the lag between 
the CME and NASS price reporting is not a problem.
    In their post-hearing brief, Agri-Mark, et al., reiterated their 
support for adoption of Proposal 14 and opposition to adopting 
Proposals 15 and 18, both of which are discussed subsequently.
    A witness appearing on behalf of DPNM, et al., testified in support 
of using CME product prices in the FMMO price formulas as advanced in 
Proposal 15. The witness was of the opinion that the CME is a superior 
price discovery mechanism. The witness asserted that the time lag 
associated with the NASS price survey has, at times, created huge 
differences between the advanced Class I and Class II prices and the 
monthly prices that are incorporated into the Class III and Class IV 
formulas. The witness opined that the time lag associated with using 
the NASS price survey sends incorrect price signals to producers and 
that it creates a disincentive for manufacturers to seek higher product 
prices in the market because it will result in increased raw milk 
costs.
    The DPNM, et al., witness testified that NASS product prices track 
closely with CME prices for cheese and butter. However, the witness 
said, the NASS NFDM price does not reflect the current cash market. The 
witness stated that the NFDM market is unique because there are only a 
few sellers and asserted that sellers tend to use the previous week's 
NASS NFDM price to sell their products. The witness stated that there 
has been a growing price disparity between the NASS NFDM price and the 
NFDM price reported by Dairy Market News. According to the witness, 
during the first quarter of 2007, the monthly NASS NFDM prices averaged 
$0.12 per pound less than what was reported as the average Western 
Mostly NFDM price by Dairy Market News. The witness calculated that 
this resulted in Class II and Class IV prices being $1.03 per cwt 
lower. The witness asserted that the price discrepancy could be a 
reporting error, noting that NASS does not have the authority to audit 
its surveyed price data.
    The DPNM, et al., witness testified that CME product prices could 
become the preferred price discovery mechanism because it is a public 
market and since 1997 has expanded trading times and the number of 
traded dairy products. The witness stressed that CME product prices are 
more reflective of the current market for cheese, butter and dry whey 
because many manufacturers refer to the current CME product price when 
making their sales. The witness added that oversight by the Commodity 
Futures Trading Commission (CFTC) provides for regulatory oversight. 
However, the witness testified that NFDM is not actively traded on the 
CME because packaging specifications require that NFDM traded on the 
CME be in government-specified bags. The witness was of the opinion 
that if such packaging requirement was changed, the CME would become a 
viable market for NFDM.
    DPNM, et al.'s, brief expressed support for adoption of Proposal 15 
and reiterated the position that NASS product price surveys should be 
replaced by CME product prices in each of the price formulas except for 
the other solids formula. According to the brief, since the other 
solids formula uses the NASS dry whey price and the CME does not have a 
cash traded dry whey price, continued use of the NASS dry whey price is 
appropriate. The brief indicated that the use of CME prices would 
alleviate timing and circularity issues associated with relying on NASS 
survey prices. The brief concluded this position is supported in a 
General Accountability Office (GAO) study of June 2007.
    The DPNM, et al., brief expressed support for using competitive pay 
price series to establish classified Federal order milk prices. 
However, the brief expressed the opinion that Proposal 18 needs to be 
more fully developed and requested that USDA further investigate the 
use of a competitive pay price and convene a hearing to consider this 
alternative.
    A witness appearing on behalf of the Maine Dairy Industry 
Association (MDIA) testified in support of Proposal 18. According to 
the witness, MDIA is an association that represents all of Maine's 350 
dairy farmers. The witness said that Proposal 18 seeks to establish an 
average competitive pay price for milk by incorporating a factor into 
the other solids portion of the Class III price formula to account for 
any monthly spread between the component prices for milk and a 
competitive pay price for equivalent Grade A milk. The witness was of 
the opinion that a competitive pay price is a superior method for 
determining the value of milk and setting regulated minimum prices than 
are product-price formulas. The witness contended that butter, NFDM, 
cheese and whey each have a separate market that responds to separate 
and unique supply and demand factors. The witness explained that in a 
competitive pay price system buyers pay for raw milk based on supply 
and demand conditions of the particular market in which they operate.
    The MDIA witness stated that USDA has previously considered 
competitive pay price mechanisms for pricing Class III milk. The 
witness explained that a 1994-1996 simulated analysis conducted by USDA 
revealed several difficulties with competitive pay prices, such as: (1) 
The influence of regulated minimum prices could not be eliminated; (2) 
inadequate vigorous competition among buyers of milk; and (3) 
competitive pricing was based on the competitive situation for milk in 
Minnesota and Wisconsin. The witness explained that these limitations 
formed the analysis basis for Proposal 18.
    The MDIA witness explained how Proposal 18's competitive pay price 
would be administered. The witness said that geographic areas where an 
adequate level of competition for milk exists should be determined by 
computing a Herfindahl index for each county. The witness said this 
index is a measurement of market competitiveness where a low Herfindahl 
index indicates more competition for milk. For example, competition for 
milk in a county with an index of 0.3450 is greater than in a county 
with an index of 0.3500. The witness proposed that competitive price 
zones be determined by aggregating clusters of 10 contiguous counties 
or more with indexes less than 0.33. The witness said that an ideal 
situation would be if at least a third of

[[Page 35321]]

the manufacturing milk in Federal order marketing areas were 
competitive price zones. The witness explained that handlers purchasing 
milk within these zones would be exempt from paying minimum classified 
prices, but would still be required to pay current differentials for 
Class I and Class II milk. According to the witness, these 
differentials would be pooled and producers within the competitive 
price zones would receive a 12-month rolling average producer price 
differential (PPD). Handlers would still pay regulated classified 
prices for milk produced outside of these zones, the witness said.
    According to the MDIA witness, market administrators would collect 
actual payment data from handlers for milk purchased within the 
competitive price zones for the preceding month and estimated payments 
for the current month. The market administrators would compute a 
weighted average price and deduct from that price the 12-month rolling 
average PPD for the month. This residual would be the value of 
manufacturing milk in the competitive price zone. A national average 
competitive manufacturing milk price would then be computed by 
aggregating the average price and volume data from all reporting 
competitive price zones. This result would become the new minimum Class 
III price for milk purchases outside of the competitive price zones.
    The MDIA witness said that the computation of protein and fat 
prices would be unchanged under its competitive price proposal. 
However, the other solids price would be the residual value of the 
Class III price once the values of butterfat and protein were deducted, 
the witness explained. The witness said indirect compensation to 
farmers, such as hauling charges, would not be included in the 
computation of a weighted average price but could be a ``loophole'' 
used by manufacturers to lower the Class III milk price by shifting 
more monies into hauling subsidies.
    The MDIA witness asserted that over the long run, producers located 
inside competitive price zones would receive the same revenue for their 
milk as producers located outside of competitive price zones. The 
witness did not know if Proposal 18's pricing method would generate 
higher or lower prices to all producers than the current end product 
pricing system.
    The MDIA witness was of the opinion that the largest group of 
counties in competitive price zones would be in the Upper Midwest (UMW) 
marketing area because of the large number of cheese plants competing 
for a milk supply. This would most likely lead to a weighted average 
competitive pay price that is heavily influenced by prices paid by UMW 
plants that historically have been higher than Federal order minimum 
prices, predicted the witness. The witness conceded that a competitive 
pay price heavily weighted to conditions in the UMW would not reflect 
national supply and demand conditions.
    A Maine dairy farmer appearing on behalf of the MDIA testified in 
support of Proposal 18. The witness testified that Maine is not an area 
regulated by the Federal milk order program, but producer prices are 
heavily influenced by those established under the Northeast order. The 
witness stated that Maine dairy farmers have turned to alternative 
sources of income such as state subsidies and increased equity 
financing to keep their farms operating because Federal minimum prices 
are too low and driven by unpredictable price swings for dairy 
products.
    After adjusting USDA cost of production information for Vermont to 
account for lower labor and feed costs, the MDIA witness estimated the 
cost of production of a Maine dairy farmer to be $19 per cwt, $20 per 
cwt and $24 per cwt in 2004, 2005 and 2006, respectively. The witness 
compared this price to the Northeast Federal order mailbox price of 
$16.29 per cwt, $15.39 per cwt and $13.22 per cwt in 2004, 2005 and 
2006, respectively. Using those data, the witness estimated that for a 
medium-sized Maine dairy farm with 150 cows, average net income fell by 
$70,000 in 2004, $140,000 in 2005 and $320,000 in 2006. The witness 
asserted that this increasing difference between revenue and costs 
illustrates why the Federal order pricing system needs to be amended to 
more fully reflect dairy farmer cost of production.
    The MDIA witness also testified regarding two programs operated by 
the State of Maine. One program boosts revenue to Maine dairy farmers 
by distributing an over-order price payment determined by the Maine 
Milk Commission; and a second program that gives a subsidy payment from 
the State general fund. However, the witness said during recent months 
these payments have not been enough to make up for the difference 
between declining milk prices and increasing production costs. The 
witness was of the opinion that these State programs cannot be relied 
upon in the long-run to provide a stable marketplace for dairy farms.
    A post-hearing brief filed on behalf of MDIA reiterated its 
position that end product pricing does not result in high enough prices 
for the dairy farmers of the northeastern region of the United States. 
MDIA stated that Proposal 18 is ``a good starting point'' from which to 
develop a competitive price scheme that would replace pricing derived 
from the values of manufactured dairy products. The brief acknowledged 
that MDIA's proposal is complex and lacks much of the detail needed for 
its adoption. However, MDIA reiterated its position that the adoption 
of a competitive pay price system would improve how producer milk is 
valued and through which minimum classified prices would be determined.
    The MDIA brief argued that price discovery based on competitive 
conditions for milk is superior to milk prices derived from the market 
prices of manufactured dairy products. The brief insisted that prices 
derived using sound economic principles and accurate market data are 
crucial to accurate price determination. The brief stressed that ending 
a competitive pay price series for milk has harmed dairy farmers, 
especially in the northeastern, mid-western and southeastern regions of 
the country. The brief attributed observed price volatility in milk 
prices to the use of end product price formulas. In this regard, the 
brief asserted that the product-pricing formulas and the logic 
underlying component pricing do not meet the articulated policy of the 
AMAA. The brief argued that the AMAA's paramount objectives are 
stabilization and enhancement of producer income.
    The witness appearing on behalf of Dairylea supported using the CME 
cheese and butter prices as substitutes for the NASS surveyed prices as 
advanced in Proposal 15. The witness said that the industry already 
uses the CME to set their base selling prices. The witness asserted 
that using NASS surveys to set minimum prices has resulted in 
disorderly market conditions because of the time lag of NASS product 
price reporting results in short-term manufacturing losses. According 
to the witness, using the CME prices for butter and cheese to set 
minimum classified milk prices would eliminate the time lag issue and 
price circularity issues.
    A post hearing brief submitted on behalf of Dairylea, et al., 
opposed adoption of Proposal 18 by concluding that record evidence is 
insufficient to support its adoption. Their post-hearing brief 
specifically expressed support for the portion of Proposal 15 for using 
CME prices for cheese and butter in the product price formulas. This 
was not supported by DFA. While Dairylea's brief expressed the opinion 
that using CME prices would address the issue of price circularity 
inherent in the NASS

[[Page 35322]]

price survey, they did not support the use of CME prices for dry whey 
and NFDM.
    In a separate post-hearing brief, DFA specifically expressed 
support for adoption of a hybrid price series advanced in Proposal 14. 
DFA emphasized that the hybrid price series would transmit more timely 
market signals to processors and producers by aligning the purchase 
price of milk with the market prices of milk products.
    The witness appearing on behalf of IDFA testified in opposition to 
adoption of Proposal 14. The witness was of the opinion that using the 
proposed hybrid price would result in unnecessarily complex price 
formulas that would provide no tangible benefit to the industry. The 
witness acknowledged the problems associated with the time-lag of the 
NASS price series, but stated that there are alternative ways to 
address the lag other than adding complexity to the price formulas. 
Similar arguments were offered in IDFA's post-hearing brief.
    The IDFA witness also testified in opposition to adoption of 
Proposal 15. The witness stated that the NASS product price survey 
provides the largest possible sample of wholesale prices and should 
continue to be relied upon in the product price formulas. The witness 
said that USDA's reasoning for relying on the NASS price survey in the 
Federal order reform decision is still relevant. The witness was of the 
opinion that many of the complaints associated with the NASS price 
series could be remedied if the price reporting to NASS became 
electronic, mandatory and audited. IDFA insisted in its post-hearing 
brief that using the CME to determine product prices could result in 
product prices that are not representative of actual market sale prices 
and could encourage product trading on the CME solely to manipulate the 
minimum classified milk prices established under Federal orders.
    The IDFA witness also testified in opposition to adopting a 
competitive pay price series as advanced in Proposal 18. The witness 
indicated that currently no reliable unregulated milk supply of 
adequate size exists to become the basis for a competitive pay price 
series.
    The witness appearing on behalf of Kraft opposed adoption of 
Proposal 15 and supported the continued use of the NASS price survey to 
determine classified prices. The witness explained that the NASS price 
survey is national in scope and represents a significantly larger 
proportion of national cheese production than does the CME. The witness 
was of the opinion that if CME prices are used to determine classified 
prices, the growing volume of cheese production and sales in the 
western states would not be adequately represented. Therefore, the 
witness concluded, NASS survey prices best reflect the settled sales 
price at the plant. The witness acknowledged the time lag between CME 
prices and the NASS price survey and insisted that a better solution to 
the time lag problem would be to require timelier reporting of prices 
to NASS rather than abandon the NASS price survey.
    The witness appearing on behalf of Saputo opposed the adoption of 
Proposals 14 or 15 and indicated support for the continued use of the 
NASS price survey. The witness was of the opinion that timelier price 
reporting to NASS would counter asserted problems associated with the 
lag between the CME and NASS survey prices. The Saputo witness opposed 
using the CME to set minimum prices because, in the witness' opinion, 
the CME is too thin a market to provide accurate market signals.
    The witness appearing on behalf of Leprino testified in opposition 
to Proposal 15 because of the low volume of cheese that is traded on 
the CME as compared to the volume of cheese production that is 
represented in the NASS survey. The witness also testified that Leprino 
was not concerned with the time lag between the CME prices and the NASS 
price survey. The witness was of the opinion that the time lag is 
predictable and manageable for manufacturers.
    The witness appearing on behalf of LOL testified in opposition to 
Proposal 15. The witness was of the opinion that the more appropriate 
solution to the problem of increased manufacturing costs is the 
timelier updating of make allowances and not the use of the CME to 
derive classified prices. The witness argued that the NASS price survey 
is more representative of the national cheese market while the CME 
continues to remain a thinly traded market.
    The witness appearing on behalf of HP Hood opposed adoption of 
Proposal 18 because of the lack of analysis available to determine its 
utility.
    A post-hearing brief filed on behalf of O-AT-KA stated that 
Proposal 18 may warrant further consideration but it should not be 
adopted in this proceeding.
6. Other Solids Price
    A witness appearing on behalf of NAJ testified in support of 
adopting Proposal 16. The witness was of the opinion that the value of 
dry whey should primarily be derived from its protein content, rather 
than its other solids content as currently computed. The witness 
acknowledged that from August 2006 to February 2007 the NASS dry whey 
price more than doubled from 29.65 cents per pound to 60.05 cents per 
pound and the lactose price reported by Dairy Market News increased 
from 33.89 cents per pound to 59.34 cents per pound. The witness was of 
the opinion that the recent increase in lactose prices reflects a 
shortage in lactose processing capacity and not a lack of available 
lactose. The witness believed that the high dry whey and lactose prices 
prior to the fall of 2006 justify valuing dry whey on a protein rather 
than other solids basis. According to the NAJ witness, if Proposal 16 
had been in place from April 2003 to September 2006, the Class III 
price would have been one-cent per cwt higher and only marginally 
higher since September 2006.
    The NAJ witness testified that from 2003 to 2006 dry whey 
production only increased 1.5 percent, while the increased production 
of whey protein concentrates (WPCs) ranged from 6.6 percent to 45.5 
percent depending on the percent protein in the WPC. The witness 
concluded that purchasers of whey solids prefer WPC products that are 
high in protein and therefore dry whey should be priced on a protein 
basis.
    Using Dairy Market News' monthly prices since January 2000, the 
witness discussed the costs of buying a pound of protein (protein 
parity) and a pound of lactose (lactose parity) in dry whey or WPC-34 
(34 percent protein). The witness concluded that in all months, the 
average price per pound of protein in dry whey or WPC-34 exceeded the 
average price per pound of lactose. The witness also asserted that the 
cost per pound of lactose in WPC-34 is higher than if lactose were 
purchased separately. According to the witness, this price relationship 
reveals that buyers of dry whey and WPCs are purchasing these products 
for their protein content rather than for their lactose content. The 
witness also emphasized that the value of protein in dry whey and WPC-
34 more closely reflect each use than does lactose value contained in 
the two products.
    The NAJ witness also offered a modification to Proposal 16 in that 
NASS price surveys be expanded to collect and report market prices of 
various WPC's and lactose. The witness said this would build a dataset 
for use in future rulemakings to consider the appropriate valuation of 
whey solids.
    A post-hearing brief filed on behalf of NAJ reiterated positions 
given in testimony. According to the brief, the current other solids 
price formula does not reasonably connect the market value

[[Page 35323]]

of whey solids, which NAJ maintains is based on its protein content, 
and how producers are paid for whey.
    The witness appearing on behalf of IDFA opposed adoption of 
Proposal 16 because it was too complex and would inappropriately value 
whey based on its protein content when it is comprised mainly of other 
solids. The witness said that USDA's preliminary economic analysis 
demonstrates that adoption of Proposal 16 could increase the cost of 
high protein milk while lowering the cost of low protein milk. However, 
milk's other solids content (primarily whey) does not change in 
relationship to the protein content, the witness said. The witness also 
stated it would be inappropriate to price dry whey on its protein 
content since protein does not affect whey yields.
    The witness appearing on behalf of Leprino testified in opposition 
to Proposal 16 because its adoption would result in distorted milk 
component values. The witness insisted that since dry whey yields are 
primarily driven by the lactose content of milk and the other solids 
composition, it would be inappropriate to price whey on its protein 
content.
    The post-hearing brief filed on behalf of Agri-Mark, et al., 
opposed adoption of Proposal 16 arguing that the price of other solids 
would then be determined on its protein component which has no impact 
on yield. The brief claimed that since there in no standardized protein 
content for whey, adoption of Proposal 16 could result in significant 
over-valuing of the protein in whey. However, the brief supported NAJ's 
call for USDA to collect manufacturing cost and price data for WPCs and 
lactose because doing so would provide data on how to appropriately 
value whey solids for use in future proceedings.
    The post-hearing brief filed on behalf of Dairylea, et al., opposed 
adoption of Proposal 16 because it would not add value or efficiency to 
the product price formulas.
    The post-hearing brief filed on behalf of DPNM, et al., opposed the 
adoption of Proposal 16. However, the brief did express support for NAJ 
calling for USDA to collect prices, manufacturing costs, and volumes 
for whey protein concentrates and whey protein isolates.
    A witness from Pennsylvania State University offered testimony on 
the use of an econometric model framework to analyze changes to the 
Federal milk marketing orders from all the proposals under 
consideration and provided the results at the hearing. The testimony 
was not given on behalf of the Pennsylvania State University. The 
witness testified neither in support of or in opposition to any 
proposals. The witness explained that the model is a short-run supply-
side model that does not take into account changes in milk demand. The 
witness said that the model analyzed scenarios as outlined in the USDA 
preliminary economic analysis based on the USDA Baseline Projections to 
2015. The witness concluded that the USDA preliminary economic analysis 
did not accurately reflect changes in the milk supply because it did 
not adequately account for the increase in feed prices and the 
resulting effect on producer decisions.
    A witness testifying on behalf of the Ohio Farmers Union (OFU), 
National Farmers Union (NFU) and the National Family Farm Coalition 
(NFFC) called for the hearing to be terminated because dairy farmers 
continuously face low milk prices and high input costs, and that these 
concerns were not being addressed in this proceeding. The witness was 
of the opinion that the FMMO system was no longer accomplishing its 
mission of returning market power to dairy farmers.

Discussion and Findings

    This proceeding offered a wide array of proposals aimed at changing 
FMMO end-product pricing formulas used to establish classified prices 
in all orders. The original 19 proposals noticed range from abandonment 
of the current product-price formulas used to compute minimum Class III 
and Class IV prices to proposals that seek a variety of changes to the 
product-pricing formulas including manufacturing cost factors (make 
allowances), yield factors, technical factors, and authority to 
separate a portion of manufactured product sales prices from what 
otherwise is used to establish subsequent raw milk prices. The record 
of this proceeding encompassed a total of 12 hearing days over a 6-
month period from February through July, 2007 and consists of more than 
3000 pages of testimony, plus 78 exhibits and 10 post hearing briefs. 
The diversity of proposals considered indicates a lack of consensus 
within the dairy industry concerning how the Federal order program 
should set minimum milk prices in general and specifically how the many 
features of the product-price formulas should be altered.
    Proponents for increasing make allowances have requested that 
regardless of the method adopted, USDA should omit a recommended 
decision and immediately adopt higher make allowances for butter, NFDM, 
cheese and dry whey because manufacturing costs have increased since 
the implementation of the current make allowances. The proponent from 
Agri-Mark for example, provided direct testimony that electricity and 
other fuel costs in cheese making had increased for plants operated by 
the cooperative. NMPF's proposed use of BLS energy cost data for an 
energy cost adjustor for make allowances as sought by Proposal 17 
(addressed in a separate decision) provided reinforcement of the 
continued and rapid increases in those energy costs. Proposal 2, 
advanced by Agri-Mark, seeking to formally regularize the methodology 
for updating manufacturing cost data, and Proposal 20, advanced by 
Dairylea, to establish a cost add-on also are addressed in a separate 
decision.
    Proponent witnesses representing Leprino, Twin County, and IDFA 
provided specific and general information that also support concluding 
that energy, transportation, labor and packaging costs for 
manufacturing processors have increased since the current make 
allowances became effective in March 2007. As pointed out by IDFA, 
because make allowances account for manufacturing costs in the Class 
III and Class IV price formulas but do not change as those costs 
change, increasing make allowances is the only reasonable way by which 
those increased costs can be recovered.
    The ability of a manufacturer to offset cost increases are limited 
by the level of make allowances in the Class III and Class IV price 
formulas. Manufacturing processors are charged the FMMO minimum price 
for producer milk used to produce Class III and Class IV products. 
However, plant manufacturing cost increases may not be recovered 
because Class III and Class IV product-price formulas use make 
allowances that are fixed regardless of market conditions and change 
only by regulatory action. Simply put, when manufacturing cost 
increases result in costs higher than those provided by the formula 
make allowance factors, the value of milk used to make those products 
may be over-valued.
    Product-price formulas are relied upon to establish the minimum 
class prices of raw producer milk used to make Class III and Class IV 
products, which in turn establish Class I and Class II prices. The 
product-pricing formulas use market prices collected by NASS for 
cheddar cheese, Grade AA butter, and dry whey to set a minimum price 
for Class III milk and NFDM and Grade AA butter to set a minimum price 
for Class IV milk. No competitive pay price series currently exists 
that can be relied upon to establish a price for raw milk nationally. 
While some proponents look

[[Page 35324]]

to the CME, the futures prices of the CME use the FMMO minimum class 
prices as the starting points for Class III and Class IV milk futures 
contracts.
    In the absence of competitive pay price series, product-price 
formulas for cheese, dry whey, NFDM and butter serve as the only 
practical basis from which the value of raw producer milk used in their 
production can be derived. A raw milk value is, in part, derived from 
NASS collecting and aggregating weekly reported sales price data from 
manufacturers who produce and market these commodity products and are 
presented in the NASS Dairy Product Price Survey.
    The Class III and Class IV product-price formulas, among other 
factors, use the market prices of the manufactured products from which 
make allowance factors are subtracted. The remaining value, when 
converted to a milk equivalent basis, is the value of raw milk. 
Accordingly, the accuracy of deriving the minimum value of raw milk is 
dependent on the accuracy of the commodity sale prices reported and in 
large part the accuracy of the manufacturing costs factors, or make 
allowance factors, that are used in the pricing formulas.
    The Agri-Mark proposal, Proposal 1, seeks to change make allowances 
used in the Class III and Class IV product formulas by relying on 
manufacturing cost data contained in the record of this proceeding by 
combining such data for plants outside of California with the most 
current manufacturing cost data published by the CDFA.\1\ The 2-sets of 
manufacturing costs for cheese, NFDM, dry whey, and butter would be 
combined on a weighted average basis in a manner consistent with the 
development of the current make allowances used in determining Class 
III and Class IV prices. Other proponents seek to use the most recently 
available publications of the CDFA.\2\ This method was used in earlier 
rulemakings to develop make allowances used in the product-price 
formulas.3 4
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    \1\ Official Notices are taken of amendments to make allowances 
and all related documentation by the State of California in the 
Determinations, Findings, Conclusions and Order of the Secretary of 
Food and Agriculture, November 20, 2007, by the Office of the 
California Secretary of Agriculture. See http://www.cdfa.ca.gov/dairy/dairy_hearings_matrix.html, and http://www.cdfa.a.gov/dairy_hearings.html, and Summary of Weighted Average Manufacturing 
Costs, Butter, Nonfat Dry Milk, Cheddar Cheese, and Dry Whey Powder, 
Released September 18, 2007; See http://www.cdfa.ca.gov/dairy/pdf/manufcostexhibit2006.pdf.
    \2\ Ibid.
    \3\ Official notice is taken of 67 FR 67906 November 7, 2002, 
and 68 FR 7063, February 12, 2003, final decision and final rule 
respectively, and 66 FR 54064, 65 FR 76832.
    \4\ Official notice is taken of 71 FR 67467, November 22, 2006, 
71 FR 78333, December 29, 2006, as well as hearing testimony, 
exhibits, and post hearing briefs for the hearing and hearing 
continuations originally noticed in 71 FR 545, January 5, 2006, and 
related materials concerning make allowances and dairy product 
manufacturing costs, and published for the convenience of the public 
on the USDA, AMS Dairy Programs Web site at http://www.ams.usda.gov/dairy.
---------------------------------------------------------------------------

    Opponents of increasing make allowances argue a number of points--
that they are already set at too high a level, that dairy farmer 
production costs also have increased significantly due to higher energy 
and feed costs, that processors should look beyond asking dairy farmers 
to receive less for their milk by charging more for manufactured 
products, and that make allowance increases should be made only when 
all dairy farmer production costs are captured in their milk pay price. 
These are not valid arguments for opposing how make allowances should 
be determined or what levels make allowances need to be in the Class 
III and Class IV product-pricing formulas. The record demonstrates that 
current make allowance levels are not reflective of the costs 
manufacturers incur in processing raw milk into the finished products 
of cheese, butter, NFDM and dry whey.
    Additionally, the Class III and Class IV product-price formulas 
establish derived classified prices for producer milk that are used 
nationally in all Federal milk orders. When dairy farmer production 
costs exceed the value for which products are sold in the marketplace, 
no source of revenue from the marketplace is available to cover those 
costs.
    In the aggregate, the costs of producing milk are reflected in the 
supply and demand conditions for the dairy products. When the supply of 
milk is insufficient to meet the demand for Class III and Class IV 
products, the prices for these products increase as do regulated 
minimum milk prices paid to dairy farmers because the milk is more 
valuable and this greater milk value is captured in the pricing 
formulas. Dairy farmers face no regulatory minimums in their costs and 
face no regulated minimum payment obligation in the way that regulated 
handlers must pay dairy farmers for milk.
    It is reasonable to conclude that the make allowances used in the 
Class III and Class IV product-price formulas should be updated to 
reflect changes in the costs manufacturers incur in producing cheese, 
butter, dry whey, and NFDM. It is necessary to reflect changes in 
manufacturing costs so that with the prevailing market prices for 
manufactured products, minimum Federal order classified prices can be 
set. In the record of this proceeding, evidence demonstrates that the 
manufacturing costs of producing cheese, dry whey, NFDM and butter have 
increased since the implementation of current make allowances on an 
interim basis and during the 6-month period when this proceeding 
occurred.\5\
---------------------------------------------------------------------------

    \5\ Ibid. Official notice is taken of 72 FR 36341, July 3, 2007.
---------------------------------------------------------------------------

    The record reveals an absence of industry consensus concerning the 
method (how) make allowances should be changed that in turn determines 
the level of the make allowances used in the Class III and Class IV 
product-pricing formulas. The differing proposed make allowance levels 
offered over the course of the proceeding represent the changes in 
opinions concerning which manufacturing costs, which manufacturing cost 
survey(s) and other factors should be considered. For example, some 
proponents seeking higher make allowances argued that only CPDMP survey 
data and/or RBCS survey data volumes should be relied upon as these 
surveys are most reflective of costs by plants who pay Federal order 
prices. CDFA data represents a cost survey of only California 
processing plants. It is important to Federal order classified pricing 
that Class III and Class IV prices be derived, as much as possible, 
from national estimates of manufacturing cost information and because 
NASS survey prices include California. Accordingly, it is reasonable to 
conclude that appropriately combining this cost data with cost survey 
data of manufacturing plants not located in California will tend to 
produce a measure of national manufacturing costs. Doing so will tend 
to not bias manufacturing costs measurements that may otherwise result 
from the exclusive use of one set of cost survey data over another.
    The proposal (Proposal 3) by DPNM is offered in opposition to 
increasing make allowances in the manner offered by Agri-Mark. DPNM 
argues that because the CPDMP 2006 survey represents manufacturing 
costs of plants not located in California, then that survey should be 
exclusively relied upon in determining new make allowances. This 
argument is rejected. Proponents of increasing make allowances have 
clearly demonstrated that costs of producing Class III and Class IV 
products have increased. Continuing with the method previously relied 
upon--relying on manufacturing cost data from CPDMP's

[[Page 35325]]

cost survey and CDFA in combination--has provided effective and useable 
make allowances in the pricing formulas even though it is clear that 
the current levels of make allowances need to be updated.
    At issue in this proceeding, in part, is whether make allowance 
levels should be increased and what method should be relied upon to 
determine those levels. On its face, the DPNM proposal to rely only on 
the CPDMP 2006 survey data in determining make allowances may seem 
reasonable as the survey excludes California plants. However, the 
argument does not consider other important factors that affect the 
marketing conditions for milk and dairy products represented by 
California's dairy sector and its impact on the supply and demand for 
milk and dairy products nationally. Cheese, butter and NFDM compete in 
a national marketplace and as such the prices established under the 
Class III and Class IV product-pricing formulas need to be reflective 
of marketing conditions that directly affect determining the minimum 
value of raw milk. Accordingly, Proposal 3 is not adopted.
    While many hearing participants support the general method of 
determining make allowances adopted in this decision, the record 
nevertheless reveals a lack of industry consensus in determining 
specific factors to be used in the Class III and Class IV product-
pricing formulas. This is illustrated by the information presented in 
Table 1 below. The seven sets of suggested make allowances represent 
proposals from 4 different groups at various points of this proceeding. 
The Agri-Mark, LOL, and DPNM proposals were advanced by producer groups 
with different milk marketing and processing interests. Regulated 
processors, including some producer groups who are also regulated in 
their capacity as processors, are represented in this regard by the 
proposals advanced by IDFA and Leprino.

                                                     Table 1
----------------------------------------------------------------------------------------------------------------
                                                                          Make allowances
                   Proponents                    ---------------------------------------------------------------
                                                   Cheese  $/lb    Butter  $/lb     NFDM  $/lb    Dry whey  $/lb
----------------------------------------------------------------------------------------------------------------
Agri-Mark et al. (Brief Pg 20-24)...............          0.2154          0.1725          0.1782          0.2080
IDFA (Brief pg 11)..............................          0.2154          0.1725          0.1782          0.2080
IDFA (Brief pg 12)..............................          0.2198          0.1846          0.1662          0.1976
Leprino (Brief pg 2)............................          0.2154          0.1725          0.1782          0.2080
DPNM Proposal...................................          0.1638          0.1108          0.1410          0.1500
DPNM Brief (pg 1)...............................          0.1638          0.1150          0.1410          0.1590
DPNM Brief (pg 20)..............................          0.1638          0.1108          0.1410          0.1498
----------------------------------------------------------------------------------------------------------------

    The range of proposed make allowances presented in Table 1 varies 
more than 30 percent between the highest and lowest proposed make 
allowance levels for cheese and dry whey. Similarly, the range from 
highest to lowest proposed make allowance for butter remarkably varies 
by more than 60 percent and about 25 percent for NFDM.
    It is appropriate to rely on the CPDMP 2006 survey of manufacturing 
costs in establishing the methodology of how make allowances should be 
determined. Its use is consistent with the methodology relied upon in 
determining the make allowances currently in the Class III and Class IV 
product-price formulas. The CPDMP 2006 survey results provide a new 
estimation of manufacturing costs for plants not located in California. 
The CPDMP 2006 survey results, when used in conjunction with the most 
current survey results from CDFA, improves estimation of manufacturing 
costs on a national basis and is consistent with the methodology relied 
upon in determining the make allowances currently in the Class III and 
Class IV product-pricing formulas.
    The manufacturing cost data presented in the CPDMP 2006 survey is 
essentially a new cost survey. The data presented in the survey is 
similar to CPDMP's earlier cost survey in that both surveys rely on 
cost information provided from manufacturing plants not located in 
California. The surveys are similar in that they collect manufacturing 
cost data for cheese, butter, NFDM, and dry whey. However there are 
differences, the most important of which is using different samples of 
plants than those reported in the earlier CPDMP 2005 survey.
    In the CPDMP 2005 survey, 16 cheese plants provided cost data that 
were incorporated to represent the weighted average costs to 
manufacture cheese. The 2006 survey represents data from 11 cheese 
plants of which 8 were among the 16 plants participating in the 2005 
survey. For butter, 4 plants provided cost data in the 2006 survey and 
2005 survey, but the surveys represent different collections of sampled 
plants with different production volumes. Regarding butter 
manufacturing cost data, the 2006 survey differs from the early survey 
in that the 2006 survey employed a different method for allocating 
costs between butter and NFDM production in plants that jointly 
manufactured these products. For NFDM, the plants sampled and reported 
in the 2006 survey included all but one of the plants sampled as part 
of the 2005 survey.
    The determination of the adopted make allowances for cheese, 
butter, NFDM and dry whey are discussed below. The make allowances 
adopted represent national manufacturing cost averages for cheese, 
butter, NFDM and dry whey. As found and determined in previous 
rulemakings on this issue, an estimation of manufacturing costs for 
national application requires that national production volumes of these 
commodities be considered in determining the level of make allowances 
to be relied upon and used in the Class III and Class IV product-
pricing formulas. This is critical because Class III and Class IV 
prices are the same in all Federal milk marketing orders.
Butter Make Allowance
    The butter manufacturing cost data presented in the CPDMP 2006 
survey reports weighted average costs based on a sample of four plants. 
These data are combined with the average cost data from the most recent 
CDFA survey and averaged over the 2006 national production volume as 
published by NASS. The combination of the weighted average costs from 
the CPDMP and CDFA surveys over the national production volume plus a 
marketing cost adjustment of $0.0015 yields a make allowance $0.1715 
per pound for butter.

[[Page 35326]]

NFDM Make Allowance
    The NFDM manufacturing cost data presented in the CPDMP 2006 survey 
reports weighted average costs based on a sample of 7 non-California 
plants. These data are combined with the weighted average costs 
reported by CDFA and averaged over the 2006 national NFDM production 
volume as reported by NASS. The combination of the weighted average 
costs from the CPDMP and CDFA surveys by the national production volume 
plus a marketing cost adjustment of $0.0015 yields a make allowance 
$0.1678 per pound of NFDM.
Cheese Make Allowance
    The cheese manufacturing cost data presented in the 2006 CPDMP 
survey reports an average cost of producing a pound of cheese of 
$0.1584 per pound. This is significantly below the cost of producing a 
pound of cheese reported by the 2005 CPDMP survey. The cost difference 
was explained by the inclusion of fewer small plants in the 2006 
survey. In addition, cheese manufacturing costs of a larger plant were 
included in the 2006 survey that did not participate in the 2005 
survey. This led to 2006 survey results that are heavily weighted 
towards larger volume plants.
    The record reveals that eight cheese plants participated in both 
the 2005 and 2006 surveys and their costs increased an average of 
$0.017 per pound of cheese between the two survey years. The Cornell 
researcher who administered both surveys conceded that this was the 
strongest conclusion which can be drawn from the cheese manufacturing 
data of the two surveys. Supporters of relying on the $0.017 factor to 
compute a new make allowance purport that this number can simply be 
added to the 2005 CPDMP plant average population cost of $0.2028. This 
decision finds that combining those two figures to compute a new cheese 
make allowance is procedurally incorrect. While a cost increase of 
$0.017 is significant and may be factually correct, it cannot be a 
factor in determining a new make allowance unless the original 2005 
average manufacturing cost of the eight plants is included in the 
record. Therefore, use of the $0.017 cost increase in determining a new 
cheese make allowance is rejected.
    While the $0.017 cannot be used to determine a new cheese make 
allowance, the cost comparison between the same samples of plants does 
reveal that average manufacturing costs have increased. However, 
comparing the weighted average cheese costs of the two CPDMP surveys 
indicates that processing costs have actually declined $0.0054 per 
pound. This decision finds that the inconsistencies between the two 
CPDMP surveys call into question whether either survey is 
representative of cheese manufacturing costs. Accordingly, for the 
purpose of determining a make allowance for cheese, the CPDMP 2006 
survey results for cheese are rejected.
    This decision finds that the CDFA 2006 survey of average cheese 
manufacturing costs is the best available information representing the 
manufacturing cost of producing a pound of cheddar cheese. Accordingly, 
the make allowance proposed for adoption for cheddar cheese is $0.2003 
per pound including $0.0015 per pound marketing cost adjustment.
Dry Whey Make Allowance
    Estimating the manufacturing cost of producing dry whey presents a 
problem similar to that for cheese. The most recent published CDFA 
manufacturing cost survey reveals that CDFA was not satisfied with the 
precision in estimating the average cost per pound for whey products it 
discovered through plant audits. In light of this concern regarding dry 
whey manufacturing costs, this decision does not rely on the CDFA data.
    This decision does rely on the CPDMP 2006 survey of the average 
manufacturing cost to produce a pound of dry whey. Relying solely on 
the CPDMP 2006 survey is identical to the approach used in determining 
the make allowance for dry whey currently used in the Class III price 
formula. The 2006 survey value of $0.1976 plus a marketing cost 
adjustment of $0.0015 yields a dry whey make allowance of $0.1991 per 
pound.
    An issue was raised by Twin County in its brief concerning an 
alleged differential impact on small and large businesses if make 
allowances or Class III and IV price formulas are amended. However, the 
purpose of the Class III and IV price formulas and make allowances is 
to set individual minimum class prices for the Federal milk order 
program on a national basis.
Butterfat Yield Factor
    A proposal, published in the hearing notice as Proposal 6, was 
included in a package of proposals advanced by DPNM seeking to amend 
the product price formulas to more accurately capture the use of modern 
manufacturing technology and its impact on milk value. A portion of 
Proposal 6 seeks to amend the butterfat yield factor in the butterfat 
price formula from 1.20 to 1.211 to account for what DPNM and other 
participants in this proceeding characterized as a misapplication of 
farm-to-plant shrinkage when the Class III and Class IV product-price 
formulas were adopted in November 2002 (67 FR 67906), and became 
effective on April 1, 2003 (68 FR 7063).
    Specifically, DPNM explained that the current butterfat recovery 
factor of 1.20 used in the butterfat pricing formula is the result of 
the incorrect application of the butterfat shrinkage factor of 0.015 
percent on a per pound of butterfat basis rather than on a per cwt 
basis. As explained by DPNW, the shrinkage factor was, however, 
properly applied to the butterfat adjustment portion of the protein 
price formula. Correction of this mathematical error removes this 
inconsistency between the butterfat pricing formula and the protein 
price formula.
    This decision agrees with DPNM and others who support correction of 
this error. In the 2002 final decision adopting the current butterfat 
yield of 1.20, USDA correctly explained that when accounting for the 
farm-to-plant loss of milk, there is a 0.25 percent butterfat loss per 
pound of butterfat, plus an additional loss of 0.015 pounds per cwt of 
milk. However, when mathematically accounting for the loss in the price 
formulas, the additional 0.015 pound of loss was applied on a per pound 
of butterfat basis. This decision corrects that error and adopts a 
butterfat yield of 1.211.
    Opponents of amending this factor do not dispute that the current 
butterfat yield factor used in the pricing formulas is in error. 
Rather, opposition rests on the premise that manufacturing processors 
are already paying too much for raw milk and attribute paying too much 
to the in-plant shrinkage of butterfat that cannot be processed into a 
finished product. Furthermore, adopting the 1.211 factor would result, 
all other factors unchanged, in a higher minimum price for raw milk. 
This decision rejects such arguments. The arguments are based on an 
unwanted outcome and not on the basis of the proper application of this 
factor. The other features of Proposal 6 are not adopted and those 
features are discussed later in this decision.
    Other proposals considered in this proceeding address the three 
major elements of the product-price formulas--end-product prices used 
in the formulas, manufactured product yield factors and other intra-
formula cost factors. A proposal (Proposal 18) advanced to establish an 
alternative

[[Page 35327]]

approach to determining prices of raw milk by attempting to develop a 
competitive pay price also is considered.
Product Yields and Butterfat Recovery Percentage
    A package of proposals was advanced by DPNM that seek to amend the 
product-price formulas to capture the use of more modern manufacturing 
technology and its impact on milk value (Proposals 6, 7, and 8). As 
already discussed, a part of Proposal 6 seeking to amend the butterfat 
yield factor in the butterfat price formula from 1.20 to 1.211 is 
adopted. However, Proposal 6 also seeks to increase the butterfat 
recovery percentage in the protein price formula from 90 percent to 94 
percent. The argument for increasing this factor is that new cheese 
manufacturing technology has increased the amount of butterfat that 
manufacturers could possibly recover when making cheese. A 94 percent 
recovery rate will also increase the blend price paid to producers by 
$0.07 per cwt.
    Opponents to increasing the butterfat recovery rate, including LOL, 
NDA, Sorrento, Leprino, MMPA, and H.P. Hood presented evidence 
countering the DPNM claim that a butterfat recovery in excess of 90 
percent is achievable industry-wide. Many manufacturer witnesses 
testified that their butterfat recovery percentage in cheese is, on 
average, 90 percent.
    While the record contains evidence of what butterfat recovery in 
cheese production is possible by the use of more modern manufacturing 
methods and technology, the preponderance of evidence reflects that 
many cheese manufacturers generally achieve butterfat recovery near 90 
percent. It is important that the product-price formulas reflect 
current market conditions, not market conditions that may be possible 
but not widely achieved or not reflective of general industry wide 
conditions. Accordingly, this decision rejects adoption of this feature 
of DPNM Proposal 6.
    A second proposal of the DPNM package of proposals, Proposal 7, 
seeks to eliminate the farm-to-plant shrink adjustment factors in the 
Class III and Class IV product-price formulas. The argument by 
proponents is that modern measurement and milk-handling techniques, and 
the trend of transporting full loads of milk from single producers 
negate the need to retain the shrinkage adjustment factors. Opponents 
argue that in many marketing areas, milk shipments are commonly 
assembled from multiple farms and some farm-to-plant shrinkage is 
inevitable.
    Record evidence supports concluding that farm-to-plant shrinkage 
remains a reality for manufacturers. Numerous witnesses testified 
regarding actual average farm-to-plant shrinkage experienced at their 
plants: LOL (0.343 percent); MMPA (0.3 percent); Leprino (0.25 
percent); and HP Hood (1.5 percent). While DPNM argued that its members 
farm-to-plant shrinkage is well below the 0.25 percent contained in the 
Class III and Class IV product-price formulas, no evidence was offered 
for examination as an alternative other than its elimination.
    This decision finds that the Class III and Class IV product-price 
formulas should continue to recognize the loss of milk that occurs when 
milk is moved from the farm to a receiving plant. The record also 
supports concluding that some losses are outside the control of the 
manufacturer. The 0.25 percent shrinkage factor contained in the 
formulas is a reasonable factor that represents the loss of producer 
milk when shipped from farm-to-plant. Accordingly, Proposal 7 is not 
adopted.
    A third proposal of the DPNM package of proposals, Proposal 8, 
seeks to increase the nonfat solids (NFS) yield factor in the Class IV 
product price formula and the yield factors for protein and butterfat 
in the protein price formula components of the Class III product-price 
formula. The argument for increasing these yield factors is that that 
new technology could allow manufacturers to achieve higher product 
yields increasing the value of a cwt of raw milk. Opponents counter 
that the methodology used to derive the proposed yield factors are 
flawed and that no actual studies were offered to support concluding 
that product yields are higher than those currently provided in the 
formulas.
    As with the rejection of a portion of Proposal 6 discussed above, 
the preponderance of record evidence does not support concluding that 
the NFS yield or the cheese yield based on protein and butterfat 
retention in cheese manufacturing should be changed. The record does 
not contain credible data that shows that the proposed yields are 
achievable. While the proponent offered proposed yield factors from 
published data, it failed to take into account whether the addition of 
milk solids to cheese vats was the likely source of higher product 
yields. In fact, numerous cheese manufacturers testified that when 
economically feasible they fortified their cheese vats to increase vat 
yields. For these reasons this decision finds that the current product 
yield factors used in the Class III and Class IV product-price formulas 
are reasonable. Accordingly, Proposal 8 is not adopted.
Value of Butterfat in Whey
    Two proposals advanced by IDFA and Agri-Mark, Proposals 9 and 10 
respectively, seek to change the protein price formula feature of the 
Class III product-price formula by reducing the protein price to 
reflect the lower market value of whey cream. Proposal 9 also seeks to 
further lower the protein price to reflect the reduced recoverable 
volume of whey cream in the cheese making process. (During the 
proceeding Agri-Mark withdrew its support of Proposal 10 in support of 
IDFA's Proposal 9.) The argument for seeking these changes is that that 
the volume of milk contained in whey cream is currently valued at the 
Grade AA butter price but can only be sold as whey butter (Grade B 
butter) or for other uses with values below the Grade AA butter price. 
Record evidence does indicate that Grade B butter is marketed at a 
discount to the Grade AA butter price and is often marketed to 
commercial food service establishments such as bakeries. Although some 
hearing participants (NAJ) suspect that the volumes of whey cream 
produced and the extent of a secondary market for whey butter are 
relatively small, record evidence also contains very limited data 
regarding plant sales of whey butter. More importantly, there is no 
known publically available data for U.S. market prices and volumes of 
whey butter produced or sold.
    Opponents (Dairylea, et al.) to IDFA's proposal acknowledge that 
while whey cream does have a lower value than that reflected in the 
Grade AA butter price, other higher-value uses for whey cream exist 
that also are not recognized. Opponents argue that it would be 
inappropriate to amend the butterfat value to reflect a selected 
measure of whey cream value while not considering whey cream value in 
other (possibly higher-value) uses.
    The record does not support reducing the protein price to account 
for unknown volumes and values of whey cream. Without publicly 
available market data that measures and reports whey cream volumes and 
prices, no reasonable and objective means is available to determine if 
or how whey cream is unreasonably distorting the protein price formula 
feature contained in the Class III product-pricing formula. The lack of 
verifiable data concerning whey cream and/or its applicability to any 
additional costs or value loss experienced by cheese manufacturers 
across the industry is unknown.

[[Page 35328]]

Accordingly, Proposal 10 is not adopted.
Barrel-Block Cheese Price Spread
    Proposal 12 offered by IDFA and supported by Leprino, DFA, NDA, 
Agri-Mark, and others, seeks to eliminate the 3-cent addition to the 
barrel price in the protein price formula. The argument for elimination 
from the protein price formula is that the average price difference 
between block and barrel cheese was 3-cents when first incorporated 
into the formula but now there is now virtually no difference in the 
packaging costs of blocks and barrels. Proponents also argue that even 
if there were a cost difference, that difference would have been 
captured in the CPDMP 2006 survey of manufacturing costs. Other 
proponents add to the argument that after the NASS barrel cheese price 
was adjusted from 39 percent to 38 percent moisture content in January 
2001, the price difference between barrels and blocks has averaged 
$0.008 per pound.
    The record contains only one cheese manufacturer's (Davisco) 
specific packaging cost data for a single plant located in Minnesota 
that produces cheese in both blocks and barrels. That plant's average 
packaging cost for block cheese was $0.0012 per pound more than for 
barrels. Another cheese manufacturer (Twin County) producing 
exclusively cheese in barrels in Iowa was unable to indicate whether it 
was advantageous to their business to support or oppose any change in 
the 3-cent adjustment advanced in Proposal 12.
    The record does not support a finding for adopting Proposal 12. The 
argument that any packaging cost differences that exist between barrel 
and block cheese is captured in the CPDMP 2006 survey is inadequately 
supported. The record reveals that all packaging costs reported in the 
CPDMP 2006 survey were for 40-pound block cheese production. If a 
surveyed plant produced barrel cheese, an average packaging cost for 
40-pound blocks was assigned to the plant.
    Additionally, proponents assert that since the price difference 
between blocks and barrels is almost zero, it can be concluded that any 
packaging cost difference must also be nearly zero. This decision does 
not find a causal relationship between selling prices and costs. While 
evidence does support that market prices of blocks and barrels can 
sometimes be identical, it cannot be concluded that any purported cost 
difference arising from packaging cost differences must have also 
disappeared. The sometime relatively similar market prices of block and 
barrels could be explained by a multitude of factors not relating to 
manufacturing and packaging costs.
    Packaging cost differences between barrels and blocks may well be 
negligible. While the record contains packaging cost information for a 
single plant that suggests similar packaging costs of barrel and block 
cheese, such evidence is insufficient to conclude that this is 
representative across Federal order manufacturing plants or should be 
the basis for adopting the proposal. Accordingly, Proposal 12 is not 
adopted.
    The proposal by DFA and NDA, Proposal 13, seeks to eliminate the 
cheese barrel price from the protein price formula feature of the Class 
III product-price formula, but not testimony given in support of this 
proposal. In addition to NDA proponent support during the hearing and 
DFA opposition to the adoption of the proposal in their post-hearing 
brief, significant opposition from others was given. Opponents argue 
that because barrel cheese represents roughly half of the NASS price 
survey cheese volume, removing the barrel price from the protein price 
formula would greatly reduce the total NASS survey volume and thus make 
the price survey less representative of the cheddar cheese market.
    This decision finds that retaining the cheese barrel price in the 
protein price formula is necessary to ensure that the protein price is 
representative of the national cheese market. The Class III product-
product price formula needs to be as reasonably representative of the 
market for cheese that determines the value of milk. Record evidence 
reveals that barrel production in the NASS survey is often in excess of 
50 percent of the total cheese volume surveyed. Eliminating the barrel 
price from the protein price formula would significantly and needlessly 
reduce the volume of cheese used in the Class III product price formula 
which could lead to protein prices that are not as representative of 
the national cheese market. Accordingly, Proposal 13 is not adopted.
Product Price Series
    Proposal 14 advanced by Agri-Mark, seeking to change the price data 
used in the Class III and protein price formula by combining NASS price 
survey data for cheddar cheese with weekly average CME cheese prices is 
presented as a superior benchmark price for cheese. The argument rests 
on the assertion that 2-week timing difference, or lag, between the CME 
price and the NASS price survey for cheese fails to capture changes in 
market prices in the current value of cheese and the near-actual Class 
III value. The proponent also argues that adoption of this new price 
series would reduce price volatility and provide more up-to-date market 
information than that currently provided by the NASS price survey. In 
other words, more current market information would be transmitted 
through minimum Class III prices and provide more accurate pricing 
signals to processors and producers.
    Opponents to adoption of Agri-Mark's Proposal 14, including IDFA 
and its members, collectively argue that combining the CME price with 
the NASS price would reduce the usefulness of currently available risk 
management tools. Those tools include the use of futures contracts and 
the use of forward contracts. Opponents also note that the CME is a 
spot market representing only about 4.1 percent of all cheddar cheese 
traded and is not representative of cheese being more commonly produced 
and marketed on a longer-term contract basis, that it adds a degree of 
complexity to a pricing-formula that is already too complex without any 
discernible benefit and its adoption would tend to bias price reporting 
to the market conditions of the Chicago area.
    It is reasonable to expect that adding a degree of complexity may 
tend to reduce transparency and lessen the understanding of the Class 
III and Class IV product-pricing formulas. Other than assertions by the 
proponent, the record lacks evidence that combining CME prices with 
NASS survey prices will improve price discovery, market information, or 
offer a superior transmission of economic signals through the minimum 
Class III price.
    A rulemaking action on mandatory product price reporting overtakes 
the need to consider adoption of a new price series that combines CME 
prices with NASS survey prices. Improved mandatory price reporting that 
provides for auditing prices reported to NASS and will make the 
accuracy, but not the timing, of price data less of an issue than 
envisioned during the course of the hearing.
    It would not be appropriate to compare NASS and CME prices as being 
coincident after accounting for their 2-week lag until adequate data 
has been collected against which a reasonable price comparison can be 
made. If the reported cheese prices in the NASS reports are largely and 
similarly reflective of CME prices, then the proponent's analysis and 
conclusions retain validity. If large differences are discovered 
between audited mandatory

[[Page 35329]]

price reports compared with price reporting that does not include 
auditing, then Agri-Mark's analysis of the 2 price series being nearly 
identical may no longer be reasonably recreated by a time lag 
adjustment. Unaudited price reporting includes all reporting prior to 
the effective date of August 2, 2007, for implementation of the 
mandatory price reporting and auditing rulemaking. Accordingly, 
Proposal 14 is not adopted.
    A proposal advanced by DPNM, Proposal 15, seeking to replace the 
NASS price series for cheese with the CME price has similarities to 
that of Proposal 14. It seeks to eliminate the 2-week lag between CME 
prices and NASS price reporting. DPNM argues that using CME prices in 
the price formula for cheese would provide producers, marketers, and 
manufacturers of cheddar cheese with timelier prices and that CME 
represents actual current cheese prices.
    Opponents, including IDFA and its members, NDA, Agri-Mark and DFA, 
as in their opposition to the adoption of Proposal 14, argue that the 
CME is too thin a market to be relied upon for use in the Class III 
product-price formula, that the CME represents only about 4.1 percent 
of all cheddar cheese traded, that its exclusive use would tend to bias 
and limit the price reporting for cheese to the market conditions of 
the Chicago market, and that being a spot market for cheese, it ignores 
other sales agreements and marketing arrangements that account for more 
than 95 percent of the cheese marketed and largely captured in the NASS 
price survey.
    This decision agrees with opponents in that cheese prices used in 
product-price formulas should reflect broad market trends and not rely 
exclusively on a smaller subset of cheese prices and spot marketing 
conditions represented by the CME. The record also makes clear that 
more industry confidence is placed on NASS price surveys than spot 
market prices for cheese. Accordingly, Proposal 15 is not adopted.
Other Solids Price
    Proposal 16, advanced by NAJ, seeks to eliminate the other solids 
price and expand the protein price formulas to include the value of dry 
whey because, according to NAJ, the value of whey lies in its protein 
content. The proponent asserts that the other solids price formula does 
not connect the market value of whey solids to how producers are paid 
for whey. Therefore, the proponent advocates that the value of dry whey 
in the price formulas be determined on the basis of its protein content 
which will make the other solids price formula no longer necessary.
    IDFA and other opponents argue that it would inappropriate to value 
dry whey on a component (protein) that has no measurable effect on the 
product yield.
    This decision finds that Proposal 16 would add no additional value 
arising from protein to the marketwide pool. It would simply shift the 
money attributed to other nonfat solids into the protein price formula 
and add a level of complexity to the product price formulas that would 
yield no measurable benefit.
    Record evidence does not support eliminating the other nonfat 
solids prices and shifting the value of dry whey into the protein price 
formula. Other solids in milk are composed primarily of lactose, whey 
protein, ash and other non-protein solids. Numerous component markets, 
such as lactose and dry whey, were evaluated during Federal order 
reform to determine an appropriate market on which to base the other 
solids price. It was determined that because no reliable lactose market 
existed, the dry whey market was the next best alternative. At this 
time, there is still no reliable market for lactose on which the other 
solids price could be based. Therefore, this decision finds that dry 
whey remains the most relevant market on which to base the other solids 
price. Accordingly, Proposal 16 is not adopted.
Competitive Price Series
    Proposal 18, advanced by the Maine Dairy Industry Association 
(MDIA), seeks to determine Class III and Class IV prices with a 
competitive pay price series rather than the current product-price 
formulas. The proposal seeks a return to a competitive pay price used 
by the FMMO program prior to 2000. The proponent argues that adoption 
of the proposed competitive pay price series would eliminate the need 
for establishing make allowances that, when increased, reduce prices 
received by dairy farmers.
    A competitive pay price series previously existed for nearly 40 
years and provided the foundation for all classified prices set in the 
system of milk marketing orders. A competitive pay price series would 
negate the need to directly consider manufacturing costs and other 
factors such as product yields and their relationship in deriving the 
value of raw milk.
    However, there are many details that need resolution before the 
FMMO program can return to basing classified prices on a competitive 
pay price series. For example, the proposed method is based on 
geographic areas (zones) wherein strong competition for raw milk 
prevails. A competitive pay price would be derived by averaging prices 
from all the competitive price zones. As conceded by the proponent, 
these areas would most likely be surrounded by Federal milk marketing 
areas where minimum classified prices prevail and therefore milk prices 
within the competitive price zones would be influenced by milk priced 
under adjoining Federal orders. Other considerations, such as 
accounting for various forms of in-kind payments to producers, also 
need to be addressed. Ignoring consideration of such subsidies would 
allow plants to increase (decrease) their hauling subsidies as a way of 
reducing (increasing) the actual pay price to dairy farmers.
    For the same reasons articulated regarding the need to abandon a 
competitive price series, the only current practical method upon which 
to establish minimum Federal order prices are product-price formulas. 
While other methods have been considered, none had superior benefits or 
had broad-based industry support other than product-price formulas.
    Therefore, this decision finds that Proposal 18 cannot be 
implemented as proposed. Accordingly, Proposal 18 is not adopted.
Rulings on Motions
    A motion for official notice of publications and a final decision 
by the CDFA was submitted by Agri-Mark, et al., joined by Twin County 
Dairy, Inc., and supported by IDFA. This decision takes official notice 
of these publications. Accordingly, the motion is rendered moot.
    A motion and supplemental information in support of that motion 
seeking a continuance of the hearing for the limited purpose of 
offering additional data and analysis in advancing Proposal 18 were 
submitted by MDIA. A counter motion opposed to MDIA's motion was made 
by IDFA. Offering new data and analysis by continuing or re-opening the 
hearing for the limited purpose of reconsidering Proposal 18 would put 
all other hearing participants advancing or opposing proposals during 
the proceeding at a disadvantage. This proceeding occurred for 3 weeks 
held over the 6 month period of February 2007 through July 2007. It 
also was preceded by an information session in December 2006. This 
decision finds that sufficient time was made available to all known 
parties to develop and present noticed proposals. Accordingly, the 
motion is denied.

[[Page 35330]]

2. Determining Whether Emergency Marketing Conditions Exist That Would 
Warrant Omission of a Recommended Decision
    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 and 
implemented on March 1, 2007. The method of determining the new make 
allowances proposed to be adopted in this tentative decision is the 
same method used when the current make allowances were adopted and 
implemented. Issuance of a recommended decision is not reasonable as it 
would only delay implementation of make allowances that more reasonably 
reflect higher manufacturing costs being incurred by manufacturers. 
Additionally, the method of determining the proposed make allowances is 
the same as that used in determining the make allowances currently in 
use and is known by handlers. The record also shows that the yield 
factor in the butterfat formula is not accurate. This factor should be 
amended from the current 1.20 to 1.211 to improve the accuracy of the 
Class III and Class IV product-pricing formulas. Improving the accuracy 
of the formulas upon which all classified milk prices are set in all 
orders is critical in providing processors with adequate revenue to 
maintain operations and in providing producers with market-based 
pricing signals from which they base production and marketing 
decisions. Accordingly, the record clearly establishes a basis for 
amending the orders on an interim 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 comments 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 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, insure 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

    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 partial decision 
and the interim orders and the interim marketing agreements 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 Appalachian, Arizona, Central, Florida, 
Mideast, Northeast, Pacific Northwest, Southeast, Southwest and Upper 
Midwest 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 2007.
    The agents of the Secretary to conduct such referenda are hereby 
designated to be the respective market administrators of the aforesaid 
orders.

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

[[Page 35331]]

conditions thereof, will tend to effectuate the declared policy of the 
Act;
    (2) The parity prices of milk, as determined pursuant to Section 2 
of the Act, are not reasonable in view of the price of feeds, available 
supplies of feeds, and other economic conditions which affect market 
supply and demand for milk in the aforesaid marketing area. The minimum 
prices specified in the order as hereby amended are such prices as will 
reflect the aforesaid factors, insure a sufficient quantity of pure and 
wholesome milk, and be in the public interest; and
    (3) The said 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.

List of Subjects in 7 CFR Part 1000

    Milk marketing orders.

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:

PART 1000--GENERAL PROVISIONS OF FEDERAL MILK MARKETING ORDERS

    1. The authority citation for 7 CFR part 1000 is amended to read as 
follows:

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

    2. Section 1000.50 is amended by:
    a. Revising paragraph (l);
    b. Revising paragraph (m);
    c. Revising paragraph (n)(2);
    d. Revising paragraph (n)(3)(i);
    e. Revising paragraph (o); and
    f. Revising paragraph (q)(3).
    The revisions read as follows:


Sec.  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 17.15 
cents, with the result multiplied by 1.211.
    (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 16.78 cents and multiplying the result by 0.99.
    (n) * * *
    (1) * * *
    (2) Subtract 20.03 cents from the price computed pursuant to 
paragraph (n)(1) of this section and multiply the result by 1.383;
    (3) * * *
    (i) Subtract 20.03 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 19.91 
cents, with the result multiplied by 1.03.
* * * * *
    (q) * * *
    (1) * * *
    (2) * * *
    (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 17.15 cents 
from this average, and multiplying the result by 1.211.

[Note: The following will not appear in the Code of Federal 
Regulations.]

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 ---- \6\ all inclusive, of the 
order regulating the handling of milk in the -------- \7\ marketing 
area (7 CFR part ----); \8\ and
---------------------------------------------------------------------------

    \6\ First and last section of order.
    \7\ Name of order.
    \8\ Appropriate Part number.
---------------------------------------------------------------------------

    II. The following provisions: Sec.  ---- \9\ Record of milk 
handled and authorization to correct typographical errors.
---------------------------------------------------------------------------

    \9\ Next consecutive section number.
---------------------------------------------------------------------------

    (a) Record of milk handled. The undersigned certifies that he/
she handled during the month of ---- \10\, ---- hundredweight of 
milk covered by this marketing agreement.
---------------------------------------------------------------------------

    \10\ 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
-----------------------------------------------------------------------


    Dated: June 16, 2008.
David R. Shipman,
Acting Administrator, Agricultural Marketing Service.
[FR Doc. E8-13943 Filed 6-19-08; 8:45 am]
BILLING CODE 3410-02-P