[Federal Register Volume 78, Number 26 (Thursday, February 7, 2013)]
[Proposed Rules]
[Pages 9248-9279]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-02623]



[[Page 9247]]

Vol. 78

Thursday,

No. 26

February 7, 2013

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; Final Decision on 
Proposed Amendments to Marketing Agreements and Orders and Termination 
of a Portion of the Proceeding; Proposed Rule

  Federal Register / Vol. 78, No. 26 / Thursday, February 7, 2013 / 
Proposed Rules  

[[Page 9248]]


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DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Part 1000

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


Milk in the Northeast and Other Marketing Areas; Final Decision 
on Proposed Amendments to Marketing Agreements and Orders and 
Termination of a Portion of the Proceeding

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Proposed rule.

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SUMMARY: This document is the final decision proposing to permanently 
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. These amendments were 
adopted by an interim final rule issued on, July 25, 2008, that became 
effective on October 1, 2008. This document also terminates the 
proceeding with regard to additional proposals that addressed 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-price formulas. The orders amended by this decision require 
producer approval. Referenda will be conducted in three markets and 
dairy farmer cooperatives will be polled in the other seven markets to 
determine whether dairy farmers approve the issuance of the orders as 
amended.

FOR FURTHER INFORMATION CONTACT: William Francis, Director, Order 
Formulation and Enforcement Division, USDA/AMS/Dairy Programs, Order 
Formulation and Enforcement, Stop 0231--Room 2971-S, 1400 Independence 
Avenue SW., Washington, DC 20250-0231, (202) 720-7183, email address: 
[email protected].

SUPPLEMENTARY INFORMATION: This final decision proposes to permanently 
adopt amendments to the manufacturing (make) allowances for cheese, 
butter, nonfat dry milk (NFDM) and dry whey contained in the Class III 
and Class IV product price formulas (Proposal 1). Specifically, this 
decision proposes to permanently adopt the following make allowances: 
$0.2003 per pound of cheese; $0.1715 per pound of butter; $0.1678 per 
pound of nonfat dry milk (NFDM); and $0.1991 per pound of dry whey. 
This decision also proposed to permanently increase the butterfat yield 
factor in the butterfat price formula from 1.20 to 1.211 (Proposal 6). 
These make-allowances and butterfat yield factor have been in use since 
October 1, 2008, following producer approval of the tentative final 
decision (73 FR 51352).
    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. This document also terminates the proceeding 
with regard to Proposals 2, 17 and 20.
    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. The 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 inhabitant, 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 farms, it should be an inclusive standard for most small dairy 
farms. For purposes of determining a handler's size of operation, 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 farms was pooled on the 
Federal order system. Of the total, 46,729 dairy farms, 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 to permanently amend the make allowances 
contained in the formulas used to compute component prices and the 
minimum class prices in all Federal milk orders that were implemented 
October 1, 2008, on an interim basis, without change. Specifically, the 
make allowance for cheese continues to be $0.1715 per pound (initially 
increased from $0.1682 per pound); the make allowance for NFDM 
continues to be $0.1678 per pound (initially increased from $0.1570); 
the make allowance for butter continues to be $0.1715 per pound 
(initially increased from $0.1202); and the make allowance for dry whey 
continues to be $0.1991 (initially increased from $0.1956). The 
butterfat yield factor in the butterfat price formulas continues to be 
1.211 (initially increased from 1.20).
    The make allowances serve 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

[[Page 9249]]

proposed amendments on industry participants including producers and 
manufacturers. It can be found on the AMS Web site at www.ams.usda.gov/dairy. Based on that economic analysis, 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 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.

Economic Analysis

    In order to assess the impact of the proposed changes in Federal 
order product price formulas, the Department conducted an economic 
analysis. This analysis was discussed in the tentative partial final 
decision (73 FR 35306) and remains unchanged. The complete analysis is 
available on the Dairy Programs Web site which can be accessed at 
www.ams.usda.gov/dairy.

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).
    Tentative Partial Final Decision: Issued June 16, 2008; published 
June 20, 2008 (73 FR 35306).
    Interim Final Rule: Issued July 25, 2008; published July 31, 2008 
(73 FR 44617).
    Delay of Effective Date: Issued August 28, 2008; published 
September 3, 2008 (73 FR 51352).

Preliminary Statement

    Notice is hereby given of the filing with the Hearing Clerk of this 
final decision and termination of proceeding with respect to the 
proposed adopted amendments to the tentative marketing agreements and 
the orders regulating the handling of milk in the Northeast and other 
marketing areas. This notice is issued pursuant to the provisions of 
the Act and applicable rules of practice and procedure governing the 
formulation of marketing agreements and marketing orders (7 CFR part 
900).
    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 Act, 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 February 9, 2007 (72 FR 6179); 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:
    A. Amending the product-price formulas used to compute Class III 
and Class IV prices.
    B. Terminating the proceeding with respect to proposals 2, 17 and 
20.

Findings and Conclusions

A. Amending the Product-Price Formulas Used To Compute Class III and 
Class IV Prices

    This final decision proposes to adopt a proposal published in the 
hearing notice as Proposal 1 which seeks to amend the manufacturing 
allowances for butter, cheese, 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. The provisions 
contained herein were adopted on an interim basis and became effective 
October 1, 2008. Specifically, this decision finalizes 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 uses wholesale 
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 Agricultural Marketing Service (AMS) surveyed prices of 
manufactured dairy products.\1\ 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.\2\ 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 
relationship between the Class III and IV price. The butterfat, 
protein, other solids and nonfat solids prices are all derived in a 
similar manner: Average AMS 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).
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    \1\ Official Notice is taken of a Final Rule (77 FR 8717) 
published February 15, 2012. Effective April 1, 2012, USDA's AMS 
began collecting and reporting wholesale dairy product prices. This 
was previously managed by the National Agricultural Statistic 
Service (NASS).
    \2\ Official Notice is taken of a Notice (77 FR 2282) published 
April 13, 2012. Effective April 18, 2012, AMS surveyed prices are 
used in the price discovery mechanism for the component values of 
raw milk. These component prices are then used to determine FMMO 
minimum classified prices.
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    The make allowance factor represents the cost manufacturers incur 
in processing raw milk into one pound of product. Federal milk order 
pricing

[[Page 9250]]

formulas currently contain 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. These make allowances were adopted on 
July 25, 2008, (73 FR 44617) and became effective on October 1, 2008, 
on an interim basis as a result of this proceeding. The make allowances 
were determined on the basis of California Department of Food and 
Agriculture (CDFA) and Cornell Program on Dairy Markets and Policy 
(CPDMP) surveys of product manufacturing costs. The current make 
allowances for butter and nonfat dry milk were determined by using a 
weighted average of the CDFA and CPDMP surveys over national production 
volumes. The cheese make allowance was determined by relying on the 
CDFA 2006 survey average cheese manufacturing cost and the dry whey 
make allowance was determined by relying on the CPDMP 2006 survey. All 
make allowances were adjusted 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 4 manufacturing plants.
    Agri-Mark was 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 Market Administrators to administer the survey, select the sample 
plants, and collect, audit, and assemble cost information.
    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 was 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 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 shrinkage and butterfat shrinkage 
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 butterfat 
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 
49 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 Chicago Mercantile Exchange (CME) 
cheese price series to determine the cheese price contained in the 
Class III and Class IV product-price formulas.
    Proposal 15 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.
    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 
northeastern states.
    To provide order to the hearing testimony, post-hearing briefs and 
comments and exceptions to the tentative final decision, 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

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4. Barrel Cheese Price: Proposals 12 and 13
5. Product Price Series: Proposals 14, 15 and 18
6. Other Solids Price: Proposal 16
7. Energy Cost Adjuster; Proposal 17
8. Cost-of-Production Add-on; Proposal 20
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 of or in 
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 was a factor 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 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 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 11 plants, 
the witness classified 7 as small plants and the remaining 4 as large 
volume plants. The witness testified that the weighted average 
manufacturing cost of the 2006 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 8 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 7 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 7 participating whey plants were associated with cheese 
plants that were also included in the 2006 survey. The witness noted 
that 12 whey plants participated in the 2005 survey.
    The Cornell witness said that 4 butter plants participated in the 
2006 survey; 3 of the plants also participated in the 2005 survey. The 
weighted average cost of the 4 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 
7 of the 8 NFDM plants that participated in the 2005 survey. According 
to the witness, the weighted average cost of the 7 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 in the 2005 survey or the 
methodological changes for the 2006 survey. 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 a previous tentative final decision (71 FR 67467) that proposed 
adoption of the make allowances that were adopted in 2006. 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 southwestern region earn from a high make allowance would not harm 
high-cost plants in the Northeast because it

[[Page 9252]]

is too costly to transport milk from the southwestern U.S. to the 
northeast region. 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 more 
timely 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 funds. 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 CPDMP 
2006 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 owns 4 
manufacturing plants in the United States. The witness supported 
updating the current make allowances with 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 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 be 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. 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 2006 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 have 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. (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 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

[[Page 9253]]

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 most representative of average size plants and is 
therefore 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 2006 CPDMP surveys. 
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.
    Comments and exceptions to the tentative partial final decision 
submitted on behalf of Agri-Mark et al. expressed support for the 
proposed make allowances. According to Agri-Mark et al. the proposed 
make allowances reasonably reflect the record evidence of 2006 surveyed 
plant cost data. However, they argued that the make allowances should 
incorporate a one-time adjustment for energy costs because energy costs 
have significantly increased from 2006 through June 2008. Based on 
energy cost data from the Bureau of Labor Statistics, Agri-Mark et al. 
proposed that the following adjustment should be added to the make 
allowances: $0.0036 for cheese, $0.0029 for butter, $0.0114 for NFDM 
and $0.0105 for dry whey.
    In its exceptions, Agri-Mark et al. also stated that USDA had 
shifted policy from adopting make allowances that allow most 
manufacturing plants receiving pooled milk to recover their 
manufacturing costs to make allowances that allow the manufacturing 
plants receiving most of the pooled milk to cover their manufacturing 
costs. Such a policy shift, from covering ``most plants'' to covering 
``most milk'' noted Agri-Mark et al. should be explained in the final 
decision. Agri-Mark et al. also requested that in the final decision 
USDA reaffirm the exclusion of balancing costs as a make allowance 
factor.
    A witness testified on behalf of DPNM, Select Milk Producers, Inc., 
and Continental Dairy Producers, Inc. (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 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 make allowances proposed by 
DPNM et al. were 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 gross income 
would average $15.51 per cwt. At an average cost of production of 
$15.17, the witness went on to predict that their clients would face a 
net profit of $0.34 per cwt. The witness said that this amount is 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 1990's, 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 western 
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

[[Page 9254]]

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 
have 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 that 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.
    Exceptions filed by DPNM et al. in response to the tentative 
partial final decision argued that in proposing new make allowances the 
Department failed to consider producer costs of feed and fuel in each 
marketing area as mandated by the Food, Conservation and Energy Act of 
2008 (2008 Farm Bill). DPNM et al. took exception with the Department's 
national Economic Analysis of the proposed changes. It argued that 
Federal orders do not encompass the entire national market and 
therefore regional economic analyses should also be conducted.
    DPNM et al. also took exception with the use of 2006 CDFA 
manufacturing cost data (released October 3, 2007) to compute the make 
allowances without input from interested parties about the 
applicability of the new data. It specifically took exception with the 
use of the weighted average cheese manufacturing cost and argued that 
the record did not indicate if the number of high-cost versus low-cost 
plants in the California survey is similar to the plant make-up of the 
rest of the country.
    DPNM et al. also stated in their comments that the Department has 
denied dairy farmers due process and provided a list of examples. They 
also took exception to the notion advanced in the tentative partial 
final decision that milk production costs are reflected in the supply 
and demand conditions for dairy products. Instead, DPNM et al. argued 
that the cost of producing milk is reflected in the supply and demand 
conditions of the various inputs, such as feed, labor and fuel. DPNM et 
al. stated that contrary to the Department's findings, the increase in 
the number of manufacturing plants from 2005 to 2007 indicates that 
make allowances were not too low, and that only CPDMP 2005 data 
(released in 2006) should be used to determine new make allowance 
levels.
    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 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 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. This position was reiterated in the IDFA 
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 dairy 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 the 
testimony of the Cornell witness which compared the 8 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.

[[Page 9255]]

    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.
    Comments and exceptions filed by IDFA expressed support for the 
proposed make allowances contained in the tentative partial final 
decision. IDFA also indicated support for comments filed by Agri-Mark 
et al. requesting that the make allowances be adjusted to reflect 
increased energy costs through June 2008. IDFA also continued to 
support adoption of a manufacturing cost survey (Proposal 2) as a means 
to provide accurate and timely manufacturing cost data for use at 
future rulemaking proceedings, and expressed continued support for the 
denial of Proposal 3.
    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 product 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 the one 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 for 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 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 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

[[Page 9256]]

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 
(Dairylea et al.), opposed adoption of Proposals 1 and 2. The brief 
expressed the opinion 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.
    Separate comments filed on behalf of Grande Cheese Company 
(Grande), Glanbia Foods, Inc. (Glanbia) and Kraft Foods (Kraft) 
expressed support for the proposed make allowances contained in the 
tentative partial final decision. Grande is a cheese manufacturer 
located in Wisconsin processing over 1.5 billion pounds of milk 
annually. Glanbia is a cheese manufacturer with plants located in Idaho 
and New Mexico. Kraft operates numerous manufacturing plants located 
throughout the country. Grande, Glanbia and Kraft all endorsed the 
comments and exceptions filed by IDFA.
    Grande's comments also took exception to the exclusive use of CDFA 
data in determining the cheese make allowance and the sole use of CPDMP 
data to determine the dry whey make allowance. Glanbia and Kraft urged 
USDA to include CDFA dry whey cost data in the make allowance 
computation because CDFA has the only audited whey cost data available. 
Grande, Glaniba and Kraft also noted support for adopting a 
manufacturing cost survey (Proposal 2).
    Comments filed by Leprino Foods in response to the tentative final 
partial decision expressed support for the proposed make allowances. 
Leprino also supported adoption of a one-time energy cost adjustment as 
proposed by Agri-Mark et al.
    Comments filed in response to the tentative partial final decision 
submitted on behalf of the Wisconsin Cheese Makers Association (WCMA) 
offered support for the make allowances in the tentative partial final 
decision and urged USDA to adopt the annual manufacturing cost survey 
advanced in Proposal 2. WCMA is an organization representing 75 
proprietary organizations and cooperatives that manufacture or process 
dairy products. WCMA argued that because small- and medium-sized plants 
typically do not have whey drying capacity, they are forced to pay more 
for the whey in their producer milk than what can be recouped in the 
market. WCMA stated that this is mostly because a plant's inability to 
dry whey for sale in the market forces them to sell a lower-valued whey 
product such as wet whey. According to WCMA, a higher whey make 
allowance keeps small- and medium-sized cheese plants from losing 
revenue in times of high dry whey prices. WCMA was of the opinion that 
USDA should include CDFA dry whey cost data in the make allowance 
computation as it would provide a higher make allowance than currently 
proposed.
    An Indiana dairy farmer took exception with the increased make 
allowances contained in the tentative partial final decision. The dairy 
farmer stated that producer paychecks should not be reduced to cover 
the cost of manufacturing milk into finished products.
    Comments filed in response to the tentative partial final decision 
submitted on behalf of the National Family Farm Coalition (NFFC) and 
the Ohio Farmers Union (OFU) opposed the increased make allowances. 
NFFC and OFU contend that the tentative partial final decision did not 
take into account farmers' costs of production. The two groups argued 
that make allowances should not be increased during a time when milk 
production costs also have increased.
    Exceptions to the tentative partial final decision filed by St. 
Albans Cooperative Creamery, Inc., (St. Albans) requested USDA to 
consider dairy farmer production costs before permanently adjusting 
make allowances. St. Albans is a dairy farmer-member Capper-Volstead 
cooperative that operates a milk manufacturing plant. St. Albans was of 
the opinion that the 2008 Farm Bill requires a dairy farmer cost 
analysis before any final adjustments to make allowances.
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' cost 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 should also 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 DPNM et al. 
witness their 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

[[Page 9257]]

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 $0.105 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 83.25, 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 their 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 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 ratio 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 0 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 et al. 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.
    Exceptions to the tentative partial final decision filed on behalf 
of DPNM et al. opposed the denial of the butterfat recovery rate 
portion of Proposal 6, and Proposals 7 and 8. DPNM et al. reiterated 
their testimony presented at the hearing that the butterfat recovery in 
cheese is in excess of 90 percent. DPNM et al. also argued that the 
USDA did not properly evaluate the CDFA yield data for cheese and the 
relevance of the factors in determining butterfat retention in cheese 
making. They offered a calculation using the butterfat tests, solids 
nonfat tests, cheese yield and cheese moisture content for California 
plants which purported to show that those plants had a butterfat 
retention rate in the range of 94 percent. They also commented that 
similar results were obtainable from the RBCS data.
    DPNM et al. noted in their comments to the tentative partial final 
decision that the farm-to-plant shrinkage allowances should be removed 
from the product-price formulas as advanced in Proposal 7. DPNM et al. 
explained that in the western part of the country, where the producers 
it represents operate, milk is delivered from the farm-to-plant in full 
tanker loads and therefore shrinkage is not a problem. Accordingly, 
they argued that DPNM et al. producers should not be penalized through 
lower component prices for being more efficient than producers who ship 
smaller loads and therefore experience farm-to-plant shrink.
    Exceptions by DPNM et al. also requested the Department to 
reconsider adoption of Proposal 8. They argued that yields contained in 
the product-price formulas should be based on average producer tests, 
not on milk standardized to 2.9915 percent protein and 3.5 percent 
butterfat. They expressed the view that since cheese prices, butterfat 
prices and make allowances are based on weighted averages, yields 
should also be based on the weighted average component tests of 
producer milk. The exception also reiterated their position that the 
casein retention rate of 82.2 percent is incorrect and that the factor 
should be 83.25 percent.
    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'

[[Page 9258]]

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 butterfat formula. However, the 
Leprino witness did not support increasing the 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 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.
    Comments and exceptions filed by IDFA to the tentative partial 
decision expressed continued support for the denial of Proposal's 6, 7 
and 8.
    A food technologist witness appearing on behalf of 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 the use of 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 testified in support of the 
positions and proposals advocated by IDFA. 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 so that 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 of 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 for 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 given that 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 a 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

[[Page 9259]]

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.
    In comments and exceptions to the tentative partial final decision, 
Agri-Mark et al. expressed support for amending the butterfat yield 
factor, and to the denial of the portion of Proposal 6 seeking to 
increase the butterfat recovery rate and the entirety of Proposals 7 
and 8.
    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 factor 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 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 the cheese 
manufacturers who testified to achieving a butterfat 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 is commonly based on farm weights and tests.
    The post-hearing brief submitted on behalf of O-AT-KA stated that 
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.
    Comments to the tentative partial final decision filed separately 
by Grande, Glanbia, Kraft, Leprino and WCMA expressed continued support 
for the denial of Proposals 7 and 8.
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 Proposal 9 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 has in the 
marketplace. The brief also highlighted testimony that some processors 
do not return whey cream back into their 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.
    Comments filed by IDFA in response to the tentative partial final 
decision took exception with the denial of Proposal 9. IDFA argued that 
record evidence demonstrates that whey cream has a lower value in the 
marketplace than butterfat used to produce Grade

[[Page 9260]]

AA butter. According to IDFA, opponents of Proposal 9 speculated as to 
how much whey cream is re-used in cheese manufacturing but did not 
provide any specific examples where the whey cream is valued at or 
above the value of butterfat in Grade AA butter. IDFA referenced 
hearing testimony from numerous cheese manufacturers who testified that 
they did not use whey cream in the cheese manufacturing process.
    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 are 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. Agri-Mark et al. reiterated this view in comments and 
exceptions filed in response to the tentative partial final decision. 
Agri-Mark et al. stated that despite a lack of widely available whey 
cream price data, USDA should still make an adjustment to the price 
formulas to recognize its lower market value.
    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 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 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.
    Comments to the tentative partial final decision filed by Leprino 
took exception to the denial of Proposal 9. Leprino reiterated 
arguments made during the hearing that the market value and volume of 
whey cream recoverable in the cheesemaking process is overvalued in the 
product-price formulas, and that the decision ignored record evidence 
demonstrating these market realities. Leprino wrote that opponents of 
Proposal 9 did not offer any evidence of other higher-valued uses for 
whey cream, but they did acknowledge that whey cream for use in Grade B 
butter has a lower market value. Leprino also argued that even if there 
are higher-valued end uses for whey cream, that the ultimate use of 
whey cream is irrelevant. According to Leprino, if whey cream is sold 
at a discount to regular cream, then that should be reflected in the 
price formulas.
    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.
    Comments to the tentative partial final decision filed by Kraft 
took exception to the denial of Proposal 9. Kraft argued that Proposal 
9 should be adopted because the record demonstrates that whey cream has 
a lower market value than cream used to produce 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 of milk manufacturing. For these reasons, the 
witness supported the adoption of Proposal 9.
    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, annually 
processes 410 million pounds of milk 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 the removal of sludge from the whey separator. 
In the

[[Page 9261]]

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 and usually sells it for 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 overvalue 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 price 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 100 pounds of milk. 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 in covering 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 their 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. Exceptions to 
the tentative partial final decision filed by DPMN et al. expressed 
their continuing opposition to Proposal 9.
    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 
the value of whey butter is as low as the proponents claim, then a 
separate whey butterfat price should be established in lieu of lowering 
the protein price.
    Separate comments to the tentative partial final decision submitted 
on behalf of Grande and Glanbia each took exception to the denial of 
Proposal 9. Grande and Glanbia both argued that record evidence 
indicates that whey cream has a lower market value than cream processed 
into Grade AA butter. Glanbia further insisted that while opponents to 
Proposal 9 claimed that other higher-value uses for whey cream exist, 
they provided no examples. Grande and Glanbia comments concluded that 
Proposal 9 should be adopted so cheese manufacturers will not be 
required to pay more for whey cream than can be recouped in the market.
    Comments filed by WCMA also took exception with the denial of 
Proposal 9 in the tentative partial final decision. WCMA argued that 
whey cream is over-valued in the current product-price formulas because 
it is made into lower valued Grade B butter. WCMA was of the opinion 
that NASS should collect data on end uses and values of whey cream.
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, therefore the 3-cent adjustment should be 
eliminated. Furthermore, the witness said, the CPDMP data used to 
determine the

[[Page 9262]]

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.
    Comments filed by IDFA in response to the tentative partial final 
decision opposed the denial of Proposal 12. IDFA argued that because 
cost data contained in the record demonstrates no difference in 
packaging costs between block and barrel cheese production, elimination 
of the 3-cent barrel-block spread is warranted.
    A witness appearing on behalf of Davisco testified in support of 
Proposal 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.
    Separate comments filed by Grande and Kraft in response to the 
tentative partial final decision opposed the denial of Proposal 12. 
Grande and Kraft argued that record evidence demonstrates that there is 
no processing cost difference between block and barrel cheese. Kraft 
elaborated that the cost data contained in this hearing record is the 
first actual cost data contained in any hearing record that addressed 
the 3-cent barrel adjustment. Therefore, Grande and Kraft urged USDA to 
adopt Proposal 12 in the final decision.
    While no testimony was received from proponents DFA and NDA 
regarding Proposal 13, a witness appearing on behalf of Kraft testified 
in opposition to 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 was of the opinion 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 a 39 percent moisture standard. However, 
the witness noted that after January 2001 the barrel cheese price was 
adjusted to a 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 5 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.
    Comments to the tentative partial final decision submitted by 
Leprino opposed the denial of Proposal 12. Leprino disagreed with the 
reasoning advanced in the tentative partial final decision that 
differences in selling prices have no causal relationship to 
differences in manufacturing costs. Leprino argued that the 3-cent cost 
add-on was originally incorporated into the product-price formulas 
because historically the selling price difference between blocks and 
barrels was 3-cents. This difference in selling prices, Leprino 
asserted, has always been attributed to manufacturing cost differences. 
Regardless, Leprino added that the Davisco plant cost data contained in 
the record proves that the difference in packaging costs between blocks 
and barrels is negligible; therefore Proposal 12 should be adopted. 
Leprino's comments were endorsed by Glanbia.
    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. Agri-Mark et al. reiterated this 
view in its comments and exceptions on the tentative partial final 
decision. Agri-Mark et al. argued that proponents of the elimination of 
the 3-cent add-on had provided enough record evidence to meet their 
administrative burden. Agri-Mark et al. summarized the regulatory 
history of the 3-cent barrel adjustment. They argued that record 
evidence by the Davisco witness demonstrated that the packaging cost 
difference between block and barrel cheese is negligible, and 
maintained that opponents of its elimination offered no rebuttal 
evidence.
    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 the determination of new make 
allowances provides the necessary recognition of

[[Page 9263]]

the cost difference between block and barrel production. The brief 
argued that CDFA data 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.
    Comments filed by DPNM et al. in response to the tentative partial 
final decision supported the continued use of the 3-cent barrel price 
adjustment if USDA continues to use both block and barrel survey prices 
in the Class III price formulas.
5. Product Price Series
    A 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 is then 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 during 
seven months of the year. According to an 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 provided an example to illustrate 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 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 low trading volume 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.
    In their comments and exception to the tentative partial final 
decision, Agri-Mark et al. expressed support for USDA's decision to 
deny Proposals 14, 15 and 18.
    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 as it results 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 they 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 that were $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 they originate 
in a public market that, since 1997, has expanded trading times and the 
number of dairy products traded. 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 the involvement 
of 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 the packaging requirement was 
changed, then the CME would become a viable market for NFDM.
    The brief submitted by DPNM et al. expressed support for adoption 
of Proposal 15 and reiterated the position that NASS product price 
surveys should be replaced by CME product prices in

[[Page 9264]]

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 noted that this position is supported in a June 2007 General 
Accountability Office (GAO) study.
    The DPNM et al. brief expressed support for using a 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. It further requested that USDA investigate the 
use of a competitive pay price and convene a hearing to consider it as 
an alternative to NASS survey price information.
    DPNM et al. exceptions to the tentative partial final decision 
stated their opposition to the denial of Proposal 15. They reiterated 
arguments made in their hearing testimony that the NASS survey is 
vulnerable to manipulation. Consequently, DPNM et al. advocated use of 
the CME prices in the product-price formulas to provide for transparent 
market signals.
    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 to 
product-price formulas in determining the value of milk used to set 
regulated minimum prices. The witness contended that butter, NFDM, 
cheese and dry whey each have a separate market that responds to unique 
supply and demand factors. The witness explained that in a competitive 
pay price system, buyers pay for raw milk according to the 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 inability to eliminate the influence of regulated minimum prices; 
(2) inadequate vigorous competition among buyers of milk; and (3) the 
problems associated with using a competitive pricing scheme based on 
the competitive situation for milk in Minnesota and Wisconsin. The 
witness explained that these limitations formed the 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 wherein a low 
Herfindahl index indicates more competition for milk. For example, 
competition for milk in a county with a value of 0.3450 is greater than 
in a county with a value of 0.3500. The witness proposed that 
competitive price zones be determined by aggregating clusters of ten or 
more contiguous counties with values below 0.33. The witness said that 
an ideal situation would be if at least a third of 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 then 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 that indirect compensation to farmers, such as 
hauling charges, would not be included in the computation of a weighted 
average price. However, the witness also noted that Class III milk 
prices could potentially be decreased if manufacturers choose to 
exploit a ``loophole'' and shift 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 prices generated by 
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. The witness predicted that 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. 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 marketing order program, but that 
producer prices in Maine are heavily influenced by those established 
under the Northeast order. The witness stated that, in the face of 
Federal minimum prices that are too low and driven by unpredictable 
price swings for dairy products, Maine dairy farmers have had to turn 
to alternative sources of income including state subsidies and 
increased equity financing to keep their farms operating. 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 for a Maine dairy farmer in 2004, 2005 and 2006, to be $19 
per cwt, $20 per cwt

[[Page 9265]]

and $24 per cwt, respectively. The witness compared this price to the 
Northeast Federal order mailbox prices of $16.29 per cwt, $15.39 per 
cwt and $13.22 per cwt in 2004, 2005 and 2006, respectively. Using the 
Vermont cost data and the Northeast Federal order price 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 provides for a subsidy payment 
from the State's general fund. However, the witness said that 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, in the long-run, these 
State programs cannot be relied upon to provide a stable marketplace 
for dairy farmers.
    A post-hearing brief filed on behalf of MDIA reiterated the 
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 the current 
scheme which derives prices 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 the valuation of producer milk and the subsequent 
determination of minimum classified prices.
    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, midwestern and southeastern regions of 
the country. The brief attributed observed price volatility in milk 
prices to the use of end-product price formulas. The brief asserted 
that the product-price 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 the stabilization and 
enhancement of producer income.
    Exceptions to the tentative partial final decision filed by MDIA 
opposed the denial of MDIA's motion to reopen the hearing. 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 base selling prices. The witness asserted that using NASS 
surveys to set minimum prices has resulted in disorderly market 
conditions because 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 based on the conclusion that the record 
evidence is insufficient to support its adoption. Their post-hearing 
brief specifically expressed support for the portion of Proposal 15 
proposing the use of 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 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 the 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 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 price reporting to NASS were electronic, 
mandatory and audited. IDFA insisted in its post-hearing brief that 
using the CME to determine product prices could result in product 
prices unrepresentative 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 
prices at the plants. The witness acknowledged the time lag between CME 
prices and the NASS survey prices 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 
reporting of prices 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.

[[Page 9266]]

    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 
is 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 a more 
timely method of updating 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.
    Comments to the tentative final partial decision filed separately 
by IDFA, Grande, Glanbia, Kraft, Leprino and WCMA expressed support for 
the denial of Proposals 14, 15 and 18.
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 be derived primarily from its protein content, rather 
than its other solids content as it is 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 in 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 is reflective of 
a shortage in lactose processing capacity and not a lack of available 
lactose. The witness believed that the higher dry whey and lactose 
prices prior to the fall of 2006 justify valuing dry whey on a protein 
rather than on an 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. It is this preference that led the witness to conclude 
that 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 such 
that the NASS price surveys would be expanded to include collection and 
reporting of market prices for 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 of whey 
solids which NAJ maintains is based on its protein content and how 
producers are paid for whey.
    NAJ stated its opposition to the denial of Proposal 16 in its 
exceptions to the tentative partial final decision. NAJ argued that 
counter to what USDA found as a flaw in Proposal 16, one of its 
strengths is its revenue neutrality. NAJ was of the opinion that 
adoption of Proposal 16 would give producers a financial incentive to 
increase their milk protein content. NAJ reiterated arguments that 
Proposal 16 would allow manufacturers to account to the pool for 
protein, the component in whey that is most valued, while also 
simplifying the product-price formulas. NAJ was also of the opinion 
that USDA's decision to only make changes in the product-price formulas 
to the make allowances and the butterfat yield factor indicates its 
unwillingness to amend other factors in the formulas.
    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 is 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 on the basis that it 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's call for USDA collection of prices, manufacturing costs and 
volumes for whey protein concentrates and whey protein isolates.
    Comments filed separately by Agri-Mark et al.; DPNM et al.; IDFA; 
Grande; Glanbia; Kraft and Leprino in response to the tentative partial 
final decision expressed support for the denial of Proposal 16.

[[Page 9267]]

    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, nor 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 was used to analyze scenarios as outlined 
in the USDA preliminary economic analysis that was 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.
7. Energy Cost Adjuster
    A witness from NMPF testified that energy costs are the most 
volatile manufacturing input cost in dairy manufacturing. The witness 
asserted that increases in energy costs have countered many of the 
measures manufacturers have taken to increase productivity and 
efficiency.
    The NMPF witness testified that the current make allowance levels 
reliance on a fixed energy cost derived from information that existed 
at a single point in time is no longer appropriate. The witness said 
USDA should instead adopt a monthly energy price adjuster to capture 
the change in energy prices that may occur from month to month. The 
witness explained that the base energy cost should be derived from 
surveyed energy costs in the manufacturing cost surveys used to 
determine the make allowances. If two or more surveys were used to 
determine make allowances, then the energy costs of each survey should 
be weighted accordingly, the witness said. According to the witness, an 
energy price adjustor would then be added (or subtracted) to the base 
energy cost value.
    The NMPF witness explained that the energy price adjustor should be 
computed using the Bureau of Labor Statistics Producer Price Indexes 
for Industrial Electricity and Industrial Natural Gas (PPI). The 
witness said that the time period selected for the energy price 
adjustor should correspond with the same time period of the 
manufacturing cost survey data. The witness suggested the use of the 
monthly PPI series for several energy products and proposed 2005 as the 
base period from which percentage changes would be calculated. The 
witness stressed that if an energy price adjuster is not adopted, then 
the make allowances that are determined as a result of the current 
proceeding may become obsolete prior to implementation.
    The NMPF witness said that the adoption of a monthly energy price 
adjustor would help maintain equity between producers and manufacturers 
given that processors would not be unduly harmed when energy prices 
rise while producers would not be harmed when energy prices fall. The 
witness was of the opinion that it was not necessary to establish 
monthly indexes for other cost factors contained in the make 
allowances.
    The NMPF witness asserted that if an annual manufacturing survey as 
offered in Proposal 2 is adopted, then an energy cost factor should be 
used in making monthly adjustments to make allowances. The witness was 
of the opinion that even if make allowances were updated on an annual 
basis, manufacturing cost data as old as 24 months would be 
incorporated. According to the witness, energy prices vary so much over 
short time periods that make allowances are essentially using a fixed 
energy cost factor which results in make allowances that are neither 
timely nor accurate.
    A post-hearing brief filed on behalf of NMPF reiterated their 
testimony in support of the adoption of Proposal 17. NMPF's brief 
offered various methods USDA could use to determine an appropriate base 
energy cost factor and corresponding monthly energy price adjustor.
    The NMPF brief also addressed other hearing participants' 
objections that an energy price adjustor would inhibit a plant's 
ability to use the futures markets to hedge risk. The brief said that 
while energy futures can be used to reduce energy price volatility, a 
plant is more likely to lock in a high energy price if that plant 
predicts energy costs will rise above levels covered by current make 
allowances. The brief also argued that the use of energy futures may 
not be applicable for balancing plants facing unpredictable energy 
costs due to large seasonal fluctuations in product output.
    A witness appearing on behalf of MMPA testified in support of 
Proposal 17. The witness said that the large fluctuations in gas and 
energy prices in recent years demonstrate the need for an energy price 
adjustor in the determination of make allowances. The witness also 
stated that adoption of the adjustor would ensure that manufacturers 
could recover increased energy costs while also preventing financial 
windfalls should energy prices decrease. Agri-Mark, Dairylea and O-AT-
KA also offered support for Proposal 17 in their post-hearing briefs.
    The witness appearing on behalf of IDFA testified in opposition to 
the adoption of Proposal 17 and was of the opinion that adoption of the 
proposal would complicate manufacturers' ability to manage risk. IDFA 
reiterated these arguments in its post-hearing brief. Kraft, Lactalis, 
HP Hood and Leprino supported IDFA's position opposing the adoption of 
Proposal 17.
    With the exception of DPNM et al., Proposal 17 was supported by all 
producer organizations that market the milk of dairy farmers who 
participated in this proceeding, including those who manufacture NFDM 
and dry whey. The record reflects that manufacturers of NFDM and dry 
whey, in particular, intensively use either natural gas or electricity 
in their drying processes. Accordingly, proponents favored the ability 
of an energy cost adjustor to reflect actual natural gas or electricity 
prices in minimum prices paid for producer milk. Supporters also 
testified that this feature would account for monthly energy price 
changes without permanently decreasing the value of producer milk until 
subsequent rulemaking changes to make allowance levels can be made.
    Opposition to Proposal 17 was universal among IDFA, along with its 
member companies Saputo, Kraft, H.P. Hood and Leprino, who testified at 
the hearing. The central themes of their opposition were that a monthly 
energy adjuster would undermine the value of existing risk management 
tools, and increase the complexity of product price formulas. DPNM et 
al. also opposed adoption of Proposal 17 because, they assert, it would 
add complexity to the pricing system.
8. Cost-of-Production Add-on
    A witness appearing on behalf of Dairylea testified that 
manufacturing plants would negotiate a price for the

[[Page 9268]]

applicable product with wholesale customers that included a factor 
reflecting manufacturing costs not reflected in the pricing formula 
make allowances. The witness said that these surcharges, or ``add-
ons,'' would not be included in the NASS price survey and therefore 
would not affect Class III and Class IV prices. According to the 
witness, the negotiated add-ons would be capped at a maximum amount to 
be determined through a separate formal rulemaking.
    The Dairylea witness explained that when a dairy manufacturer 
attempts to pass on its higher manufacturing costs by charging higher 
prices to its customers, the price increase is captured in the NASS 
price survey which, in turn, increases a manufacturer's raw milk costs 
through higher Class III and Class IV prices. The witness described 
this as a ``price circularity'' problem. The witness was of the opinion 
that Proposal 20 provided a method whereby dairy processors could pass 
on higher manufacturing costs not reflected in the product-price 
formulas to customers without those higher prices being reflected in 
the NASS price survey. According to the witness, classified prices 
would not be affected by a change in manufacturing costs.
    The Dairylea witness acknowledged that manufacturers have 
experienced higher processing costs than those that are represented by 
the current make allowances. However, according to the witness, higher 
make allowances cause dairy farmers to receive lower prices for their 
milk even though they also face higher production costs. The witness 
said that because dairy farmers are unable to pass on their higher 
costs of production, as a matter of fairness and equity, processors 
should seek needed manufacturing cost recovery through the price they 
charge their customers, rather than through the price they pay dairy 
farmers for raw milk.
    The Dairylea witness emphasized that while the manufacturing cost 
add-ons would not be included in the NASS price survey, any amount a 
manufacturer charged in excess of the cost add-ons would be required to 
be reported to NASS. The witness testified that the maximum 
manufacturing cost add-on should only be changed through formal 
rulemaking and that the value of a cost add-on should never be 
negative. The witness was of the opinion that the National Fluid Milk 
Processors Promotion Program (MilkPEP) check-off assessment 
administered by AMS and the in-state over-order premium program 
administered by the Pennsylvania Milk Marketing Board are examples of 
successful programs providing for surcharges.
    The Dairylea witness viewed adoption of an energy price adjustor to 
modify make allowances as detailed in Proposal 17 to be a complement to 
Proposal 20. The witness explained that any change in the energy price 
adjustor should be subtracted from the value of the manufacturing cost 
add-on. For example, the witness explained that for a given month, if 
the manufacturing cost add-on for cheese was determined to be $0.0029 
per pound and the energy price adjustor was $0.0023 per pound, then the 
maximum cheese manufacturing cost add-on for that month would be 
$0.0006 per pound. In months when the energy price adjustment was 
greater than the maximum cost add-on, then the cost add-on for that 
month would be zero, the witness said.
    A joint post-hearing brief filed on behalf of Dairylea and Dairy 
Farmers of America (Dairylea et al.) reiterated that adoption of the 
cost add-on would address the price circularity problem inherent to the 
NASS price survey. The brief argued that the Federal order system needs 
to evolve such that manufacturing cost increases can be fully passed on 
to consumers without lowering the value of producer milk used to make 
Class III and Class IV products.
    The Dairylea et al. brief emphasized that opposition to the 
adoption of Proposal 20 was based on the invalid assumptions that: (1) 
Manufacturing plants would not be able to negotiate cost add-ons, and 
(2) manufacturing plants regulated by Federal orders would become 
disadvantaged. The brief noted that a NFDM processor has been 
successful in negotiating an energy cost surcharge with its customers, 
despite competition from non-pool NFDM plants located in the United 
States and abroad. The brief also countered opposition arguments 
suggesting that a buyer would simply purchase finished products on a 
spot basis from the Chicago Mercantile Exchange (CME) to avoid paying a 
manufacturing cost add-on. The brief asserted that manufacturing 
plants, regardless of pool status, would not give up the opportunity to 
maximize profit by charging a cost add-on.
    The witness appearing on behalf of HP Hood testified as being 
receptive to the manufacturing cost add-on feature of Proposal 20 
without offering any further details or justification.
    The witness appearing on behalf of IDFA testified in opposition to 
the adoption of Proposal 20. The witness disagreed with the assertion 
that all manufacturers would be able to negotiate cost add-ons with 
their customers. The witness insisted that manufacturers unsuccessful 
in negotiating the cost add-on would only be able to recoup 
manufacturing costs equal to the product-price formula's make 
allowances. The witness argued that the examples of successfully 
administered surcharges--the Milk PEP check-off assessment and the 
Pennsylvania Milk Marketing Board over-order premiums--are misleading 
because they involve regulated charges that processors are required to 
pay. The witness was of the opinion that Federally regulated 
manufacturers would be harmed by the adoption of manufacturing cost 
add-ons because customers would simply seek a lower-cost product from 
other manufacturers whose milk is not priced by an order or would make 
spot purchases of product from the CME.
    In characterizing that all cheeses have a price relationship in the 
market, the IDFA witness strongly disagreed that a commodity cheddar 
cheese manufacturer could include a cost add-on in its sales price. 
According to the witness, cost add-ons change the price relationship of 
commodity cheddar to other cheese varieties in the marketplace and as a 
result, cheesemakers buying pooled milk would be at a competitive 
disadvantage to those buying non-pooled milk. IDFA reiterated their 
opposition to the adoption of Proposal 20 in their post-hearing brief.
    The witness appearing on behalf of Lactalis found merit with the 
intent of Proposal 20 but thought its method too complex and 
impractical, and therefore opposed its adoption. According to the 
witness, Lactalis operates six cheese plants in the United States. The 
witness was of the opinion that Federally regulated manufacturers would 
not be able to consistently and successfully negotiate a higher sales 
price with their customers to compensate for higher manufacturing 
costs.
    In their post-hearing brief, Agri-Mark et al. opposed adoption of 
Proposal 20 on the grounds that it assumes plants can successfully 
negotiate manufacturing cost add-ons to recoup increased manufacturing 
costs. The brief expressed the opinion that a manufacturing cost add-on 
scheme would only be successful if all plants, including unregulated 
plants, simultaneously increased prices and clearly labeled the cost 
add-on on all invoices so that the add-on would not be included in the 
NASS price survey. The brief asserted that unregulated manufacturing 
plants have no incentive to report a manufacturing cost add-on

[[Page 9269]]

because NASS prices do not impact their raw milk costs in the same way 
as plants regulated by Federal orders. The brief also stressed that if 
plants were unsuccessful in negotiating a manufacturing cost add-on, 
they would likely be unable to obtain cost relief elsewhere.
    In their post-hearing brief, DPNM et al. opposed the adoption of a 
manufacturing cost add-on in an attempt to eliminate the circularity 
problem inherent to the NASS survey (now administered by AMS). DPNM et 
al. was of the opinion that USDA resources should instead be 
concentrated on developing a competitive pay price to replace the 
product-price formulas.
    A post-hearing brief filed on behalf of O-AT-KA stated that while 
Proposal 20 may warrant further consideration, it should not be adopted 
in this proceeding.

Discussion and Findings

1. Amending the Product Price Formulas

    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 those that 
seek to abandon the current product-price formulas used to compute 
minimum Class III and Class IV prices to those that seek a variety of 
changes to the product-price formulas including manufacturing cost 
factors (make allowances), yield factors, technical factors and the 
authority to separate a portion of manufactured product sales prices 
from what otherwise is used to establish subsequent raw milk prices. 
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 more specifically, how 
the many features of the product-price formulas should be altered.
    Witnesses representing Agri-Mark, NMPF, Leprino, Twin County and 
IDFA provided evidence that energy, transportation, labor and packaging 
costs for manufacturing processors have increased since the adoption of 
the March 2007 make allowances. As pointed out by IDFA, make allowances 
account for manufacturing costs in the Class III and Class IV price 
formulas but do not change as those costs change, therefore, increasing 
make allowances is the only reasonable way that those increased costs 
can be recovered.
    The ability of a manufacturer to offset cost increases is 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 higher costs than those provided for in 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-price formulas use market prices collected by AMS 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 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 a competitive pay price series, product-price 
formulas based on cheese, dry whey, NFDM and butter serve as the only 
practical basis that the value of raw producer milk used in their 
production can be derived. A raw milk value is, in part, derived from 
sales price data collected by AMS from manufacturers who produce and 
market these commodity products. The information is aggregated weekly 
and reported in the AMS Dairy Product Sales Repot. The Class III and 
Class IV product-price formulas use, among other factors, the wholesale 
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 cost 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 and 
combining such data for plants outside of California with the most 
current manufacturing cost data published by the CDFA.\3\ The two 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.\4\ This method was used in earlier 
rulemakings to develop the make allowances used in the product-price 
formulas.5 6
---------------------------------------------------------------------------

    \3\ 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.
    \4\ Ibid
    \5\ 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.
    \6\ 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 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-price formulas. The record evidence 
demonstrates that 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

[[Page 9270]]

milk that are used nationally in all Federal milk orders. When dairy 
farmer production costs exceed the value that 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 the greater 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, the evidence demonstrates that 
the manufacturing costs of producing cheese, dry whey, NFDM and butter 
have increased since the implementation of the make allowances that 
were adopted on an interim basis, effective March 1, 2007.\7\
---------------------------------------------------------------------------

    \7\ Ibid. Official notice is taken of 72 FR 36341, July 3, 2007.
---------------------------------------------------------------------------

    The record reveals an absence of industry consensus concerning the 
method that make allowances should be changed which in turn determines 
the level of the make allowances used in the Class III and Class IV 
product-price formulas. The differing proposed make allowance levels 
offered during this proceeding represent the changes in opinions 
concerning which manufacturing costs, which manufacturing cost 
survey(s) and which 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 
they are most reflective of costs borne by plants that pay Federal 
order prices.
    Proposal 3, proposed by DPNM, was offered in opposition to 
increasing make allowances annually through a USDA administered 
manufacturing cost survey, as contained in Proposal 2 offered by Agri-
Mark. DPNM argued that because the CPDMP 2005 survey represents 
manufacturing costs of plants not located in California, it should be 
relied upon exclusively 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 cost survey and 
CDFA in combination--has provided effective and useable make allowances 
in the pricing formulas.
    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 2005 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, dry whey and NFDM 
compete in a national marketplace and as such, the prices established 
under the Class III and Class IV product-price formulas need to be 
reflective of marketing conditions that directly affect the 
determination of the minimum value of raw milk. Accordingly, Proposal 3 
is not adopted.
    Others participants supported the use of CDFA data. However, CDFA 
data represents a cost survey of only California processing plants. 
Federal order Class III and Class IV prices must be derived, as much as 
possible, from national estimates of manufacturing cost information. 
AMS survey prices, used to establish minimum Federal order prices, 
include California processing plants. Accordingly, it is reasonable to 
conclude that appropriately combining CDFA cost data with cost survey 
data of manufacturing plants not located in California will produce a 
measure of national manufacturing costs. This combination removes as 
much bias as possible in manufacturing costs measurements that may 
otherwise result from the exclusive use of one set of cost survey data 
over another.
    While many hearing participants support the general method of 
determining make allowances proposed to be adopted in this decision, 
the record nevertheless reveals a lack of industry consensus in 
determining the specific factors to be used in the Class III and Class 
IV product-price formulas. This is illustrated by the information 
presented in Table 1 below. The seven sets of suggested make allowances 
represent proposals from four different groups at various points during 
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--Proposed 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
----------------------------------------------------------------------------------------------------------------


[[Page 9271]]

    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 and about 25 percent for NFDM. 
Similarly, the range from highest to lowest proposed make allowances 
for butter varies by more than 60 percent.
    This final decision continues to find that 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 previous 
make allowance levels (effective March 1, 2007) in the Class III and 
Class IV product-price formulas that utilized the CPDMP 2005 survey. 
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, improve the estimation of manufacturing costs on a national 
basis and is consistent with the methodology relied upon in determining 
the previously set make allowances.
    The CPDMP 2006 survey is essentially a new cost survey. The 
manufacturing cost data presented in the survey is similar to CPDMP's 
earlier cost survey in that they both rely on cost information provided 
from manufacturing plants not located in California. The surveys also 
are similar in that they collect manufacturing cost data for cheese, 
butter, NFDM and dry whey. However, there are differences with the most 
important one being the use of different samples of plants.
    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, 8 of which were among the 16 plants that participated in the 
2005 survey. For butter, 4 plants provided cost data in both the 2006 
survey and the 2005 survey, but the surveys represent different 
collections of sampled plants with different production volumes. In 
addition, the butter manufacturing cost data in the 2006 survey differs 
from the earlier survey because it employed a different method for 
allocating costs between butter and NFDM production in plants that 
jointly manufacture these products. For NFDM, the plants sampled and 
reported in the 2006 survey included 7 of the 8 plants sampled as part 
of the 2005 survey.
    The purpose of this proceeding, in part, is to determine if make 
allowances should be updated. Central to this question is determining 
the proper methodology for determining new make allowances given the 
available public data. Proponents of Proposal 1 argued that both CDFA 
and CPDMP data were used to determine the 2006 make allowances and that 
they should continue to be used because their combination better 
reflects conditions in the national marketplace. This decision 
continues to find that incorporating CDFA data into the make allowance 
computations is justified to best reflect the national market where 
dairy commodity products are sold. AMS prices used in the product-price 
formulas incorporate sales from across the country, including 
California. Despite comments filed by DPNM et al. this decision finds 
that it is appropriate to rely on cost data from California (CDFA 
survey) and the rest of the country (CPDMP survey). It is also 
appropriate, contrary to comments from DPNM et al. to assess the 
economic impact of the changes on the national market. Consequently, 
the record supports use of the 2006 CDFA data to determine make 
allowances.
    DPNM et al. also commented that the Department failed to consider 
producer feed and fuel costs as mandated by the Food, Conservation and 
Energy Act of 2008 (2008 Farm Bill, (Pub. L. 110-246)). At the hearing, 
official notice was taken of USDA data pertaining to various producer 
costs. This information is part of the hearing record and as such, was 
considered by the Department in determining whether make allowances 
should be amended.
    Comments regarding the tentative final decision from Agri-Mark et 
al. request that make allowances be updated to reflect energy costs 
through June 2008. Their comments cite the Bureau of Labor Statistics 
Producer Price Indexes for Industrial Natural Gas and Industrial 
Electric Power that demonstrate an increase in these energy prices 
through June 2008. Agri-Mark et al. assert that energy prices would 
remain high through 2009. Updating energy costs would result in make 
allowances that may give an inappropriate weight to one cost factor in 
an array of cost factors that are considered in determining make 
allowances. This would lock in an artificially high make allowance 
based solely on the costs of electricity and natural gas. Accordingly, 
the request by Agri-Mark's et al. is denied. The determination of the 
adopted make allowances for cheese, butter, NFDM and dry whey are 
discussed below. The make allowances proposed to be permanently 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-price 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.
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 CPDMP 2006 
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 CPDMP 2005 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.

[[Page 9272]]

    The record reveals that eight cheese plants participated in both 
the 2005 and 2006 surveys and that 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 denied.
    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 to be permanently adopted for cheddar 
cheese is $0.2003 per pound including a $0.0015 per pound marketing 
cost adjustment.
Dry Whey Make Allowance
    Estimating the cost of manufacturing dry whey presents a problem 
similar to that for cheese. Despite exceptions to the tentative partial 
final decision from Kraft, Glanbia and WCMA that CDFA whey data should 
be factored into determining a dry whey make allowance, this decision 
continues to reject relying on CDFA data in determining the dry whey 
make allowance. The CDFA 2006 manufacturing cost survey reveals that 
CDFA was not satisfied with the precision in estimating the average 
cost per pound for whey products. Accordingly, it is unreasonable to 
rely on information that may not be reflective of market conditions. 
Adopting an artificially high make allowance for dry whey would result 
in the unwarranted decrease of producer revenue. Accordingly, CDFA dry 
why manufacturing cost data is not relied upon in determining the dry 
whey make allowance in the product-price formulas.
    This decision continues to 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 used in the Class III price 
formula effective March 1, 2007. 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 7, 2002 (67 FR 67906), and became 
effective on April 1, 2003 (68 FR 7063).\8\
---------------------------------------------------------------------------

    \8\ Official notice is taken of 67 FR 67906, published November 
7, 2002, and 68 FR 7063, effective April 1, 2003.
---------------------------------------------------------------------------

    Specifically, DPNM explained that the butterfat recovery factor of 
1.20 used in the butterfat pricing formula was 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 DPNM, 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 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 proposes to 
permanently adopt a butterfat yield of 1.211.
    Opponents of amending this factor do not dispute that the 1.20 
butterfat yield factor used in the pricing formulas was in error. 
Rather, opposition rests on the premise that manufacturing processors 
are already paying too much for raw milk and they attribute this 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 proposed to be 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 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, advanced by DPNM, 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 
proposed to be permanently adopted.

[[Page 9273]]

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 can potentially recover when making cheese. A 94 percent 
recovery rate also will 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 rate 
in cheese production is possible through 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. DPNM et al. failed to make a compelling 
argument for an increase in the butterfat recovery rate in their 
exceptions to the tentative partial final decision. While they did 
offer several references to articles published by dairy scientists 
providing examples of cheese yields with higher butterfat retention 
rates, they did not provide examples of manufacturing facilities 
currently experiencing those higher rates. Furthermore, the use of 
advertisements claiming that a specific cheese vat will result in 
higher butterfat retention rates does not merit the conclusion that 
those rates are, on average, achieved. It is important that the 
product-price formulas reflect current plant conditions, not plant 
conditions that may be possible but not reflective of general industry 
wide conditions. Accordingly, this final decision continues to reject 
adoption of this feature of Proposal 6.
    Proponents also commented that plants whose butterfat recovery rate 
is greater than 90 percent are not paying for all of the protein used 
to make cheese. This final decision rejects that assertion. All of the 
protein contained in producer milk, regardless of if its end use in 
cheese or in the whey stream, is priced at the protein price. The 
protein price is not reduced to reflect a lower value for the protein 
in the whey stream.
    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 including in-plant losses). While 
DPNM argued at the hearing and in its exceptions 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. 
Furthermore, while proponents assert that shipping full tanker loads of 
milk is common in the southwest where they operate, record evidence 
does not demonstrate this reality in the rest of the country.
    This final decision continues to find that the Class III and Class 
IV product-price formulas should recognize the loss of milk that occurs 
when milk is moved from the farm to a receiving plant. Record evidence 
demonstrates that farm-to-plant shrinkage occurs, for example, from 
imprecise stick readings and sampling at the farm or from product 
remaining on tanker walls after emptying the load at the plant. In most 
cases, producers are paid based on farm weights and tests, in which 
case the handler pays for product that is not ultimately received. It 
is therefore reasonable when determining component prices charged to 
handlers to make an adjustment for the lost product. 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 proposed to be 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. Proponents computed the proposed conversion factors to be used 
in the protein price formula by assuming: a) that the percentage of 
casein in true protein is actually 83.25 percent (resulting in a cheese 
yield per pound of protein of 1.405); b) the butterfat recovery rate in 
cheese is 94 percent (resulting in a cheese yield per pound of 
butterfat of 1.653); and c) that average producer tests should be used 
in the price formulas (resulting in a fat to protein ratio of 1.214). 
The conversion factor for computing the nonfat solids should be 1.02 
based on actual nonfat dry milk yield per pound of nonfat solids. 
Opponents counter that the methodology used to derive the proposed 
yield factors are flawed and that no actual studies were offered to 
support their conclusion that product yields are higher than those 
currently provided in the formulas. This final decision continues to 
find no record evidence to support amending the yield factors as 
proposed in Proposal 8.
    Despite comments to the tentative partial final decision by DPNM et 
al., record evidence does not support making changes to the yield 
factors in the protein price formula. Proponents continue to argue that 
based on producer tests, the actual percentage of casein in true 
protein is 83.25 percent. The formulas currently assume that the 
percentage of casein in true protein is 82.2 percent. This factor, 
adopted in 2002 (67 FR 67928),\9\ was based on evidence provided at 
that proceeding by a university researcher whose studies demonstrated a 
casein in true protein range of 82.2 percent to 82.4 percent. The 
record of this proceeding does not contain data from any studies that 
would indicate that the casein in true protein percentage has 
increased. Accordingly, this decision does not propose increasing the 
percentage of casein in true protein to 83.25.
---------------------------------------------------------------------------

    \9\ Official notice is taken of 67 FR 67928, published November 
7, 2002.
---------------------------------------------------------------------------

    In their exceptions DPNM et al. reiterated its arguments that a 
butterfat recovery rate of 94 percent should be adopted. Its adoption 
would result in an increase in the cheese yield per pound of butterfat 
to 1.653. This final decision has already discussed why a 94 percent 
butterfat recovery rate is not proposed to be adopted. Consequently, 
the butterfat yield factor in the protein formulas is not amended.
    Proposal 8 also seeks to increase the fat-to-protein ratio in the 
protein formula to 1.214. Proponents claim that the increased ratio 
reflects the use of average producer milk tests of 3.04 percent true 
protein and 3.69 percent butterfat. The current ratio of 1.17 was 
computed using standardized milk tests

[[Page 9274]]

of 2.9915 percent true protein and 3.5 percent butterfat. Record 
evidence does not support using average producer tests in determining 
yield factors. Proponents claim that other yield factors were 
determined using average producer tests. This statement is incorrect. 
Other yield factors in the product price formulas take into account the 
amount of the component in the product; there is no consideration of 
average producer tests. For example, the yield factor in the butterfat 
price formula is 1.211. This value was derived from the percentage of 
butterfat in butter, and was later adjusted for farm-to-plant 
shrinkage. Weighted average producer tests have no bearing on this 
yield number. This final decision continues to find that increasing the 
fat-to-protein ratio to account for weighted average producer tests is 
not justified.
    The last portion of Proposal 8 seeks to increase the nonfat solids 
yield factor from .99 to 1.02. DPNM et al. claims that it is impossible 
for 1 pound of solids nonfat to yield less than one pound of nonfat dry 
milk. In their exceptions, DPNM et al. claims that the California milk 
pricing formulas actually use a yield factor of 1.02. According to a 
December 2007 California Milk Pricing Formulas publication release by 
CDFA, California price formulas utilize a nonfat solids yield factor of 
1.\10\ The .99 yield factor currently contained in the nonfat solids 
price formula was adopted on April 1, 2003 (68 FR 7063).\11\ This 
factor was reduced from 1.02 to account for farm-to-plant shrinkage. 
USDA continues to find it appropriate to acknowledge farm-to-plant 
shrinkage in the product price formulas. Therefore, the nonfat solids 
yield factor is unchanged.
---------------------------------------------------------------------------

    \10\ Official notice is taken of ``California Milk Pricing 
Formulas'', December 2007, Dairy Marketing Services Branch, 
California Department of Agriculture: http://www.cdfa.ca.gov/dairy/pdf/steps_for_calc_minprices.pdf.
    \11\ Official notice is taken of 68 FR 7063, February 12, 2003.
---------------------------------------------------------------------------

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 milkfat 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 is often marketed to 
commercial food service establishments such as bakeries and is marketed 
at a discount to the Grade AA butter price. 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 contains very limited data regarding plant sales of whey cream 
or Grade B butter. More importantly, there is no known publically 
available data for U.S. market prices and volumes of whey cream or 
Grade B 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.
    After considering the comments and exceptions to the tentative 
partial final decision for reducing the protein price to reflect the 
lower market value of whey cream, this decision continues to reject 
this proposal. Whey cream may have a lower market value, but without 
publicly available market data that provides whey cream volumes and 
prices, no reasonable and objective means is available to determine if 
or how whey cream is distorting the protein price formula feature 
contained in the Class III product-price formula. Supporters of 
Proposal 9 did not offer market information that could be relied upon 
as a basis for changing the protein price. While there is record 
evidence from some manufacturers as to their individual saleable 
volumes and values of whey cream, that limited data does not provide 
for a reasonably complete assessment of the national market for whey 
cream and its various competing uses. 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. Accordingly, Proposals 9 and 10 are not proposed to be 
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 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 cheese 
exclusively 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.
    This final decision does not support adoption of 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 
that any packaging cost difference must also be nearly zero. This 
decision does not find a causal relationship between selling prices and 
manufacturing costs. Even though the price spread between blocks and 
barrels has narrowed over time and recently averaged near zero, the 
cost difference between block and barrel packaging cannot be assumed to 
also be zero. Blocks and barrels have different supply and demand 
functions. Comparing average prices over a period of time does not 
therefore automatically reflect cost differences. Since barrel cheese 
prices exceed block cheese prices at certain times, due to different 
supply and demand curves, average prices will not in and of themselves 
indicate cost

[[Page 9275]]

differences. 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 
denied.
    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 no testimony was 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 (now captured in the AMS survey), removing the 
barrel price from the protein price formula would greatly reduce the 
total AMS survey volume thereby making the price survey less 
representative of the cheddar cheese market.
    This final decision continues to find 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-price formula needs to be reasonably representative 
of the market for cheese that determines the value of milk. Record 
evidence reveals that barrel production in the AMS 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 proposed to be adopted.
Product Price Series
    Proposal 14, advanced by Agri-Mark, seeks to change the price data 
used in the Class III and protein price formula by combining the NASS 
price survey data for cheddar cheese (now the AMS price survey data for 
cheddar cheese) with the weekly average CME cheese prices as a method 
that results in a superior benchmark price for cheese. The argument 
rests on the assertion that the 2-week timing difference, or lag, 
between the CME price and the AMS 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 provided by the AMS 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 AMS price would reduce the usefulness of currently available risk 
management tools. These tools include the use of futures contracts and 
the use of forward contracts. Opponents also note that (1) 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, (2) it adds a degree of 
complexity to a pricing-formula which is already too complex without 
any discernible benefit and (3) its adoption would tend to bias price 
reporting to the market conditions of the Chicago area. All comments to 
the tentative partial final decision regarding Proposal 14 supported 
USDA's denial of the proposal.
    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-price formulas. Other than assertions by the 
proponent, the record lacks evidence that combining CME prices with AMS 
survey prices would improve price discovery or market information or 
would offer superior transmission of economic signals through the 
minimum Class III price.
    In addition, rulemaking action on mandatory product price reporting 
overtakes the need to consider adoption of a new price series that 
combines CME prices with AMS survey prices. Improved mandatory price 
reporting that provides for the auditing of prices reported to AMS 
makes the accuracy, but not the timing, of price data less of an issue 
than envisioned throughout this proceeding. Accordingly, Proposal 14 is 
not proposed to be adopted.
    A proposal advanced by DPNM, Proposal 15, seeking to replace the 
AMS 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 AMS price reporting. DPNM has argued throughout this rulemaking 
proceeding that the use of CME prices in the price formula for cheese 
would provide producers, marketers and manufacturers of cheddar cheese 
with more timely and transparent prices as the CME represents actual 
current cheese prices.
    In opposition to the adoption of Proposal 15, the opponents, 
including IDFA, NDA, Agri-Mark and DFA, as in their opposition to the 
adoption of Proposal 14, argue that (1) The CME is too thin a market to 
be relied upon for use in the Class III product-price formula, (2) the 
CME represents only about 4.1 percent of all cheddar cheese traded, (3) 
its exclusive use would tend to bias and limit the price reporting for 
cheese to the market conditions of the Chicago market, and (4) being a 
spot market for cheese, the CME ignores other sales agreements and 
marketing arrangements that account for more than 95 percent of the 
cheese marketed and largely captured in the AMS price survey.
    This final decision continues to find that cheese prices used in 
product-price formulas should reflect broad markets and not rely 
exclusively on a smaller subset of cheese prices and spot marketing 
conditions as represented by the CME. The record also makes clear that 
more industry confidence is placed in AMS price surveys than in 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 be inappropriate to 
value dry whey on a component (protein) that has no measurable effect 
on the product yield. Except for comments filed by the proponent, 
comments filed by both producer and manufacturer groups in response to 
the tentative partial final decision expressed opposition to the 
adoption of Proposal 16.
    This decision continues to find 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

[[Page 9276]]

price formulas that would yield no measurable benefit.
    Record evidence regarding Proposal 16 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 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 final decision finds 
that dry whey, despite the opinion of NAJ, 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 could return to using 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. Milk prices within the competitive price 
zones would therefore be influenced by milk priced under adjoining 
Federal orders. Other considerations, including an accounting of 
various forms of in-kind payments to producers, also need to be 
addressed. Ignoring consideration of such payments would allow plants 
to increase (decrease) their hauling charges as a way of reducing 
(increasing) the actual pay price to dairy farmers.
    Therefore, this final decision finds that Proposal 18 cannot be 
implemented as proposed and is herein denied

B. Termination of a Portion of the Proceeding

    Proposal 2, offered by Agri-Mark, proposed to amend the Class III 
and Class IV product formulas to annually update the manufacturing 
allowances using an annual manufacturing cost survey of cheese, whey 
powder, butter and non-fat dry milk plants. The proposal would give 
authority for selecting the sample and conducting the survey to the 
market administrators. The manufacturing cost data would then be used 
to update manufacturing allowances to prescribed levels. On brief, 
Agri-Mark withdrew the automatic-updating portion of the proposal.
    The record of hearing reflects a mixture of support and opposition 
to this proposal. This wide variance in industry response clearly 
demonstrates a lack of unity and policy direction. Opposition to 
Proposal 2 tended to stem primarily from the implementation of an 
automatic adjuster to manufacturing allowances, which was subsequently 
withdrawn by Agri-Mark. However, amongst supporters there was a clear 
lack of consensus as to how and by whom the survey should be 
implemented, what regions should comprise the survey sample, and 
specifics as to how the survey data were to be used. The only clear 
assertion made by the record was that some participants supported 
establishing a manufacturing cost survey.
    Proposal 17, advanced by NMPF, would have amended the Class III and 
Class IV product price formulas to incorporate a monthly energy cost 
adjustment based on monthly changes in the producer price indices for 
industrial natural gas and electricity as published by the Bureau of 
Labor Statistics. Proponents argued that the implementation of an 
energy price adjuster would update make allowances in response to 
fluctuating energy prices. As mentioned earlier, this proposal was 
broadly supported by producer organizations, many of which manufacture 
NFDM and dry whey. These two products, in particular, require the use 
of energy-consuming driers in their production processes.
    Opponents to Proposal 17 were overwhelmingly manufacturers of dairy 
products. They argued that the inclusion of an energy cost adjuster in 
the make allowance would complicate the milk pricing system and reduce 
the effectiveness of certain risk management tools.
    Proposal 20, advanced by Dairylea, would amend the Class III and 
Class IV product price formulas by establishing cost-of-production add-
ons that manufacturers could include in the selling price of their 
products, but which would not be included as part of the NASS (now AMS) 
dairy product price survey. Proponents noted that increases in 
wholesale prices on dairy products are captured by product price 
surveys and subsequently drive up the costs of raw milk, through higher 
Class III and Class IV prices. The proposed mechanism, they argued, 
would break the existing price circularity, allowing processors to 
increase wholesale prices without affecting input costs.
    Opponents, many of whom are dairy processors, argued that it would 
be difficult to negotiate cost add-ons with wholesalers. Those handlers 
unable to successfully negotiate a higher cost add-on would be limited 
to the cost allowance included in the manufacturing allowance. 
Similarly, handlers operating outside of the Federal order system could 
potentially gain market share over regulated competitors. Additionally, 
opponents noted, the implementation of a cost add-on would further 
complicate the existing price discovery mechanism used by the Federal 
order system.
    In the time following the implementation of the interim final rule 
(73 FR 44617), the Department received a request, which has been made 
part of the Official Record, from the Greater Northeast Milk Marketing 
Agency (GNEMMA) to finalize those proposals from this proceeding 
implemented on an interim basis and terminate the remainder (Proposals 
2, 17 and 20). GNEMMA is a marketing agency in common comprised of: 
Agri-Mark, Inc.; Dairy Farmers of America, Inc.; Dariylea Cooperative, 
Inc.; Dairy Marketing Services, LLC; Land O'Lakes, Inc.; Maryland and 
Virginia Milk Producers Cooperative Association, Inc.; St. Albans 
Cooperative Creamery, Inc.; and Upstate Niagara Cooperative, Inc. 
GNEMMA members market in excess of 64 percent of all milk in the 
Northeast milk marketing area. The petitioners argue that certain 
market conditions have changed in the time since the hearing and 
certain data reflected in the record of hearing in regards to Proposals 
2, 17 and 20 are no longer valid.

[[Page 9277]]

    Other proposals proposed to be permanently adopted by this decision 
have already been implemented on an interim basis. This decision 
continues to support their adoption, and in essence the status quo.
    While evidence regarding Proposals 2, 17 and 20 was collected 
during the hearing, the Department has never issued a decision on their 
merits. The hearing was initially held in 2007. The hearing record 
reflects marketing conditions at that time. Marketing conditions since 
the 2007 hearing have changed. Accordingly, given these circumstances, 
it is reasonable to terminate the proceeding in regards to Proposals 2, 
17 and 20 in their entirety.
    In view of the foregoing, it is hereby determined that the 
proceeding with respect to Proposals 2, 17 and 20 should be and are 
hereby terminated.
Rulings on Motions
    A motion for official notice of a publication \12\ and a final 
decision \13\ by the CDFA was submitted by Agri-Mark et al. joined by 
Twin County Dairy, Inc., (Twin County) and supported by IDFA. This 
decision takes official notice of these publications.
---------------------------------------------------------------------------

    \12\ California Department of Food and Agriculture: Summary of 
Weighted Average Manufacturing Costs, Butter, Nonfat Dry Milk, 
Cheddar Cheese, and Dry Whey Powder, Released September 18, 2007.
    \13\ California Department of Food and Agriculture: Final 
Results for Class 4a and 4b Pricing Formula Hearing of October 10, 
2007, released November 20, 2007.
---------------------------------------------------------------------------

    In their comments to the tentative partial final decision, Agri-
Mark et al. and Twin County also filed a motion for official notice of 
specific energy price statistics and projections of the U.S. Department 
of Labor and the U.S. Department of Energy. This motion was supported 
by IDFA. The motion advocated use of this data for a one-time energy 
cost adjustment to the manufacturing allowances adopted in the final 
decision. Previous publications of these statistics were officially 
noticed during the hearing. This final decision takes official notice 
of these publications through March 2009.
    A motion and supplemental information in support of the 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 lasted for 3 weeks 
over a 6 month period from February 2007 through July 2007. It also was 
preceded by an information session in December 2006. The tentative 
final decision found that sufficient time was made available to all 
known parties to develop and present noticed proposals and the motion 
was denied.
    Exceptions to the tentative partial final decision filed by MDIA 
requested that USDA reconsider their original motion for a continuance 
of the hearing. MDIA argued that because a decision has yet to be 
issued on three other noticed proposals, the hearing--in regard to 
those proposals--remains open. Therefore, concluded MDIA, USDA has the 
latitude to grant MDIA's motion for a continuance on Proposal 18. MDIA 
also stated that in denying its first motion, USDA did not give proper 
weight to the support for the basic concept of Proposal 18 (a 
competitive pay price series) expressed in numerous post-hearing briefs 
that were submitted by various hearing participants.
    MDIA also took exception with the tentative partial final 
decision's characterization that the MDIA's witness conceded problems 
with the proposed competitive pay price series. MDIA wrote that 
Proposal 18 was designed to be a beginning framework for a functioning 
competitive pay price series that would be superior to end-product 
pricing formulas. MDIA argued that it intended to use the hearing 
process as a method for determining concerns with the proposal and then 
recommend to the Department a procedure for further development of the 
proposal.
    MDIA's motion for a continuance continues to be denied. Though a 
continuation might allow for further development of Proposal 18 with 
USDA and industry participants, there is a necessity to proceed with 
finalizing the rulemaking on the Class III and Class IV price formulas. 
While MDIA's motion is denied, this does not prevent future 
consideration of a competitive pay price system.

Rulings on Proposed Findings and Conclusions

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

General Findings

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

Rulings on Exceptions

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

Marketing Agreement and Order

    Annexed hereto and made a part hereof is one document: A Marketing 
Agreement regulating the handling of milk. The order amending the order 
regulating the handling of milk in the Northeast and other marketing 
areas was approved by producers and published in the Federal Register 
on July 31, 2008 (73 FR 44617), as an Interim Final Rule.

[[Page 9278]]

Both of these documents have been decided upon as the detailed and 
appropriate means of effectuating the foregoing conclusions.
    It is hereby ordered that this entire final decision and the 
Marketing Agreement annexed hereto be published in the Federal 
Register.

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

    It is hereby directed that referenda be conducted and completed on 
or before the 30th day from the date this decision is published in the 
Federal Register, in accordance with the procedure for the conduct of 
referenda (7 CFR 900.300-311), to determine whether the issuance of the 
orders as amended and as hereby proposed to be amended, regulating the 
handling of milk in the Upper Midwest, Mideast, and Northeast 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 May 2012.
    The agents of the Secretary to conduct such referenda are hereby 
designated to be the respective market administrators of the aforesaid 
orders.

Determination of Producer Approval and Representative Period for All 
Other Orders

    May 2012 is hereby determined to be the representative period for 
the purpose of ascertaining whether the issuance of the orders, as 
amended and hereby proposed to be amended, regulating the handling of 
milk in the Appalachian, Florida, Southeast, Central, Pacific 
Northwest, Arizona, and Southwest areas is approved or favored by 
producers, as defined under the terms of each of these 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.

List of Subjects in 7 CFR Part 1000

    Milk marketing orders.

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

    This order shall not become effective until the requirements of 7 
CFR section 900.14 of the rules of practice and procedure governing 
proceedings to formulate marketing agreements and marketing orders have 
been met.

Findings and Determinations

    The findings and determinations hereinafter set forth supplement 
those that were made when the orders were first issued and when they 
were amended. The previous findings and determinations are hereby 
ratified and confirmed, except where they may conflict with those set 
forth herein.
    (a) Findings. A public hearing was held upon certain proposed 
amendments to the tentative marketing agreements and to the orders 
regulating the handling of milk in the Northeast and other marketing 
areas. The hearing was held pursuant to the provisions of the 
Agricultural Marketing Agreement Act of 1937, as amended (7 U.S.C. 601-
674), and the applicable rules of practice and procedure (7 CFR part 
900).
    Upon the basis of the evidence introduced at such hearing and the 
record thereof, it is found that:
    (1) The said orders as hereby amended, and all of the terms and 
conditions thereof, will tend to effectuate the declared policy of the 
Act;
    (2) The parity prices of milk, as determined pursuant to section 2 
of the Act, are not reasonable in view of the price of feeds, available 
supplies of feeds, and other economic conditions which affect market 
supply and demand for milk in the aforesaid marketing area. The minimum 
prices specified in the order as hereby amended are such prices as will 
reflect the aforesaid factors, 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.

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:
    The provisions of the order amending the order contained in the 
interim amendment of the order issued by the Administrator, 
Agricultural Marketing Service, on July 25, 2008, and published in the 
Federal Register on July 31, 2008 (73 FR 44617), are adopted without 
change and shall be and are the terms and provisions of this order.
    [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 -------- all inclusive, of the 
order regulating the handling of milk in the ------------ marketing 
area (7 CFR part --------); and
    II. The following provisions: Sec.  ------------ Record of milk 
handled and authorization to correct typographical errors.
    (a) Record of milk handled. The undersigned certifies that he/she 
handled during the month of ------------, ------------ hundredweight of 
milk covered by this marketing agreement.
    (b) Authorization to correct typographical errors. The undersigned 
hereby authorizes the Deputy Administrator, or Acting Deputy 
Administrator, Dairy Programs, Agricultural Marketing Service, to 
correct any typographical errors which may have been made in this 
marketing agreement.

[[Page 9279]]

    Effective date. This marketing agreement shall become effective 
upon the execution of a counterpart hereof by the Department in 
accordance with Section 900.14(a) of the aforesaid rules of practice 
and procedure.
    In Witness Whereof, The contracting handlers, acting under the 
provisions of the Act, for the purposes and subject to the limitations 
herein contained and not otherwise, have hereunto set their respective 
hands and seals.

Signature

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

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

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

(Seal)

Attest-----------------------------------------------------------------


    Dated: February 1, 2013.
David R. Shipman,
Administrator, Agricultural Marketing Service.
[FR Doc. 2013-02623 Filed 2-6-13; 8:45 am]
BILLING CODE 3410-02-P