[Federal Register Volume 79, Number 45 (Friday, March 7, 2014)]
[Proposed Rules]
[Pages 12985-13002]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-04693]


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DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Parts 1005 and 1007

[Doc. No. AMS-DA-09-0001; AO-388-A17 and AO-366-A46; DA-05-06-A]


Milk in the Appalachian and Southeast Marketing Areas; Final 
Partial Decision on Proposed Amendments to Marketing Agreements and to 
Orders

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Proposed rule.

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SUMMARY: This final decision proposes to permanently adopt revised 
transportation credit balancing fund provisions for the Appalachian and 
Southeast milk marketing orders. Specifically, this document 
Establishes a variable mileage rate factor using a fuel cost adjustor 
to determine the transportation credit payments of both orders; 
increases the transportation credit assessment rate for the Appalachian 
order to $0.15 per hundredweight; and establishes a zero diversion 
limit standard on loads of milk requesting transportation credits. 
Separate decisions will address the proposed adoption of an intra-
market transportation credit provision for the Appalachian and 
Southeast orders and for increasing the transportation credit rate 
assessment for the Southeast order. This final decision is subject to 
producer approval. Producer approval for this action will be determined 
concurrently with amendments adopted in a separate final decision that 
amends the Class I pricing and other provisions of the Appalachian, 
Southeast, and Florida milk marketing orders.

FOR FURTHER INFORMATION CONTACT: Erin Taylor, USDA/AMS/Dairy Programs, 
Order Formulation and Enforcement Branch, STOP 0231-Room 2971, 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 that: (1) Establish a variable transportation credit 
mileage rate factor which uses a fuel cost adjustor in both orders; (2) 
Increase the Appalachian order's maximum transportation credit 
assessment rate to $0.15 per hundredweight (cwt); and (3) Establish a 
zero diversion limit standard on loads of milk requesting 
transportation credits.
    This administrative action is governed by the provisions of 
sections 556 and

[[Page 12986]]

557 of Title 5 of the United States Code and, therefore, is excluded 
from the requirements of Executive Order 12866.
    The amendments to the rules proposed herein have been reviewed 
under Executive Order 12988, Civil Justice Reform. They are not 
intended to have a retroactive effect. If adopted, the proposed 
amendments would not preempt any state or local laws, regulations, or 
policies, unless they present an irreconcilable conflict with this 
rule.
    The Agricultural Marketing Agreement Act of 1937, as amended (7 
U.S.C. 601-674) (the Act), 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 a petition with the 
United States Department of Agriculture (USDA) 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 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 would 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 
marketing guideline of 500,000 pounds per month. Although this 
guideline does not factor in additional monies that may be received by 
dairy producers, it should be an inclusive standard for most small 
dairy farms. For purposes of determining a handler's size, if the plant 
is part of a larger company operating multiple plants that collectively 
exceed the 500-employee limit, the plant will be considered a large 
business even if the local plant has fewer than 500 employees.
    During January 2006, the time of the hearing, there were 3,055 
dairy farmers pooled on the Appalachian order (Order 5) and 3,367 dairy 
farmers pooled on the Southeast order (Order 7). Of these, 2,889 dairy 
farmers (95 percent) in Order 5 and 3,218 dairy farmers (96 percent) in 
Order 7 were considered small businesses.
    During January 2006, there were a total of 37 handlers operating 
plants associated with the Appalachian order (22 fully regulated 
plants, 11 partially regulated plants, 2 producer-handlers and 2 exempt 
plants). A total of 52 plants were associated with the Southeast order 
(31 fully regulated plants, 9 partially regulated plants and 12 exempt 
plants). The number of plants meeting the small business criteria under 
the Appalachian and Southeast orders were 9 (24 percent) and 18 (35 
percent), respectively.
    The amendments that are recommended for permanent adoption in this 
decision revise the transportation credit provisions of the Appalachian 
and Southeast orders. The Appalachian and Southeast orders contain 
provisions for a transportation credit balancing fund. To partially 
offset the costs of transporting supplemental milk into each marketing 
area to meet fluid milk demand at distributing plants during the months 
of July through December, handlers are charged an assessment year-round 
to generate revenue used to make payments to qualified handlers.
    The adopted amendments establish a variable mileage rate factor 
that would be adjusted monthly by changes in the price of diesel fuel 
(a fuel cost adjustor) as reported by the Department of Energy for 
paying claims from the transportation credit balancing funds of the 
Appalachian and Southeast orders. Prior to their interim adoption, the 
mileage rate of both orders was fixed at 0.35 cents per cwt per mile.
    The adopted amendments increase the transportation credit 
assessment rate for the Appalachian order. Specifically, the maximum 
assessment rate for the Appalachian order is increased to $0.15 per 
cwt. The transportations credit assessment rate for the Southeast order 
is increased by actions taken in a separate rulemaking (73 FR 14153). 
The higher assessment rate is intended to minimize the proration and 
depletion of the order's transportation credit balancing fund during 
those months when supplemental milk is needed. The higher assessment 
rate for the Appalachian order adopted in this decision is necessary 
due to expected higher mileage reimbursement rates arising from 
escalating fuel costs, the transporting of milk over longer distances 
and the expected continuing need to rely on supplemental milk supplies 
arising from declining local milk production in the marketing areas.
    The transportation credit assessment rate for the Southeast order 
was increased from 10 cents per cwt to 20 cents per cwt on an interim 
basis (71 FR 62377). Subsequent to this increase, a separate rulemaking 
affecting the Southeast order proposed an additional increase in the 
assessment rate to 30 cents per cwt. A tentative partial decision (73 
FR 11194), effective February 25, 2008, describes the record evidence 
supporting a 30 cents per cwt transportation credit assessment rate. 
The 30 cents per cwt assessment rate was then adopted on an interim 
basis (73 FR 14153) effective March 18, 2008. Since these separate 
decisions address the higher assessment rate, there is no further 
consideration to this issue in this proceeding.
    Proposals published in the hearing notice as Proposal 2, seeking to 
establish an intra-market transportation credit provision for the 
Appalachian and Southeast orders, and Proposal 5, seeking to reduce the 
volume of milk diverted to plants located outside of the Appalachian 
and Southeast milk marketing areas, will be addressed in a separate 
decision. No further discussion of these proposals is made in this 
decision.
    The adopted amendments also amend the Producer milk provisions of 
the Appalachian and Southeast orders by eliminating the current ability 
to pool diverted milk associated with supplemental milk receiving a 
transportation credit payment. As previously indicated in the tentative 
partial final decision of this rulemaking (71 FR 54118), this decision 
does not specifically adopt the Dean Foods Company proposal (published 
in the hearing notice as Proposal 4), but agrees with the need to limit 
diverted milk pooled on the order made possible by supplemental milk 
eligible to receive transportation credits.
    Prior to amendments adopted on an interim basis, the Appalachian 
and Southeast orders provided transportation credits on supplemental 
shipments of milk for Class I use provided the milk was from dairy 
farmers who are not defined as a ``producer'' under the orders. A 
producer under the order is defined as a dairy farmer who: (1) during 
the immediately preceding months of

[[Page 12987]]

March through May and not more than 50 percent of the milk production 
of the dairy farmer, in aggregate, is received as producer milk by 
either order during those 3 months; and (2) produced milk on a farm not 
located within the specified marketing areas of either order. The 
provisions of each order provide the market administrator the 
discretionary authority to adjust the 50 percent milk production 
standard to assure orderly marketing and efficient handling of milk in 
the marketing areas.
    Adoption of the proposed amendments will be applied to all 
Appalachian and Southeast order handlers and producers, which consist 
of both large and small businesses. Since the adopted amendments will 
affect all producers and handlers equally regardless of their size, the 
amendments would not have a significant economic impact on a 
substantial number of small entities.
    The Agricultural Marketing Service is committed to complying with 
the E-Government Act, to promote the use of the Internet and other 
information technologies to provide increased opportunities for citizen 
access to Government information and services, and for other purposes.
    This notice does not require additional information collection that 
needs clearance by the Office of Management and Budget (OMB) beyond 
currently approved information collection. The primary sources of data 
used to complete the forms are routinely used in most business 
transactions. 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.
    No other burdens are expected to fall on the dairy industry as a 
result of overlapping Federal rules. This rulemaking proceeding does 
not duplicate, overlap, or conflict with any existing Federal rules.

Prior Documents in This proceeding

    Notice of Hearing: Issued December 22, 2005; published December 28, 
2005 (70 FR 76718).
    Tentative Partial Decision: Issued September 1, 2006; published 
September 13, 2006 (71 FR 54118).
    Interim Final Rule: Issued October 19, 2006; published October 25, 
2006 (71 FR 62377).

Preliminary Statement

    A public hearing was held upon proposed amendments to the marketing 
agreement and the orders regulating the handling of milk in the 
Appalachian and Southeast marketing areas. The hearing was held, 
pursuant to the provisions of the Agricultural Marketing Agreement Act 
of 1937 (AMAA), as amended (7 U.S.C. 601-674), and the applicable rules 
of practice and procedure governing the formulation of marketing 
agreements and marketing orders (7 CFR part 900).
    The proposed amendments set forth below are based on the record of 
a public hearing held in Louisville, KY, on January 10-12, 2006, 
pursuant to a notice of hearing issued December 22, 2005, published 
December 28, 2005 (70 FR 76718).
    Upon the basis of the evidence introduced at the hearing and the 
record thereof, the Administrator, on September 1, 2006, issued a 
Tentative Partial Decision, published in the Federal Register on 
September 13, 2006 (71 FR 54118) containing notice of the opportunity 
to file written exception thereto.
    The material issues on the record of hearing relate to:

1. Transportation Credits

    A. Establishing a variable mileage rate factor.
    B. Increasing the maximum assessment rates.
    C. Establishing diversion limit standards.

Findings and Conclusions

    This final decision specifically addresses proposals published in 
the hearing notice as Proposals 3, 1, and certain objectives of 
Proposal 4. Proposal 3 seeks to establish a variable mileage rate 
factor (MRF) using a fuel cost adjustor. Proposal 1 seeks to increase 
the maximum transportation credit assessment rates for both orders. The 
intent of Proposal 4 is to discourage the volume of milk pooled by 
diversions by reducing the amount of transportation credits a handler 
could receive. A complete discussion and findings on these three 
proposals appears after the summary of testimony.
    Proposal 2, seeking to establish an intra-market transportation 
credit provision for both the Appalachian and Southeast orders and 
Proposal 5, seeking to reduce the volume of milk diverted to an out-of-
area plant, will be addressed in a separate decision. Accordingly, no 
further references to Proposals 2 and 5 will be made in this decision.
    The following findings and conclusions on the material issues are 
based on evidence presented at the hearing and the record thereof:

1. Transportation Credits

A. Establishing a Variable Mileage Rate Factor
    A proposal, published in the hearing notice as Proposal 3, seeking 
to establish a variable mileage rate factor (MRF) that uses a fuel cost 
adjustor in the transportation credit payment provisions in both the 
Appalachian and Southeast orders, is recommended for permanent 
adoption. At the time of the hearing, the two orders provided for a 
fixed mileage rate of $0.035 per cwt per mile. The proposal was offered 
by Dairy Farmers of America, Inc. (DFA). DFA is a dairy farmer member-
owned Capper-Volstead cooperative that at the time of the hearing had 
12,800 member farmers whose milk was pooled throughout the Federal 
order system, including on the Appalachian and Southeast orders.
    A witness appearing on behalf of Southern Marketing Agency, Inc. 
(SMA) and Dairy Cooperative Marketing Association, Inc. (DCMA) 
testified in support of Proposal 3. SMA and DCMA are marketing 
agencies-in-common operating in the southeast region of the country. 
Members of SMA at the time of the hearing included Arkansas Dairy 
Cooperative Association; Dairy Farmers of America, Inc.; Dairymen's 
Marketing Cooperative, Inc.; Lone Star Milk Producers, Inc.; and 
Maryland & Virginia Milk Cooperative Association, Inc. Members of DCMA 
at the time of the hearing included the abovementioned members of SMA; 
Zia Milk Producers Association; Select Milk Producers Association; 
Cooperative Milk Producers Association, Inc.; and Southeast Milk, Inc. 
Dairylea Cooperative, Inc. also requested that the witness testify on 
their behalf and in support of Proposal 3.
    The SMA witness testified that the southeastern region of the 
United States is experiencing declining milk production while the 
population and demand for fluid milk are increasing. As a result, the 
witness stated that handlers servicing the Appalachian and Southeast 
marketing areas must continually seek supplemental supplies of milk 
from outside their normal milksheds. The witness added that the volume 
of supplemental milk needed to meet demand that cannot be met by local 
production and the distances from where the supplemental milk is 
obtained continues to increase. The witness explained that these 
marketing conditions cause the transportation

[[Page 12988]]

credit balancing funds to be depleted at a rate faster than the rate at 
which handlers are assessed.
    The SMA witness presented monthly fuel cost data for the United 
States and nine U.S. sub-regions from the Energy Information 
Administration of the United States Department of Energy (EIA). Relying 
on EIA data, the witness asserted that the cost of diesel fuel has 
escalated sharply in recent years. According to the witness, the 
national average diesel fuel price in mid-1997 was reported to be 
approximately $1.15 to $1.17 per gallon while the national average 
diesel fuel price in mid-2005 was reported to be $2.20 to $2.50 per 
gallon. The witness emphasized that diesel fuel prices are much higher 
than the prices that existed when the transportation credit provisions 
were first implemented in 1996 and amended in 1997.
    The SMA witness noted that the cost of hauling has also increased. 
Relying on EIA data, the SMA witness estimated the cost of hauling to 
be in the range of $1.75 to $1.80 per loaded mile in 1997, whereas the 
cost in 2005 was about $2.35 per loaded mile. As diesel fuel costs have 
increased, the witness explained, so have other costs such as 
equipment, insurance, and labor.
    The SMA witness emphasized that there have been no adjustments made 
to the MRF of the transportation credit provisions since they were last 
amended in 1997. The witness recounted that the original mileage rate 
was reduced by 5 percent, from $0.037 per cwt per mile to $0.035 per 
cwt per mile in 1997.
    The SMA witness explained that in 1997, approximately 94 to 95 
percent of the transportation costs of supplemental milk were covered 
by transportation credit balancing fund payments. The witness 
reiterated that since no adjustments have been made to the orders' 
transportation credit reimbursement rate since 1997, the percentage of 
hauling costs covered by the transportation credits today are 
substantially less than those in 1997.
    According to the SMA witness, the use of a fixed mileage rate is 
not responsive to changes in hauling costs. The witness explained that 
Proposal 3 would compute a variable transportation credit mileage rate 
per cwt per mile that would adjust with changes in the cost of diesel 
fuel. The witness stressed the importance of, and the need for, keeping 
information on hauling costs current by using independent fuel cost 
data. The witness stated that hauling cost rates, adjusted for changes 
in fuel costs, are common in the industry.
    The SMA witness illustrated components used to calculate the 
proposed variable MRF. According to the witness, a monthly average 
diesel fuel price, a reference diesel fuel price, an average mile-per-
gallon truck fuel use, a reference hauling cost per loaded mile and a 
reference load size are the components needed to calculate the proposed 
variable MRF.
    Using EIA data for the United States and nine U.S. sub-regions, the 
SMA witness explained that using the Lower Atlantic and Gulf Coast EIA 
regions in computing the monthly mileage rates would be reflective of 
the Appalachian and Southeast marketing areas. Relying on EIA data, the 
witness explained that the Lower Atlantic region is comprised of the 
states of Virginia, West Virginia, North Carolina, South Carolina, 
Georgia, and Florida. Similarly, the witness added, the Gulf Coast 
region is comprised of Alabama, Mississippi, Arkansas, Louisiana, 
Texas, and New Mexico. According to the witness, of the nine sub-
regions described by the EIA, the Lower Atlantic and Gulf Coast regions 
best reflect the Appalachian and Southeast marketing areas 
geographically. The witness also noted that according to EIA data, the 
diesel fuel costs for these two regions are among the lowest reported 
nationally.
    In establishing a reference diesel fuel price for the proposed 
transportation credit mileage rate calculation, the SMA witness relied 
on EIA retail diesel fuel prices for the time period of October to 
November 2003. During that period, the witness said, diesel fuel prices 
averaged $1.48 per gallon nationally and ranged from $1.42 per gallon 
in the Lower Atlantic to $1.43 per gallon in the Gulf Coast EIA 
regions. Due to relatively little fluctuation of diesel fuel prices 
during October to November 2003, the witness was of the opinion that 
this period is a fair and conservative timeframe on which to establish 
a reference diesel fuel price. The witness concluded by suggesting 
$1.42 per cwt per mile should be used as the reference diesel fuel 
price.
    The SMA witness submitted a random selection of actual milk hauler 
bills as the basis for computing the reference hauling cost component 
of the proposed MRF. According to the witness, actual origination and 
destination points, miles moved, and rates and fuel surcharges per 
loaded mile were depicted on each hauling bill. For the month of 
October 2005, the witness stated that hauling costs ranged from $1.89 
to $2.70 per loaded mile, with the average being $2.48 per loaded mile. 
In order to be consistent with the timeframe used for the reference 
diesel fuel price, the witness submitted selected milk hauling bills 
from October to November 2003 as the basis for determining the 
reference hauling cost. The witness testified that for this time period 
the simple average hauling rate charged per loaded mile in the 
Southeast was $1.9332 and $1.8913, respectively, and averaged $1.9122. 
Accordingly, the witness offered that the average hauling rate of $1.91 
per loaded mile should become the reference hauling cost used in 
calculating the MRF.
    The SMA witness provided data compiled by the United States 
Department of Transportation (USDOT) on combination truck fuel economy. 
According to the witness, the USDOT data indicated that the average 
miles traveled per gallon for a combination truck in 2002 was 5.2. The 
witness was of the opinion that dairy industry fuel economy is similar, 
as it ranges between 5.0 to 6.0 miles per gallon. Accordingly, the 
witness advocated using a 5.5 miles per gallon fuel consumption rate in 
computing the proposed MRF. The witness also testified that a 5,600 
gallon tanker, at its fullest capacity, can carry 48,160 pounds of 
milk. Therefore, the witness explained, 48,000 pounds should be the 
reference load size used in calculating the MRF.
    The SMA witness summarized that Proposal 3 calculates a variable 
monthly MRF by using: (1) EIA data from a base period defined as 
October and November 2003, (2) hauling cost of $1.91 per loaded mile, 
(3) a reference diesel fuel rate of $1.42 per gallon, (4) a fuel 
economy of 5.5 miles per gallon and (5) a load size of 48,000 pounds.
    The SMA witness explained that the proposed mileage rate would be 
calculated by averaging the four most recent weeks of retail on-highway 
diesel prices for both the Lower Atlantic and Gulf Coast, as reported 
by the EIA prior to each order's announcement of the Advance Class milk 
prices. According to the witness, the proposed mileage rate would then 
be computed and included in each order's announcement of Advanced Class 
milk prices that are announced publicly on or before the 23rd of the 
month.
    The SMA witness stressed that, for a variety of reasons, the 
proposed mileage rate computation reflects less than the actual cost of 
hauling. The witness asserted that the proposed mileage rate is based 
on costs of hauling from 2003, rather than a more current timeframe, 
and therefore would only reflect changes in the cost of diesel fuel 
since that time. The witness also reiterated that the proposed mileage 
rates would apply only to Class I milk shipped in

[[Page 12989]]

excess of 85 miles, directly from farms to plants. The SMA witness was 
of the opinion that transportation costs will continue to increase and 
that adopting the proposed changes to the transportation credit 
provisions will avoid exhausting the transportation credit balancing 
fund before costs are reimbursed.
    The SMA witness asserted at the time of the hearing that they were 
incurring substantial losses in supplying supplemental milk for Class I 
use to the Appalachian and Southeast marketing areas. The witness 
indicated that hauling costs in supplying supplemental milk exceed $15 
million annually.
    A comment filed by SMA in response to the Tentative Final Decision 
reiterated support for the adoption of Proposal 3.
    Six DFA farmer-members testified in support of Proposal 3. 
According to these witnesses, it is the cooperative members of SMA who 
are acting as handlers to supply the supplemental fluid milk needs of 
both marketing areas. According to the witnesses, this results in 
additional costs that are absorbed by the dairy farmer members of the 
cooperatives that comprise SMA. The witnesses argued that hauling costs 
and the distances supplemental milk must be hauled continue to 
increase.
    The six DFA dairy farmer witnesses were of the opinion that 
Proposal 3 is a reasonable solution to deal with the continued 
production decline and population driven demand increase in the 
southeastern region of the United States. The witnesses were of the 
opinion that using a fuel adjustor that moves up and down with changes 
in the cost of diesel fuel would more adequately cover the costs of 
transporting supplemental milk to the two marketing areas.
    A post-hearing brief submitted by DFA, and supported by SMA, 
reiterated support for adopting a fuel cost adjustor.
    A post-hearing brief was submitted on behalf of Arkansas Dairy 
Cooperative Association (ADCA) in support of Proposal 3. According to 
ADCA, its members' milk does not usually qualify for transportation 
credit payments because it is typically pooled on the Southeast and 
Central orders year-round. However, ADCA noted that its members are 
impacted by the cost of hauling supplemental milk into the southeast 
because of its membership in a marketing agency-in-common.
    A post-hearing brief was submitted on behalf of Dairymen's 
Marketing Cooperative, Inc. (DMCI) in support of Proposal 3. The brief 
emphasized that as fuel costs continue to increase, the Class I 
differential surface becomes more outdated and unable to reflect the 
costs of moving milk.
    A post-hearing brief was submitted on behalf of Lone Star Milk 
Producers (Lone Star) in support of Proposal 3 because it would 
establish updated mileage rates for payments from the transportation 
credit balancing funds. The brief stated that the hauling cost factor 
used to develop the mileage rate for the transportation credit 
balancing fund has not been updated since the mid 1990's and is 
inadequate.
    A post-hearing brief submitted by Maryland & Virginia Milk 
Producers Cooperative Association, Inc. (Maryland & Virginia) 
reiterated support for the adoption of Proposal 3.
    A post-hearing brief was submitted on behalf of South East Dairy 
Farmers Association (SEDFA). The brief expressed support for a variable 
mileage rate based on the changes in the cost of diesel fuel. The brief 
stated that the industry uses a consistent fuel economy estimate of 5.0 
to 6.0 miles per gallon when calculating expected milk transportation 
costs. The brief stressed that the extreme rise in diesel fuel prices 
in recent months has made the adoption of Proposal 3 critical for 
producers who incur the cost of hauling milk to the market.
    A witness appearing on behalf of Southeast Milk, Inc. (SMI) 
testified in support of Proposal 3. SMI is a dairy marketing 
cooperative with, at the time of the hearing, approximately 300 dairy 
farmer members in Florida, Georgia, Alabama, and Tennessee. The SMI 
witness stated that relying on cost indexes of other government 
agencies determined on a national scale makes the data less subject to 
manipulation by any given industry.
    A witness testified on behalf of Dean Foods Company (Dean) in 
support of Proposal 3. According to the witness, Dean owns and operates 
8 plants regulated by the Appalachian marketing area and 10 plants 
regulated by the Southeast marketing area. The Dean witness agreed with 
the benefit of using an adjustor in determining the MRF to reflect 
changes in fuel prices over time. However, the witness also was of the 
opinion that the MRF should be reduced to 95 percent in order to be 
consistent with the Secretary's past decisions that transportation 
credits do not encourage the uneconomic movement of milk or 
inefficiencies.
    The Dean witness testified that the marketing areas are in need of 
supplemental milk supplies and that supplying such milk presents 
challenges. Nevertheless, the witness expressed concern for the 
continuing and potential future abuse of transportation credits. The 
witness asserted that current order provisions allow supplemental milk 
to receive transportation credits, when such milk is not demanded. 
Moreover, the witness stressed that there is no assurance that 
transportation credit balancing fund payments would flow to the dairy 
farmer members of the cooperatives acting as handlers located in the 
two marketing areas regardless of the producers' status as independent 
or cooperative members.
    A post-hearing brief submitted on behalf of Dean reiterated support 
for Proposal 3, indicating that disorderly marketing conditions exist 
because the milk supply in the Southeastern United States is deficit 
and the cost of supplying the market is not borne equally. 
Additionally, a comment filed by Dean in response to the Tentative 
Final Decision expressed continued support for the adoption of Proposal 
3.
    A dairy farmer who supplies milk to Dean testified in support of 
the intent of Proposal 3. The witness stated that a dynamic mileage 
rate that adjusts to the energy markets is better than a static factor 
that is unable to adjust in response to changes in energy costs.
    A dairy farmer who markets milk to Dean through Dairy Marketing 
Service (DMS) testified in favor of Proposal 3. The witness stated that 
using a variable MRF derived from a source outside of the dairy 
industry, such as the USDOT, would help decrease the chances of 
industry participants manipulating the information that should be used 
in calculating a MRF.
    A witness appearing on behalf of Land O'Lakes, Inc. (LOL) testified 
in support of Proposal 3. LOL is a dairy farmer member-owned Capper-
Volstead cooperative with, at the time of the hearing, over 4,000 
member farmers whose milk is pooled on 6 Federal Orders. The witness 
stated that its members' milk located in the Northeast and Midwest have 
provided supplemental supplies to both the Appalachian and Southeast 
marketing orders for the past 10 years.
    According to the witness, LOL supplies supplemental milk to the 
Appalachian and Southeast orders and experiences high milk hauling 
costs. The witness asserted that using diesel fuel prices as the basis 
for the MRF would make it responsive to actual costs incurred by the 
handlers moving milk into these two deficit markets.
    A post-hearing brief submitted by LOL reiterated support for the 
adoption of Proposal 3. The brief said that in order to fulfill the 
supplemental milk needs of the Appalachian and Southeast

[[Page 12990]]

order marketing areas, milk is sourced from 28 States. According to the 
brief, this demonstrates that the distance milk must travel has further 
increased, thereby strengthening the justification for the adoption of 
Proposal 3. Additionally, a comment filed by LOL in response to the 
Tentative Final Decision expressed continued support for the adoption 
of Proposal 3.
    An independent dairy farmer from Tennessee testified in opposition 
to any changes to the Appalachian or Southeast marketing orders. The 
witness testified that additional government intervention in moving 
milk was not necessary and that supply and demand should be relied upon 
to dictate what services are needed. The witness asserted that amending 
the orders as proposed would change the way milk is moved, thereby 
hindering efficient milk hauling. The witness also was of the opinion 
that there is no assurance that transportation credits received for 
supplying supplemental milk would truly reach the market's producers. 
The witness expressed concerns that the proposed increases in the 
transportation credit rate could affect producer decisions and producer 
blend prices.
    A witness testified on behalf of the Kentucky Dairy Development 
Council (KDDC). KDDC is a member-based organization that, at the time 
of the hearing, represented approximately 1,360 dairy farmers in 
Kentucky. The witness did not state support for or opposition to the 
proposals presented at the hearing. The witness was of the opinion that 
noncompetitive pricing is discouraging milk production in the 
southeastern United States. The witness was of the opinion that farm 
milk prices in Kentucky and in the Southeastern States have eroded and 
that KDDC was opposed to any Federal Order changes which would further 
erode farm prices. The witness did testify in support of changes to the 
orders that would strengthen the position of dairy farmers in Kentucky 
and in other Southeastern States.
    A post-hearing brief submitted by KDDC in support of Proposal 3 
said that Proposal 3 would benefit Kentucky dairy farmers by providing 
assistance in recovering market service costs.
B. Increasing the Maximum Assessment Rate
    A proposal, published in the hearing notice as Proposal 1, offered 
by DFA, that seeks to increase the maximum transportation credit 
balancing fund assessment rates for the Appalachian and Southeast 
orders is adopted. Specifically, the maximum transportation credit 
balancing fund assessment rate in the Appalachian order is increased by 
$0.055 per cwt on Class I milk for an amended rate of $0.15 per cwt. 
The Southeast order's maximum assessment rate was increased by $0.10 
per cwt for an amended rate of $0.20 per cwt and implemented on an 
interim basis. Subsequent to the interim adoption of the $0.20 per cwt 
assessment rate, a separate rulemaking increased this rate to $0.30 per 
cwt (73 FR 14153). Accordingly, this decision would permanently adopt 
the higher assessment rate for the Appalachian order only.
    A witness appearing on behalf of DCMA and SMA testified in support 
of Proposal 1. As previously described in testimony regarding Proposal 
3, the SMA witness said that the current transportation credit 
provisions provide for the collection of a maximum transportation 
credit assessment to handlers on all Class I milk for the Appalachian 
and Southeast marketing areas year-round. While the market 
administrator has the discretion to waive the maximum transportation 
credit assessments if deemed necessary, the SMA witness explained that 
the market administrator of each order collected the maximum 
assessments in 2004 and 2005. However, the witness said that the 
collected assessments in both orders had been insufficient to pay the 
requested credits, thereby necessitating the prorating of payments from 
the transportation credit balancing fund.
    The SMA witness stated that even with the November 1, 2005, 
implementation of a transportation credit assessment increase of $0.03 
per cwt for both orders, the assessment rate will likely not be able to 
ensure payments from the transportation credit balancing funds on all 
milk eligible to receive payment.
    The SMA witness estimated that the transportation credit assessment 
rate for the Appalachian order for 2004 would have needed to be $0.0889 
per cwt and $0.0953 per cwt for all of 2005 to cover all of the 
transportation credits requested. The witness also estimated that the 
Southeast order transportation credit assessment rate would needed to 
have been $0.1318 per cwt and $0.1246 per cwt in 2004 and 2005, 
respectively, to cover all requested credits. Additionally, the witness 
noted that the transportation credits requested for both the 
Appalachian and Southeast marketing orders for the months of July, 
September, and October of 2005 exceeded the transportation credits 
requested in all of 2004. The witness said this also demonstrates that 
increased volumes of supplemental milk were transported from locations 
farther from the marketing areas.
    The witness said that the reason the market administrators prorated 
payments from the transportation credit balancing funds was because the 
rate of assessments exceeded collections. The witness was of the 
opinion that this occurred because more supplemental milk was sourced 
from more distant locations.
    Relying on market administrator data, the witness concluded that 
only 55 percent of the actual cost of transporting supplemental milk 
was covered by the transportation credit payments in the Appalachian 
order in 2004. Similarly, only 39 percent of the actual cost was 
covered for the Southeast order during the same period. The witness 
further estimated that in 2005, only 53 percent and 43 percent of the 
actual hauling costs for supplemental milk would be covered for the 
Appalachian and Southeast orders, respectively.
    In explaining the need for the adoption of Proposal 3, the SMA 
witness reiterated that the combined effect of higher mileage hauling 
rates and the increased distance from which supplemental milk had to be 
hauled, resulted in a smaller portion of actual transportation costs 
being funded with transportation credits compared to the rate in 1997. 
The witness was of the opinion that transportation costs will continue 
to increase, making it necessary to again increase the assessment rate.
    Further illustrating the need to increase the maximum 
transportation credit assessment rate, the SMA witness indicated that 
if a transportation credit reimbursement rate of $0.046 per cwt per 
mile had been in place rather than the current rate of $0.035 per cwt 
per mile, the Appalachian order would have required an assessment of 
$0.133 per cwt in 2004 and an assessment of $0.1415 per cwt in 2005, to 
prevent the prorating of transportation credit claims. Similarly, the 
witness stated that for the Southeast order, the assessment rate would 
have needed to have been $0.1927 per cwt in 2004 and $0.1869 per cwt in 
2005.
    The SMA witness testified that the different rates of 
transportation credit balancing fund assessments proposed for the 
Appalachian and Southeast orders reflect the differing costs of 
supplying supplemental milk into each marketing area. The witness 
stated that while the transportation credit assessment was waived for 2 
months during 2002 and 2003 in the Appalachian order, assessments were 
not waived for the Southeast order. The

[[Page 12991]]

witness asserted that while both orders rely on some of the same 
sources for supplemental milk, the Appalachian marketing area, at the 
time of the hearing, received most of its milk from the more northern 
Mid-Atlantic States while the Southeast marketing area received most of 
its supplemental milk from States located to the west and southwest of 
the marketing area. Furthermore, the witness added that different 
assessment rates for the two orders are warranted because at the time 
of the hearing, supplemental milk moved greater distances to service 
the Southeast market than it did to service the Appalachian market.
    The six DFA dairy farmer witnesses that testified in support of 
Proposal 3 also testified in support of increasing the transportation 
credit assessments for both orders. The witnesses were of the opinion 
that the assessment increases would generate funds needed to maintain a 
sufficient transportation credit fund balance capable of paying on 
eligible claims. In addition, the witnesses were of the opinion that 
the orders' current location adjustments were not able to reflect the 
rapidly increasing costs of transporting milk from where it is located 
to where it is needed. Similarly, the witnesses stated that over-order 
premiums cannot be garnered from the market to offset rapidly 
increasing transportation costs.
    The six DFA dairy farmer witnesses were also of the opinion that 
the intent of increasing the transportation credit assessment rates was 
a reasonable solution to mitigate continued production declines and the 
increasing demand for milk in the southeastern United States due to 
continued population increases in that region. The witnesses added that 
the markets' producers face higher fuel costs and longer hauling 
distances associated with obtaining supplemental milk. When producers 
go out of business, the witnesses said, the gap between supply and 
demand widens thereby increasing the cost of supplying the market with 
supplemental milk.
    Post-hearing briefs submitted by DFA reiterated the position and 
testimony of SMA in support of increasing the transportation credit 
assessment rates immediately.
    A post-hearing brief was submitted on behalf of Select Milk 
Producers, Inc. (Select) and Continental Dairy Products, Inc. 
(Continental) in support of Proposal 1. At the time of the hearing, 
Select's members were located in New Mexico, Texas, Kansas, and 
Oklahoma, while Continental's members were located in Indiana, 
Michigan, and Ohio. The brief stated that both cooperatives supply the 
Appalachian and Southeast marketing areas with supplemental milk. 
Select and Continental expressed support for proponent's hearing 
testimony in favor of increasing the transportation credit assessment 
rates of the two orders. The brief stated that while the proposals 
under consideration will not fix long-term marketing and transportation 
problems, Proposal 1 should be adopted in conjunction with USDA's 
consideration of alternative approaches aimed at correcting the milk 
deficit problems in the southeast region of the United States.
    The Select/Continental brief expressed the opinion that blend 
prices, not Class I prices, provide the economic incentive to supply 
milk to a marketing area. The brief stated that when producers in a 
large marketing area share the same blend price, the incentive to move 
milk within the large marketing area is greatly diminished. In 
addition, the brief indicated that the pricing of diverted milk ignores 
the value of milk to the market where pooled, which results in milk 
being pooled that is not available to meet the Class I needs of the 
market.
    A post-hearing brief was submitted on behalf of Southeast Dairy 
Farmer Association (SEDFA). The brief expressed support for Proposal 1 
as published in the hearing notice. SEDFA represents cooperative and 
independent producers who are regular and supplemental milk suppliers 
located in and outside of the Appalachian and Southeast marketing 
areas.
    The SEDFA brief asserted that whether milk is produced inside or 
outside of the two marketing areas, the cost of moving Class I 
supplemental milk should be borne by the marketplace. The brief stated 
that while the reimbursement of actual hauling costs is much lower than 
in 1997, the amount of supplemental milk being brought into the 
marketing areas is increasing. The brief concluded that because 
reimbursement of actual hauling cost is smaller, the higher costs not 
reimbursed have fallen disproportionately on producers. The brief 
agreed with Lone Star and Maryland & Virginia that the $0.03 increase 
in the transportation credit assessments implemented in November 2005 
\1\ would be insufficient to cover the expected transportation credit 
claims during 2006.
---------------------------------------------------------------------------

    \1\ 70 FR 59221.
---------------------------------------------------------------------------

    A witness appearing on behalf of LOL testified in support of 
Proposal 1. The LOL witness agreed with other proponents that the 
transportation credit balancing fund for both orders has been 
insufficient to support transportation credit payments. While the 
witness supported the transportation credit assessment increases 
effective in November 2005, the witness did not think that this would 
be sufficient to reimburse future claims.
    A post-hearing brief submitted by LOL reiterated its support for 
the adoption of Proposal 1. The brief indicated that the southeast 
region of the country is not able to fulfill Class I demands during any 
season of the year and must rely on a supplemental milk supply from 
about 28 States outside the Appalachian and Southeast marketing areas. 
The brief noted that transportation credits installed in the 
southeastern region in 1996 were based on the recognition that the 
region's Class I needs could only be met by supplemental milk from 
dairy farms located outside of the region.
    A witness testifying on behalf of Dean expressed cautious support 
for increasing the transportation credit assessment rates of the two 
orders because the availability of additional credits must be balanced 
with consideration for abuses and undesired results. The witness was of 
the opinion that handlers who receive such credits are also pooling 
milk on the orders through the diversion process which does not 
actually serve the markets' Class I needs.
    A post-hearing brief submitted on behalf of Dean agreed with 
proponents of Proposal 1 that disorderly marketing conditions exist. 
The brief stated that the southeast area's milk supply is deficit and 
the cost of supplying the market is not borne equally.
    A witness testified on behalf of SMI in opposition to Proposal 1. 
The witness characterized transportation credits as a subsidy. The 
witness further expressed that subsidizing the transportation of milk 
produced outside of the marketing areas results in economic 
disincentives for local milk production and provides incentives for 
local milk supplies to be replaced by milk from outside the two 
marketing areas. The witness noted that when transportation credits 
were first adopted in 1996, the average Class I utilization of the 
southeast region was in the mid-80 percent range. Since the 
implementation of transportation credits, the witness said, Class I 
utilization had fallen to the 60 percent range. It was the opinion of 
the witness that transportation credit provisions are contributing to 
declining milk production in the two marketing areas.
    The SMI witness testified that transportation credits should be 
eliminated. As an alternative, the witness suggested: (1) Establishing 
a

[[Page 12992]]

method whereby Class I prices could be adjusted based on more regional 
marketing conditions; (2) adopting a base-excess plan; (3) increasing 
the current Class I differential level; and (4) any other provisions 
that would encourage local milk production.
    A Kentucky dairy farmer testified in opposition to Proposal 1. The 
witness argued that providing transportation credits devalues local 
milk, which results in lower prices to local producers and causes 
declining milk production in the two marketing areas. The witness 
expressed concern that Proposal 1 would encourage more milk from 
outside the marketing areas to be pooled on the orders even though it 
is not delivered to either marketing area on a daily basis, as is the 
locally produced milk. According to the witness, local producers are 
not able to receive the full value for local production because 
transportation credits give price advantages to producers located far 
from the marketing areas. The witness concluded by stating that pooling 
milk located outside of both marketing areas does not represent Class I 
use and therefore this milk should not be pooled on the Appalachian or 
Southeast orders.
    A dairy farmer witness who supplies milk to Dean testified in 
opposition to Proposal 1. The witness viewed increasing assessment 
rates on transportation credits as detrimental to those dairy farmers 
who are located in the Appalachian and Southeast marketing areas and 
who regularly supply the Class I needs of the market. The witness was 
of the opinion that Proposal 1 lacks safeguards on the amount of 
additional milk that could be pooled on the orders by diversion. The 
witness said that this additional pooled milk would unnecessarily lower 
the blend price received by producers and essentially result in out-of-
area milk supplies becoming less expensive relative to milk produced 
in-area. As a consequence, the witness said, local in-area producers 
will be forced out of business because of lower prices. Should this 
occur, the witness said, the need for additional out-of-area 
supplemental milk supplies would further increase to meet the Class I 
needs of the marketing areas.
    The witness suggested that instead of providing additional 
transportation credits, a review of the level of Class I differentials 
and a review of diversions and touch-base provisions should be 
considered in another hearing.
    An independent dairy farmer from Tennessee testified against making 
any changes to the Appalachian and Southeast marketing orders, 
including the adoption of Proposal 1. In addition to the witness' 
testimony regarding Proposal 3 as was already described, the witness 
was of the opinion that additional government intervention to provide 
for increasing the transportation credit assessment rate was not 
necessary and that supply and demand forces should dictate what 
services are needed. The witness asserted that amending the orders as 
proposed would change the way milk is transported and would hinder 
efficient handling of milk. The witness was of the opinion that there 
would be no assurance that the transportation credits would benefit the 
producers who were pooled on the two orders and had incurred the 
additional costs of servicing the Class I market.
    A dairy farmer, who also markets milk to Dean through DMS, 
testified in opposition to Proposal 1. The witness said that local 
producers of the Appalachian and Southeast marketing areas are unable 
to supply all the fluid milk needs of the two marketing areas because 
local milk production in these areas is declining. The witness 
suggested that if Proposal 1 were adopted, an accounting of the total 
transportation costs of all milk movements should be supplied to the 
market administrators and be made available for public inspection. The 
witness also suggested making changes to the level of adjustments of 
milk prices by location (location adjustments) as an alternative to 
increasing the transportation credit assessment rate. The witness said 
if location adjustments were changed, the pooling standards for both 
orders would also need to be adjusted. Specifically, the witness 
suggested increasing the number of days' production needed to touch 
base, or increasing the performance standards of the orders.
    A post-hearing brief submitted by the Kentucky Dairy Development 
Council (KDDC) supported Proposal 1. The brief noted that increasing 
the transportation credit assessment rate would benefit Kentucky dairy 
farmers by providing assistance in recovering costs associated with 
serving the market.
C. Establishing Diversion Limit Standards
    A proposal submitted by Dean Foods, published in the hearing notice 
as Proposal 4, seeks to reduce a handler's ability to utilize 
transportation credits to qualify producers for pooling on the orders. 
The intent of the proposal is to limit the pooling of additional 
surplus milk on the orders through the diversion process. At the time 
of the hearing, large volumes of milk were being pooled through 
diversions on the Appalachian and Southeast orders from locations 
distant from the marketing areas. While Proposal 4 would provide 
incentives to limit the pooling of milk through the diversion process, 
it would do so indirectly by limiting the payment of transportation 
credits. This decision chooses to directly limit diversions by 
establishing a zero diversion limit on milk that receives 
transportation credits.
    A witness appearing on behalf of Dean testified in support of 
Proposal 4 while also expressing cautious support for the proposed 
transportation credit assessment increase (Proposal 1). The witness was 
of the opinion that handlers supplying supplemental milk to the two 
marketing areas receive a financial benefit from pooling diverted milk 
on the orders even though the milk does not ultimately serve the fluid 
market. The witness explained that while the diverted milk typically 
does not serve the two markets, it seeks to be pooled on the two orders 
because the blend prices are higher than what this milk could receive 
if pooled on other Federal orders.
    The Dean witness testified that the establishment of large 
marketing orders has created new marketing problems. According to the 
witness, when the Federal order system had a larger number of smaller 
markets, each order's marketwide pools were small. Markets with large 
populations relative to associated milk, the witness explained, had 
higher Class I utilizations and higher blend prices to attract 
supplemental milk supplies. Markets with significant supplies of milk 
and smaller populations, the witness related, had lower Class I 
utilizations and producers pooled in those markets were provided with 
the economic incentive to look for higher returns from markets with 
higher blend prices. The witness further explained that smaller 
marketing areas limited the size of the Class I market and, in turn, 
limited how much milk could be pooled by diversion. The witness said 
that when orders were smaller, there were disincentives to pooling milk 
and the orders were more effective in limiting a handler's ability to 
pool milk through diversions. According to the witness, the relative 
value of diverted milk was tied to its distance from the market.
    The Dean witness also testified that the Class I price surface 
adopted during Federal milk order reform changed the relative 
relationship of milk value to its distance from the market. According 
to the witness, the location value of diverted milk prior to reform was 
determined by adjusting milk value according to its distance from an 
order's pricing point. The witness said this

[[Page 12993]]

resulted in each plant having a different location adjustment value to 
its milk receipts depending on the order on which its receipts were 
pooled. The witness explained that the further milk was located from 
the order's pricing point, the less likely it was to be pooled as a 
diversion.
    The Dean witness expressed concern that no longer valuing milk 
relative to the order on which it is pooled had a material effect on 
the value of pooling milk located far from the market by diversion. The 
witness was of the opinion that the flatter Class I price surface, with 
fixed differential levels by county, places a value on milk that is not 
reflective of its value to the marketing order where pooled making it 
economically desirable to pool milk located far from the market through 
the diversion process. The witness was also of the opinion that this 
served to provide the incentive for pooling distant milk by diversion.
    The Dean witness testified that even though there are closer milk 
supplies, distant milk is being pooled on both orders. The witness 
further asserted that transportation credits amplify the pooling of 
milk on the orders, which does not service the markets' Class I needs. 
The witness was of the opinion that pooling distant milk by diversion 
clearly results in disorderly marketing conditions within the two 
markets. According to the witness, when such milk is pooled, local 
farmers who are consistently serving the Class I needs of the markets 
receive a needlessly lower blend price.
    According to the Dean witness, the objective of Proposal 4 is to 
modify the receipt of transportation credits depending on a handler's 
specific service to the Class I need of the markets and to lower 
transportation credit payments to those handlers who have higher levels 
of diversions. The witness stated that the current reimbursement rate 
of transportation credits is the same for each handler regardless of 
the level of its relative service to the fluid market. The witness 
explained that when a handler delivers 100 percent of its receipts to a 
pool distributing plant, it receives transportation credits at the same 
rate as a handler delivering only the minimum volume needed to meet the 
pooling qualifications. The witness conveyed that the handlers meeting 
only the minimum pooling standards are then able to divert milk which 
is not actually available to the market. Additionally, the witness 
indicated that adjusting a handler's receipt of transportation credits 
in this way will maintain and help extend the transportation credit 
balancing funds.
    The Dean witness acknowledged the need for balancing because 
distributing plants do not typically need to receive milk every day of 
the week. However, the witness asserted that unlimited diversions 
undermine the purpose of the Federal order system. The witness 
explained that the proposed 30 percent diversion limit on supplemental 
milk seeking transportation credits is reasonable because a 
distributing plant typically receives milk five days per week. The need 
to divert milk 2 days per week, the witness explained, justifies the 30 
percent diversion limit. The Dean witness explained that based on data 
provided by the market administrator, there are handlers in both orders 
who divert significantly more pounds of milk than the orders need to 
balance the Class I demands of pool distributing plants, and yet still 
receive transportation credits.
    A post-hearing brief submitted on behalf of Dean reiterated support 
for the adoption of Proposal 4 provided that Proposals 1 and 3 are 
adopted. The brief stated that Proposal 4, when adopted in conjunction 
with Proposals 1 and 3, would tend to limit the abuse of transportation 
credits on supplemental milk for Class I use as a result of the cap on 
the receipt of transportation credits by handlers suggested in Proposal 
4. The brief also stressed that, if adopted, the provisions detailed in 
Proposal 4 would lead to the exercise of some control over the amount 
of milk that would be pooled on the orders through the diversion 
process.
    A dairy farmer who supplies milk to Dean testified in support of 
Proposal 4. The witness agreed with Dean and other witnesses that 
orders should only pool the milk of producers who truly serve the Class 
I needs of the market, otherwise revenue essentially leaves the two 
marketing areas. According to the witness, this loss of revenue leads 
area dairy farmers to exit the industry, thereby further reducing the 
availability of local milk supplies and increasing the need for 
acquiring more milk produced from far outside the marketing areas. The 
witness was of the opinion that it is the shipments of supplemental 
milk into the marketing areas that provide the ability to pool milk by 
diversion when it is not available to the market.
    A witness from SMI testified in support of Proposal 4, provided 
Proposals 1 and 3 are adopted.
    A Kentucky dairy producer testified in support of Proposal 4 and 
said that supplemental milk receiving transportation credits should be 
subject to some limits on the amount of additional milk that can be 
pooled by diversion. The witness was of the opinion that transportation 
credits give producers located outside the marketing areas a price 
advantage because their diverted milk receives the blend price of the 
orders.
    A witness appearing on behalf of LOL testified in opposition to 
Proposal 4. The witness noted that transportation credits were 
established to attract supplemental milk and to partially offset the 
cost of hauling supplemental milk into the deficit markets. The witness 
explained that the orders' specify the conditions that must be met to 
be eligible to receive transportation credit payments. The current 
transportation credit provisions, the witness said, already limit 
payments for supplemental milk from outside the marketing areas to 
include only the milk of dairy farmers who are not defined as 
``producers'' under the orders. The witness also said that payments are 
limited to Class I pounds and are not paid on the first 85 miles of 
hauling milk from farms to the plant receiving supplemental milk.
    The LOL witness stressed that additional limitations would do 
nothing to encourage the delivery of needed supplemental milk into the 
marketing areas during the short production months. The witness was of 
the opinion that if the intent is to change the diversion limits of the 
orders, then those changes should be addressed in a separate hearing.
    A post-hearing brief submitted by LOL reiterated its position given 
at the hearing opposing Proposal 4. The brief also stated that Proposal 
4 improperly assumes that all handlers supplying supplemental milk have 
equal access to distributing plants and that distributing plants' Class 
I use of milk is the same as the Class I utilization of the two 
markets.
    A witness appearing on behalf of SMA also testified in opposition 
to Proposal 4. The witness was of the opinion that the orders touch-
base and diversion limit standards already provide sufficient 
safeguards to pooling milk not needed for Class I use. The SMA witness 
explained that it is difficult to establish specific diversion limits 
on supplemental milk, as contained in Proposal 4, because of individual 
differences in the balancing needs of each distributing plant, noting 
that these needs continually change. The witness emphasized that 
difficulties in balancing the orders' pool distributing plants exist 
year-round, and that suppliers sometimes have no control over factors 
that may alter balancing needs. The witness noted that some of SMA's 
purchase agreements for supplemental milk included

[[Page 12994]]

arrangements where transportation credit payments are paid directly to 
the supplying cooperative. In this regard, the witness expressed 
concern that providing a separate diversion limit on milk receiving 
transportation credit payments would unfairly penalize the cooperative 
when a distributing plant overestimates its need for supplemental milk. 
The witness stated that extreme variations in daily, weekly, and 
monthly deliveries to pool distributing plants occur. Relying on market 
administrator data for January 2004 through October 2005 that showed 
the ratio of the highest delivery to lowest delivery day, the witness 
concluded that a 30 percent reserve factor would not have been 
sufficient to cover distributing plant balancing needs.
    The SMA witness also was of the opinion that Proposal 4 would give 
pool distributing plant operators an advantage over cooperatives who, 
in their capacity as handlers, are supplying supplemental milk. The 
witness said that while cooperatives handle the majority of 
supplemental milk for the orders, they may receive little or no 
transportation credit payments under Proposal 4. According to the 
witness, a diversion limit could only benefit those handlers in nearer 
proximity to the marketing areas.
    A post-hearing brief was submitted on behalf of ADCA in opposition 
to Proposal 4. The brief stressed that the seasonality of production in 
the southeastern region is the highest in the country and as such, a 
greater reserve of milk must be available. The brief concluded that 
Proposal 4 would create inequities between handlers supplying 
supplemental milk while also encouraging uneconomic movements of milk.
    A post-hearing brief was submitted on behalf of DMCI in opposition 
to Proposal 4. The brief asserted that there are too many unanswered 
questions as to how Proposal 4 would be applied. The brief stated that 
a distributing plant's reserve milk needs are an individual business 
decision and should only be limited by the order's pooling provisions.
    A post-hearing brief submitted by DFA and other SMA members 
reiterated their opposition to Proposal 4. The brief noted that during 
many months, a 30 percent diversion limit is insufficient to cover 
balancing needs. Therefore, if Proposal 4 were implemented, the brief 
said, it could disproportionately affect different supplemental 
supplies and distributing plants in the marketing areas.
    A post-hearing brief was submitted on behalf of Lone Star in 
opposition to Proposal 4. The premise of its opposition was that 
Proposal 4 would establish a ``one-size-fits-all'' diversion limit for 
all Class I handlers. The brief noted that a distributing plant's 
reserve milk needs are individual decisions in response to its customer 
base and seasonal changes in demand. The brief expressed the opinion 
that the orders already provide for some of the most strict diversion 
limit standards and touch-base requirements in the Federal order 
system.

Comments and Exceptions

    Comments filed by Dean in response to the tentative partial 
decision supported the proposed amendments as recommended by USDA. The 
brief offered support of USDA's alternative to Proposal 4 which, in its 
opinion, more directly addressed the problem of pooling diverted milk 
that is associated with supplemental milk supplies. Dean also stated 
that since the Department's alternative continued to address the intent 
of Proposal 4, it would support the adoption of Proposals 1 and 3. In 
brief, Dean expressed that USDA's decision adequately addressed 
concerns it expressed at the hearing regarding pooling abuse and 
ensuring that transportation credits only reimburse handlers for a 
portion of the supplemental hauling costs.
    Comments filed on behalf of SMA also expressed support for the 
amendments recommended in the tentative final decision. SMA stated that 
the recommended amendments would ensure that there are sufficient funds 
available to fund the transportation credit balancing fund and that 
transportation credits would better reflect the changing costs of 
supplying supplemental milk to the southeastern region. Comments filed 
on behalf of LOL supported the adoption of Proposals 1 and 3. LOL 
stated that increasing the transportation credit assessment rates and 
updating the payment rate to better reflect the cost of fuel were long 
overdue improvements to the two orders' transportation credit 
provisions. However, LOL took exception with USDA's recommendation 
regarding Proposal 4 (pooling of diverted milk through supplemental 
milk supplies). LOL argued that by not allowing diversions on 
supplemental milk supplies, supplemental milk suppliers located outside 
of the marketing areas would bear the burden of balancing the markets' 
seasonal milk needs. LOL also argued that while USDA asserted in the 
tentative final decision that limiting diversions on supplemental milk 
supplies would increase blend prices to the orders' dairy farmers, no 
analysis was provided to verify the claim. Additionally, LOL wrote that 
the record reveals the problem with diversions is greater in the 
Southeast marketing area and therefore unique marketing conditions call 
for unique provisions in each order.

Findings/Discussion

    The issue before USDA in this decision is the consideration of 
changes to the transportation credit and closely related provisions of 
the Appalachian and Southeast milk marketing orders. Transportation 
credit provisions have been a feature of the current orders (and their 
predecessor orders) since 1996. The need for transportation credit 
provisions arose from a consistent need to import milk from 
considerable distances to the marketing areas during certain months of 
the year when local milk production was not sufficient to meet Class I 
demands. Transportation credit provisions provide payments to handlers 
to cover a portion of the costs of hauling supplemental milk supplies 
into the Appalachian and Southeast marketing areas during the months of 
January, February, and July through December--a time period during 
which supplemental milk is needed to meet the demand for Class I milk 
at distributing plants.
    The transportation credit provisions are designed to distinguish 
between producers who regularly supply the Appalachian and Southeast 
markets from producers who are supplemental suppliers (not regular 
suppliers) of these markets. Only milk from producers who are both 
located outside of the marketing area and who are not considered 
``producers'' of the order is eligible to receive transportation 
credits.
    The record reveals that the Appalachian marketing area, and in 
particular, the Southeast marketing area, are chronically unable to 
meet Class I demands. Local milk production relative to demand has 
declined and is expected to continue declining. Consequently, local 
milk production is not always able to fulfill the Class I needs of the 
markets which necessitates the need for supplemental milk from distant 
locations. As local milk production has eroded, the volume of 
supplemental milk needed for fluid use has increased, while at the same 
time the distance from the marketing areas from which the supplies are 
obtained has increased. This development is particularly evident for 
the Southeast marketing area. These combined factors have caused the 
transportation credit balancing fund (TCBF) to be insufficient in 
covering requested transportation

[[Page 12995]]

credit payments. The TCBF will likely not be able to cover future 
requested payments unless the amendments contained in this decision are 
adopted.
    While both marketing areas are able to supply the Class I needs of 
their respective markets during the spring ``flush'' months without the 
need for transportation credits, the record clearly indicates that both 
orders are unable to fully supply their fluid needs with local 
production during the last 6 months of the year. The chronic shortage 
of milk for fluid uses during this period has worsened over time, 
especially in the Southeast marketing area. Evidence shows that the 
trend of declining production relative to demand will result in an 
increased need for supplemental milk supplies and it is likely that 
this trend will continue into the foreseeable future.

Variable Mileage Rate Factor--A Fuel Cost Adjustor

    Based on record evidence, this decision continues to find that the 
mileage rate factor (MRF) used to determine the payment of 
transportation credits should include a fuel cost adjustor as proposed 
in DFA's Proposal 3.
    The original fixed mileage rate for both orders was $0.037 per cwt 
per mile when the transportation credit provisions were first 
established in 1996. The computation of the transportation credit 
payments was based on the total miles supplemental milk was shipped 
from its point of origination to its destination--the receiving pool 
distributing plant. In 1997, several amendments were made to the 
transportation credit provisions of the orders that included a 
reduction of the mileage rate from $0.037 per cwt per mile to the 
current $0.035 per cwt per mile.\2\
---------------------------------------------------------------------------

    \2\ 62 FR 39738.
---------------------------------------------------------------------------

    Additional amendments made in 1997 to the transportation credit 
provisions specified the exclusion of the first 85 miles supplemental 
milk was hauled from farms in determining the total miles shipped. 
Additionally, the 1997 amendments eliminated the use of the orders' 
producer settlement fund as a source of revenue for the payment of 
transportation credits on supplemental milk when the TCBF was unable to 
pay net transportation credit claims. No other amendments have been 
made to the MRF used in the transportation credit provisions since 
1997.
    Proposal 3 adjusts the MRF accordingly with changes in the cost of 
diesel fuel. Specifically, the component factors used in the 
determination of the variable MRF used in the calculation of TCBF 
payments include: a monthly average diesel fuel price; a reference 
diesel fuel price; an average mile-per-gallon truck fuel use; a 
reference hauling cost per loaded mile; and a reference load size.
    The Energy Information Administration (EIA) data for the United 
States and nine U.S. sub-regions are a reliable and reasonable data 
source to be used in the establishment of certain components required 
to determine a variable MRF. The data are representative of diesel fuel 
prices in the Appalachian and Southeast marketing orders and can be 
relied upon as a basis upon which adjustments to the MRF can be made. 
Reliance on EIA data, as it is independent and unbiased, will make 
determination of the MRF objective and uniformly applicable to all 
handlers.
    The proponent's suggested that the use of the Lower Atlantic and 
Gulf Coast EIA regions in the computation of monthly mileage rates for 
the Appalachian and Southeast orders is reasonable. The record reveals 
that the Lower Atlantic and Gulf Coast regions best reflect the 
Appalachian and Southeast marketing areas geographically. Additionally, 
the record reflects that the diesel fuel prices reported for these two 
regions are among the lowest in the country. Hence, it is appropriate 
to utilize these geographically defined data sets in the mileage rate 
calculations.
    The record reveals that fuel prices and other factors impacting 
hauling prices have increased greatly since the establishment of 
transportation credits. Specifically, the record indicates that current 
diesel fuel prices exceed those prices that prevailed when 
transportation credit provisions were first implemented in 1996 and 
amended in 1997. The national average diesel fuel prices in mid-1997 
were reported to be approximately $1.15 to $1.17 per gallon, while the 
national average diesel fuel price in mid-2005 was reported to be $2.20 
to $2.50 per gallon. Additionally, while diesel fuel prices have 
increased, all other costs impacting hauling have also increased. 
According to the record, EIA data indicates that hauling costs ranged 
from $1.75 to $1.80 per loaded mile in 1997 and were about $2.35 per 
loaded mile in January 2006. Establishing a reference diesel fuel price 
for the MRF calculation using the EIA retail diesel fuel prices from 
October to November 2003 data is reasonable. According to the EIA data, 
national average diesel fuel costs during this period demonstrated 
price stability relative to any other time between 1997 and 2005.
    From October to November 2003, national diesel fuel prices 
fluctuated by only $0.001. Specifically, diesel fuel prices averaged 
$1.48125 per gallon in October 2003 and $1.48225 per gallon in November 
2003. Similarly, the record shows that, for both the Lower Atlantic and 
Gulf Coasts, diesel fuel prices ranged from $1.4210 to $1.43075 per 
gallon between October and November 2003. The stability of diesel fuel 
prices during October to November 2003 supports this period as a 
reasonable point in time for use in determining a reference diesel fuel 
price. Therefore, the record supports using $1.42 per gallon as the 
reference diesel price in the MRF calculation.
    Evidence submitted by SMA provides a basis for the determination of 
a reference average hauling cost per loaded mile as a component for 
determining the MRF. The evidence consisted of data randomly selected 
from actual hauler bills paid to cooperatives during October and 
November 2003, and October and November 2005. The record supports the 
use of hauling cost data from October and November 2003 as a basis for 
the calculation of a reference hauling cost in the MRF consistent with 
the time frame used for the reference diesel price.
    The randomly selected hauling bills depict actual origination and 
destination points of the milk hauled, miles traveled, and the rates 
and fuel surcharges per loaded mile for each bill. For the month of 
October 2005, the data indicate that hauling costs ranged from $1.89 to 
$2.70 per loaded mile, with an average cost of $2.48 per loaded mile. 
Data also show that the simple average hauling rate charged per loaded 
mile in the Southeast marketing area was $1.9332 and $1.8913 in October 
and November 2003, respectively, yielding a two-month simple average 
cost of $1.9122 per loaded mile. Therefore, it is reasonable to 
conclude that a reference hauling rate of $1.91 per loaded mile be used 
as a component in the MRF calculations.\3\
---------------------------------------------------------------------------

    \3\ It should be noted that as a result of the Emergency 
Hurricane hearing held for the Appalachian, Florida and Southeast 
marketing orders during the fall of 2004, a reasonable haul rate 
used to determine how handlers would be compensated for the 
transportation costs of extraordinary movements of milk was 
established for a temporary time period. Specifically, a maximum of 
$2.25 per loaded mile hauling rate was established (69 FR 71697).
---------------------------------------------------------------------------

    Another component needed in the calculation of the MRF is the 
average number of miles traveled per gallon of fuel used in 
transporting milk.

[[Page 12996]]

Combination truck fuel economy data, regularly maintained by the United 
States Department of Transportation, indicates that the average miles 
per gallon for a combination truck was 5.2 in 2002; and 5.1 in 2003. 
The record also consists of testimony revealing that the dairy industry 
typically estimates fuel economy at between 5.0-6.0 miles per gallon. 
Therefore, given that 5.5 miles per gallon is the median point, and the 
goal of this decision is to promote efficiencies, the record finds that 
a 5.5-mile per gallon fuel consumption rate is reasonable and should be 
used to compute the MRF.
    The record also supports the use of 48,000 pounds as a reasonable 
reference load size for determining the MRF. Data reveal that a 5,600 
gallon tanker truck at maximum capacity can carry 48,160 pounds of 
milk. Therefore, 48,000 pounds is appropriate for use as the reference 
load size component in calculating the MRF.
    Proposal 3 would calculate the MRF by averaging the four most 
recent weeks of weekly retail on-highway diesel prices for both the 
Lower Atlantic and Gulf Coast, as reported by the EIA. Record evidence 
supports announcing the monthly MRF at the same time as Advanced Class 
Prices, on or before the 23rd of the month. This way, handlers will 
know in advance the rate at which transportation credits will be paid.
    Table 1 shows an example of the calculation of the MRF to be used 
in the transportation credit provisions:
BILLING CODE 3510-22-P
[GRAPHIC] [TIFF OMITTED] TP07MR14.002

BILLING CODE 3510-22-C

[[Page 12997]]

    Concern exists that relying on a variable MRF may result in 
reimbursing the total, rather than a portion, of the hauling costs on 
supplemental milk. In this regard, a variable MRF that is consistent 
and reflective of the original intent of the transportation credit 
provisions of the Appalachian and Southeast orders is necessary. As 
already discussed, approximately 94 to 95 percent of the total 
transportation costs on supplemental milk were covered by the TCBF 
payments for both orders in 1997. However, the record reveals that for 
2005, 53 percent and 42 percent of the total transportation costs for 
the Appalachian and Southeast orders, respectively, were covered by 
TCBF payments.
    Due to a number of unknown variables, it is not possible to 
predetermine the percent of the total transportation costs that will be 
reimbursed by TCBF payments. However, the transportation credit 
provisions already contain precautionary measures for how the MRF is 
calculated. The record indicates that reference diesel fuel prices and 
reference hauling costs per loaded mile are components of the mileage 
rate calculation and are based on 2003 data that are more current than 
the data considered and adopted in 1997 establishing a fixed mileage 
rate. Finally, current transportation credit provisions do not include 
the first 85 miles that supplemental milk is shipped from farms in 
determining the total miles shipped. This feature also plays a part to 
safeguard against excessive transportation credit payments.

Maximum Assessment Rates

    This decision continues to find that the transportation credit 
assessment rate in the Appalachian order should be increased to $0.15 
per cwt on all Class I milk pooled.\4\
---------------------------------------------------------------------------

    \4\ The Southeast order transportation credit assessment rate 
has subsequently been increased in a separate rulemaking proceeding 
(73 FR 14153).
---------------------------------------------------------------------------

    As discussed earlier in this decision, transportation credit 
provisions of the Appalachian and Southeast orders were originally 
established to partially offset the cost of transporting supplemental 
milk supplies into each marketing area to meet fluid milk demands. The 
transportation credit assessment rates have been increased twice in an 
effort to ensure that the TCBF would be sufficient to meet the expected 
claims. When first established for the Appalachian, Southeast, and 
predecessor orders (Orders 5, 7, 11 and 46), the maximum transportation 
credit assessment charged to Class I handlers was $0.06 per cwt for 
each order. The first increase, adopted in 1997, raised the maximum 
assessment by $0.005 per cwt for the Appalachian order and by $0.01 per 
cwt for the Southeast order.\5\ The second increase in the maximum 
assessment rates for both orders became effective in November 2005.\6\ 
The maximum assessment rates for both orders were increased by $0.03 
per cwt, from $0.065 to $0.095 per cwt for the Appalachian order, and 
from $0.070 to $0.10 per cwt for the Southeast order.
---------------------------------------------------------------------------

    \5\ 62 FR 39738.
    \6\ 70 FR 59221.
---------------------------------------------------------------------------

    The hearing record reveals that the Appalachian order was able to 
pay all transportation credit claims for every month since 
implementation through September 2004. For the remainder of 2004, the 
Appalachian Market Administrator began prorating the transportation 
credit payments.
    Specifically, the record shows that for the Appalachian order, 41, 
39, and 43 percent of the transportation credit claims were paid in 
October, November, and December of 2004, respectively. The Appalachian 
order paid 90 percent and 31 percent of the claims in September and 
October of 2005, respectively. Despite the assessment rate increase 
that became effective November 2005, the evidence indicates that only 
58 percent of the transportation credit claims for the Appalachian 
order were paid. Table 2 below illustrates the percent paid from the 
TCBF for the Appalachian order:

             Table 2--Percent of Transportation Credits Paid
                [Percent of Transportation Credits Paid]
------------------------------------------------------------------------
                                                            Appalachian
                                                          marketing area
                                                                FO 5
------------------------------------------------------------------------
Jul 04..................................................           100.0
Aug 04..................................................           100.0
Sep 04..................................................           100.0
Oct 04..................................................            40.6
Nov 04..................................................            39.0
Dec 04..................................................            45.7
------------------------------------------------------------------------
Jul 05..................................................           100.0
Aug 05..................................................           100.0
Sep 05..................................................            91.9
Oct 05..................................................            30.6
Nov 05 *................................................            58.5
------------------------------------------------------------------------
* Effective November 1, 2005, the transportation credit assessment rates
  were increased by 3 cents for the Appalachian order.
Source: Appalachian Market Administrator data.

    The record demonstrates that at a transportation credit mileage 
rate of $0.0035 per cwt per mile, the TCBF assessment for Appalachian 
marketing area has been insufficient to pay all transportation credit 
claims, especially during the time when payment of credits was most 
needed. Preventing the prorating of the transportation credit 
reimbursement payments would have required a higher assessment rate. 
Evidence submitted by the SMA witness showed that the maximum 
transportation credit assessment rate for the Appalachian order would 
have needed to be $0.0889 and $0.0953 per cwt, for 2004 and 2005, 
respectively. Such evidence further supports the need to increase the 
transportation credit assessment rate.
    The adoption of the variable MRF that is calculated and adjusted 
with changes in diesel fuel prices (as presented in Proposal 3), will 
most likely increase the current mileage rate of $0.035 per cwt per 
mile. Relying on EIA data, the record reveals that applying the 
calculated mileage rates to the months of July through December 2005 
would have resulted in transportation credit mileage rates ranging from 
$0.0432 to$ 0.0461 per cwt per mile for both orders. If a 
transportation credit mileage reimbursement rate of $0.046 per cwt per 
mile had been in place, rather than the current rate of $0.035 cents 
per cwt, the maximum transportation credit assessments needed for the 
Appalachian order to ensure that the TCBF covered all claims, would 
have been $0.133 and $0.1415 per cwt for 2004 and 2005, respectively. 
This analysis supports concluding, and this final decision continues to 
find, that increasing the Appalachian order maximum transportation 
credit assessment rate, as contained in Proposal 1, by $0.055, to $0.15 
per cwt is warranted.
    Precautionary measures, which decrease the likelihood that the rate 
of assessments occurs in excess of actual handler claims, are currently 
provided for within the transportation credit provisions of the orders. 
The transportation credit provisions provide the market administrator 
the authority to reduce or waive assessments as necessary to maintain 
sufficient fund balances for the payment of the transportation credits 
requested. Therefore, increasing the maximum transportation credit 
assessment rate will not result in an accumulation of funds beyond what 
is needed to pay transportation credit claims and no additional 
precautionary measures are necessary beyond those currently provided.
    The record supports concluding that local milk production is 
expected to continue declining within both marketing areas and will 
result in an even greater reliance on supplemental milk to meet the 
fluid milk needs of the

[[Page 12998]]

markets. Record evidence shows a constant increase in both the volume 
and the distance, from which supplemental milk supplies are obtained. 
It is reasonable to conclude that future transportation credit claims 
will increase. In this regard, it is important to prevent exhausting 
the TCBF before the payment of claims on the supplemental milk have 
been met. Doing so is consistent with the fundamental purposes of the 
transportation credit provisions. Therefore, increasing the 
transportation credit assessment rate as contained in Proposal 1, will 
better assure that the rate of assessments will keep pace with the 
payments from the TCBF.

Diversion Limit Standard for Supplemental Milk

    The intent of a proposal offered by Dean, published in the hearing 
notice as Proposal 4, seeks to provide a method to limit the amount of 
additional milk being pooled by diversion on the Appalachian and 
Southeast orders. As proposed, Dean's proposal would change the amount 
of transportation credits paid on eligible supplemental milk depending 
on the amount of milk delivered to plants other than pool distributing 
plants--this includes diversions to plants located outside of the 
marketing areas and deliveries to pool supply plants. Simply put, the 
greater the volume of diversions, the lower the amount of 
transportation credits paid. In this regard, Dean's proposal attempts 
to provide an incentive to limit diversions indirectly by reducing 
transportation credits paid on supplemental milk. This decision agrees 
with the need to limit pooling diverted milk on the orders that is 
linked to supplemental milk deliveries to distributing plants. Rather 
than attempt to create disincentives to pooling diverted milk 
indirectly, this decision addresses the issue directly by adopting a 
zero diversion limit standard on supplemental milk deliveries to 
distributing plants that receive transportation credits.
    The record reveals that the volume of supplemental milk needed to 
serve the Class I needs of the marketing areas has grown over time and 
is expected to continue growing. Supplemental milk is representing a 
greater percentage of the Southeast market's total Class I utilization. 
The record reveals that for the months of July through December, 
supplemental milk accounted for 16 percent of total Class I utilization 
in 2004. For 2005, such supplemental milk as a percent of total Class I 
utilization increased to 19 percent.
    In addition, the record indicates that, for the Southeast marketing 
area, the monthly weighted average distance supplemental milk eligible 
to receive transportation credits traveled ranged from 578 to 627 
miles, during July through December 2000. During July through November 
2005, the weighted average distance increased, ranging from 682 to 755 
miles. The amount of supplemental milk receiving transportation credits 
during 2005 was nearly 686 million pounds. In 2000 and 2004 the amounts 
were 363 million and 541 million, respectively. This represents an 89 
percent increase in the amount of supplemental milk receiving 
transportation credits from 2000 to 2005 and a 27 percent increase 
since 2004.
    For the Southeast order, the record reveals that total diversions 
at locations outside of the Appalachian and Southeast marketing areas 
totaled 883.4 million pounds in 2004. Total diversions outside of the 
marketing areas for 2005, not including the months of November and 
December, were 965.6 million pounds, an increase of 9.3 percent from 
2004. Such data for November and December 2005 are not contained in the 
record. For the months of January through June, when transportation 
credits are not available, total diversions outside the marketing areas 
increased almost 18 percent from 2004 to 2005. During the time period 
of July through October, when transportation credits are available, 
such diversions increased over 27 percent from 2004 to 2005. It is 
reasonable, given the trend of the data, that the percentage increase 
from 2004 would have been greater than 27 percent if data had been 
available for the months of November and December 2005.
    It is reasonable to conclude that diversions outside the 
Appalachian and Southeast marketing areas are most likely attributed to 
supplemental milk that is eligible to receive transportation credits. 
The record reveals that for the Southeast marketing area, the 27 
percent increase in the amount of milk receiving transportation credits 
from 2004 through 2005 corresponds with the 27 percent increase of 
diversions outside the marketing areas between 2004 and 2005. It is 
also reasonable to conclude from the record that it is in the interest 
of the handler supplying supplemental milk, and in this case, the 
cooperatives in their capacity as handlers, to maximize the value of 
diversions. Doing so would require pooling the maximum amount of 
diverted milk to the closest location from where supplemental milk was 
sourced. Therefore, relying on data provided by the Market 
Administrator for the Southeast marketing area for the months when 
transportation credits are available, the calculated total maximum 
diverted pounds associated with supplemental milk would have totaled 
over 178 million pounds in 2004, and over 226 million pounds in 2005. 
On the basis of these calculations, an estimate of diversions 
attributed to supplemental milk is 64 percent of total diversions for 
both 2004 and 2005, ranging from 56 percent to 77 percent of the total 
known diversions outside the marketing areas.
    The contribution from diversions associated with supplemental milk 
as compared to total outside diversions is nearly three times greater 
than the contribution of the supplemental milk to Class I utilization. 
As previously discussed, for 2004 and 2005, supplemental milk 
represented about 15.9 and 19 percent, respectively, of total Class I 
utilization. However, estimated diversions attributable to supplemental 
milk represent approximately 64 percent of total diversions. Clearly, 
not only do transportation credits offset the costs of hauling 
supplemental milk to the markets, they also contribute to pooling much 
more milk on the orders through the diversion process.
    For the Appalachian order, data contained in the record is much 
more limited for determining the diversions arising from transportation 
credit eligible supplemental milk. What can be reasonably concluded is 
that the pooling of diverted milk linked to supplemental milk is not 
occurring on nearly the magnitude as is the case for the Southeast 
order. For the Appalachian order, evidence indicates that total 
diversions at locations outside of the Appalachian and Southeast 
marketing areas, for the time period of January through June, increased 
by 64.4 percent from 2004 to 2005. Total diversions from the time 
period of July through November, when transportation credits are 
available, decreased over 20 percent from 2004 to 2005.
    For the Appalachian order, only 2 months of data--October and 
November 2005--is available to estimate the maximum diversions that 
could be associated with supplemental milk. Relying on Appalachian 
Market Administrator data, it is estimated that the maximum diversions 
from transportation credit eligible milk during October and November 
2005 were approximately 34 percent and 28 percent, respectively, of the 
total diversions at locations outside the Appalachian and Southeast 
marketing areas. Supplemental milk on the Appalachian order for October 
and

[[Page 12999]]

November 2005 was approximately 19 percent, and 16 percent, 
respectively, of the total Class I milk pooled.
    Pooling the diversions of this milk differs from pooling diverted 
milk that is part of the regular supply of milk of the marketing area. 
Pooling diverted milk associated with transportation credit eligible 
supplemental milk, allows more milk to be pooled on the order than 
normal. Pooling this milk is different than pooling milk that is part 
of the regular supply for the marketing area. The difference is that 
producers of milk eligible to receive transportation credits are not a 
part of the regular and consistent supply of milk that serves the Class 
I needs of the markets. In fact, transportation credit qualifying 
criteria exclude the milk of producers who are regularly pooled on the 
orders. These producers are, therefore, supplemental suppliers of milk 
to the Appalachian and Southeast marketing areas.
    Pooling diverted milk arising from supplemental milk eligible to 
receive transportation credits not only offsets the intended benefit of 
increasing the supply of milk for fluid uses, it also lowers blend 
prices to those producers who regularly and consistently supply the 
Class I needs of the markets. Higher blend prices provide important 
economic signals--the incentive to: (1) Continue supplying the markets; 
(2) increase local production; and (3) attract the milk of producers to 
become regular and consistent suppliers.
    Lowering blend prices received by producers who regularly supply 
the markets relative to producers who supply supplemental milk sends 
contradictory pricing signals. Lower blend prices do not send the 
proper price signals to local producers to increase local production or 
to continue supplying the Class I needs of the markets. Furthermore, 
lower blend prices fail to create the price signals necessary to 
attract a regular and consistent milk supply.
    The availability of transportation credits on supplemental milk has 
clearly provided a platform to pool additional diverted milk at 
locations distant to the marketing areas. Milk diverted from 
supplemental producers is more likely to be diverted at locations far 
from the marketing areas. The record reveals that suppliers of the 
supplemental milk to the Appalachian and Southeast marketing areas pool 
diverted milk at locations as far away as California and Utah. 
Supplemental milk suppliers benefit in three ways: (1) Receiving 
reimbursement for costs of transporting milk to the deficit markets; 
(2) receiving cost savings from the diverted milk not transported to 
the marketing areas; and (3) receiving higher blend prices on the 
diverted milk that would have otherwise been pooled on a different 
order with a typically lower blend price.
    The pooling of milk that is not part of the regular and consistent 
supply of milk which serves the Class I needs of the market is 
contradictory to the intent of an order's pooling standards and 
provisions. The pooling standards of the orders serve to identify the 
milk of producers who regularly and consistently serve the Class I 
needs of the marketing areas. Pooling milk that is available but not 
immediately needed for Class I use is provided through diversion limit 
standards. Diversion limit standards provide the criteria for 
determining how much additional milk can be pooled on the orders. 
Diverted milk in this context reflects the legitimate reserve supply of 
milk available to serve the Class I needs of the marketing areas and, 
therefore, receives the blend price of the orders.
    Since implementation of Federal milk order reform, there have been 
many formal rulemakings that have amended orders to more properly 
identify the milk of producers which should and should not be pooled on 
the orders. The milk of producers who are the consistent and reliable 
suppliers serving the Class I needs of the market should be pooled even 
when it is not immediately needed for Class I use. However, this 
foundational principle of orderly marketing in milk marketing orders is 
essentially disregarded for 6 months each year when the orders allow 
the pooling of diverted milk from producers who are specifically 
identified as not being ``producers'' under either of the orders.
    The lowering of blend prices by pooling such diverted milk is an 
unintended outcome not foreseen when the transportation credit 
provisions of the Appalachian and Southeast orders were implemented and 
amended. As the blend prices are reduced so is the incentive for local 
milk production. The markets become less capable of supplying their own 
Class I needs and supplemental milk supplies needed to meet Class I 
needs are not likely to be supplied without reliance on additional 
transportation credits.
    The pooling of diverted milk associated with supplemental milk 
would seem to offer substantial benefits to cooperative suppliers. The 
record reveals that when transportation credits were first implemented, 
well over 90 percent of hauling costs were offset. The record further 
reveals that more recent conditions suggest that only about 45 percent 
is being reimbursed. This clearly represents a burden borne by the 
cooperatives supplying supplemental milk.
    Pooling diverted milk at locations far from the marketing areas 
based on supplemental milk eligible to receive transportation credits 
would provide additional revenue to help offset hauling costs not 
covered by the current transportation credit assessment rates. This 
diverted milk receives the blend price of the order where it is pooled. 
The benefit is that the blend price received on such diverted milk, on 
either the Appalachian or Southeast order, is historically higher than 
the price the milk would otherwise receive.
    As presented above, this final decision adopts a variable mileage 
rate factor that will reimburse hauling costs at a level more 
reflective of actual costs, in addition to a significantly higher 
transportation credit assessment. To the extent that it is necessary to 
offset the higher costs of transporting supplemental milk, the adoption 
of a variable MRF and the increase in the transportation credit 
assessment rates should significantly reduce or eliminate the need to 
seek generating revenue to offset hauling costs at the expense of the 
producers who are regularly and consistently supplying milk to meet the 
Class I needs of the two marketing areas.
    LOL took exception with the proposed zero diversion limit standard 
arguing that it would shift the burden of balancing the southeastern 
markets' seasonal milk needs onto the markets' supplemental milk 
suppliers. LOL also argued that USDA should provide an analysis to 
verify that adoption of this standard would, in fact, increase the 
orders' blend prices.
    The transportation credit provisions of the Southeast and 
Appalachian orders are designed to attract supplemental milk supplies 
for Class I use when the orders' regular supplies cannot meet demand. 
Supplemental suppliers choose to provide this service and are 
subsequently compensated by receiving the orders' blend price and the 
ability to receive a transportation credit to reimburse them for part 
of the hauling cost. If, at any time, a supplemental supplier does not 
believe they are adequately compensated for their service, they may 
cease providing supplemental supplies. This decision continues to find 
that allowing milk diversions on supplemental milk supplies receiving a 
transportation credit lowers the TCBF monies available to supplemental 
milk loads that are actually delivered to the southeastern markets, and 
ultimately decreases the blend price paid to the orders' producers. A 
quantitative assessment is

[[Page 13000]]

not necessary to conclude that the pooling of this diverted milk on the 
orders is disorderly and should not occur.

Rulings on Proposed Findings and Conclusions

    Briefs, proposed findings, and conclusions were filed on behalf of 
certain interested parties. These briefs, proposed findings, 
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 
claims 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 Appalachian and Southeast 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.
    The following findings are hereby made with respect to the 
aforesaid marketing agreements and orders:
    (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 with respect to the price of feeds, 
available supplies of feeds, and other economic conditions that affect 
market supply and demand for milk in the marketing area, and the 
minimum prices specified in the tentative marketing agreements and the 
orders, as hereby proposed to be amended, are such prices as will 
reflect the aforesaid factors, ensure a sufficient quantity of pure and 
wholesome milk, and be in the public interest; and
    (c) The tentative marketing agreements and the orders, as hereby 
proposed to be amended, will regulate the handling of milk in the same 
manner as, and will be applicable only to persons in the respective 
classes of industrial and commercial activity specified in, the 
marketing agreements upon which a hearing have been held.

Rulings on Exceptions

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

Marketing Agreement and Order

    Annexed hereto and made a part hereof are two documents--a 
Marketing Agreement regulating the handling of milk and an Order 
amending the order regulating the handling of milk in the Appalachian 
and Southeast marketing areas, that was approved by producers and 
published in the Federal Register on October 25, 2006 (71 FR 62377). 
These documents have decided upon as the detailed and appropriate means 
of effectuating the foregoing conclusions.
    It is hereby ordered that this entire decision and the Marketing 
Agreement annexed hereto be published in the Federal Register.

Determination of Producer Approval and Representative Period

    The month of July 2013 is hereby determined to be the 
representative period for the purpose of ascertaining whether the 
issuance of the order, as amended and as hereby proposed to be amended, 
regulating the handling of milk in the Appalachian and Southeast 
marketing areas is approved or favored by producers, as defined under 
the terms of the order as hereby proposed to be amended, who during 
such representative period were engaged in the production of milk for 
sale within the aforesaid marketing area.

List of Subjects in 7 CFR Parts 1005 and 1007

    Milk Marketing Orders.

Order Amending the Order Regulating the Handling of Milk in the 
Appalachian and Southeast Marketing Areas

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

Findings and Determinations

    The findings and determinations hereinafter set forth supplement 
those that were made when the orders were first issued and when they 
were amended. The previous findings and determinations are hereby 
ratified and confirmed, except where they may conflict with those set 
forth herein.
    (a) Findings. A public hearing was held upon certain proposed 
amendments to the tentative marketing agreements and to the orders 
regulating the handling of milk in the Appalachian, Florida and 
Southeast 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 areas. The 
minimum prices specified in the orders 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 are 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 Appalachian and Southeast marketing 
areas shall be in conformity to and in compliance with the terms and 
conditions of the orders, as amended, and as hereby amended, as 
follows:
    For the reasons set forth in the preamble, 7 CFR parts 1005 and 
1007 are proposed to be amended as follows:

0
1. The authority citation for 7 CFR parts 1005 and 1007 continues to 
read as follows:

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

PART 1005--MILK IN THE APPALACHIAN MARKETING AREA

0
2. Section 1005.13 is amended by revising paragraphs (d)(3) and (d)(4) 
to read as follows:


Sec.  1005.13  Producer milk.

* * * * *
    (d) * * *
    (3) The total quantity of milk so diverted during the month by a

[[Page 13001]]

cooperative association shall not exceed 25 percent during the months 
of July through November, January, and February, and 35 percent during 
the months of December and March through June, of the producer milk 
that the cooperative association caused to be delivered to, and 
physically received at, pool plants during the month, excluding the 
total pounds of bulk milk received directly from producers meeting the 
conditions as described in Sec.  1005.82(c)(2)(ii) and (iii), and for 
which a transportation credit is requested;
    (4) The operator of a pool plant that is not a cooperative 
association may divert any milk that is not under the control of a 
cooperative association that diverts milk during the month pursuant to 
paragraph (d) of this section. The total quantity of milk so diverted 
during the month shall not exceed 25 percent during the months of July 
through November, January, and February, and 35 percent during the 
months of December and March through June, of the producer milk 
physically received at such plant (or such unit of plants in the case 
of plants that pool as a unit pursuant to Sec.  1005.7(d) during the 
month, excluding the quantity of producer milk received from a handler 
described in Sec.  1000.9(c) of this chapter and excluding the total 
pounds of bulk milk received directly from producers meeting the 
conditions as described in Sec.  Sec.  1005.82(c)(2)(ii) and (iii), and 
for which a transportation credit is requested;
* * * * *
0
3. Section 1005.81 is amended by revising paragraphs (a) and (b) to 
read as follows:


Sec.  1005.81  Payments to the transportation credit balancing fund.

    (a) On or before the 12th day after the end of the month (except as 
provided in Sec.  1000.90 of this chapter), each handler operating a 
pool plant and each handler specified in Sec.  1000.9(c) shall pay to 
the market administrator a transportation credit balancing fund 
assessment determined by multiplying the pounds of Class I producer 
milk assigned pursuant to Sec.  1005.44 by $0.15 per hundredweight or 
such lesser amount as the market administrator deems necessary to 
maintain a balance in the fund equal to the total transportation 
credits disbursed during the prior June-February period. In the event 
that during any month of the June-February period the fund balance is 
insufficient to cover the amount of credits that are due, the 
assessment should be based upon the amount of credits that would had 
been disbursed had the fund balance been sufficient.
    (b) The market administrator shall announce publicly on or before 
the 23rd day of the month (except as provided in Sec.  1000.90) the 
assessment pursuant to paragraph (a) of this section for the following 
month.
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4. Section 1005.82 is amended by revising paragraphs (d)(2)(ii) and 
(d)(3)(iv) to read as follows:


Sec.  1005.82  Payments from the transportation credit balancing fund.

* * * * *
    (d) * * *
    (2) * * *
    (ii) Multiply the number of miles so determined by the mileage rate 
for the month computed pursuant to Sec.  1005.83(a)(6);
* * * * *
    (3) * * *
    (iv) Multiply the remaining miles so computed by the mileage rate 
for the month computed pursuant to Sec.  1005.83(a)(6);
* * * * *
0
5. Add Section 1005.83 to read as follows:


Sec.  1005.83  Mileage Rate for the Transportation Credit Balancing 
Fund.

    (a) The market administrator shall compute a mileage rate each 
month as follows:
    (1) Compute the simple average rounded to three decimal places for 
the most recent four (4) weeks of the Diesel Price per Gallon as 
reported by the Energy Information Administration of the United States 
Department of Energy for the Lower Atlantic and Gulf Coast Districts 
combined.
    (2) From the result in paragraph (a)(1) in this section subtract 
$1.42 per gallon;
    (3) Divide the result in paragraph (a)(2) of this section by 5.5, 
and round down to three decimal places to compute the fuel cost 
adjustment factor;
    (4) Add the result in paragraph (a)(3) of this section to $1.91;
    (5) Divide the result in paragraph (a)(4) of this section by 480;
    (6) Round the result in paragraph (a)(5) of this section down to 
five decimal places to compute the mileage rate.
    (b) The market administrator shall announce publicly on or before 
the 23rd day of the month (except as provided in Sec.  1000.90 of this 
chapter) the mileage rate pursuant to paragraph (a) of this section for 
the following month.

PART 1007--MILK IN THE SOUTHEAST MARKETING AREA

0
6. Section 1007.13 is amended by revising paragraphs (d)(3) and (d)(4) 
to read as follows:


Sec.  1007.13  Producer milk.

* * * * *
    (d) * * *
    (3) The total quantity of milk diverted during the month by a 
cooperative association shall not exceed 25 percent during the months 
of July through November, January, and February, and 35 percent during 
the months of December and March through June, of the producer milk 
that the cooperative association caused to be delivered to, and 
physically received at, pool plants during the month, excluding the 
total pounds of bulk milk received directly from producers meeting the 
conditions as described in section 1007.82(c)(2)(ii) and (iii), and for 
which a transportation credit is requested;
    (4) The operator of a pool plant that is not a cooperative 
association may divert any milk that is not under the control of a 
cooperative association that diverts milk during the month pursuant to 
paragraph (d) of this section. The total quantity of milk so diverted 
during the month shall not exceed 25 percent during the months of July 
through November, January and February, and 35 percent during the 
months of December and March through June of the producer milk 
physically received at such plant (or such unit of plants in the case 
of plants that pool as a unit pursuant to Sec.  1007.7(e)) during the 
month, excluding the quantity of producer milk received from a handler 
described in Sec.  1000.9(c) of this chapter, excluding the total 
pounds of bulk milk received directly from producers meeting the 
conditions as described in section 1007.82(c)(2)(ii) and (iii), and for 
which a transportation credit is requested.
* * * * *
0
7. Section 1007.81 is amended by revising paragraph (b) to read as 
follows:


Sec.  1007.81  Payments to the transportation credit balancing fund.

* * * * *
    (b) The market administrator shall announce publicly on or before 
the 23rd day of the month (except as provided in Sec.  1000.90 of this 
chapter) the assessment pursuant to paragraph (a) of this section for 
the following month.
0
8. Section 1007.82 is amended by revising paragraphs (d)(2)(ii) and 
(d)(3)(iv) to read as follows:

[[Page 13002]]

Sec.  1007.82  Payments from the transportation credit balancing fund.

* * * * *
    (d) * * *
    (2) * * *
    (ii) Multiply the number of miles so determined by the mileage rate 
for the month computed pursuant to Sec.  1007.83(a)(6); * * * * *
    (3) * * *
    (iv) Multiply the remaining miles so computed by the mileage rate 
for the month computed pursuant to Sec.  1007.83(a)(6);
* * * * *
0
9. Add a new Section 1007.83 to read as follows:


Sec.  1007.83  Mileage Rate for the Transportation Credit Balancing 
Fund.

    (a) The market administrator shall compute the mileage rate each 
month as follows:
    (1) Compute the simple average rounded to three decimal places for 
the most recent 4 weeks of the Diesel Price per Gallon as reported by 
the Energy Information Administration of the United States Department 
of Energy for the Lower Atlantic and Gulf Coast Districts combined.
    (2) From the result in paragraph (a)(1) in this section subtract 
$1.42 per gallon;
    (3) Divide the result in paragraph (a)(2) of this section by 5.5, 
and round down to three decimal places to compute the fuel cost 
adjustment factor;
    (4) Add the result in paragraph (a)(3) of this section to $1.91;
    (5) Divide the result in paragraph (a)(4) of this section by 480;
    (6) Round the result in paragraph (a)(5) of this section down to 
five decimal places to compute the MRF.
    (b) The market administrator shall announce publicly on or before 
the 23rd day of the month (except as provided in Sec.  1000.90 of this 
chapter) the mileage rate pursuant to paragraph (a) of this section for 
the following month.

    [This marketing agreement 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 ----\7\ all inclusive, of the order 
regulating the handling of milk in the ------\8\ marketing area (7 CFR 
Part ----\9\) which is annexed hereto; and
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    \7\ First and last section of order.
    \8\ Name of order.
    \9\ Appropriate Part number.
---------------------------------------------------------------------------

    II. The following provisions: Sec.  ----\10\ Record of milk handled 
and authorization to correct typographical errors.
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    \10\ Next consecutive section number.
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    (a) Record of milk handled. The undersigned certifies that he/she 
handled during the month of ------,\11\ ------ hundredweight of milk 
covered by this marketing agreement.
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    \11\ Appropriate representative period for the order.
---------------------------------------------------------------------------

    (b) Authorization to correct typographical errors. The undersigned 
hereby authorizes the Deputy Administrator, or Acting Deputy 
Administrator, Dairy Programs, Agricultural Marketing Service, to 
correct any typographical errors which may have been made in this 
marketing agreement.
    Effective date. This marketing agreement shall become effective 
upon the execution of a counterpart hereof by the Department in 
accordance with Sec. 900.14(a) of the aforesaid rules of practice and 
procedure.
    In Witness Whereof, The contracting handlers, acting under the 
provisions of the Act, for the purposes and subject to the limitations 
herein contained and not otherwise, have hereunto set their respective 
hands and seals.

Signature

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

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

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

(Seal)

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

    Dated: February 25, 2014.
Rex A. Barnes,
Associate Administrator.
[FR Doc. 2014-04693 Filed 3-6-14; 8:45 am]
BILLING CODE 3410-02-P