[Federal Register Volume 82, Number 29 (Tuesday, February 14, 2017)]
[Proposed Rules]
[Pages 10634-10688]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-02732]



[[Page 10633]]

Vol. 82

Tuesday,

No. 29

February 14, 2017

Part II





Department of Agriculture





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Agricultural Marketing Service





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7 CFR Part 1051





Milk in California; Recommended Decision and Opportunity To File 
Written Exceptions on Proposal To Establish a Federal Milk Marketing 
Order; Proposed Rule

  Federal Register / Vol. 82 , No. 29 / Tuesday, February 14, 2017 / 
Proposed Rules  

[[Page 10634]]


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DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Part 1051

[Doc. No. AO-15-0071; AMS-DA-14-0095]


Milk in California; Recommended Decision and Opportunity To File 
Written Exceptions on Proposal To Establish a Federal Milk Marketing 
Order

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Proposed rule and opportunity to file exceptions.

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SUMMARY: This Recommended Decision proposes the issuance of a Federal 
Milk Marketing Order (FMMO) regulating the handling of milk in 
California. The proposed FMMO incorporates the entire state of 
California and would adopt the same dairy product classification and 
pricing provisions used throughout the current FMMO system. The 
proposed FMMO provides for the recognition of producer quota as 
administered by the California Department of Food and Agriculture. This 
proposed rule also announces the Agricultural Marketing Service's (AMS) 
intent to request approval by the Office of Management and Budget (OMB) 
of new information collection requirements to implement the order.

DATES: Written exceptions to this proposed rule must be submitted on or 
before May 15, 2017. Pursuant to the Paperwork Reduction Act, comments 
on the information collection burden must be received by April 17, 
2017.
    AMS will conduct a public meeting on February 22, 2017, to review 
the rulemaking process, explain and answer questions relating to how 
the proposed California FMMO would operate, and inform the public how 
they can submit public comments for consideration.

ADDRESSES: Comments should be submitted at the Federal eRulemaking 
portal: http://www.regulations.gov. Comments may also be filed with the 
Hearing Clerk, U.S. Department of Agriculture, Room 1031-S, Washington, 
DC 20250-9200, Facsimile number (202) 720-9976. All comments should 
reference the docket number and the date and page number of this issue 
of the Federal Register. All comments will be made available for public 
inspection in the Office of the Hearing Clerk during regular business 
hours, or can be viewed at: http://www.regulations.gov.
    The public meeting will convene at 9:00 a.m. on Wednesday, February 
22, 2017, at the Clovis Veterans Memorial District Building, 808 Fourth 
Street, Clovis, California 93612. Additional meeting information can be 
found at www.ams.usda.gov/caorder.

FOR FURTHER INFORMATION CONTACT: Erin Taylor, Acting Director, Order 
Formulation and Enforcement Division, USDA/AMS/Dairy Program, STOP 
0231, Room 2969-S, 1400 Independence Ave. SW., Washington, DC 20250-
0231, (202) 720-7311, email address: [email protected].

SUPPLEMENTARY INFORMATION: This recommended decision finds that a FMMO 
for California would provide more orderly marketing conditions in the 
marketing area, and therefore promulgation of a California FMMO is 
warranted. The record is replete with discussion from most parties on 
whether disorderly marketing conditions exist, or are even needed, to 
warrant promulgation of a California FMMO. FMMOs are authorized by the 
Agricultural Marketing Agreement Act of 1937, as amended (7 U.S.C. 601-
674 and 7253) (AMAA). The declared policy of the AMAA makes no mention 
of ``disorder,'' and this recommended decision finds that disorderly 
marketing conditions are not a requirement for an order to be 
promulgated. The standard for FMMO promulgation is to ``. . . establish 
and maintain such orderly marketing conditions . . .,'' (7 U.S.C. 
602(4) and this recommended decision finds that the California FMMO 
recommended decision meets that standard.
    AMS has considered all record evidence presented at the hearing, as 
well as the arguments and proposed findings submitted in post-hearing 
briefs, to formulate this Recommended Decision. The package of 
provisions recommended in this decision reflect California marketing 
conditions, while still adhering to fundamental FMMO principles that 
have historically helped to maintain orderly marketing conditions, 
ensured a sufficient supply of pure and wholesome milk, and been in the 
public interest.
    A FMMO is a regulation issued by the Secretary of Agriculture that 
places certain requirements on the handling of milk in the area it 
covers. Each FMMO is established under the authority of the AMAA. A 
FMMO requires handlers of milk for a marketing area pay minimum class 
prices according to how the milk is used. These prices are established 
under each FMMO after a public hearing where evidence is received on 
the supply and demand conditions for milk in the market. A FMMO 
requires that payments for milk be pooled and paid to individual 
farmers or cooperative associations of farmers on the basis of a 
uniform or average price. Thus, all eligible dairy farmers (producers) 
share in the marketwide use-values of milk by regulated handlers.
    This decision recommends the establishment of a FMMO to regulate 
the handling of milk in California. Where appropriate, the recommended 
California FMMO proposes adoption of uniform provisions that are 
contained in the 10 current FMMOs. These uniform provisions include, 
but are not limited to, product classification, end-product price 
formulas, Class I differential structure, and producer-handler 
definition.\1\ This decision recognizes the unique market structure of 
the California dairy industry through tailored performance-based 
standards to determine eligibility for pool participation.
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    \1\ References to Class I, Class II, Class III and Class IV 
refer to products classified in those classes based on uniform FMMO 
provisions.
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    As in all current FMMOs, California handlers regulated by a 
California FMMO would be responsible for accurate reporting of all milk 
movements and uses, and would be required to make timely payments to 
producers. The order would be administered by the United States 
Department of Agriculture (USDA) through a Market Administrator, who 
would provide essential marketing services, such as laboratory testing, 
account verification, information collection and publication, and 
producer payment enforcement.
    A unique feature of the proposed order is a provision for the 
recognition of the California quota value specified in the California 
quota program currently administered by the California Department of 
Food and Agriculture (CDFA). This decision finds that the California 
quota program should remain a function of CDFA in whatever manner CDFA 
deems appropriate. Should CDFA continue to use producer monies to fund 
the quota program, this decision finds that the proper recognition of 
quota values within a California FMMO, as provided for in the 
Agriculture Act of 2014 (2014 Farm Bill) (Pub. L. 113-79, sec. 
1410(d)), is to permit an authorized deduction from payment to 
producers, in an amount determined and announced by CDFA.
    In conjunction with this Recommended Decision, AMS conducted a 
Regulatory Economic Impact Analysis to determine the potential impact 
of regulating California milk handlers under a FMMO on the milk supply, 
product demand and

[[Page 10635]]

prices, and milk allocation in California and throughout the United 
States. As part of the analysis, a regional econometric model was used 
to project deviations from the USDA Agricultural Baseline Projections 
to 2025 \2\ under the provisions of the proposed order. The full text 
of the Regulatory Economic Impact Analysis Report and accompanying 
documentation may be accessed at www.regulations.gov or 
www.ams.usda.gov/caorder.
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    \2\ U.S. Department of Agriculture, Office of the Chief 
Economist, World Agricultural Outlook Board, Interagency 
Agricultural Projections Committee, 2016. Long-term Projections 
Report OCE-2016-1.
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    Prior documents in this proceeding:
    Notice of Hearing: Issued July 27, 2015; published August 6, 2015 
(80 FR 47210);
    Notice To Reconvene Hearing: Issued September 25, 2015; published 
September 30, 2015 (80 FR 58636).
    This administrative action is governed by the provisions of 
Sections 556 and 557 of Title 5 of the United States Code and is 
therefore excluded from the requirements of Executive Order 12866.
    The provisions of the marketing agreement and order 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 order would not preempt any state or local laws, regulations, 
or policies, unless they present an irreconcilable conflict with this 
rule.
    AMS is committed to complying with the E-Government Act, to promote 
the use of the Internet and other information technologies to provide 
increased opportunities for citizen access to Government information 
and services, and for other purposes.
    The AMAA provides that administrative proceedings must be exhausted 
before parties may file suit in court. Under 7 U.S.C. 608c(15)(A) of 
the AMAA, any handler subject to an order may request modification or 
exemption from such order by filing with USDA a petition stating that 
the order, any provision of the order, or any obligation imposed in 
connection with the order is not in accordance with the law. A handler 
is afforded the opportunity for a hearing on the petition. After a 
hearing, USDA would rule on the petition. The AMAA 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.

Civil Rights Impact Analysis

    AMS has reviewed this rule in accordance with Departmental 
Regulation 4300-4--Civil Rights Impact Analysis, to identify and 
address potential impacts the proposal might have on any protected 
groups of people. After a careful review of the rule's intent and 
provisions, AMS has determined that this rule would not limit or reduce 
the ability of individuals in any protected classes to participate in 
the proposed FMMO, or to enjoy the anticipated benefits of the proposed 
program. Any impacts on dairy farmers and processors arising from 
implementation of this proposed rule are not expected to be 
disproportionate for members of any protected group on a prohibited 
basis.

Regulatory Flexibility Analysis

    Pursuant to the requirements set forth in the Regulatory 
Flexibility Act (RFA) (5 U.S.C. 601-612), AMS has considered the 
economic impact of this action on small entities. Accordingly, AMS has 
prepared this initial regulatory flexibility analysis.
    The purpose of the RFA is to fit regulatory actions to the scale of 
business subject to such actions so that small businesses will not be 
unduly or disproportionately burdened. Small dairy farm businesses have 
been defined by the Small Business Administration (SBA) (13 CFR 
121.601) as those businesses having annual gross receipts of less than 
$750,000. SBA's definition of small agricultural service firms, which 
includes handlers that would be regulated under the proposed California 
FMMO, varies depending on the product manufactured. Small fluid milk 
and ice cream manufacturers are defined as having 1,000 or fewer 
employees. Small butter and dry or condensed dairy product 
manufacturers are defined as having 750 or fewer employees. Small 
cheese manufacturers are defined as having 1,250 or fewer employees.
    For the purpose of determining which California dairy farms are 
``small businesses,'' the $750,000 per year criterion was used to 
establish a production guideline that equates to approximately 315,000 
pounds of milk per month. Although this guideline does not factor in 
additional monies that may be received by dairy farmers, it is a 
standard encompassing most ``small'' dairy farms. For the purpose of 
determining a handler's size, if the plant is part of a larger company 
operating multiple plants that collectively exceed the employee limit 
for that type of manufacturing, the plant is considered a large 
business even if the local plant has fewer than the defined number of 
employees.
    Interested persons were invited to present evidence at the hearing 
on the probable regulatory and informational impact of the proposed 
California FMMO on small businesses. Specific evidence on the number of 
large and small dairy farms in California (above and below the 
threshold of $750,000 in annual sales) was not presented at the 
hearing. However, data compiled by CDFA\3\ suggests that between 5 and 
15 percent of California dairy farms would be considered small business 
entities. No comparable data for dairy product manufacturers was 
available.
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    \3\ CDFA, California Dairy Review, Volume 19, Issue 9, September 
2015.
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    Record evidence indicates that implementing the proposed California 
FMMO would not impose a disproportionate burden on small businesses. 
Currently, the California dairy industry is regulated by a California 
State Order (CSO) that is administered and enforced by CDFA. While the 
CSO and FMMOs have differences that will be discussed later in this 
decision, they both maintain similar classified pricing and marketwide 
pooling functions. Therefore, it is not expected that the proposed 
regulatory change will have a significant impact on California small 
businesses.
    The record evidence does indicate that while the program is likely 
to impose some costs on the regulated parties, those costs would be 
outweighed by the benefits expected to accrue to the California dairy 
industry. AMS prepared a Regulatory Economic Impact Analysis to study 
the possible impacts of the proposed California FMMO. The analysis may 
be viewed in conjunction with this recommended decision (Docket No. 
AMS-DA-14-0095) at www.regulations.gov.

California Dairy Market Background

    The record shows that the California dairy industry accounts for 
approximately 20 percent of the nation's milk supply. While its 39 
million residents are concentrated in the state's coastal areas, the 
majority of California's dairy farms are located in the interior 
valleys, frequently at some distance from milk processing plants and 
consumer population centers.
    CDFA has defined and established distinct regulations for Northern 
and Southern California dairy regions.\4\

[[Page 10636]]

According to data published by CDFA,\5\ well over 90 percent of the 
state's approximately 41 billion pounds of milk for 2015 was produced 
in the Northern California region. The five leading milk production 
counties in 2015 were Tulare, Merced, Kings, Stanislaus, and Kern, 
together accounting for approximately 73 percent of the state's milk.
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    \4\ CDFA, Stabilization and Marketing Plan for Market Milk, as 
Amended, for the Northern California Marketing Area.
    \5\ CDFA, California Dairy Statistics Annual 2015.
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    According to CDFA, there were 1,438 dairy farms in California in 
2015. Of those, 1,338 were located in Northern California, and 100 were 
in Southern California. The statewide average number of cows per dairy 
was 1,215; in Northern California, the average herd size was 1,235 
cows, and in Southern California, 952 cows. Average milk production for 
the state's 1.75 million cows was 23,382 pounds in 2015.
    According to record evidence, 132 handlers reported milk receipts 
to CDFA for at least one month during 2015. A CDFA February 2015 list 
of California dairy product processing plants by type of product 
produced \6\ shows that 35 California plants processed Class 1 
products; 75 plants processed Class 2 and 3 products; 18 plants 
processed Class 4a products; and 64 plants processed Class 4b 
products.\7\ Some plants processed products in more than one class.
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    \6\ CDFA, Milk and Dairy Food Safety Branch (MDFS). https://www.cdfa.ca.gov/ahfss/Milk_and_Dairy_Food_Safety/index.html#Plants.
    \7\ References to Class 1, Class 2, Class 3, Class 4a and Class 
4b refer to products classified in those categories based on the 
CSO.
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    CDFA reported \8\ that approximately 99 percent of California's 
2015 milk production was market grade (Grade A), and the rest was 
manufacturing grade (Grade B). Thirteen percent of the milk pooled 
under the CSO was utilized by California processors as Class 1 (fluid 
milk). Nine percent was utilized for Classes 2 and 3 (soft and frozen 
dairy products), 32 percent was utilized for Class 4a (butter and dried 
milk powders), and 46 percent was utilized for Class 4b (cheese).
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    \8\ CDFA, California Dairy Statistics Annual 2015.
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    According to CDFA, total Class 1 sales in California were 
approximately 662 million gallons in 2015. Record evidence shows that 
annual California Class 1 sales outside the state averaged 22 million 
gallons for the five years preceding 2015.
    The record shows that for the five-year period from 2010 through 
2014, an average of 230 million pounds of California bulk milk products 
were transferred to out-of-state plants for processing each year. 
During the same period, an average of 633 million pounds of milk from 
outside the state was received and reported by California pool plants 
each year.

Impact on Small Businesses

    This rule proposes to establish a FMMO in California similar to the 
10 existing FMMOs in the national system. The California dairy industry 
is currently regulated under the CSO, which is similar to the 
recommended FMMO in most respects. California handlers currently report 
milk receipts and utilization to CDFA, which calculates handler prices 
based on component values derived from finished product sales surveys. 
Likewise, FMMO handlers report milk receipts and utilization to the 
Market Administrators, who calculate handlers' pool obligations 
according to price formulas that incorporate component prices based on 
end product sales values. Under both programs, the value of handlers' 
milk is pooled, and pool revenues are shared by all the pooled 
producers. Thus, transitioning to the FMMO is expected to have only a 
minimal impact on the reporting and regulatory responsibilities for 
large or small handlers, who are already complying with similar CSO 
regulations.

Pricing

    Under the recommended California FMMO, uniform FMMO end-product 
price formulas would replace the CDFA price formulas currently used to 
calculate handler milk prices. FMMO end-product price formulas 
incorporate component prices derived from national end-product sales 
surveys conducted by AMS. Use of price formulas based on national 
product sales would permit California farmers to receive prices for 
pooled milk reflective of the national market for commodity products 
for which their milk is utilized. Consistent with the current FMMOs, 
California FMMO Class I prices would be computed using the higher of 
the Class III or IV advance prices announced the previous month, and 
would be adjusted by the Class I differential for the county where the 
plant is located.\9\
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    \9\ FMMOs have four classifications of milk: Class I--fluid milk 
products; Class II--fluid cream products, soft ``spoonable'' 
cheeses, ice cream, and yogurt; Class III--hard cheeses and 
spreadable cheese such as cream cheese; Class IV--butter and dried 
milk products.
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    Regulated minimum prices, especially for milk used in cheese 
manufacturing, are likely to be higher than what handlers would pay 
under the CSO. However, pooling regulations under the proposed FMMO 
would allow handlers to elect not to pool milk used in manufacturing. 
This option would be available to both large and small manufacturing 
handlers.
    Dairy farmers whose milk is pooled on the order would receive a pro 
rata share of the pool revenues through the California FMMO uniform 
blend price. The FMMO would not provide for the quota and non-quota 
milk pricing tiers found under the CSO. Under the recommended FMMO, 
regulated handlers would be allowed to deduct monies, in an amount 
determined and announced by CDFA, from blend prices paid to California 
dairy farmers for pooled milk and send those monies to CDFA to 
administer the quota program.
    These changes are expected to affect producers and handlers of all 
sizes, but are not expected to be disproportionate for small entities.

Producer-Handlers

    The record shows that there are four producer-handlers \10\ in 
California whose Class 1 milk production is all or partially exempt 
from CSO pricing and pooling by virtue of their ``exempt quota'' 
holdings, representing approximately 21 million pounds of milk each 
month. It is likely that these four entities would become fully 
regulated under the recommended FMMO and accountable to the marketwide 
pool for all of their Class I sales in the marketing area. By 
accounting to the pool for all their Class I sales in the marketing 
area, the value of the marketwide pool is expected to increase, 
benefiting most other large and small producers. The recommended 
California FMMO makes no provision for exempting large producer-
handlers from pricing and pooling regulations under the order.
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    \10\ A producer-handler is a dairy farmer who processes and 
distributes their own-farm milk into dairy products.
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    The evidentiary record shows that several smaller California 
producer-handlers, whose production volume exceeds the threshold to 
receive an exemption from the CSO's pricing and pooling regulations, 
would likely qualify as producer-handlers under the recommended 
FMMO.\11\
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    \11\ The CSO exempts producer-handlers with sales averaging less 
than 500 gallons of milk per day on an annual basis and who 
distribute 95 percent of their production to retail or wholesale 
outlets.
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Interstate Commerce

    The evidentiary record indicates that milk in interstate commerce, 
which the CSO does not have authority to regulate, would be regulated 
under the FMMO. Currently, California handlers who purchase milk 
produced outside the state do not account to the CSO marketwide pool 
for that milk. Record

[[Page 10637]]

evidence shows approximately 425 million pounds of milk from outside 
the state was processed into Class 1 products at California processing 
plants during 2014.
    Under the recommended FMMO, all Class I milk processed and 
distributed in the marketing area would be subject to FMMO pricing and 
pooling regulations, regardless of its origin. Revenues from Class 1 
sales not currently regulated would accrue to the California FMMO pool 
and would be shared with all producers who are pooled on the California 
FMMO. If California handlers elect to continue processing out-of-state 
milk into Class I products under the FMMO, they would be required to 
pay the order's classified minimum price for that milk. Those 
additional revenues would be pooled and would benefit large and small 
producers who participate in the pool. Both large and small out-of-
state producers who ship milk to pool plants in California would 
receive the California FMMO uniform blend price for their milk.

Classification and Fortification

    Dairy product classification under the CSO and the recommended FMMO 
is similar, but not identical. The table below compares CSO and FMMO 
product classes.

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                 CSO class                      Equivalent FMMO class
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Class 1...................................  Class I.
Class 2 and 3.............................  Class II.
Class 4b..................................  Class III.
Class 4a..................................  Class IV.
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    Under the proposed California FMMO, the classification of certain 
California products would change to align with standard FMMO 
classifications:

 Reassigning buttermilk from CSO Class 2 to FMMO Class I
 Reassigning half and half from CSO Class 1 to FMMO Class II
 Reassigning eggnog from CSO Class 2 to FMMO Class I
 There are numerous instances where the CSO classifies products 
based on product type and location of where the product is sold.\12\ 
The proposed California FMMO would classify all products based solely 
on product type.
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    \12\ CDFA, Classification of Dairy Products. https://www.cdfa.ca.gov/dairy/pdf/PRDCLASS.pdf.

    Under the recommended FMMO, California handlers would no longer 
receive credits for fluid milk fortification. Instead, accounting for 
fortification would be uniform with other FMMOs, as the classification 
of the fluid milk equivalent of the milk solids used to fortify fluid 
milk products would be classified as Class IV and the increased volume 
of Class I product due to fortification would be classified as Class I. 
The FMMO system accounts for fortification differently from the CSO, 
but the record does not indicate the net impact of this change. 
However, the impact is not expected to disproportionately affect small 
entities.

Transportation Credits

    The recommended FMMO does not contain a transportation credit 
program to encourage shipments to Class 1, 2 and 3 plants as is 
currently provided for in the CSO. This decision recommends that 
producer payments be adjusted to reflect the applicable producer 
location adjustment for the handler location where their milk is 
received, thus providing the incentive to producers to supply Class I 
plants. As producers are responsible for finding a market for their 
milk and consequently bear the cost of transporting their milk to a 
plant, the record of this proceeding does not support reducing the 
producers' value of the marketwide pool through the payment of 
transportation credits to handlers. This change is not expected to 
disproportionately impact small business entities.

Summary

    This decision finds that adoption of the recommended California 
FMMO would promote more orderly marketing of milk in interstate 
commerce. Classified milk prices under the recommended order would 
reflect national prices for manufactured products and local prices for 
fluid milk products, fostering greater equality for California 
producers and handlers in the markets where they compete. Under the 
recommended order, handlers would be assured a uniform cost for raw 
milk, and producers would receive uniform payments for raw milk, 
regardless of its use. Small dairy farmers and handlers are not 
expected to be disproportionately impacted by the transition from CSO 
to FMMO regulations.

Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
Chapter 35) (Act), this notice announces AMS' intention to request 
approval from the Office of Management and Budget (OMB) for a new 
information collection totaling 2138.35 hours for the initial set-up 
and annual reporting and recordkeeping requirements contained in this 
proposed rule for the promulgation of a California FMMO.
    OMB previously approved information collection requirements 
associated with all other FMMOs and assigned OMB control number 0581-
0032. This proposed rule would change certain aspects of the 
information collection and recordkeeping requirements previously 
approved. Therefore, a NEW information collection is required to carry 
out the requirements of this proposed rule. AMS intends to merge this 
new information collection, upon OMB approval, into the approved OMB 
No. 0581-0032 collection.
    Below, AMS has described and estimated the annual burden for 
entities to prepare and maintain information necessary to participate 
in this proposed California FMMO. As with all mandatory regulatory 
programs, reporting and recordkeeping burdens are periodically reviewed 
to reduce information requirements and duplication by industry and 
public sector agencies. The Act, as amended, provides authority for 
this action.
    Title: Report Forms Under a California Federal Milk Marketing Order 
(From Milk Handlers and Milk Marketing Cooperatives).
    OMB Number: 0581-NEW.
    Expiration Date of Approval: Three years from date of approval.
    Type of Request: This is a NEW collection.
    Abstract: FMMO regulations (7 CFR parts 1000-1199) authorized under 
the AMAA require milk handlers to report in detail the receipts and 
utilization of milk and milk products handled at each of their plants 
that are regulated by a Federal order. The data are needed to 
administer the classified pricing system and related requirements of 
each Federal order.
    A FMMO is a regulation issued by the Secretary of Agriculture that 
places certain requirements on the handling of milk in the area it 
covers. Each FMMO is established under the authority of the AMAA. The 
FMMO requires handlers of milk for a marketing area pay not less than 
certain minimum class prices according to how the milk is used. These 
prices are established under each FMMO after a public hearing where 
evidence is received on the supply and demand conditions for milk in 
the market. A FMMO requires payments for milk be pooled and paid to 
individual farmers or cooperative associations of farmers on the basis 
of a uniform or average price. Thus, all eligible dairy farmers 
(producers) share in the marketwide use-values of milk by regulated 
handlers.

[[Page 10638]]

    FMMOs help ensure adequate supplies of milk and minimum returns to 
producers. The FMMOs also provide for the public dissemination of 
market statistics and other information for the benefit of producers, 
handlers, and consumers.
    Formal rulemaking amendments to the FMMOs must be approved in 
referenda conducted by the Secretary.
    During 2015, 1,438 California dairy farmers produced over 40.9 
billion pounds of milk. This volume represents approximately 20 percent 
of all milk marketed in the U.S. The value of this milk delivered to 
CSO regulated handlers at minimum CSO classified prices was over $3 
billion. Producer deliveries of milk used in Class 1 products (mainly 
fluid milk products) totaled 13 percent of the State's market 
utilization.
    Under the proposed California FMMO, an estimated 3.4 billion pounds 
of milk would be pooled, making it the largest FMMO pool. Class I 
volume pooled would approximate 438 million pounds each month, making 
it the third largest.
    Each FMMO is administered by a Market Administrator. The Market 
Administrator is authorized to levy assessments on regulated handlers 
to carry out their duties and responsibilities under the FMMOs. 
Additional duties of the Market Administrator are to prescribe reports 
required of each handler, to assure handlers properly account for milk 
and milk products, and to assure such handlers pay producers and 
associations of producers according to the provisions of the FMMO. The 
Market Administrator employs a staff that verifies handlers' reports by 
examining their records to determine that required payments are made to 
producers. Most reports required from handlers are submitted monthly to 
the Market Administrator.
    The forms used by the Market Administrators are required by the 
respective FMMOs authorized by the AMAA. The forms are used to 
establish the quantity of milk received by handlers, the pooling status 
of the handlers, the class use of milk by the handler, and the 
butterfat content and amounts of other components of the milk.
    The forms covered under this information collection require the 
minimum information necessary to effectively carry out the requirements 
of the proposed California FMMO, and their use is necessary to fulfill 
the intent of the AMAA as expressed in the FMMO and in the rules and 
regulations proposed under the FMMO. The information collected will 
only be used by authorized employees of the Market Administrator and 
authorized representatives of the USDA, including AMS Dairy Program 
staff.
    Some of the established forms under ``Report Forms under Federal 
Milk Orders (From Milk Handlers and Milk Marketing Cooperatives)'' OMB 
No. 0581-0032 will be used and modified for this proposed order. 
However, the burden shown in this section is for this collection only. 
Upon approval, USDA will request to merge this burden into the 
currently approved OMB No. 0581-0032. All separate burdens will become 
all inclusive.
    Estimate of Burden: Public reporting burden for this collection of 
information is estimated to average 1.06 hours per response.
    Respondents: Milk handlers and milk marketing cooperatives.
    Estimated Number of Respondents: 55.
    Estimated Total Annual Responses: 2,022.
    Estimated Number of Responses per Respondent: 36.76.
    Estimated Total Annual Burden on Respondents: 2138.35.
    Comments are invited on: (1) Whether the proposed collection of 
information is necessary for the proper performance of the functions of 
the agency, including whether the information will have practical 
utility; (2) the accuracy of the agency's estimate of the burden of the 
proposed collection of information including the validity of the 
methodology and assumptions used; (3) ways to enhance the quality, 
utility, and clarity of the information to be collected; and (4) ways 
to minimize the burden of the collection of information on those who 
are to respond, including the use of appropriate automated, electronic, 
mechanical, or other technological collection techniques or other forms 
of information technology.
    All responses to this notice will be summarized and included in the 
request for OMB approval. All comments will become a matter of public 
record. A 60-day period is provided to comment on the information 
collection burden.

Preliminary Statement

    Notice is hereby given of the filing with the Hearing Clerk of this 
Recommended Decision with respect to the proposed marketing agreement 
and order regulating the handling of milk in California.
    This Recommended Decision is issued pursuant to the provisions of 
the AMAA and the applicable rules of practice and procedure governing 
the formulation of marketing agreements and orders (7 CFR part 900). 
The proposed marketing agreement and order are authorized under 7 
U.S.C. 608(c).
    The proposed marketing agreement and order are based on the record 
of a public hearing held September 22 through November 18, 2015, in 
Clovis, California. The hearing was held to receive evidence on four 
proposals submitted by dairy farmers, handlers, and other interested 
parties. Notice of this hearing was published in the Federal Register 
on August 6, 2015.
    Ninety-eight witnesses testified over the course of the 40-day 
hearing. Witnesses provided a broad overview of the history and 
complexity of the California dairy industry, and submitted 194 exhibits 
containing supporting data, analyses, and historical information.
    The material issues presented on the record of hearing are as 
follows:
    1. Whether the handling of milk in the proposed marketing area is 
in the current of interstate commerce, or directly burdens, obstructs, 
or affects interstate commerce in milk or its products;
    2. Whether economic and marketing conditions in California show a 
need for a Federal marketing order that would tend to effectuate the 
declared policy of the Act;
    3. If an order is issued, what its provisions should be with 
respect to:
    a. Handlers to be regulated and milk to be priced and pooled under 
the order;
    b. Classification of milk, and assignment of receipts to classes of 
utilization;
    c. Pricing of milk;
    d. Distribution of proceeds to producers; and
    e. Administrative provisions.

Findings and Conclusions

    The findings and conclusions on the material issues are based on 
the record of the hearing. Discussions are organized by topic, 
recognizing inevitable overlap in some areas. Topics are addressed in 
the following order:

1. Regulatory Comparison
2. Overview of Proposals
3. Justification for a California FMMO
4. California Quota Program Recognition
5. Definitions and Uniform Provisions
6. Classification
7. Pricing
8. Pooling
9. Transportation Credits
10. Miscellaneous and Administrative Provisions

1. Regulatory Comparison

    The purpose of the following section is to provide a general 
description and comparison of the major features of the California 
state dairy regulatory

[[Page 10639]]

framework and the FMMO system as provided in the evidentiary record. A 
more detailed discussion of each issue is provided in the appropriate 
section of this decision.

California State Order

    Currently, milk marketing in California is regulated by the CDFA. 
The CSO is codified in the Pooling Plan for Market Milk, as amended, 
and in two Stabilization and Marketing Plan(s) for Market Milk, as 
amended, for the Northern and Southern California marketing areas.\13\
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    \13\ Chapter 2, Part 3, Division 21 and Chapter 3, Part 3, 
Division 21 of the California Food and Agriculture Code.
---------------------------------------------------------------------------

Quota
    The California quota program is a state-administered producer 
program that entitles the quota holder to $0.195 per pound of solids-
not-fat above the CSO base and overbase price of milk.\14\ The quota 
premium is funded through a deduction from the CSO marketwide pool 
before the CSO overbase price is calculated. The quota program requires 
quota holders to deliver milk to a pool plant at least once every 60 
days. Quota can be bought and sold, and according to record evidence, 
approximately 58 percent of California dairy farms owned some volume of 
quota in 2015.
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    \14\ The hearing record reveals that the $0.195 per pound 
solids-non-fat equates to a $1.70 per cwt of milk quota premium. 
Additionally, under current CSO provisions, base and overbase prices 
are equal.
---------------------------------------------------------------------------

Classification
    The CSO provides for the pricing of five classified use values of 
milk. In general, Class 1 is milk used in fluid milk products; Class 2 
is milk used in heavy cream, cottage cheese, yogurt, and sterilized 
products; Class 3 is milk used in ice cream and frozen products; Class 
4a is milk used in butter and dry milk products, such as nonfat dry 
milk; and Class 4b is milk used in cheese--other than cottage cheese--
and whey products.
Pricing
    The CSO utilizes an end-product pricing system to determine 
classified prices for raw milk produced and manufactured in the State 
of California. Class 1, 4a, and 4b prices are announced monthly. Class 
2 and 3 prices are announced bi-monthly. Prices for all five milk 
classes are component-based. Three components of milk are used to 
determine prices: Butterfat (fat); solids-not-fat (SNF), which includes 
protein and lactose; and a fluid carrier (used in only the Class 1 
price).
    The CSO determines milk component prices based on commodity market 
prices obtained from the Chicago Mercantile Exchange (CME), the AMS 
Dairy Market News Western Dry Whey--Mostly (WDW-Mostly) price series, 
and the announced nonfat dry milk (NFDM) California Weighted Average 
Price (CWAP), which is determined by CDFA through weekly surveys of 
California manufacturing plants.
    The price for milk used in cheese manufacturing (CSO Class 4b) is a 
central issue in this proceeding. The Class 4b price is announced 
monthly and utilizes average commodity market prices for block Cheddar 
cheese, butter, and dry skim whey to determine the Class 4b component 
values. The average CME prices for butter and 40-pound Cheddar blocks 
are adjusted by f.o.b. price adjusters, which are designed to represent 
the difference between the CME price and the price California 
manufacturers actually receive. The CME butter price is also reduced by 
$0.10 per pound to derive the value of whey butter as it relates to 
cheese processing. The value of dry skim whey is determined through a 
sliding scale that provides a ``per hundredweight (cwt)'' value based 
on a series of announced WDW-Mostly per pound value ranges. The sliding 
scale determines dry whey's contribution to the Class 4b price, with a 
floor of $0.25 per cwt and a ceiling of $0.75 per cwt when the WDW-
Mostly price equals or exceeds $0.60 per pound.
    The CSO pricing system has a number of features worth highlighting. 
First, under the CSO, handlers must pay at least minimum classified 
prices for all Grade A milk purchased from California dairy farmers, 
regardless of whether the milk is pooled on the CSO. Additionally, 
Class 1 processors may claim credits against their pool obligations to 
offset the cost of fortifying fluid milk to meet the State-mandated 
solids content standards.
    The classified use values of all the milk pooled on the CSO are 
aggregated, and producers are paid on the fat and SNF component levels 
in their raw milk. Producers are paid on the basis of their allocated 
quota (if applicable), base, and overbase production for the month. 
While the CSO pricing formulas have changed over time, in their current 
form, the base and overbase prices are the same. Generally, the quota 
price is the overbase price plus the $1.70 per cwt quota premium.
Pooling
    Almost all California-produced milk received by California pool 
plants is pooled on the CSO, with some exceptions. Grade B milk is 
neither pooled nor subject to minimum prices. Manufacturing plants that 
do not make any Class 1 or 2 products can opt out of the pool, however, 
they are still required to pay announced CSO classified minimum prices 
for Grade A milk received. The requirement that quota holders must 
deliver milk to a pool plant at least once every 60 days tends to limit 
the amount of Grade A milk not pooled on the CSO. The decision not to 
pool milk in California carries with it a stipulation that the plant 
may not repool for 12 months after opting not to pool, and after 
repooling, a plant cannot opt out of pooling for 12 months.
    Entities recognized as producer-handlers under the CSO may be 
exempt from pooling some or all of their milk. Producer-handlers are 
dairy farmers who also process and distribute their dairy products. 
Fully exempt (``Option 66'') producer-handlers have minimal production 
volumes and are exempt from the pricing and pooling provisions of the 
CSO. Producer-handlers who own exempt quota (``Option 70'') do not 
account to the CSO marketwide pool for the volume of Class 1 milk 
covered by their exempt quota.
    The State of California cannot regulate interstate commerce, and 
therefore milk from out-of-state producers cannot be regulated by the 
CSO. While the record reflects that California handlers typically pay 
for out-of-state milk at a price reflective of the receiving plant's 
utilization, those prices are not regulated or enforced by the CSO.
Transportation Credits
    The CSO provides transportation credits to producers for farm-to-
plant Class 1, 2 and 3 milk movements between designated supply zones 
and plants with more than 50 percent Class 1, 2 and/or 3 utilization in 
designated demand zones. The CSO also provides for transportation 
allowances to handlers for plant-to-plant milk movements.
Classification
    Whereas the CSO designates five classes of milk utilization, FMMOs 
provide for four classes of milk utilization. FMMO Class I is milk used 
in fluid milk products. Class II is milk used to produce fluid cream 
products, soft ``spoonable'' products like cottage cheese, ice cream, 
sour cream, and yogurt, and other products such as kefir, baking mixes, 
infant formula and meal replacements, certain prepared foods, and 
ingredients in other prepared food products. Class III is milk used to

[[Page 10640]]

produce spreadable cheeses like cream cheese, and hard cheeses, like 
Cheddar, that can be crumbled, grated, or shredded. Class IV is milk 
used to produce butter, evaporated or sweetened condensed milk in 
consumer-style packages, and dry milk products.

Federal Milk Marketing Orders

    A FMMO is a regulation issued by the Secretary of Agriculture 
(Secretary) that places certain requirements on the handling of milk in 
a defined geographic marketing area. FMMOs are authorized by the AMAA. 
The declared policy of the AMAA is to ``. . . establish and maintain 
such orderly marketing conditions for agricultural commodities in 
interstate commerce . . .'' (7 U.S.C. 602(1)) . The principle means of 
meeting the objectives of the FMMO program are through the use of 
classified pricing of milk and the marketwide pooling of returns.
Pricing
    Like the CSO, the FMMO program currently uses end-product price 
formulas based on the wholesale prices of finished products to 
determine the minimum classified prices handlers pay for raw milk in 
the four classes of utilization. However, the FMMO pricing system has 
some notable differences. While the CSO announces some classified 
prices on a bi-monthly basis, FMMOs announce prices for all four milk 
classes monthly. FMMOs use four components of milk to determine prices: 
Butterfat, protein, nonfat solids and other solids.
    Like the CSO, the FMMO determines component prices based on 
commodity prices. However, AMS administers the Dairy Product Mandatory 
Reporting Program (DPMRP) to survey weekly wholesale prices of four 
manufactured dairy products (cheese, butter, NFDM and dry whey), and 
releases weekly average survey prices in the National Dairy Product 
Sales Report (NDPSR).\15\ The FMMO product-price formulas use these 
surveyed prices to determine the component values in raw milk.
---------------------------------------------------------------------------

    \15\ Official Notice is taken of the Notice of Equivalent Price 
Series: 77 FR 22282. The National Dairy Product Sales Report was 
deemed as equivalent to the price series previously released by the 
National Agricultural Statistics Service.
---------------------------------------------------------------------------

    As referenced previously, a main feature of this proceeding is the 
pricing of milk used for cheese manufacturing (FMMO Class III). The 
FMMO pricing system determines the Class III value from DPMRP surveyed 
butter, cheese, and dry whey prices. The FMMO does not utilize a 
sliding scale to determine the value of whey that contributes to the 
Class III price.
    Unlike the CSO, FMMOs do not provide for a tiered system of 
producer payments. A uniform blend price is computed for each FMMO 
reflecting the use of all milk in each marketwide pool. A blend price 
is paid for all milk that is pooled on the FMMO, adjusted for location. 
In six of the FMMOs, producers are paid for the pounds of butterfat, 
pounds of protein, pounds of other solids, and cwt of milk pooled. The 
cwt price is known as the producer price differential (PPD) and 
reflects the producer's pro rata share of the value of Class I, Class 
II, and Class IV uses in the pool relative to Class III value. In the 
other four FMMOs, producers are paid on a butterfat and skim basis.
Pooling
    Inclusion in the FMMO marketwide pool carries with it an obligation 
to be available to serve the fluid market with necessary milk supplies 
throughout the year. In the FMMO system, participation in the pool is 
mandatory for distributing plants that process Grade A milk into Class 
I products sold in a FMMO marketing area. Handlers of manufacturing 
milk (Class II, III or IV) have the option of pooling, and pool 
eligibility is based on performance standards specific to each FMMO.
    FMMOs recognize the unique business structures of producer-
handlers, and exempt them from the pricing and pooling regulations of 
the orders based on size. Producer-handler exemptions under FMMOs are 
limited to those vertically-integrated entities that produce and 
distribute no more than three million pounds of packaged fluid milk 
products each month.
    Unlike the CSO, FMMOs are authorized to regulate the interstate 
commerce connected with milk marketing. Thus, there is no 
differentiated regulatory treatment for milk produced outside of a FMMO 
marketing area boundary. All eligible milk is pooled and priced in the 
same manner, regardless of its source.
Transportation Credits
    The Appalachian and Southeast FMMOs provide for transportation 
credits to offset a handler's cost of hauling supplemental milk to 
Class I markets. During deficit months, handlers can apply for 
transportation credits to offset the cost of supplemental milk 
deliveries from outside the marketing area to meet the Class I demand 
of FMMO handlers. The most significant difference from the CSO is that 
the FMMO transportation credits described are not paid from the 
marketwide pool. Instead, they are paid from separate funds obtained 
through monthly assessments on handlers' Class I producer milk. The 
exception is the Upper Midwest FMMO, which provides transportation 
credits on plant-to-plant milk movements paid from the marketwide pool.

2. Overview of Proposals

    Four proposals were published in the Hearing Notice of this 
proceeding. Dairy Farmers of America, Inc., Land O'Lakes, Inc., and 
California Dairies, Inc., jointly submitted Proposal 1. Dairy Farmers 
of America, Inc. (DFA), is a national dairy-farmer owned cooperative 
with approximately 14,000 members and several processing facilities 
located throughout the United States, with products marketed both 
nationally and internationally. Within California, DFA represents 260 
members and operates three processing facilities. Land O'Lakes (LOL) is 
a national farmer-owned cooperative with over 2,200 dairy-farmer 
members. LOL has processing facilities in the Upper Midwest, the 
eastern United States, and the State of California, with products 
marketed nationally and internationally. Within California, LOL 
represents 200 dairy-farmer members and operates three processing 
facilities. California Dairies, Inc. (CDI), is a California based 
dairy-farmer owned cooperative with 390 dairy-farmer members, six 
processing facilities in California, and national and international 
product sales. Combined, DFA, LOL, and CDI (Cooperatives) market 
approximately 75 percent of the milk produced in California.
    Proposal 1 seeks to establish a California FMMO that incorporates 
the same dairy product classification and pricing provisions as those 
used throughout the FMMO system. Proposal 1 also includes unique 
pooling provisions, described as ``inclusive'' throughout the 
proceeding that would pool the majority of the milk produced in 
California each month, while also allowing for the pooling of milk 
produced outside of the marketing area, if it meets specific pooling 
provisions. The proposal includes fortification and transportation 
credits similar to those currently provided by the CSO. Lastly, 
Proposal 1 provides for payment of the California quota program quota 
values from the marketwide pool before the FMMO blend price is computed 
each month.
    Proposal 2 was submitted on behalf of the Dairy Institute of 
California (Institute). The Institute is a California trade association 
representing proprietary fluid milk processors and cheese 
manufacturers, and cultured and

[[Page 10641]]

frozen dairy products manufacturers in 38 plants throughout California. 
Institute plants process 70 percent of the fluid milk products, 85 
percent of the cultured and frozen dairy products, and 90 percent of 
the cheese manufactured in the state. The Institute's first position is 
that a California FMMO should not be promulgated. However, should USDA 
find justification for promulgation, the Institute supports Proposal 2. 
Proposal 2 incorporates the same dairy product classification 
provisions used throughout the FMMO system, as well as pooling 
provisions that are consistent with those found in other FMMOs. The 
Proposal 2 pooling provisions require the pooling of Class I milk, but 
the pooling of milk used in manufactured products is optional. Proposal 
2 includes fortification and transportation credits similar to those 
currently provided by the CSO. It also includes an additional shrinkage 
allowance for extended shelf life (ESL) products above that provided in 
the FMMO system. Lastly, Proposal 2 recognizes quota value by allowing 
producers to opt out of the quota program, thus receiving a FMMO blend 
price reflective of the market's utilization. Under Proposal 2, 
producers who remain in the quota program would have their blend price 
monies transferred to CDFA and redistributed according to their quota 
and non-quota holdings.
    Proposal 3 was submitted on behalf of the California Producer 
Handlers Association (CPHA). CPHA is an association of four producer-
handlers: Foster Farms Dairy, Inc. (Foster), Hollandia Dairy, Inc., 
Producers Dairy Foods, Inc. (Producers), and Rockview Dairies, Inc. 
(Rockview). CPHA members own their respective dairy farms and process 
that farm milk, as well as the milk of other dairy farms, for delivery 
to consumers. CPHA members own exempt quota, which entitles them to 
exemption from CSO pricing and pooling provisions for the volume of 
Class 1 milk covered by their exempt quota. Proposal 3 seeks 
recognition and continuation of CPHA members' exempt quota status under 
a California FMMO.
    Proposal 4 was submitted on behalf of Ponderosa Dairy (Ponderosa). 
Ponderosa is a Nevada dairy farm that supplies raw milk to California 
fluid milk processing plants. Ponderosa contends that disorderly 
marketing conditions do not exist in California that would warrant 
promulgation of a FMMO. However, if USDA finds justification for a 
California FMMO, Proposal 4 seeks to allow California handlers to elect 
partially-regulated plant status with regard to milk they receive from 
out-of-state producers. Such allowance would enable handlers to not 
pool out-of-state milk, as long as they could demonstrate that they 
paid out-of-state producers an amount equal to or higher than the 
market blend price.

3. Justification For A California FMMO

    This section reviews and highlights the testimony and evidence 
received regarding whether or not promulgation of a California FMMO is 
justified. This decision finds that the proposed California FMMO would 
provide for more orderly marketing conditions for the handling of milk 
in the State of California, as provided for and authorized by the AMAA.
    A Cooperative witness testified regarding current California 
marketing conditions and the need for establishing a California FMMO. 
According to the witness, California is the largest milk-producing 
state, producing more than 20 percent of the nation's milk. The witness 
stated that the pooled volume of a California FMMO would be the largest 
of all FMMOs, averaging slightly below 3.4 billion pounds per month; 
the Class I volume would represent the third largest, following the 
Northeast and Mideast FMMOs.
    The Cooperative witness testified that the primary reason 
California farmers are seeking the establishment of a FMMO is to 
receive prices reflective of the national commodity values for all milk 
uses. The witness opined that orderly marketing is no longer attainable 
through the CSO because the prices California dairy farmers receive do 
not reflect the full value of their raw milk. The witness estimated 
that this pricing difference has reduced California dairy farm income 
by $1.5 billion since 2010. The witness maintained that Proposal 1 
allows California dairy farms to receive an equitable price for their 
milk, while also tailoring FMMO provisions to the California dairy 
industry. The Cooperatives' post-hearing brief reflected this position.
    The Cooperative witness testified that there are significant 
differences in prices, depending on whether a producer's milk is 
regulated by the CSO or a FMMO. To illustrate this difference, the 
witness compared California farm milk prices to those received by 
producers in the states that comprise the Upper Midwest and Pacific 
Northwest marketing areas.\16\ The witness selected these areas for 
comparison due to the similar milk utilization in the Upper Midwest 
FMMO and the geographic proximity of the Pacific Northwest FMMO. The 
witness estimated that between August 2012 and May 2015, California 
dairy farmers received on average $1.85 per cwt less (ranging from 
$0.43-$4.27 per cwt lower) than producers pooled on the Upper Midwest 
and Pacific Northwest FMMOs. The witness used the data to emphasize a 
wide difference in prices for farmers in similarly situated areas. The 
witness opined that a California FMMO, as advanced in Proposal 1, would 
ensure California dairy farmers receive equitable prices, more in line 
with those received by their FMMO counterparts.
---------------------------------------------------------------------------

    \16\ Wisconsin, Minnesota, and Illinois; Oregon, Washington and 
Northern Idaho, respectively.
---------------------------------------------------------------------------

    The Cooperative witness emphasized that while both the CSO and the 
FMMOs use end-product pricing formulas to determine class prices, the 
two regulatory systems use different commodity series, effective dates, 
yield factors, and make allowances, which result in substantially 
different prices, as highlighted above. The witness explained that 
while the two regulatory systems have always had price differences, 
historically CSO and FMMO prices were relatively close. According to 
the witness, prices began to diverge significantly in 2007 when the CSO 
established a fixed whey factor in its formula for milk used to produce 
cheese. From that point forward, the witness said, price differences 
have become significant and have led to market disruptions both in the 
fluid and manufacturing markets.
    The Cooperative witness summarized USDA's justification from the 
FMMO Order Reform decision for adopting a national Class I price 
surface that assigns a Class I differential for every county in the 
country, including counties in California. The witness said that the 
separate CSO Class 1 price surface undermines the integrity of the 
nationally coordinated Class I price surface and has become a source of 
disorder in California. To demonstrate the disorder, the witness 
compared FMMO Class I and CSO Class 1 prices for both in-state and out-
of-state purchases. The witness said that because of the CSO and FMMO 
differences in both classified price formulas and Class I/1 price 
surfaces, the Class 1 price paid by California handlers is almost 
always lower than what it otherwise would be if FMMO Class I prices 
were applicable for those same purchases.
    The Cooperative witness presented a similar comparison between CSO 
Class 1 prices and Class I prices in FMMO areas that were likely 
competitors. The witness said that under FMMO regulations, the 
difference in Class I prices between two FMMO areas is attributed to 
the difference in the Class I differential at the two locations. For

[[Page 10642]]

example, the witness explained, the Class I price difference between 
two plants, one located in a $2.10 zone and another in the $2.00 zone, 
would be $0.10 per cwt. However, when the witness compared Class 1 
prices in California and a competing FMMO area, the price difference 
was always greater than the difference in differentials. For example, 
the FMMO differential in the Los Angeles/San Diego market is $2.10, 
while the differential in neighboring Phoenix is $2.35, a difference of 
$0.25. However, said the witness, when comparing the actual CSO Class 1 
price in Los Angeles/San Diego with the FMMO Class I price in Phoenix 
from August 2012 to July 2015, the difference averaged $0.62. The 
witness concluded that these observed price differences undermine a 
nationally-coordinated pricing structure and contribute to disorderly 
marketing where fluid milk handlers pay different minimum prices 
depending on where they are regulated.
    The Cooperative witness also provided testimony on the CSO and FMMO 
price disparities for manufacturing milk. The witness testified that 
FMMO Class II, III, and IV prices reflect national prices for products 
manufactured in these classes. If Proposal 1 is adopted, the witness 
said, California handlers would pay the same uniform prices as their 
FMMO competitors in the national marketplace. The witness noted past 
FMMO decisions that discussed the national supply and demand for 
manufactured dairy products and the need for national uniform 
manufacturing prices. The witness stressed that California producers 
should also receive these national prices like their FMMO counterparts.
    The Cooperative witness elaborated on the differences between CSO 
and FMMO manufacturing class prices. When comparing FMMO Class II to 
CSO Class 2 and Class 3 prices, the witness cited differences in the 
commodity series used as price references, the time periods of data 
used, and the length of time prices are applicable to explain the 
sometimes large differences in prices under the two regulatory systems. 
As a result, the witness said, Class 2 products are sometimes sold on a 
spot basis to exploit short-term price differences.
    The Cooperative witness presented a comparison of CSO Class 4a and 
FMMO Class IV prices from January 2000 to July 2015, revealing that 
over the entire time period the Class 4a price averaged $0.29 per cwt 
less than the Class IV price. The witness added that over this 15-year 
period, the CSO Class 4a price on an annual average basis was never 
above the FMMO Class IV price.
    The Cooperative witness also provided testimony on the price 
disparity between CSO Class 4b and FMMO Class III price formulas. Data 
from January 2000 to July 2015 revealed that the CSO Class 4b price was 
lower than the Class III price in 161 of the 187 months examined. The 
witness computed the difference over that 15-year time period averaged 
$0.91 per cwt, with the largest difference of $3.24 per cwt occurring 
in November 2014. The witness attributed the observed price differences 
to differences in the valuation of dry whey between the CSO 4b and the 
FMMO Class III formulas. The witness said that in 2007, the whey factor 
in the CSO Class 4b formula became a tiered, bracketed system with a 
floor of $0.25 and a ceiling of $0.75 which is reached when the WDW-
Mostly price is greater than or equal to $0.60 per pound. The witness 
added that the whey value contained in the FMMO Class III price comes 
from the AMS NDPSR, and reflects the mandatory reporting of dry whey 
sales throughout the country. The witness estimated that from August 
2012 through July 2015, the DMN whey value contributed $0.68 per cwt to 
the CSO 4b price, while the NDPSR whey value contributed $2.39 per cwt 
to the FMMO Class III price. The witness concluded that the whey cap 
contained in the CSO 4b price results in lower contributions to the 
marketwide pool than what is observed in the national marketplace and 
reflected in FMMO prices.
    The Cooperative witness reiterated the consequences of two 
different regulatory pricing schemes have led to severe differences 
between the regulated markets. The witness opined that the regulatory 
differences allow California handlers who purchase raw milk and 
manufacture products for sale on the national marketplace to pay 
substantially different regulated minimum prices than handlers 
regulated by the FMMO system. The witness estimated that because of the 
regulatory price differences, from August 2012 to July 2015, California 
farms received, on average, $1.89 per cwt less than similarly-situated 
FMMO farms. The witness concluded that this results in California farms 
being in a worse competitive position than other similarly situated 
FMMO farms. The witness labeled this as disorderly and said that this 
condition should be remedied through the adoption of Proposal 1.
    The Cooperative witness also entered data estimating the value of 
regulating interstate commerce through the establishment of a 
California FMMO. The witness cited January 2009 through July 2015 CDFA 
data that indicated a monthly average of 54.5 million pounds of milk 
originating outside the state was processed by California processing 
plants and another monthly average 36 million pounds of milk was 
produced inside California and sold to plants located outside of the 
state. The witness explained that this milk is able to evade CSO 
minimum-price regulations because of the state's inability to regulate 
interstate commerce. Consequently, the witness said, out-of-state farms 
delivering milk to California plants can receive plant blend prices, 
which can be higher than the market's overbase price received by in-
state producers delivering to the same plant. The witness elaborated 
that the problem is compounded because processors receiving these 
unregulated supplies are not required to pay minimum classified prices 
and can instead pay a lower price than their regulated competitors. By 
regulating these transactions through the establishment of a California 
FMMO, the witness stressed, the California market would be more 
orderly.
    The Cooperatives' post-hearing brief also highlighted the CSO's 
inability to regulate out-of-area milk as a market dysfunction. The 
Cooperatives wrote that out-of-area sales financially harm California 
dairy farms because the Class 1 revenues from those sales does not 
contribute to the CSO marketwide pool that is shared with all the farms 
in the market.
    A consultant witness, appearing on behalf of the Cooperatives, 
testified in support of Proposal 1. The witness was of the opinion that 
the primary purpose of FMMOs is to enhance producer prices, which is 
provided in the AMAA through its flexibility to regulate milk and/or 
milk products, not just fluid milk. As evidence of this flexibility, 
the witness discussed the Evaporated Milk Marketing Agreement, in 
existence until 1947, under which manufacturing milk was regulated. 
Therefore, the witness said, it is reasonable to conclude from this 
example that the regulation of all California plants that purchase milk 
from California farms, as contained in Proposal 1, would fall within 
the scope of the AMAA.
    The consultant witness elaborated that extending minimum price 
regulation to all classes of milk in California is necessary to avoid 
the market-disrupting practice of handlers opting to not pool eligible 
milk because of price, often referred to as depooling. The witness said 
that many FMMOs have adopted provisions to reduce the instances of 
depooling. Currently, under the CSO, the witness said, while plants

[[Page 10643]]

can choose to not participate in the marketwide pool, there is no price 
advantage, because they are still required to pay minimum classified 
prices. The witness was of the opinion that the impact of depooling 
would be greater in a California FMMO because of how California quota 
premiums are paid. The witness testified that uniform prices calculated 
after deducting quota premiums would be less than they otherwise would 
be, if large volumes of milk were not pooled. Additionally, the witness 
addressed the issue of uniform producer payments. The witness was of 
the opinion that once quota premiums were paid, as required by 
California law, remaining pool revenues would be distributed uniformly 
to producers for non-quota milk, as required by the AMAA.
    The consultant witness addressed the issue of whether Proposal 1 
would implement classified prices that were too high. The witness 
opined that the classified price formulas contained in Proposal 1 would 
not establish manufacturing milk prices that are too high because FMMO 
regulated handlers in other areas are already paying those prices. The 
witness entered data showing that cheese production has increased in 
the western states (not including California and Idaho) by 92 percent 
from 2000 to 2014, while California cheese production has increased 
only 64 percent. The witness concluded that minimum FMMO prices have 
not been detrimental to FMMO-regulated plants, and offered the fact 
that over-order premiums are currently paid to FMMO producers to 
support that claim. The witness stated that provisions providing for 
orderly marketing conditions should also provide stability (regulations 
should not alter market transactions) and efficiency (regulations 
should stimulate a competitive economic environment), and concluded 
that both are embodied in Proposal 1.
    Twenty-seven California dairy farmers testified in support of 
Proposal 1. Sixteen belong to one of the three proponent Cooperatives: 
Nine LOL members, three DFA members, and four CDI members. An 
additional 11 dairy farmers not associated with the Cooperatives 
provided testimony supporting the adoption of Proposal 1.
    Although each dairy farmer provided unique testimony, several 
difficulties challenging the California dairy industry were addressed 
repeatedly. Producer testimony described financial hardships due to the 
CSO producer prices they receive consistently being below the amount 
needed to cover the cost of production. One farmer witness cited CDFA 
cost of production data from the first quarter of 2015 for the North 
Valley of California, and estimated that 90 percent of surveyed farms 
had negative net incomes. Farmer witnesses stated that a FMMO would 
provide an opportunity for dairy farms to cover their cost of 
production and work toward reducing debts incurred from historically 
low mailbox prices.
    A number of producers testified that historically they had many 
competitive advantages (low cost of land, grain, hay and water) 
enabling them to produce milk at a significantly lower cost than farms 
located in the rest of the county. All of the witnesses testified that 
the hardships of high land, feed, and/or water costs, as compared to 
those in other dairy states, have eroded their competitive advantage. 
Citing no competitive advantage, coupled with the difference between 
the FMMO and CSO pricing formulas, dairy farmers testified they are 
receiving a lower mailbox price than their FMMO counterparts. Testimony 
stressed that these realities are forcing many California dairy farms 
out of business.
    Many producers were of the opinion that their inability to cover 
the cost of production is tied to how whey is valued in the CSO Class 
4b formula. Thirteen of the 27 producers testified regarding the impact 
of the whey valuation on mailbox prices. The witnesses stressed that 
the CSO historically responded to producers' needs by encouraging 
manufacturing plant investment that would provide an outlet for milk to 
be processed at a regulated price considered fair. According to the 
witnesses, this regulatory balance shifted in 2007 because of a CDFA 
rulemaking that adopted a sliding scale that capped the value of the 
dry whey factor in the Class 4b formula. Testimony was provided that 
stated that the 2007 hearing marked the start of the widening 
discrepancy between mailbox prices for California dairy farmers and 
those received by other dairy farmers across the nation. Witnesses 
stated the reduced mailbox prices continue to undervalue milk 
throughout the State. The producers were of the opinion that a 
California FMMO would bring California's valuation of dry whey in line 
with the rest of the country. With comparable whey values, producers 
testified their mailbox price would become more representative of the 
true market value of their milk.
    Three testifying producers owned farms in both California and FMMO 
regulated areas. These producers testified to the difference in 
production costs and mailbox prices received by their farms over the 
last decade or more. Their testimonies specifically highlighted the 
industry differences between California and Wisconsin. The producers 
said the production advantages California dairy farmers enjoyed 
(inexpensive land, feed, and a different regulatory environment) no 
longer exist, and as a result, California dairy farms are closing or 
moving out of state at an increasing rate.
    Seven producers testified that the use of futures contracting and 
hedging as risk management tools are hindered by the differences in the 
CSO and FMMO price formulas. They explained that current risk 
management tools are based on FMMO prices, and the fact that CSO prices 
are different make those tools less effective for California producers.
    Eight producers provided evidence about reductions in the 
California dairy industry since 2007. According to the witnesses, many 
farms have elected to reduce their herd size or cease dairy farming. A 
witness provided September 2014 to September 2015 data showing that the 
Cooperatives have experienced a 6.6 percent reduction in milk 
production volume. The witness stated that the reduction seen by the 
Cooperatives is supported by CDFA data showing a 3.5 percent reduction 
in California milk production. The witness noted that while milk 
production in California is decreasing, it is increasing in the rest of 
the country. The witnesses believed the discrepancy between California 
milk production and national production is due to the inability of 
California farms to compete on a level-playing field with farms in the 
FMMO system. Many also expressed concern with the impact on related 
businesses due to the closing of many California dairy farms.
    According to six producer witnesses, many farms have opted to 
weather the milk price volatility by diversifying their operations and 
investing in tree-crop production. Several witnesses testified that 
lenders encourage tree-crop production over dairy farming, due to the 
reduction of risk and the large margins attainable in tree-crop 
farming. Producers expressed a belief that the adoption of a California 
FMMO would lead to a more stable dairy industry supported by lenders.
    Overall, California producer witnesses stated they are currently 
subject to a regulatory system that does not provide producer milk 
prices representative of the full value of their raw milk in the 
market. The producers believe adoption of a California FMMO represents 
an opportunity to remedy this regulatory disadvantage and to compete on 
a level-

[[Page 10644]]

playing field with the rest of the country.
    A Western United Dairymen (WUD) representative testified in support 
of Proposal 1. WUD is a trade organization representing approximately 
50 percent of California dairy farmers, whose farm sizes range from 17 
to 10,000 cows. According to the WUD witness, the difference between 
CSO Class 4b and FMMO Class III prices demonstrates that the CSO is not 
providing California dairy farms with a milk price reflective of the 
national marketplace for manufactured dairy products. The witness 
attributed the pricing differences to how dry whey is accounted for in 
the two price formulas. The witness said the value difference has 
become increasingly larger since the CSO adopted a fixed whey factor in 
2007, and then subsequently replaced it with a sliding scale whey 
factor in 2011. The witness said that from August 2014 to July 2015, 
the CSO Class 4b whey value averaged $1.50 per cwt less than the FMMO 
Class III whey value. As a result, the witness said, there are 
different regulated minimum milk prices for the milk products that 
compete in a national market. This milk price difference, the witness 
stressed, results in market decisions based on government regulations 
instead of market fundamentals. Furthermore, the witness said, the 
resulting lower CSO class prices put California dairy farmers at a 
competitive disadvantage compared to their FMMO counterparts. The 
witness concluded that this situation is disorderly and reiterated 
WUD's support for Proposal 1 as a more appropriate method to determine 
the value of whey.
    A witness representing the California Dairy Campaign (CDC) 
testified in support of Proposal 1. CDC is a dairy producer 
organization with members located throughout California. The CDC 
witness said that over the last 10 years, more than 600 California 
dairy farms have permanently closed or moved to other states. The 
witness attributed this to milk prices that have been consistently 
lower than the cost of producing milk in California, and noted that 
water and feed availability due to the ongoing drought is the primary 
reason for increased production costs. The witness highlighted the 
consolidation and concentration of the California dairy manufacturing 
sector that causes dairy producers to be price takers in the market, 
thus making equitable minimum regulated prices vital to the long-term 
viability of California dairy farms.
    The CDC witness testified that the failure of the CSO to align with 
FMMO prices, particularly between CSO Class 4b and FMMO Class III, has 
resulted in a more than $1.5 billion loss to California producers since 
2010. The witness also said that risk-management tools, particularly 
the USDA Margin Production Program (MPP), are not as effective for 
California dairy farms because the national all-milk price used to 
determine MPP payments is significantly higher than California producer 
mailbox prices under CSO regulation.
    The witness highlighted CDC's support of specific provisions 
contained in Proposal 1, including the adoption of FMMO end-product 
pricing formulas, unique pooling provisions that address the needs of 
the California market, regulation of out-of-state milk, uniform 
producer-handler provisions, fluid milk fortification allowances, and 
the continuation of the California quota program. The witness was of 
the opinion that Proposal 1 addresses California's unique market 
conditions and is the only path to restoring California producer price 
equity and the health of the California dairy industry.
    CDC's post-hearing brief stated CDC has supported adoption of a 
California FMMO for over 20 years. The brief highlighted 2015 CDFA data 
showing California cost of production at $19.30 per cwt, while the 
average farm income was $15.94 per cwt. The brief stated the belief 
that minimum prices are put in place to ensure dairy farmers are able 
to share in some minimal level of profitability. CDC estimated that in 
2015, a 1,000-cow California dairy farm was paid approximately $1.4 
million less than equal-sized farms whose milk was pooled on a FMMO.
    A witness representing Milk Producers Council (MPC) testified in 
support of Proposal 1. MPC is a nonprofit trade association with 120 
California dairy-farmer members, accounting for approximately 10 
percent of the California milking herd. The witness agreed with 
testimony given by the Cooperatives outlining California's disorderly 
marketing conditions. The witness said that California dairy farmers 
have repeatedly, though unsuccessfully, sought relief through CDFA to 
bring CSO classified prices more in line with FMMO classified prices. 
This is why California dairy farmers are now seeking to join the FMMO 
system, the witness added.
    The MPC witness testified that Proposal 1 would establish orderly 
marketing conditions in California, resulting in a level-playing field 
for producers and processors. The witness stressed that not only would 
Proposal 1 provide price alignment between California and FMMOs, but a 
California FMMO would regulate interstate commerce--something the CSO 
cannot do. Proposal 1 would also maintain the current California quota 
program, a vital financial tool for many California dairy farmers, the 
witness stated. The witness said that while the quota program has no 
impact on the minimum prices handlers pay, it does aid in providing a 
local milk supply for some plants that would otherwise have to source 
milk from farther distances. The witness explained that in some 
instances, quota is an investment farms located in higher cost areas of 
the state make to remain financially viable and be able to provide a 
local milk supply to plants that would otherwise have to seek a supply 
from farther distances.
    A witness representing the National Farmers Union (NFU) testified 
in support of Proposal 1. NFU is a national grassroots farmer 
organization with over 200,000 members across the nation, including 
dairy farmers located in California. The witness testified that NFU 
supports the inclusion of California in the FMMO system so California 
dairy farms could receive prices similar to those received by dairy 
farms located throughout the country. The witness testified that 
California's low-milk prices and high-feed costs have resulted in 
strained margins and ultimately the closure of over 400 dairy farms in 
the last five years.
    The NFU witness testified the pay price differences between dairy 
farms whose milk is pooled under the CSO and FMMOs is primarily due to 
the difference in the Class 4b and Class III prices and has resulted in 
disorderly marketing conditions and a revenue loss to California dairy 
farms of more than $1.5 billion since 2010. The witness added that pay-
price differences have reduced the ability of California dairy farms to 
utilize risk management tools, and puts them at a competitive 
disadvantage when competing for resources such as feed, land, cattle 
and labor.
    A witness appearing on behalf of the Institute testified that while 
the Institute offered Proposal 2 as an alternative to the Cooperatives' 
proposal, their first position is that disorderly marketing conditions 
do not exist in California to warrant the promulgation of a FMMO. The 
witness stated that the California dairy industry is currently 
regulated by the CSO, whose purpose, much like a FMMO, is to provide 
for orderly marketing conditions. The witness emphasized their opinion 
that orderly marketing conditions are currently achieved through CSO 
classified pricing and marketwide pooling.

[[Page 10645]]

    The Institute witness reviewed CSO history and regulatory 
evolution, and highlighted regulatory changes demonstrating how the CSO 
has consistently adapted to changing market conditions. Some, but not 
all, of these regulatory changes are highlighted below.
    The Institute witness explained that California sought state 
solutions to disorderly marketing conditions through the Young Act of 
1935. When FMMOs were authorized in 1937, California opted to remain 
under the purview of the CSO.
    The Institute witness explained that the CSO adopted marketwide 
pooling through the Gonsalves Milk Pooling Act. Before that time, 
handlers operated individual handler pools, giving Class 1 handlers 
strong bargaining power as producers sought Class 1 contracts. 
According to the witness, this led to handler practices that eroded 
producer revenues. The witness testified that the California quota 
program, also authorized by the Gonsalves Milk Pooling Act, was a way 
for Southern California dairy farmers, who at the time had a higher 
percentage of Class 1 contracts, to preserve some of the Class 1 
earnings they would otherwise be required to share with all producers 
through marketwide pooling. At the time, the witness said, producers 
were assigned a production base, and producer quota was allocated based 
on historical Class 1 sales. Milk marketed in excess of a producer's 
base and quota allocations was termed overbase milk. The witness 
explained that, during this time, the state's population was growing, 
and quota was deemed necessary to ensure the market's Class 1 needs 
would always be met.
    The Institute witness said that when the quota program was 
established, there was a growing number of dairy farmers who also owned 
fluid milk bottling operations. They typically processed all the milk 
they produced, and were referred to as producer-handlers. These 
operations feared that the income benefits they gained from processing 
their own milk would disappear with the establishment of mandatory 
pooling. To relieve this concern, the witness said smaller producer-
handlers were exempted from pooling in return for not receiving a quota 
allocation. The witness explained larger producer-handlers had the 
option of not receiving a quota premium, and deducting those quota 
pounds from their Class 1 obligations to the pool, an amount referred 
to as exempt quota.
    The Institute witness testified that the CSO was modified numerous 
times in the late 1970's and early 1980's to ensure that Class 1 needs 
of the market would always be met. First, call provisions were 
established requiring manufacturing plants participating in the pool to 
maintain a percentage of quota milk available to Class 1 plants. 
Second, a system of transportation credits and allowances was 
established to cover part of the cost of moving milk from surplus areas 
to deficit areas for Class 1 use. According to the witness, CDFA 
regularly updates these milk movement incentives to reflect current 
costs.
    In the early 1990's, CDFA amended how the quota premium was 
derived. At the time, quota funds were derived from Class 1, 2 and 3 
prices, while overbase prices were derived from Class 4a and 4b prices. 
Consequently, the witness noted, the difference between quota and 
overbase prices varied greatly by month. The witness said the historic 
value of quota, in comparison to the overbase value, was evaluated to 
derive a fixed quota price of $0.195 per pound of quota solids nonfat.
    The Institute witness also reviewed several instances since 2000 
where CSO provisions were amended to reflect changing market conditions 
and changing FMMO regulations. These instances included adopting the 
``higher of''' concept for pricing Class 1 milk, incorporating a dry 
whey factor in the price formulas, and changing the make allowances 
contained in the product price formulas--all changes the witness said 
were necessary to maintain orderly marketing conditions in California.
    The Institute witness maintained that current California marketing 
conditions are orderly, and therefore the establishment of a FMMO is 
not justified. The witness stated the CSO program focuses on orderly 
marketing conditions to ensure Class 1 needs are met, while providing 
reasonable returns to those dairy farms who supply the Class 1 market. 
The witness stressed the regulated price differences between CSO Class 
4a/4b prices and FMMO Class III/IV prices do not amount to disorder, 
and in fact, those differences are needed to maintain orderly marketing 
in the state.
    The Institute witness testified that in the CSO-regulated 
environment, where all milk is subject to minimum price regulation, it 
is important that manufacturing prices are not set above market-
clearing levels. The witness elaborated that the largest market, and 
therefore the highest value, for finished dairy products is in the 
eastern United States where most of the population resides. Therefore, 
the witness said, in order for California dairy products to be 
transported and compete in the eastern markets, they must have a lower 
value in the West. The witness was of the opinion that FMMO Class III 
and Class IV prices are not appropriate local, market-clearing prices 
for California.
    The Institute witness also was of the opinion that current 
differences between CSO Class 2 and 3 prices and FMMO Class II prices 
are not disorderly. The witness explained that Class 2 and 3 prices are 
set relative to the Class 4a price, and it is important that these 
prices are not set so high as to encourage dairy ingredient 
substitution with Class 4a products. The witness argued the 
Cooperatives provided no evidence that the class price differences 
between the CSO and FMMO systems are disorderly.
    The Institute witness also testified regarding the difference 
between CSO Class 1 and FMMO Class I prices. While CSO Class 1 prices 
are somewhat lower than those in neighboring FMMO areas, the witness 
said, they are not causing disorderly marketing conditions. The witness 
explained that if lower priced California milk is sold into FMMO areas, 
there are provisions for FMMO partial regulation to ensure the 
California Class 1 plants do not have a regulatory price advantage over 
the FMMO plants.
    The Institute witness testified that recent declines in California 
milk production and increases in dairy farm consolidation are not 
evidence of disorderly marketing conditions. The witness elaborated 
that dairy-farm consolidation is a natural market evolution resulting 
from differences in producers' cost structure, risk tolerance, and 
access to capital. This is no different than consolidation trends that 
have happened in other regions of the country, added the witness. The 
witness also testified that, while dairy farmer margins have been 
volatile in recent years, California milk production costs have 
remained below the United States average. According to USDA Economic 
Research Service data, the witness said 2010-2014 California milk 
production costs were well below the national average, by a yearly 
average of $4.19 per cwt. Regardless of milk production and 
consolidation trends, the witness stated that California has adequate 
milk supplies to meet fluid demand, and milk movements to meet 
processing and manufacturing demands are largely efficient.
    The Institute witness explained its members represent approximately 
65 percent of the fluid milk processing in California, and none have 
expressed difficulty obtaining milk supplies or any type of disorderly 
marketing condition. The witness expressed concern that any changes in 
the regulatory environment

[[Page 10646]]

would likely increase the cost of fluid milk. This cost would be passed 
onto consumers, thereby creating a barrier for fluid milk sales, said 
the witness.
    The Institute witness opined the CSO has an effective pricing and 
pooling system that has evolved over time to address changing market 
conditions, and disorderly marketing conditions do not exist to warrant 
a California FMMO. However, should USDA recommend a California FMMO, 
the witness said the provisions outlined in Proposal 2 should be 
adopted.
    The post-hearing brief submitted on behalf of the Institute 
reiterates its opinion that USDA must find disorderly marketing 
conditions to justify intervention. Disorderly marketing conditions 
under the AMAA, the Institute wrote, refers to the fluid milk supply 
and not the market for manufactured milk. The brief stated that 
California has, on average, an 11 to 12 percent Class 1 utilization and 
more than enough reserve milk to meet fluid demand.
    The Institute's brief outlined a six-point test that it argued 
needs to be met in order to justify a California FMMO. The Institute 
stated the current CSO already meets all six of the requirements and 
thus Federal intervention is not justified.
    The Institute's brief also addressed the 1996 and 2014 Farm Bills 
as they pertain to the consideration of a California FMMO. The 
Institute stressed that in neither case did Congress amend the AMAA, 
and therefore USDA is authorized, but not required, to incorporate the 
California quota program. According to the Institute, whatever decision 
USDA makes, it must uphold the AMAA's uniform payments and trade 
barrier provisions. The Institute stated that Proposal 1's 
incorporation of the California quota program does not uphold either of 
these provisions.
    The Institute's post-hearing brief argued that the differences in 
Class III and Class 4b prices, highlighted by the Cooperatives, do not 
provide justification for a California FMMO. According to the brief, 
the AMAA requires marketing orders to have regional application that 
recognizes differences in production and market conditions.
    A witness appearing on behalf of Hilmar Cheese Company (Hilmar) 
testified that USDA has consistently found that evidence of disorderly 
marketing conditions must exist in order to justify Federal 
intervention through the promulgation or amendment of a FMMO. Hilmar is 
a dairy manufacturer with facilities in California and Texas selling 
dairy products both domestically and internationally. According to the 
witness, Hilmar's California cheese and whey manufacturing facility is 
the largest cheese manufacturing facility in the State, processing 12 
percent of the total California milk supply, which is purchased from 
200 dairy farms, most of whom are not affiliated with any cooperative.
    The Hilmar witness cited previous USDA decisions, including the 
1981 Southwestern Idaho/Eastern Oregon and the 1990 Carolina 
promulgations, as examples of what market conditions should be present 
in order for USDA to act. The witness was of the opinion that the 
Cooperatives did not provide evidence of actual disorderly marketing 
conditions in California warranting Federal intervention.
    In its post-hearing brief, Hilmar stated that FMMOs are designed to 
be a marketing tool to address problems associated with the inherent 
instability in milk marketing. Hilmar reiterated its opposition to a 
California FMMO, stating that USDA has consistently denied proposals 
seeking price enhancement, as they believe is the case in this 
proceeding. Hilmar stated the record does not support the notion that 
there is an inadequate supply of milk for fluid use in California, and 
therefore a California FMMO is not justified.
    A witness appearing on behalf of HP Hood, LLC, a milk processor 
with facilities in California and other states, testified that 
disorderly marketing conditions are not present in California and 
therefore a FMMO is not warranted. The witness said the CSO is an 
efficient program that has been routinely updated to reflect changing 
market conditions. The witness stated that HP Hood has not had any 
difficulty securing an adequate supply of raw milk for its California 
processing plants, nor is HP Hood aware of instances where raw milk had 
to be transported long distances in order to meet California demand.
    The HP Hood witness suggested USDA consider the potential adverse 
impacts of recommending a California FMMO on other FMMOs, as well as 
potential increases in milk costs to consumers that may stem from 
adoption of the higher uniform minimum milk prices included in Proposal 
1. The witness specifically opposed the inclusive pooling portion of 
Proposal 1 and explained how the ability for milk handlers to pool or 
not pool is how orderly marketing has been maintained in the existing 
FMMOs. The witness urged the adoption of Proposal 2, should USDA find 
that a California FMMO is warranted.
    A witness appeared on behalf of Saputo Cheese USA, Inc. (Saputo), a 
proprietary international dairy and grocery products manufacturer and 
marketer with seven dairy product-manufacturing facilities in 
California. Saputo opposes the promulgation of a California FMMO, but 
should USDA find a FMMO warranted, it supports adoption of Proposal 2. 
The witness testified that disorderly marketing conditions are not 
present in California to warrant FMMO promulgation. The witness 
explained how CDFA has been responsive to dairy industry concerns, has 
held many hearings in the past, and administers the CSO in a manner 
that facilitates orderly marketing as well as, or better than, the FMMO 
system.
    The Saputo witness summarized many of the similarities and 
differences between the CSO and FMMO systems. The witness was of the 
opinion that the CSO mandatory pooling rules increased milk production 
to surplus levels and encouraged the construction of bulk, storable 
dairy product manufacturing facilities. In conjunction with these 
rules, the witness explained, CSO regulated minimum prices are set at 
levels that are not too high to encourage significant additional 
increases in supply.
    The Saputo witness described the California cheese production 
landscape. The witness, relying on CDFA data, said that from January 
through March of 2015, 57 cheese plants processed 45 percent of 
California's milk. The witness noted that out of the 57 cheese plants, 
3 of the plants processed more than 25 percent of the state's entire 
milk supply. The witness stated that if the increase in the 
hypothetical California FMMO Class III price included in the USDA 
Preliminary Economic Analysis of $1.84 per cwt occurred, under a system 
of mandatory pooling, the aforementioned 3 cheese plants would face 
combined increased annual raw milk costs of nearly $196.5 million. The 
witness testified that such raw milk cost increases would be disorderly 
and threaten the viability of California manufacturing facilities.
    A witness appearing on behalf of Farmdale Creamery (Farmdale) 
testified in support of Proposal 2. Farmdale is a proprietary dairy 
processing company located in San Bernardino, CA, that manufactures 
cheese, sour cream, dried whey protein concentrate, and buttermilk. The 
witness was of the opinion that disorderly marketing conditions are not 
present in California, since there is no shortage of milk to meet fluid 
milk needs. The Farmdale

[[Page 10647]]

witness was of the opinion that the CSO maintains an orderly market by 
responding to changing market conditions when warranted. Should USDA 
find a California FMMO justified, the witness supported adoption of 
Proposal 2 and opposed the mandatory pooling provisions contained in 
Proposal 1.
    The witness also testified about financial losses incurred by 
Farmdale since 2005, when the CSO whey value was sometimes higher than 
what they could obtain from the market. The witness added that their 
on-again, off-again financial losses demonstrate the inability of 
current regulatory pricing systems to track and value the whey markets.
    A witness appeared on behalf of Pacific Gold Creamery (Pacific 
Gold) in opposition to the adoption of a California FMMO, although the 
witness supported the provisions contained in Proposal 2 should a FMMO 
be recommended. Pacific Gold operates a dairy farmer owned specialty 
cheese plant in California. The witness testified that across existing 
FMMOs and unregulated areas, dairy product manufacturers regularly pay 
below FMMO minimum prices. The witness presented and explained USDA-
prepared FMMO data regarding volumes of milk pooled and not pooled 
across existing FMMOs.
    The Pacific Gold witness explained how their business produces 
ricotta from the whey stream of their cheese manufacturing, and how 
ricotta sales supplement the income of the cheese operation. The 
witness was of the opinion that the FMMO Class III price, and the 
accompanying higher whey value contained in Proposal 1, would be 
devastating to small and mid-size facilities. The witness also 
testified how an increase in California minimum-regulated prices would 
jeopardize exports, saying that U.S. domestic cheese prices are already 
relatively higher than global prices.
    A post-hearing brief was submitted on behalf of Trihope Dairy Farms 
(Trihope). Trihope is a dairy farm located in, and pooled on, the 
Southeast FMMO. Trihope stated that disorderly marketing conditions do 
not exist in California to warrant promulgation of a FMMO. Trihope was 
of the opinion that California dairy farmers are seeking higher prices 
through a new regulatory body, which is not a justification for USDA to 
proceed. According to Trihope, the AMAA was designed to solve marketing 
problems in unregulated areas, not to address price disparities between 
Federal and State regulation.
    Trihope expressed concern about the potential impact a California 
FMMO would have on the entire system. Trihope specifically noted the 
impacts to the southeastern marketing areas contained in the USDA 
Preliminary Economic Impact Analysis. According to their brief, Trihope 
estimates losses from 2017 to 2024 of approximately $313,091. Trihope 
wrote that California's marketing issues of high California milk 
production and limited plant capacity would not be solved by a FMMO.
    A post-hearing brief submitted by Select Milk Producers, Inc. 
(Select), expressed support for the adoption of a California FMMO. 
Select is a national dairy-farmer cooperative that markets over 6.5 
billion pounds of milk annually, and whose members' milk is regularly 
pooled on the Appalachian, Mideast, Southeast and Southwest FMMOs. 
Select also supplies plants located in many other FMMOs, but it does 
not supply any California plants. Select was of the opinion that having 
California's milk supply priced similarly to the rest of the FMMOs 
would remedy the competitive disadvantages faced by companies competing 
in the national marketplace, and would allow for more efficient milk 
movements. Select expressed support for maintaining a uniform national 
pricing system and opposed the Institute's alternative whey-pricing 
proposal. Select expressed support for the Cooperatives' inclusive 
pooling provisions on the basis that the provisions would apply only to 
California, due to its unique marketing conditions. Select stated the 
California quota program should be addressed outside of this rulemaking 
proceeding. Select was of the opinion that adoption of a California 
FMMO would lead to more orderly milk marketing throughout the entire 
FMMO system, and thus uphold the intent of the AMAA.
    A post-hearing brief submitted on behalf of the Northwest Dairy 
Association (NDA) expressed support for Proposal 1. NDA is a dairy 
farmer-owned cooperative that markets the milk of its 460 members and 
operates numerous fluid milk and manufacturing plants located in 
Washington, Oregon, Idaho, and Montana. NDA was of the opinion that 
adoption of Proposal 1 would create more orderly marketing conditions 
and strengthen the entire FMMO system. As California represents the 
largest milk supply in the United States, NDA wrote, it is important 
for the integrity of the FMMO program to include the additional 20 
percent of United States milk represented by California. NDA stated 
that California producers should not be disadvantaged with lower Class 
III and IV prices than what their western FMMO producer counterparts 
receive.

Findings

    The record contains a voluminous amount of testimony, evidence and 
opinions as to whether or not a California FMMO is justified. The 
Cooperatives and their supporters argue that a California FMMO was 
authorized by Congress in the 2014 Farm Bill. They contend that this 
proceeding is not about whether or not a FMMO should be established, 
but rather to determine what the California FMMO provisions should be. 
The Cooperatives are of the opinion that the existence of disorderly 
marketing conditions is not required by the AMAA to justify order 
promulgation. They stressed in their post-hearing briefs that a FMMO 
needs to establish and maintain orderly marketing conditions, and that 
would be accomplished through the adoption of their proposal. However, 
should the Department find that disorderly marketing conditions must be 
present, the Cooperatives provided evidence of what they believe are 
ongoing disorderly marketing conditions in California.
    In general, the record reflects that the California producer 
community supports joining the FMMO system. Producers are of the 
opinion that the prices they currently receive under the CSO do not 
reflect the appropriate value for their milk and its components. 
Particularly, producers believe that the price they receive for milk 
used for cheese manufacturing does not value the dry whey component at 
a level commensurate with what manufacturers receive for whey in the 
marketplace.
    In contrast, the Institute and its members consistently argued 
throughout the hearing and in their post-hearing briefs that the 
existence of disorderly marketing conditions is required by the AMAA, 
and that such conditions do not exist in California. They provided 
testimony explaining how the CSO is a flexible system that is routinely 
evaluated through the CDFA hearing process and changes are made as 
market conditions warrant. The Institute and its members were united in 
the opinion the Cooperatives are solely seeking to receive higher 
prices for their milk, and that such higher prices are not justified 
for California.
    As discussed earlier, the declared policy of the AMAA is to ``. . . 
establish and maintain such orderly marketing conditions for 
agricultural commodities in interstate commerce . . .'' FMMOs 
accomplish this through the classified

[[Page 10648]]

pricing of milk products and marketwide pooling of those classified use 
values. Through these mechanisms, orderly marketing conditions are 
provided so that handlers are assured uniform minimum raw milk costs 
and producers receive minimum uniform payments for their raw milk, 
regardless of its use.
    While in recent history FMMOs have been consolidated, amended and 
expanded, it has been decades since a new order has been promulgated. 
The records of those promulgation proceedings include descriptions of 
the market conditions at the time, and how a FMMO would provide order 
in the market. However, those decisions did not, nor does this decision 
find, that disorderly marketing conditions must exist to justify order 
promulgation. Order promulgation and amendatory proceedings have 
reiterated that a FMMO must adhere to the declared policy of the AMAA, 
where there is no mention of disorderly marketing conditions.
    This decision finds that a FMMO for California would provide more 
orderly marketing conditions in the marketing area, and therefore 
promulgation of a California FMMO is warranted. The record is replete 
with discussion from most parties on whether disorderly marketing 
conditions exist, or are even needed, to warrant promulgation of a 
California FMMO. The declared policy of the AMAA makes no mention of 
``disorder,'' and this decision finds that disorderly marketing 
conditions are not a requirement for an order to be promulgated. The 
standard for FMMO promulgation is to ``. . . establish and maintain 
such orderly marketing conditions . . .,'' and this decision finds that 
the California FMMO recommended meets that standard by providing 
uniform minimum raw milk costs to handlers and minimum uniform payments 
to producers for their raw milk, regardless of its use.
    The record indicates that there are both handler and producer price 
differences between the CSO and the FMMO systems. The record contains 
data regarding the difference in classified use values paid by handlers 
regulated by the CSO and FMMOs. As discussed later, this decision 
recommends the adoption of the classified price formulas that currently 
exist in the FMMO system. A California FMMO, under the provisions 
recommended in this decision, will ensure that the prices handlers pay 
to purchase pooled California milk will be similar to prices paid for 
milk pooled on other FMMOs. As commodity dairy products compete in the 
national market, current FMMOs uniformly price the raw milk used in 
those products. This pricing system ensures that competing handlers 
have uniform minimum raw milk costs, and consequently none has a 
regulatory price advantage. The record demonstrates that California 
manufactured dairy products compete in the national market, however the 
CSO regulated prices paid by California manufacturers are different 
than those priced by FMMOs. This decision finds the proposed California 
FMMO would provide classified milk prices that would be more uniform 
with those paid by competing handlers, and more reflective of the 
national market for manufactured milk products and the local market for 
fluid milk products, as is the policy for the 10 current FMMOs. This 
decision finds that these prices would provide more orderly market 
conditions for California.
    This decision also finds that the classified prices proposed for a 
California FMMO will provide producers with a minimum producer blend 
price more reflective of the national market for manufactured products 
and the utilization of the local California market. Taken together, 
handler and producer prices reflective of the national market, for 
which manufactured dairy products are sold, will ensure orderly 
marketing conditions in California.
    While the current CSO provides classified pricing and marketwide 
pooling similar to a FMMO, the hearing record reflects that California 
dairy producers have been unsuccessful in obtaining a minimum regulated 
price they believe is reflective of the full value of their raw milk. 
Some parties argued on the record that because the CSO already provides 
classified pricing and marketwide pooling, disorderly marketing 
conditions do not exist and therefore there is no justification for 
promulgating a California FMMO. As discussed earlier, disorderly 
marketing conditions are not a requirement for order promulgation. 
Furthermore, this decision finds that it is not the intent of the AMAA 
to preclude a group of producers from petitioning for a FMMO because 
they are otherwise regulated by a state that provides classified 
pricing and marketwide pooling. Such a requirement would place an undue 
barrier on those producers as they would not have the opportunity to 
petition for FMMO regulation simply because they are currently 
regulated by a state.
    Additionally, unlike the CSO, a California FMMO would have the 
authority to regulate interstate commerce. The record reveals that 
there is milk, both raw and packaged, being sold into and out of 
California over which the CSO has no regulatory jurisdiction. The 
revenues from those Class I sales are not shared with all the producers 
supplying the California market. A FMMO would ensure that those 
classified use values would be shared with all producers who supply the 
California market. The ability of a California FMMO to regulate these 
interstate sales, either through full or partial regulation, protects 
the integrity of the entire regulatory framework. Furthermore, out-of-
state producers supplying that milk would be paid the order's blend 
price, which is reflective of the market's total classified use value.
    In their post-hearing brief, the Institute made reference to a 
``six-point test'' that must be met in order for a FMMO to be 
promulgated. While the Institute correctly lists various factors that 
have been used in some order promulgations, the articulated AMAA 
standard that must be met for order promulgation is that the order will 
``. . . establish and maintain such orderly marketing conditions. . . 
.''
    Other parties in post-hearing briefs contend that the 2014 Farm 
Bill mandated that a California FMMO be promulgated. The Farm Bill 
authorized a California FMMO that recognizes quota value as determined 
appropriate through a rulemaking proceeding. It is important to note 
that California producers could have petitioned for a FMMO at any time. 
However, Congress did not provide for the recognition of quota before 
the 1996 Farm Bill, and later, the 2014 Farm Bill. This decision finds 
that a California FMMO is justified, as it will meet the objective of 
the AMAA to ``. . . maintain such orderly marketing conditions . . ..'' 
The provisions recommended are tailored to the California market, 
adhere to the uniform handler and producer pricing provisions of the 
AMAA, and recognize quota as authorized by the 2014 Farm Bill and as 
deemed appropriate by an analysis of this hearing record.
    Additionally, some hearing participants indicated that a goal of 
FMMOs, and therefore of a California FMMO, is to enhance producer 
prices. Other participants from outside of California, in testimony and 
post-hearing briefs, expressed the opinion that a California FMMO 
cannot be promulgated if it would have adverse impacts on other FMMOs, 
and that the Department must act to negate those adverse impacts before 
such promulgation.
    FMMOs are a marketing tool that, among other things, establish a

[[Page 10649]]

marketing framework and enforce market-based minimum prices to handlers 
and uniform payments to producers reflective of all classified use 
values in the market. The record reflects that California represents 
over 20 percent of the United States milk supply. If a California FMMO 
is established, over 80 percent of the United States milk supply would 
fall under the same regulatory framework. This decision finds that a 
California FMMO will provide more orderly marketing conditions in 
California. Through inclusion of California in the FMMO regulatory 
framework, the prices received by all producers participating in the 
FMMO system would be more reflective of the national marketplace for 
dairy products. This would send uniform market signals to producers 
that would allow them to make their own individual business decisions.

4. California Quota Program Recognition

    This section reviews and highlights the testimony and evidence 
received regarding the appropriate recognition of the California quota 
program, including exempt quota, in a California FMMO. The California 
quota program is a state-administered program that entitles the quota 
holder to an additional $0.195 per pound of SNF over the CSO overbase 
price. The money to pay the quota premium is deducted from the CSO 
marketwide pool before the CSO overbase price is calculated. This 
decision finds that the quota program should remain entirely within the 
jurisdiction of CDFA, and that its proper recognition under the 
proposed California FMMO would be through an authorized deduction from 
payments due to producers.

Proposal 1

    A Cooperative witness testified regarding the development of the 
California quota program and its continued significance to California 
dairy farmers. The witness explained the California quota system is a 
tiered pricing system, developed in the late 1960's, that pays 
producers on three price calculations referred to as quota, base, and 
overbase. In its current form, ownership of quota entitles producer-
owners to a higher price for milk covered by quota, and a lower base/
overbase price on their nonquota milk production. Approximately 58 
percent of all California farmers own quota at varying levels, which in 
aggregate represents approximately 2.2 million pounds of SNF on a daily 
basis. The witness testified that, currently, quota premium payments 
are approximately $12.5 to $13 million per month, and this money is 
taken out of the CSO marketwide pool before the base/overbase price is 
calculated. The witness stressed that the quota program is an important 
revenue source for California dairy farms, and the value of quota 
should not be diminished with the adoption of a California FMMO.
    The Cooperative witness reviewed the authorization of the 
California milk pooling and quota programs by the 1967 Gonsalves Milk 
Pooling Act (Gonsalves Act). Originally, the witness explained, 
producers were assigned quota holdings as they related to the 
producers' historical milk production and individual deliveries to the 
Class 1 market. The witness said that in the beginning, quota premiums 
were not a set value, but instead were determined by allocating quota 
holdings to the highest value milk (Class 1), then base and overbase 
production were allocated to the remaining classes in descending order 
of classified value. In essence, the witness explained, quota holders 
were paid the Class 1 price for their quota holdings, and then a 
separate lower value for their non-quota holdings. According to the 
witness, when CDFA sought to enhance producer prices, typically 
additional revenue was assigned to Class 1 and subsequently quota 
holders, and overbase prices were not impacted. As milk production grew 
without corresponding increases in quota holdings, the witness said 
that producers were faced with lower milk prices on their non-quota 
production. Therefore, the Gonsalves Act was amended, effective January 
1, 1994, and set a quota premium at $0.195 per pound of SNF (equivalent 
to $1.70 per cwt). The result, said the witness, was that overbase 
production did not subsidize quota milk, and quota holders could 
receive a reasonable return on their quota holdings.
    The witness also discussed adjustments made to the total CSO 
marketwide pool value in conjunction with the quota program. According 
to the witness, when pooling was originally established, the provisions 
contained producer location differentials designed to encourage quota 
milk to be delivered to Class 1 plants. However, as overbase milk 
production began to grow, location differentials applicable to only 
quota milk did not ensure that the market's Class 1 needs would always 
be met, the witness stated. Consequently, in 1983 transportation 
allowances (on milk movements from ranch-to-plants) were established in 
lieu of location differentials. At the same time, the witness said, 
regional quota adjusters (RQAs), while providing no direct incentive to 
move Class 1 milk, were established to address producer equity issues 
that arose with the elimination of location differentials. The witness 
described RQAs as reductions (ranging from $0.00 to $0.27 per cwt) to 
the producer's quota premium, depending on their farm location and 
plant of receipt. In essence, the witness said, quota premiums have a 
location value: The farther the dairy farm is located from the 
receiving plant, the lower the quota premium.
    The Cooperative witness stated that quota can only be held on Grade 
A milk produced in California, and a quota holder must deliver milk to 
a pool handler at least every 60 days. The witness also noted the fact 
that quota is bought and sold on a monthly basis, which underscores its 
continued importance to California dairy farms. The witness estimated 
that at a price of $525 per pound of SNF, the California quota program 
has a value of $1.2 billion to California dairy farms.
    The witness was of the opinion, which was reiterated in the 
Cooperatives' post-hearing briefs, that under current California and 
Federal statutory authorities, a California FMMO can be established and 
the California quota program maintained. The witness said that the main 
objective of Proposal 1 is to preserve the quota program to the maximum 
extent possible, and proponents believe this is consistent with the 
Congressional intent of the Agricultural Act of 2014 (2014 Farm Bill), 
which authorized a California FMMO that recognizes the quota program.
    The witness concluded by outlining what the proponents believe is 
the necessary framework of a proposed working relationship between CDFA 
and USDA, and that the provisions contained in Proposal 1 are needed to 
effectively maintain the quota program. The witness explained that 
Proposal 1 allows the quota premium to be removed from the marketwide 
pool before a FMMO blend price is computed. Producers would then 
receive the blend price for their nonquota holdings and the FMMO blend 
price plus the quota premium (adjusted for RQAs) for their quota 
holdings. According to the witness, USDA would enforce all producer 
payments, including quota payments, and jurisdiction over quota 
administration, calculations, record keeping and regulatory changes 
would remain with CDFA.
    In their post-hearing brief, the Cooperatives asserted that their 
proposal is the only one that properly

[[Page 10650]]

recognizes the quota program as intended by Congress. The Cooperatives 
rebutted the Institute's claim that adoption of Proposal 1 would create 
a trade barrier to milk produced outside the state because that milk 
would be ineligible for the quota program. The Cooperatives offered a 
modification that would create an out-of-state adjustor to ensure out-
of-state producers do not receive a lower price due to California quota 
premium payments.
    The Cooperatives further argued that Proposal 1 upholds the AMAA's 
uniform pricing provisions, as all quota would be paid uniformly, all 
non-quota milk would be paid uniformly, and all milk located outside of 
the proposed marketing area would be unaffected by the quota program. 
The Cooperatives' brief stated that the ability of a FMMO to regulate 
interstate commerce would provide a more level playing field among all 
handlers with sales in California.
    A consultant witness, appearing on behalf of the proponents of 
Proposal 1, testified regarding the economic importance of the 
California quota program, and provided a brief history of its 
evolution. At current market prices, the witness estimated the value of 
the California quota program at $1.164 billion--a significant economic 
asset for dairy farms and the communities they support, especially in 
counties where a high percentage of milk production is covered by 
quota. The witness noted that not only is quota a solid financial 
investment for dairy farms, but it is a tangible asset used by dairy 
farms to obtain additional financing from banks and lenders.
    The witness utilized an economic impact analysis model to estimate 
the total economic impact of the California quota program. The witness 
estimated that total annual economic value of quota is associated with 
a $27.9 million increase in California GDP, creation of 1,269 jobs, an 
$11 million increase in local tax revenue, and a $16.7 million increase 
in Federal tax revenue. The witness clarified that the analysis did not 
consider the economic impact of the quota program on non-quota holders, 
but stressed any change to the quota program would create regulatory 
uncertainty and diminish the economic value of quota. The witness was 
of the opinion that Proposal 2 does not recognize the economic value of 
quota and would result in the devaluation of the asset, which would 
financially harm California quota holders. The witness concluded that 
Proposal 1 was the only proposal that would preserve and maintain the 
California quota program.
    Twelve dairy farmers testified that a California FMMO must provide 
for the continuation of the California quota program. The farmers 
stressed the importance of the California quota program as an asset for 
dairy farms throughout the state. The witnesses explained that farms 
utilize quota not only for the monthly quota premium they receive, but 
also as an asset on farm balance sheets for lending purposes. The 
witnesses expressed concern that any devaluation of their quota asset 
would be financially harmful to their businesses. Of the 27 dairy 
farmers who testified, 8 said they owned quota, and both quota and non-
quota holders expressed support for the quota program.
    A witness testifying on behalf of WUD also elaborated on the 
importance of maintaining the quota program and the need for strict 
pooling provisions to ensure the quota premium could continue being 
paid. The witness said quota is considered an asset and if its value is 
diminished, it could create cash flow and lending difficulties for 
dairy farms. The witness was of the opinion that if a California order 
was adopted with pooling provisions similar to those found in other 
FMMOs, the quota value would likely be diminished, which would violate 
the California statute.

Proposal 2

    A witness appearing on behalf of the Institute testified regarding 
Proposal 2's recognition of the California quota program. Like the 
Cooperative witness, the Institute witness provided a historical 
overview of the quota program's authorization and evolution. The 
witness stated that the quota program served as a way to compensate 
producers who shipped most of their milk to Class 1 plants through the 
contract system in place prior to marketwide pooling. At the time, the 
witness said, the industry believed prices to producers would become 
more uniform and quota allocation would be equalized among producers as 
Class 1 utilization grew.
    The Institute witness outlined the problems they believe arise from 
Proposal 1's method for quota recognition. The witness was of the 
opinion, which also was stressed in the Institute's post-hearing 
briefs, that the Cooperatives have rendered an overly broad 
interpretation of the 2014 Farm Bill, and in doing so, proposed 
provisions that violate the AMAA. The witness said that before quota 
can be recognized, a California FMMO must first determine and pay a 
traditional FMMO blend price to out-of-state dairy farms who cannot own 
quota. The witness said that subtracting the quota value from the 
marketwide pool first, before computing a non-quota blend price, as 
suggested in Proposal 1, would result in non-uniform payments to 
producers and violate the AMAA.
    The Institute witness explained the mechanics of quota recognition 
in Proposal 2, which were modeled after the former Oregon-Washington 
FMMO. The witness said that out-of-state producers would receive a 
traditional FMMO blend price for their milk pooled on the California 
FMMO. In-state producers would have the option to receive the CDFA 
calculated quota and non-quota prices, or they could irrevocably opt 
out of the quota program and receive the traditional FMMO blend price. 
The witness explained that producers opting to be paid on a quota/non 
quota basis would have their aggregate FMMO blend price monies 
transferred to CDFA for reblending and distribution to that producer 
subset. The witness was of the opinion that by giving in-state 
producers the payment choice, the uniform payment provision of the AMAA 
would be satisfied. The Institute witness said that Proposal 2 sought 
to recognize quota value as authorized by the 2014 Farm Bill while 
simultaneously upholding the purpose and provisions of the AMAA. These 
opinions were reiterated in the Institute's post-hearing brief.
    The Institute witness highlighted California producer support for 
the quota program, and was of the opinion that USDA's Preliminary 
Economic Impact Analysis prediction that the program would quickly 
erode under Proposal 2 was overstated.

Proposal 3

    Proposal 3, submitted by the CPHA, seeks to have exempt quota--as 
part of the California quota program--be recognized and preserved, 
should a California FMMO be recommended. CPHA also proposed that the 
terms of consanguinity, as currently applied to producer-handlers under 
CDFA regulations, be removed to allow indefinite perpetuation of exempt 
quota. CPHA withdrew the second part of their proposal at the hearing.
    A consultant witness for CPHA provided testimony regarding the 
history of the Gonsalves Act and detailed how exempt quota was included 
as part of the State's milk marketing program from its inception. 
According to the witness, the CSO marketwide pooling system and quota 
program was developed as an alternative to a FMMO. The witness said the 
quota program was originally designed so that farmers who

[[Page 10651]]

historically served fluid milk processors would continue to receive a 
higher price for the portion of their milk that had previously been 
under Class 1 contract; under the CSO marketwide pooling system, all of 
the Class 1 revenue would be shared with the market's producers. Over 
time, the witness said, it was thought that quota holdings would be 
equalized among dairy farmers. Those who had not previously held 
contracts with fluid milk processors were expected to be assigned 
rights to new quota created as the fluid milk market expanded.
    The consultant witness explained that dairy farmers who processed 
their own milk into fluid milk products were issued exempt quota, 
rather than regular quota, under the new CSO system. The exempt quota 
was allotted to these vertically integrated entities, known as 
producer-handlers, in recognition of how their milk was marketed. The 
witness said that there were originally 49 exempt quota holders, but 
only 4 remain. The witness said that the amount of exempt quota was 
legislatively capped in 1995.
    The consultant witness clarified that exempt quota was issued as 
certificates of ownership to the producer entity. The witness explained 
that the handler side of the business is still required to report all 
its milk receipts to the CSO, and in turn, the handler entity receives 
a credit against its financial obligation to the pool for the volume of 
exempt quota owned by the producer entity. The handler entity then 
accounts to the CSO marketwide pool for Class 1 sales in excess of the 
exempt quota volume, said the witness. The producer entity side 
receives the Class 1 price from the handler side for the exempt quota 
volume of milk they produce, and then they receive a combination of the 
quota and overbase prices from the marketwide pool, depending on their 
regular quota holdings.
    A witness from Producers, testifying on behalf of CPHA, said that 
all four members of CPHA own exempt quota, are referred to as ``Option 
70'' producer-handlers, are fully regulated, and report to the CSO 
marketwide pool for all their Class 1 sales. The witness contrasted 
this to ``Option 66'' producer-handlers, who are fully exempt from the 
CSO and do not participate in the quota program. Of the original 49 
``Option 70'' producer-handlers, the witness said only the 4 CPHA 
members remain, and all have maintained essentially the same business 
structures since the quota program was established.
    According to the Producers witness, CPHA members hold both exempt 
quota and regular quota, but most of the milk produced by CPHA members 
is accounted for as overbase production. Using 2015 CDFA data, the 
Producers witness calculated that ``Option 70'' producer-handler milk 
represents approximately 0.6 percent of all California production. The 
witness estimated that exempt quota represents 17.4 percent of ``Option 
70'' producer-handler production and 4.6 percent of all California 
Class 1 sales. The witness said that all of the milk produced and sold 
by CPHA members, including volumes covered by exempt quota, is reported 
to the CSO marketwide pool.
    The Producers witness said that the Gonsalves Act primarily 
addressed industry problems that did not impact producer-handlers 
because all the milk from their dairy operations flowed to their own 
Class 1 plants and the markets they had developed. The witness was of 
the opinion that the exempt quota feature was included as part of the 
quota program to recognize the vertically integrated producer-handler's 
unique business structure.
    Additional CPHA witnesses representing Foster and Rockview joined 
the Producers witness in describing their acquisition and maintenance 
of exempt quota over the years. Each mentioned they had to make 
strategic business decisions or sacrifices in order to preserve their 
exempt quota status.
    The CPHA witnesses attempted to quantify the value of exempt quota, 
explaining that exempt quota is carried as an asset on their farms' 
books and can be sold as or converted to regular quota. The CPHA 
witnesses measured the value of exempt quota as the difference between 
the CSO Class 1 and the quota prices. Using historical CDFA data, the 
Producers and Rockview witnesses calculated the average exempt quota 
value over the previous 20 years to be approximately $1.14 and $1.20 
per cwt, respectively.
    Using CDFA data for the preceding five years, a second Foster 
witness calculated the value of exempt quota in terms of regular quota 
for both northern and southern California. The witness estimated that 
every pound of exempt quota in northern California and southern 
California is worth 1.96 pounds and 2.12 pounds of regular quota, 
respectively. Valuing regular quota at $525 per pound of SNF, but not 
adjusting for RQAs, the witness estimated the value of exempt quota as 
$1,029 per pound of SNF in northern California, and $1,113 per pound of 
SNF in southern California. Citing CDFA production data, the witness 
calculated the value of the collective 40,244.51 pounds of SNF exempt 
quota in northern California as $41,411,600 and the 17,669.59 pounds of 
SNF exempt quota in southern California as $19,666,253.
    The Rockview witness added that converting exempt quota to regular 
quota would make those volumes eligible for CSO transportation credits 
that are not currently available for exempt quota milk.
    A Cooperative witness also testified with regard to the evolution 
of exempt quota for ``Option 70'' producer-handlers. The witness 
estimated that the four CPHA members market approximately five percent 
of all California Class 1 sales. The witness explained that exempt 
quota entitles the producer-handler to waive any pool obligation on 
those holdings. The witness described the value of exempt quota as the 
difference between the Class 1 and quota prices. The witness estimated 
that from 1970 through 2014, the additional value of exempt quota was 
approximately $0.58 per cwt in southern California. The witness 
estimated the monthly impact to the marketwide pool of recognizing 
exempt quota in this manner at less than one-half of one cent per cwt. 
The witness testified that the Cooperatives did not oppose adoption of 
Proposal 3.
    A witness representing the Institute was of the opinion that exempt 
quota was offered to large producer-handlers for political expediency. 
According to the witness, as the Gonsalves Act and the particulars of 
marketwide pooling were being developed in the 1960s, larger producer-
handlers worried they would lose advantages enjoyed under the then-
prevailing system. To head off producer-handler opposition to 
marketwide pooling, the witness contended concessions were made to 
smaller producer-handlers who were exempted entirely from pooling and 
received no quota allocation. Larger entities were given the option to 
forgo the quota premium and instead exempt those pounds from their 
Class 1 pool obligations.
    The Institute witness testified that exempt quota holds no real 
market value, as it cannot be bought and sold. The witness acknowledged 
that determining an equivalency between exempt quota and regular quota 
might be one method to assign a value to exempt quota. The Institute 
witness was of the opinion that exempt quota holders have already 
recovered the cost of their exempt quota, which they were last able to 
purchase 20 years ago.
    A witness from Dean Foods testified that the competitive advantage 
producer-handlers gain from their exempt quota can be spread out over

[[Page 10652]]

their total volume of Class 1 sales. The witness argued that CPHA 
witnesses diluted the impact of exempt quota on Class 1 sales by 
comparing exempt quota volumes to total California milk production. The 
witness contended that it was more accurate to compare total ``Option 
70'' producer-handler Class 1 production to total California Class 1 
sales. The witness calculated that the total volume of the 4 producer-
handlers, including their exempt quota volumes, accounted for 24 
percent of total California Class 1 volume, including milk from out of 
state. The witness testified that 31 handlers process the other 76 
percent of California Class 1 milk.
    Additional fluid milk processor witnesses representing Clover 
Stornetta Farms and Farmdale Creamery, along with another Dean Foods 
witness, all testified that their companies face significant 
disadvantages compared to producer-handlers with exempt quota because, 
unlike exempt quota holders, their companies must account to the CSO 
pool at classified prices every month for all the milk they utilize. 
Some witnesses claimed they have lost sales to ``Option 70'' producer-
handlers due to these regulatory disadvantages.
    The Producers witness countered opposition testimony that exempt 
quota provides a competitive advantage enabling them to bid customers 
away from fully-regulated handlers. The witness said that Producers 
pays the Class 1 price to the farm side of the business for the exempt 
quota milk they use, and pays the quota or overbase price for the rest 
of the farm's milk it processes.
    In its post-hearing brief, the Institute argued against recognition 
of exempt quota under a California FMMO. According to the Institute's 
brief, the recognition of exempt quota in a California FMMO would 
violate the AMAA's uniform pricing provisions. The Institute explained 
that by recognizing exempt quota, exempt-quota-holding-producer 
entities would not share the value of all their Class 1 sales with 
their fellow dairy farmers, and handler entities would not be required 
to pay uniform minimum prices for their raw milk supplies.
    The Institute brief further argued that the 2014 Farm Bill language 
authorizing a California FMMO that recognizes quota value does not mean 
California's entire quota system should be preserved and maintained, 
nor that certain Class 1 handlers should be permitted to have a 
regulatory competitive advantage over other Class 1 handlers. The 
Institute brief also argued that permitting a differentiated status for 
only those few entities who currently own exempt quota would be 
inequitable to new market entrants.
    In response, CPHA's reply brief asserted that CPHA handler entities 
currently pay Class 1 prices for all their raw milk, exempt quota 
provides no financial advantage over other fully-regulated handlers, 
and there are no market disruptions attributable to exempt quota. The 
reply brief stressed that CPHA producer entities, not their handler 
counterparts, hold exempt quota. Their reply brief also asserted the 
record contains no evidence that exempt quota holders enjoy raw milk 
price advantages. CPHA contended that all handlers pay the same 
classified price for raw milk in California despite misperceptions to 
the contrary. CPHA pointed out that competitors have won and lost 
accounts for milk sales for a variety of reasons not necessarily 
attributed to exempt quota ownership.
    According to CPHA's reply brief, Congress's use of the term ``quota 
system,'' and its omission of specific reference to exempt quota in the 
2014 Farm Bill language is consistent with its directive that the 
Secretary should hold a hearing to consider, and is authorized to 
recognize, all aspects of California's quota program under a California 
FMMO.
    CPHA's reply brief clarified the intent of Proposal 3 to allow for 
the preservation of exempt quota status for those few producer-handlers 
who own it. CPHA argued its members are not seeking exemption from all 
pricing and pooling obligations under a California FMMO, but merely 
recognition of their ownership of exempt quota and the related volumes 
of production it represents.
    A post hearing brief submitted by Trihope expressed concerns 
regarding the recognition of the California quota program within the 
FMMO framework. Trihope was of the opinion that any recognition of 
quota would violate the AMAA's uniform payments provision. Trihope also 
wrote that authorizing quota payments would give a revenue advantage to 
California dairy farms and create a trade barrier for out-of-state 
farms seeking to be pooled on the California FMMO.

Findings

    The record contains detailed information about the establishment 
and evolution of the quota program administered by the State of 
California. The record reflects that the Gonsalves Act legislatively 
authorized both the California quota program and marketwide pooling 
within the structure of the CSO. Until that point, dairy farms were 
paid through individual handler pools that reflected a plant's use 
values for their milk--there was no marketwide pooling function that 
allowed all producers to share in the benefits from Class 1 sales and 
the burden of balancing the market to ensure an adequate supply of milk 
to meet Class 1 demand. Many witnesses spoke to the political 
compromise reached to compensate dairy farmers who held Class 1 supply 
contracts from the financial loss they would incur by pooling and 
sharing their Class 1 revenue with all dairy farmers in California. 
While the original quota allotment was based on existing Class 1 
contracts, it was thought at the time that quota would equalize among 
producers as Class 1 utilization increased and future quota allotments 
were issued; however, this did not occur.
    Many witnesses spoke of the importance they believe the California 
quota program has for the state's dairy industry. Producers spoke of 
the investments they made in purchasing quota allotments, and the 
continued financial benefit it provides through the monthly quota 
premium they receive. Even producers who own little or no quota spoke 
of the importance of continuing the program for their fellow dairy 
farmers.
    The 2014 Farm Bill authorized the promulgation of a California 
FMMO, and specified that the order ``shall have the right to reblend 
and distribute order receipts to recognize quota value.'' The hearing 
record is replete with testimony on the proper interpretation of those 
final three words, ``recognize quota value.'' The Cooperatives 
conveyed, and stressed in their post-hearing brief submissions, that 
the 2014 Farm Bill mandates the quota program must be recognized, and 
only the method of recognition is to be decided through this rulemaking 
proceeding. The Cooperatives are of the opinion that the proper 
recognition of quota value is through the deduction of quota monies 
from the marketwide pool before a California blend price is calculated, 
as is current practice for the CSO.\17\ The Cooperatives stressed 
repeatedly that should any conflict be found between the provisions of 
the 2014 Farm Bill and the AMAA, the 2014 Farm Bill language should be 
given more credence, as it is the most recent Congressional action.
---------------------------------------------------------------------------

    \17\ This position was slightly modified in their post-hearing 
brief to also adjust prices for out-of-state producers so that their 
price was not impacted by quota payments.
---------------------------------------------------------------------------

    Institute witnesses and post-hearing briefs stressed that quota 
recognition must be harmonized with the AMAA, in

[[Page 10653]]

particular its uniform payments and trade-barrier provisions. Should 
any conflict arise, the Institute contends that because the Farm Bill 
did not amend the AMAA, the AMAA as the authorizing legislation should 
take precedent. The Institute's approach to recognizing quota value is 
to first allow producers the one-time decision to opt out of the quota 
program. Those producers who opt out of the quota program would be paid 
a FMMO blend price calculated without a deduction for quota. Those 
producers who remain in the quota program would have their FMMO blend 
price monies sent, in aggregate, to CDFA for reblending and 
redistribution according to their quota and nonquota milk marketings. 
The Institute is of the opinion that because dairy producers opting out 
of the quota program would not have their payments affected by quota, 
recognizing quota under a California FMMO would not violate the uniform 
pricing and trade-barrier provisions of the AMAA.
    As discussed earlier, when promulgating or amending any FMMO, the 
Department must always evaluate whether the proposed action is 
authorized by the AMAA. The AMAA not only clearly defines its policy 
goal, which this decision has already discussed, but it also defines 
specific provisions that must be contained in the FMMO framework. The 
two most relevant to the discussion on quota recognition are the 
provision for uniform payments handlers make to producers, and the 
provision to prevent trade barriers. The uniform payment provisions 
require all handlers regulated by a FMMO to pay the same classified use 
value for their raw milk, and all producers whose milk is pooled on a 
FMMO to receive the same price for their milk regardless of how it is 
utilized. In this respect, similarly situated handlers are assured that 
they are paying the same raw milk costs as their competitors, and 
producers are indifferent as to where or how their milk is utilized, as 
they receive the same price regardless.
    The trade barrier provision specifies that no FMMO may, in any 
manner, limit the marketing of milk or milk products within the 
marketing area. In this regard, FMMOs cannot adopt provisions that 
would create any economic barrier limiting the marketing of milk within 
marketing area boundaries.
    To determine how to properly recognize quota value, Congress 
provided additional guidance to the 2014 Farm Bill language through the 
2014 Conference Report.\18\ In the report, Congress specified that the 
Department has discretion to determine how best to recognize quota 
value in whatever manner is appropriate on the basis of a rulemaking 
proceeding. Consistent with the Conference Report, this decision 
evaluated record evidence pertaining to how the current California 
quota program operates, how it can best be recognized within FMMO 
provisions tailored to the California market, and how all the FMMO 
provisions work in conjunction with each other to adhere to all AMAA 
provisions.
---------------------------------------------------------------------------

    \18\ Official Notice is taken of the Agricultural Agreement of 
2014 Conference Report. https://www.congress.gov/congressional-report/113th-congress/house-report/333/1.
---------------------------------------------------------------------------

    The California quota program, like the CSO, is administered by 
CDFA. The record reflects that 58 percent of California dairy farmers 
own quota. In its current form, the quota program entitles a quota 
holder to an additional $0.195 per pound SNF (equivalent to $1.70 per 
cwt) over the market's overbase price on the quota milk they market 
each month. Similar to their FMMO counterparts, California handlers pay 
classified use values for their milk, and those values make up the CSO 
marketwide pool. Each month, CDFA deducts quota monies from the CSO 
marketwide pool before a marketwide blend price, otherwise known as the 
overbase price, is calculated. CDFA then announces the quota and 
overbase prices \19\ to be paid to California dairy farmers. As a 
result, in general, nonquota milk receives the market's overbase price, 
and quota milk receives the overbase price plus an additional $1.70 per 
cwt. CDFA enforces payments of both quota and overbase prices. Record 
data shows that the deduction from the CSO marketwide pool to pay quota 
premiums is approximately $12.5 to $13 million per month. Numerous 
witnesses estimated, at current quota market prices, the asset value of 
quota at $1.2 billion.
---------------------------------------------------------------------------

    \19\ The record reflects that CDFA also announces a base price 
which is equal to the overbase price. For simplicity, this decision 
will refer only to the overbase price.
---------------------------------------------------------------------------

    The record reflects that the California quota program is funded by 
California producers. All handlers regulated through the CSO pay 
minimum classified use values, and it is only once those values have 
been pooled that the quota value is deducted from the pool. Data on the 
record reflects all California dairy farmers, including quota holders, 
receive $0.37 per cwt less, on average, for all of their milk 
marketings in order to fund the $0.195 per pound of quota SNF payment 
to quota holders.
    This decision finds the California quota program could be 
maintained, administered, and enforced by CDFA and that a California 
FMMO should operate as a stand-alone program. As is currently done in 
all FMMOs, handlers would pay classified use values into the pool, and 
all producers, both in state and out of state, would receive a FMMO 
blend price reflective of the market's use values. It is through this 
structure that a California FMMO could ensure the uniform payment and 
trade barrier provisions of the AMAA are upheld.
    Should CDFA determine it can continue to operate the California 
quota program through the use of producer monies, as is the current 
practice, the proposed California FMMO could recognize quota values 
through an authorized deduction by handlers from the payments due to 
producers for those dairy farmers determined by CDFA to be participants 
in the state-administered California quota program. The amount of the 
deduction would be determined and announced by CDFA.
    Currently, FMMOs allow for authorized deductions, such as the Dairy 
Promotion and Research Program assessment, from a producer's milk 
check. The California FMMO similarly would authorize a deduction for 
the state-administered California quota program. The California FMMO 
would allow regulated handlers to deduct monies, in an amount 
determined and announced by CDFA, from blend prices paid to California 
dairy farmers for pooled milk, and send those monies to CDFA to 
administer the quota program. CDFA would in turn enforce quota payments 
to quota holders.
    In essence, this decision proposes that the California quota 
program could continue to operate in essentially the same manner as it 
currently does. The record reflects that the California quota program 
already assesses California producers to pay quota values to quota 
holders. While producers may not see this as an itemized deduction on 
their milk checks, their overbase price is lower than it otherwise 
would be. This is a result of deducting the quota value from the pool 
prior to calculating the overbase price.
    The California FMMO would authorize deductions from those 
California producers whose milk is pooled on the order. As this 
decision will later explain, the proposed California FMMO would have 
performance-based pooling standards that allow for milk to not be 
pooled. CDFA would be responsible for the collection of California 
producer monies for milk not pooled, because a California FMMO would 
only apply to producer

[[Page 10654]]

milk as defined by the order. USDA and CDFA could cooperate by sharing 
data through a memorandum of understanding to ensure that, between the 
two regulatory bodies, all appropriate California producers are 
assessed an amount necessary to administer the quota program.
    In regard to the treatment of exempt quota as addressed in Proposal 
3, this decision finds that exempt quota is part of the California 
quota program and therefore its proper recognition should be determined 
by CDFA. The record demonstrates that exempt quota was initially 
granted when the California quota program was established, and like 
regular quota, the provisions have been adjusted numerous times through 
both California legislative and rulemaking actions. This decision finds 
the continuation of exempt quota, in whatever manner appropriate, 
should be determined by CDFA.
    The record reflects that under the proposed FMMO, the four 
California producer-handlers who own exempt quota would likely become 
fully-regulated handlers because their sales exceed three-million 
pounds per month. These fully-regulated handlers would be required to 
account to the marketwide pool for all of their Class I utilization and 
pay uniform FMMO minimum classified prices for all milk they pool. The 
CPHA witnesses testified that exempt quota is held on the producer side 
of their businesses. CDFA could best determine how those producers 
holding exempt quota should be compensated. Such compensation cannot be 
made from reducing the minimum Class I obligation of FMMO fully-
regulated handlers without undermining the uniform handler payment 
provision of the AMAA.
    Throughout the hearing and in post-hearing briefs, dairy farmers 
and their Cooperative representatives stressed that while a California 
FMMO would provide them a more equitable price for their milk, entry 
into the FMMO system must not diminish or disturb, in any form, 
California quota values. This decision finds that the package of FMMO 
provisions recommended in this decision would create more orderly 
marketing of milk in California, adhere to all the provisions of the 
AMAA, and allow the California quota program to operate independently 
of the FMMO. In doing so, the California quota program will not be 
diminished or disturbed in any form by California's entry into the FMMO 
system.

5. Definitions and Uniform Provisions

    This section outlines definitions and provisions of a California 
FMMO that describe the persons and dairy plants affected by the FMMO 
and specify the regulation of those entities.
    The Cooperatives and the Institute both proposed regulatory 
language for an entire FMMO, including definitions and regulations 
specific to a California FMMO, as well as adoption of several of the 
uniform provisions common to other FMMOs. In many cases, hearing 
witnesses simply provided the list of uniform provisions for which they 
supported adoption, and in most cases, proponents for Proposals 1 and 2 
agreed on the inclusion of these provisions.
    The FMMO system currently provides for uniform definitions and 
provisions, which are found in Part 1000 under the General Provisions 
of Federal Milk Marketing Orders. Where applicable, those provisions 
are incorporated by reference into each FMMO. The uniform provisions 
were developed as part of FMMO Order Reform to prescribe certain 
provisions that needed to be contained in each FMMO to describe and 
define those entities affected by FMMO regulatory plans.
    As outlined in the Order Reform Proposed Rule \20\ and as 
implemented in the Final Rule,\21\ the establishment of a set of 
uniform provisions provides for regulatory simplification and defines 
common terms used in the administration of all FMMOs, resulting in the 
uniform application of basic program principles throughout the system. 
Application of standardized terminology and administrative procedures 
enhances communication among regulated entities and supports effective 
administration of the individual FMMOs.
---------------------------------------------------------------------------

    \20\ Official Notice is taken of Federal Order Reform Proposed 
Rule: 63 FR 4802.
    \21\ Official Notice is taken of Federal Order Reform Final 
Rule: 64 FR 47898.
---------------------------------------------------------------------------

    This decision finds that a set of uniform provisions should 
continue to be maintained throughout the FMMO system to ensure 
consistency between uses of terms. Therefore, this decision finds that 
a California FMMO should contain provisions consistent with those in 
the 10 current FMMOs.
    Marketing conditions in each regulated marketing area do not lend 
themselves to completely identical provisions. Consequently, some 
provisions are tailored to the marketing conditions of the individual 
order, and provisions recommended for a California FMMO in this 
decision are similarly tailored to the California market where 
appropriate. This section provides a brief description of the uniform 
definitions and provisions recommended for a California FMMO. Where a 
definition or provision does not lend itself to uniform application, it 
is discussed in greater detail here or in other sections of this 
document.
    This decision recommends the following definitions for a California 
FMMO:
    Marketing Area. The Marketing Area refers to the geographic area 
where handlers who have fluid milk sales would be regulated. In this 
case, the marketing area should include the entire state of California. 
The marketing area encompasses any wharves, piers, and docks connected 
to California and any craft moored there. It also includes all 
territory within California occupied by government reservations, 
installations, institutions, or other similar establishments.
    Route Disposition. A Route Disposition should be a measure of fluid 
milk (Class I) sales in commercial channels. It should be defined as 
the amount of fluid milk products in consumer-type packages or 
dispenser units delivered by a distributing plant to a retail or 
wholesale outlet, either directly or through any distribution facility.
    Plant. A Plant should be defined as what constitutes an operating 
entity for pricing and regulatory purposes. Plant should include the 
land, buildings, facilities, and equipment constituting a single 
operating unit or establishment where milk or milk products are 
received, processed, or packaged. The definition should include all 
departments, including where milk products are stored such as coolers, 
but not separate buildings used as reload points for milk transfers or 
used only as distribution points for storing fluid milk products in 
transit. On-farm facilities operated as part of a single dairy farm 
entity for cream separation or concentration should not be considered 
plants.
    Distributing Plant. A Distributing Plant should be defined as a 
plant approved by a duly constituted regulatory agency to handle Grade 
A milk that processes or packages fluid milk products from which there 
is route disposition.
    Supply Plant. A Supply Plant should mean a regular or reserve 
supplier of bulk milk for the fluid market that helps coordinate the 
market's milk supply and demand. A supply plant should be a plant, 
other than a distributing plant, that is approved to handle Grade A 
milk as defined by a duly constituted regulatory agency, and at which 
fluid milk products are received or from which fluid milk products are 
transferred or diverted.

[[Page 10655]]

    Pool Plant. A Pool Plant should mean a plant serving the market to 
a degree that warrants their producers sharing in the added value that 
derived from the classified pricing of milk. The pool plant definition 
provides for pooling standards that are unique to each FMMO. The 
specifics of the pooling standards recommended for a California FMMO 
are discussed in detail in the Pooling section of this decision.
    Nonpool Plant. A Nonpool Plant should be defined as plants that 
receive, process, or package milk, but do not satisfy the standards for 
being a pool plant. This provision provides additional clarity to 
define the extent of regulation applicable to plants. Nonpool plants 
should be further defined to include: A Plant Fully Regulated under 
Another Federal Order, which means a plant that is fully subject to the 
pricing and pooling provisions of another order; a Producer-Handler 
Plant, which means a plant operated by a producer-handler as defined 
under any Federal order; a Partially Regulated Distributing Plant, 
which means a plant from which there is route disposition in the 
marketing area during the month, but does not meet the provisions for 
full regulation; and an Unregulated Supply Plant, which is a supply 
plant that does not qualify as a pool supply plant.
    Exempt Plant. An Exempt Plant also is a nonpool plant, and should 
be defined as a plant exempt from the pricing and pooling provisions of 
any order, although the exempt plant operator would still need to 
comply with certain reporting requirements regarding its route 
disposition and exempt status. Exempt plants should include plants 
operated by a governmental agency with no route disposition in 
commercial market channels, plants operated by duly accredited colleges 
or universities disposing of fluid milk products only through their own 
facilities and having no commercial route disposition, plants from 
which the total route disposition is for individuals or institutions 
for charitable purposes and without remuneration, and plants that have 
route disposition and sales of packaged fluid milk products to other 
plants of no more than 150,000 pounds during the month.
    The exempt plant definition was standardized as part of Order 
Reform to provide a uniform definition of distributing plants which, 
because of their size, did not significantly impact competitive 
relationships among handlers in the market. The 150,000 pound limit on 
route disposition and sales of packaged fluid milk products was deemed 
appropriate because at the time it was the maximum amount of fluid milk 
products allowed by an exempt plant in any FMMO. Therefore, the uniform 
provisions ensured that exempt plants remained exempt from pricing and 
pooling provisions as part of Order Reform. This decision finds that to 
provide for regulatory consistency, the exempt plant definition in a 
California FMMO should be uniform with the 10 current FMMOs. This 
provision would allow for smaller California distributing plants that 
do not significantly impact the competitive relationship among handlers 
to be exempt from the pricing and pooling provisions of a California 
FMMO.
    Both the Cooperatives and the Institute proposed adoption of the 
standard FMMO definition of exempt plants, and hearing witnesses were 
supportive of the proposals. However, in their post-hearing brief, the 
Cooperatives proposed two additional exempt plant categories to provide 
regulatory relief to small handlers under Proposal 1. The two 
additional exempt plant categories proposed include: (1) Plants that 
process 300,000 pounds or less of milk during the month into Class II, 
III, and IV products, and have no Class I production or distribution; 
and (2) plants that process, in total, 300,000 pounds or less of milk 
during the month, from which no more than 150,000 pounds is disposed of 
as route disposition or sales of packaged fluid milk products to other 
plants. Proposal 1, as originally drafted, would have fully regulated 
all handlers that received California milk, except for plants with 
150,000 pounds or less of route disposition. Through the proposed 
modification, the Cooperatives sought to extend exempt plant status to 
smaller plants regardless of their use of milk. In essence, it would 
allow smaller plants with primarily manufacturing uses to be exempt 
from the pricing and pooling provisions. This decision finds the 
recommended performance-based pooling provisions make such additional 
exemptions unnecessary, as plants with manufacturing uses will have the 
option to elect not to pool their milk supply.
    Handler. A Handler should be defined as a person who buys milk from 
dairy farmers. Handlers have a financial responsibility for payments to 
dairy farmers for milk in accordance with its classified use. Handlers 
must file reports with the Market Administrator detailing their 
receipts and utilization of milk.
    The handler definition for a California FMMO should include the 
operator of a pool plant, a cooperative association that diverts milk 
to nonpool plants or delivers milk to pool plants for its account, and 
the operator of a nonpool plant.
    The handler definition should also include intermediaries, such as 
brokers and wholesalers, who provide a service to the dairy industry, 
but are not required by the FMMO to make minimum payments to producers.
    The Cooperatives proposed adoption of the uniform FMMO handler 
definition for a California FMMO. The Institute proposed adopting the 
uniform handler definition, modified to include proprietary bulk tank 
handlers (PBTH). A witness representing the Institute and Hilmar 
testified regarding the PBTH provision. The witness said a PBTH 
provision had been included in some former FMMOs to allow proprietary 
handlers to pool milk in a fashion similar to cooperative handlers, 
without needing to first deliver milk to a pool supply plant to meet 
the performance standards of the order. The witness explained that 
under Proposal 2, a PBTH would have to operate a plant--located in the 
marketing area--that does not process Class I milk and further, the 
PBTH would have to be recognized as the responsible handler for all 
milk pooled under that provision. The witness was of the opinion that 
the PBTH provision would promote efficient milk movements, reduce 
transportation costs, and eliminate unnecessary milk loading and 
unloading simply to meet the order's performance standards.
    The witness said the flexibilities of a PBTH provision would offer 
operational efficiencies to Hilmar and allow them to meet criteria 
similar to the pool supply plant qualifications advanced in Proposal 2. 
The witness explained that Hilmar would be able to ship milk directly 
from a farm to a distributing plant, rather than shipping milk first to 
a pool supply plant and then on to a distributing plant.
    In their post-hearing briefs, the Cooperatives opposed the PBTH 
provision, citing disorderly marketing conditions with its use in 
earlier marketing orders, and stating that the provision is 
unnecessary, prone to create disorder, and, as proposed, 
administratively unworkable.
    The record supports adoption of the standard FMMO handler 
definition without the additional PBTH provision prescribed in Proposal 
2. The Department has found in the past that PBTH provisions led to the 
pooling of milk that was not part of the legitimate reserve supply for 
distributing plants in

[[Page 10656]]

the marketing area.\22\ In California, with a relatively low Class I 
utilization, such a provision is unnecessary to ensure an adequate 
supply of milk for Class I use. Therefore, this decision finds that the 
uniform handler definition, without the inclusion of a PBTH provision, 
is appropriate for a California FMMO.
---------------------------------------------------------------------------

    \22\ Official Notice is taken of Pacific Northwest and Western 
Marketing Areas Tentative Final Decision: 68 FR 49375.
---------------------------------------------------------------------------

    Producer-Handler. Under the 10 existing FMMOs, Producer-Handlers 
are defined as persons who operate, as their own enterprise and at 
their sole risk, both a dairy farm and a distributing plant from which 
there is route disposition within the marketing area, and have total 
Class I fluid milk sales of no more than three million pounds per 
month. Seven of the existing orders also allow producer-handlers to 
receive up to 150,000 pounds of fluid milk products per month from 
fully-regulated handlers in any order. Producer-handlers are exempt 
from the pricing and pooling provisions under each of the existing 
orders.
    As a result of their exemption from the pricing and pooling 
provisions, producer-handlers, in their capacity as handlers, are not 
required to pay the minimum class prices established under the orders, 
nor are they, in their capacity as producers, granted minimum price 
protection for disposal of their surplus milk. Producer-handlers, in 
their capacity as handlers, are not obligated to equalize their use-
value of milk through payment of the difference between their use-value 
of milk and the respective order's blend price into the producer-
settlement fund. Thus, producer-handlers retain the full value of milk 
processed and disposed of as fluid milk products by their operation.
    Entities defined as FMMO producer-handlers must adhere to strict 
criteria that limit certain business practices, including the purchase 
of supplemental milk. Given these limitations, producer-handlers bear 
the full burden of balancing their milk production between fluid and 
other uses. Milk production in excess of their Class I route 
disposition does not enjoy minimum price protection under the orders 
and may be sold at whatever price is obtainable in the market.
    Producer-handlers are required to submit reports and provide access 
to their books, records and any other documentation as deemed necessary 
by the Market Administrator to ensure compliance with the requirements 
for their regulatory status as producer-handlers. Therefore, producer-
handlers are regulated under the orders, but are not ``fully 
regulated'' like other handlers who are subject to an order's pricing 
and pooling provisions.
    Under the CSO, two categories of producer-handlers are recognized. 
``Option 66'' producer-handlers may request exemption from the CSO's 
pooling regulations if both their farm production and their sales 
average less than 500 gallons of milk per day on an annual basis, and 
if they ship 95 percent of their production to retail or wholesale 
outlets. ``Option 66'' producer-handlers are fully exempt from the pool 
for their entire production and may not own quota or production base. 
The record reflects that there were two ``Option 66'' producer-handlers 
in California at the time of the hearing. No production data was 
submitted at the hearing to quantify the volume of ``Option 66'' 
producer-handler milk exempt from the CSO pool.
    The CSO's second producer-handler category pertains to ``Option 
70'' producer-handlers--large scale entities that own exempt quota, 
which exempts them from pooling a portion of their Class 1 milk. The 
exempt quota held by ``Option 70'' producer-handlers was discussed 
earlier in this decision.
    Proposals 1 and 2 both include definitions and provisions for 
producer-handlers consistent with the 10 FMMOs that currently exempt 
persons who operate both dairy farms and distributing plants, and 
process and distribute no more than three million pounds of fluid milk 
per month. The producer-handler regulations under Proposal 2 more 
closely resemble those in the Pacific Northwest and Arizona FMMOs in 
that they contain additional specificity about producer-handler 
qualifications.
    A Cooperative witness supported adoption of the standard FMMO 
producer-handler definition for a California FMMO as contained in 
Proposal 1. Under the standard definition, producer-handlers who sell 
or deliver up to three million pounds of Class I milk or packaged fluid 
milk products monthly would be exempt from the pricing and pooling 
provisions. The witness added that under Proposal 1, producer-handlers 
could own regular quota and qualify for transportation credits.
    Two producer witnesses who also operate processing facilities in 
California described their individual experiences related to running 
small dairy farms and fluid milk processing operations. Both witnesses 
testified that they supported Proposal 1 because, among other things, 
they thought the proposed FMMO producer-handler definition could 
provide them exemptions from the pooling requirements for their Class I 
production and sales, something that they do not currently enjoy from 
the CSO.
    A witness from Organic Pastures Dairy Company, LLC (Organic 
Pastures) testified on behalf of Organic Pastures and three other small 
San Joaquin Valley ``producer-distributor'' entities. According to the 
witness, these entities produce and bottle their own Class 1 milk, but 
do not qualify as ``Option 66'' producer-handlers, and must therefore 
account to the CSO pool. The witness explained that these businesses 
have taken risks to develop their own brands and customer bases, but 
struggle to survive financially. The witness said that Organic 
Pastures' monthly pool obligation for December 2014 was $50,000 for the 
milk they bottled and sold in California. The witness contended that 
because they produce, process, and distribute their own products, they 
should be exempt from regulation.
    The entities represented by the witness supported a California FMMO 
because they believe they would meet the FMMO producer-handler 
definition and thus be exempt from the pricing and pooling provisions. 
The witness testified that the standard three-million pound limit would 
allow them to grow their businesses, but remain exempt from pricing and 
pooling provisions.
    A witness from Dean Foods testified in support of the producer-
handler provision contained in Proposal 2. The witness described 
similarities and differences between the producer-handler definitions 
in Proposals 1 and 2. The witness added that proponents of Proposal 2 
recommended adoption of the additional ownership requirements, which 
mirror the standards in the Pacific Northwest and Arizona FMMOs. The 
witness explained that the additional requirements would ensure that 
larger-size operations typical of the western Federal orders that meet 
the producer-handler definition would not be able to undermine the 
intent of the provision.
    The witness testified that Dean Foods fully supported the 
Institute's proposal to cap producer-handler exemptions at three 
million pounds of monthly Class I route disposition. The witness cited 
USDA decisions that found producer-handlers with greater than three 
million pounds of route disposition per month impacted the market, and 
thus their exemption from pricing and pooling provisions was 
disorderly.
    Support for the producer-handler provisions contained in Proposal 2 
was

[[Page 10657]]

also expressed by two small California processors and by the 
Cooperatives in their post-hearing brief.
    The FMMO system has historically exempted producer-handlers from 
the pricing and pooling provisions of FMMOs on the premise that the 
burden of disposal of their surplus milk was borne by them alone. Until 
2005, there was no limit on the amount of Class I route disposition 
producer-handlers were allowed before they would be fully regulated. A 
Pacific Northwest and Arizona FMMO rulemaking established a three-
million pound per month limit on Class I route disposition.\23\ The 
record of that proceeding revealed large producer-handlers were able to 
market fluid milk at prices below those that could be offered by fully 
regulated handlers in such volumes that the practice was undermining 
the order's ability to establish uniform prices to handlers and 
producers. That proceeding found that producer-handlers with more than 
three million pounds of Class I route disposition significantly 
affected the blend prices received by producers and should therefore be 
fully regulated. The producer-handler provisions in all FMMOs were 
later amended in 2010.\24\ In that proceeding, USDA found a three-
million pound monthly limit on producer-handler total Class I route 
dispositions was appropriate to maintain orderly marketing conditions 
throughout the FMMO system.
---------------------------------------------------------------------------

    \23\ Official Notice is taken of Pacific Northwest and Arizona 
Proposed Rule: 70 FR 19636.
    \24\ Official Notice is taken of FMMO Producer-Handler Final 
Rule: 75 FR 21157.
---------------------------------------------------------------------------

    This decision finds the regulatory treatment of producer-handlers 
should continue to be uniform throughout the FMMO system. The monthly 
three-million pound limit on Class I route disposition would ensure 
that California FMMO producer-handlers could not use their pricing and 
pooling exemption to undermine orderly marketing conditions. Therefore, 
the proposed California FMMO should contain the uniform FMMO producer-
handler provision that limits monthly Class I route disposition to 
three million pounds.
    The adoption of the standard FMMO producer-handler definition was 
supported by proponents of Proposals 1 and 2, as well as by entities 
that could meet the proposed producer-handler definition. The record 
does not contain data to indicate how many California entities would 
meet the proposed FMMO producer-handler definition, but it does 
indicate that only a small number would be impacted.
    The additional qualification standards contained in the Pacific 
Northwest and Arizona FMMOs were explained in the Order Reform Proposed 
Rule.\25\ The decision explained the larger than average herd size of 
dairy farms in the western United States lent itself to the existence 
of producer-handlers that were a significant factor in the market. 
Therefore, the Pacific Northwest and Arizona FMMOs adopted producer-
handler provisions with additional qualification standards tailored to 
the larger dairy farm size typical of the western region of the United 
States.
---------------------------------------------------------------------------

    \25\ See infra.
---------------------------------------------------------------------------

    The record reveals that herd sizes in California tend to be typical 
of the larger herd sizes found in the western FMMOs. According to CDFA 
data, in 2015 California's average herd size was 1,215. This decision 
finds it appropriate that the producer-handler provision in a 
California FMMO should include the additional qualification standards 
similar to those in the nearby Pacific Northwest and Arizona FMMOs.
    In their post-hearing brief, the Cooperatives proposed modifying 
Proposal 1 to broaden the producer-handler definition to include 
utilization other than Class I. The modification would allow producer-
handlers with Class II, Class III, or Class IV manufacturing, in 
conjunction with their Class I processing, to be granted producer-
handler status, as long as their total production remained under the 
three million pound processing limit. The Cooperatives contend this 
would provide regulatory relief to smaller producer-handlers, who would 
otherwise become regulated under the inclusive pooling provisions of 
Proposal 1. This decision finds that extending the producer-handler 
definition to include manufacturing uses is not necessary because the 
package of pooling provisions recommended in this decision allows for 
optional pooling of milk used in manufacturing.
    California Quota Program. The California Quota Program should be 
defined as the program outlined by the applicable provisions of the 
California Food and Agriculture Code and related provisions of the 
pooling plan administered by CDFA. Details about the proposals, hearing 
record, and this decision's findings regarding appropriate recognition 
of the California quota program were discussed earlier in this 
decision.
    Producer. A Producer should be defined as a dairy farmer that 
supplies the market with Grade A milk for fluid use or who is at least 
capable of doing so if necessary. Producers would be eligible to share 
in the revenue that accrues from marketwide milk pooling. The producer 
definition in each FMMO order typically differs with respect to the 
degree of association that dairy farmers must demonstrate within a 
marketing area, as provided in the producer milk definition. The 
details of the proposals, hearing evidence, and this decision's 
findings regarding the producer milk definition are described later in 
the Pooling section of this decision.
    Producer Milk. Producer Milk should be defined to identify the milk 
of producers that is eligible for inclusion in the marketwide pool. 
This definition is specific to the proposed California FMMO marketing 
order, reflecting California marketing conditions, and provides the 
parameters for the efficient movement of milk between dairy farms and 
processing plants. The details of the proposals, hearing evidence, and 
this decision's findings regarding the producer milk definition are 
described later in the Pooling section of this decision.
    Other Source Milk. The order should include the uniform FMMO 
definition of Other Source Milk to include all the skim milk and 
butterfat in receipts of fluid milk products and bulk fluid cream 
products from sources other than producers, cooperative handlers, or 
pool plants. Other source milk should also include certain products 
from any source that are used to make other products and products for 
which a handler fails to make a disposition.
    Fluid Milk Product. A California FMMO should include the standard 
FMMO definition of a Fluid Milk Product, which sets out the criteria 
for determining whether the use of producer milk and milk-derived 
ingredients in those products should be priced at the Class I price. 
Under the definition, Fluid Milk Product includes any milk products in 
fluid or frozen form that are intended to be used as beverages 
containing less than 9 percent butterfat, and containing 6.5 percent or 
more nonfat solids or 2.25 percent or more true milk protein. Fluid 
milk products would include, but not be limited to: Milk, eggnog, and 
cultured buttermilk; and those products could be flavored, cultured, 
modified with added or reduced nonfat solids, sterilized, concentrated, 
or reconstituted. Nonfat solid and protein sources include, but are not 
limited to, casein, whey protein concentrate, dry whey, and lactose, 
among others.
    Products such as whey, evaporated milk, sweetened condensed milk, 
yogurt beverages containing 20 or more percent yogurt by weight, kefir, 
and certain

[[Page 10658]]

packaged infant formula and meal replacements, would not be considered 
fluid milk products for pricing purposes.
    Fluid Cream Product. The order should include the standard FMMO 
definition of Fluid Cream Product. Fluid cream product includes cream 
or milk and cream mixtures containing at least 9 percent butterfat. 
Plastic cream and frozen cream would not be considered fluid cream 
products.
    Cooperative Association. The order should include the uniform FMMO 
definition of Cooperative Association to facilitate administration of 
the order as it applies to dairy farmer cooperative associations. Under 
the uniform definition, a cooperative association means any cooperative 
marketing association of producers that the Secretary determines is 
qualified to be so recognized under the Capper-Volstead Act. 
Cooperative associations have full authority to engage in the sales and 
marketing of their members' milk and milk products. The definition also 
provides the recognition of cooperative association federations that 
function as cooperative associations for the purposes of determining 
milk payments and pooling.
    Commercial Food Processing Establishment. The uniform FMMO 
definition for Commercial Food Processing Establishment should be 
included in a California FMMO to describe those facilities that use 
fluid milk and cream as ingredients in other food products. The 
definition helps identify, for classification purposes, whether 
disposition to such a facility should be considered anything but Class 
I, and clarifies that packaged fluid milk products could not be further 
disposed of by the facility other than those received in consumer-type 
containers of one gallon or smaller. Producer milk may be diverted to 
commercial food processing establishments, subject to the diversion and 
pricing provisions of a California FMMO.
    Market Administrator. The record supports a provision for the 
administration of the order by a Market Administrator, who is selected 
by the Secretary and responsible for the oversight of FMMO activities. 
The market administrator receives and reviews handler reports, 
allocates handlers' milk receipts to their proper utilization and 
classification, publicizes monthly milk prices, provides monthly 
written account statements to handlers, and manages the producer 
settlement fund which serves as a clearing house for marketwide pool 
revenues. The market administrator is authorized to make adjustments to 
the order's shipping and diversion provisions, where justified, and to 
investigate noncompliance with the order. The market administrator 
manages the marketwide pool, conducts handler audits, provides 
laboratory testing of milk samples, and performs many other functions 
that support the regulation of milk marketing in the area. Market 
administrator activities are funded through an administrative 
assessment on handlers.
    Continuity and Separability of Provisions. Each FMMO prescribes 
uniform rules governing the implementation and maintenance of the 
marketing order itself, and a California FMMO should likewise include 
these provisions. These rules state that the Secretary determines when 
the FMMO becomes effective and whether and when it should be 
terminated. The rules also provide for the fulfillment of any 
outstanding obligations arising under the order and liquidating any 
assets held by the Market Administrator, if the order is terminated or 
suspended. Finally, the rules provide that if, for some reason, one 
provision of the order--or its applicability to a person or 
circumstance--were to be held invalid, the applicability of that 
provision to other persons or circumstances and the remaining order 
provisions would otherwise continue in force.
    Handler Responsibility for Records and Facilities. Provision should 
be made for the maintenance and retention by handlers of the records 
pertaining to their operations under a California FMMO. Records of the 
handler's milk purchases, sales, processing, packaging, and disposition 
should be included, along with records of the handler's milk 
utilization, producer payments, and other records required by the 
market administrator to verify the handler's compliance with order 
provisions. The market administrator should be able to review and audit 
each handler's records, and should have access to the handler's 
facilities, equipment and operations, as needed to verify the handler's 
obligation under the order. Handlers should be required to retain all 
pertinent records for three years, or longer if part of a compliance 
enforcement action, or as directed by the market administrator.
    Termination of Obligations. Provision should be made under a 
California FMMO for notification to any handler who fails to meet 
financial obligations under the order, including payments to producers, 
other handlers, and to the market administrator. Such provision is 
contained in the uniform provisions of all FMMOs, and specifies that 
the market administrator has two years after the receipt of the 
handler's report of receipts and utilization to notify the handler of 
any unmet financial obligation. Provisions are included for the 
enforcement of the handler's payment requirement and for the handler's 
opportunity to file a petition for relief as provided under the AMAA.

6. Classification

    The AMAA authorizes FMMOs to regulate milk in interstate commerce, 
and its provisions require that milk be classified according to the 
form in which or purpose for which it is used. Therefore, the 
classification of milk is uniform in all FMMOs to maintain orderly 
marketing conditions within and between FMMOs and to ensure that 
handlers competing in the national market for manufactured products 
have similar raw milk costs.
    This decision finds that because California would be joining the 
FMMO system it should contain the uniform classification provisions 
included in the 10 existing FMMOs. Adoption of standard FMMO product 
classification provisions in the proposed California FMMO is 
appropriate to maintain uniform pricing for similar products both 
within the California FMMO and throughout the FMMO system. This section 
provides a summary of the hearing evidence and post-hearing arguments 
regarding milk classification under a California FMMO.
    Proposals 1 and 2 both offer standard FMMO product classifications 
for their respective California FMMO provisions. Proposal 2 also 
provides an additional shrinkage allowance for ESL production at 
qualified ESL pool distributing plants.
    A Cooperative witness testified regarding the proposed 
classification provisions contained in Proposal 1. The witness reviewed 
the evolution of the FMMO classification provisions and noted that the 
CSO uses a similar classification system, with limited differences. The 
witness was of the opinion that the FMMO classification provisions 
should be adopted in a California FMMO to ensure uniform classification 
of milk and milk products throughout the entire FMMO system.
    A Cooperative witness contended that ESL products are value-added 
products and should not be granted additional shrinkage allowances 
under a California FMMO. The Cooperatives further argued that ESL 
shrinkage allowances should be evaluated at a national hearing because 
ESL products are manufactured in other FMMO marketing areas, as well as 
in California.
    A consultant witness, appearing on behalf of the Institute, 
testified in support of the portion of Proposal 2 that

[[Page 10659]]

establishes an additional shrinkage allowance for the manufacture of 
ESL and ultra-high temperature (UHT) milk products. The witness 
explained that the shrinkage allowance recognizes the inherent loss of 
milk from farm to plant and within the plant. The FMMO system currently 
allows for up to a 2 percent shrinkage allowance for pool distributing 
plants, depending on how the milk was received at the plant. The 
witness contended that the standard 2 percent allowance was developed 
before extensive use of ESL technology became common-place, and was 
based on typical shrinkage experienced in traditional high temperature, 
short time pasteurization (HTST) processing. The witness explained that 
under current FMMO classification provisions, a portion of the milk 
accounted for as shrinkage is classified at the lowest priced class for 
the month and shrinkage losses beyond 2 percent are considered excess 
shrinkage and classified as Class I.
    The consultant witness testified that Proposal 2 provides an 
additional shrinkage allowance of 3 percent on ESL production at plants 
qualified as ESL pool distributing plants. Under the proposed 
provisions, the plants eligible for the additional shrinkage allowance 
would be distributing plants located in the marketing area that process 
15 percent of the respective plant's total receipts of fluid milk 
products physically received at the plant into ultra-pasteurized or 
aseptically-processed fluid milk products.
    The intent of Proposal 2, explained the witness, is for an eligible 
plant to have a maximum shrinkage allowance of up to 5 percent on milk 
used in its ESL production, not on all milk used in the plant. Data 
from the witness' ESL processing clients, all located outside of 
California, showed their total product pound shrinkage averaged above 5 
percent. The witness also estimated based on 2013 to 2014 USDA record 
data, excess shrink in ESL and UHT plants throughout the country 
averaged 2.09 percent.
    Another Institute consultant witness testified regarding a 19-plant 
shrinkage study of ESL plants; three of the plants in the study were 
located in California. The study showed a weighted average product 
pound shrinkage of 2.73 percent.
    Two additional Institute consultant witnesses and a witness from HP 
Hood testified in support of the ESL shrinkage allowance provided in 
Proposal 2. The witnesses presented historical shrinkage data for ESL 
and UHT manufacturing facilities and offered extensive technical 
explanations for why shrinkage levels are higher in those systems than 
in HTST systems. The witnesses explained that shrinkage refers to milk 
lost in the manufacturing process due primarily to the fact it sticks 
to the equipment pipes and is lost in the cleaning process. The 
witnesses stressed that ESL equipment has longer piping, and noted 
numerous operational differences which inherently lead to higher losses 
of milk when compared to HTST processing.
    The HP Hood witness provided a similar explanation of ESL 
processing and why it lends itself to higher product losses. The 
witness said that even though fluid milk sales across the United States 
are declining, HP Hood ESL product sales have grown. The witness was of 
the opinion that because increases in ESL fluid milk sales benefit the 
entire dairy industry, dairy producers should share the burden of 
producing these products through greater shrinkage allowances, as 
reflected in the classification provisions provided in Proposal 2.
    HP Hood, in its post-hearing brief, reiterated its position that 
the heavy investment in the development of ESL technology and market 
expansion for those products should be shared by dairy farmers. The 
Institute, in its post-hearing brief, concurred with HP Hood's brief 
and argued the shrinkage allowances provided in Proposal 2 would assure 
ESL processors, like conventional fluid milk processors, would only be 
charged Class I prices for milk contained in fluid milk products and 
not for milk lost during processing. The Institute also stated that a 
promulgation proceeding for a new FMMO was an appropriate place to 
consider ESL shrinkage allowances.
    The Cooperatives' reply brief reiterated that ESL products are 
value-added products and handlers already receive a premium in the 
market. As well, the Cooperatives claimed that the manufacturing costs 
cited by HP Hood in its brief were not significant enough to warrant 
the proposed change to the uniform classification rules.

Findings

    As discussed earlier in this decision, the primary objective of 
FMMOs is to establish and maintain orderly marketing conditions. FMMOs 
achieve this goal through the classified pricing and the marketwide 
pooling of the proceeds of milk associated with a marketing area. To 
that end, the AMAA specifies that a FMMO should classify milk ``in 
accordance with the form in which or the purpose for which it is 
used.'' The classification of milk ensures competing handlers have the 
same minimum regulated price for milk used in a particular product 
category. Thus, FMMOs have found it is reasonable and appropriate that 
milk used in identical or nearly identical products should be placed in 
the same class of use. This reduces the incidence of disorderly 
marketing that could arise from regulated price differences between 
competing handlers.
    Currently, the provisions providing the classification of milk 
pooled on the existing FMMOs are identical.\26\ Uniform classification 
provisions are particularly important in assuring orderly marketing 
because markets are no longer isolated, and handlers often sell 
products outside of their local marketing area. The current FMMO 
classification provisions provide four classes of milk use, and specify 
provisions for the classification of milk transfers and diversions, 
plant shrinkages and overages, allocation of handler receipts to 
handler utilization, and Market Administrator reporting and 
announcements concerning classification.
---------------------------------------------------------------------------

    \26\ 7 CFR 1000.40 through 1000.45.
---------------------------------------------------------------------------

    Under the current FMMO uniform provisions, Class I consists of milk 
used to produce fluid milk products (whole milk, lowfat milk, skim 
milk, flavored milk such as chocolate milk). Class II milk includes 
milk used to make a variety of soft products, including cottage cheese, 
ice cream, yogurt and yogurt beverages, sour cream, baking mixes, 
puddings, meal replacements, and prepared foods. Class III includes 
milk used to make hard cheeses that may be sliced, grated, shredded, or 
crumbled, cream cheese, and other spreadable cheeses. Class IV milk 
includes milk used to produce butter, evaporated or condensed milk in 
consumer-type packages, and dried milk products. Other milk 
dispositions, including milk that is dumped, fed to animals, or 
accidentally lost or destroyed, is generally assigned to the lowest 
priced class for the month.
    The record reflects that current product classification provisions 
under the CSO are comparable to those under FMMOs. While the CSO has 
five classes of milk (1, 2, 3, 4a and 4b), the record reflects that 
under the uniform FMMO classification provisions, products currently 
classified by the CSO as Class 2 and 3 would be classified by the 
California FMMO as Class II; CSO Class 4b products would be classified 
as California FMMO Class III; and CSO Class 4a products would be 
classified as California FMMO Class IV products.
    Both the Cooperatives and the Institute supported the product 
classification provisions already

[[Page 10660]]

provided in the current FMMOs. Neither group was of the opinion that 
the proposed FMMO classification provisions would disadvantage any 
handler currently regulated by the CSO.
    This decision finds that a California FMMO should contain, to the 
maximum extent possible, provisions that are uniform with the FMMO 
system California producers are seeking to enter. To that end, the 
proposed California FMMO should include the same classification 
provisions as currently provided in existing FMMOs to allow for 
consistency of regulation between FMMOs. Adoption of these provisions 
would ensure that milk pooled on the California FMMO is classified 
uniformly with the rest of the FMMO system, and consequently, competing 
handlers will incur the same regulated minimum prices.
    Therefore, this decision finds a California FMMO should provide the 
following product classifications used in existing FMMOs: Class I milk 
should be defined as milk used to produce fluid milk products; Class II 
milk should be defined as milk used to make a variety of soft products, 
including cream products, high-moisture cheeses like cottage cheese, 
ice cream, yogurt and yogurt beverages, sour cream, baking mixes, 
puddings, meal replacements, and prepared foods; Class III milk should 
be defined as milk used to make spreadable cheeses like cream cheese, 
and hard cheeses that may be sliced, grated, shredded, or crumbled; 
Class IV milk should be defined as milk used to make butter, evaporated 
or condensed milk in consumer-type packages, and dried milk products. 
Other uses for milk, including milk that is dumped, fed to animals, or 
accidentally lost or destroyed, should be assigned to the lowest-priced 
class for the month.
    This decision also finds that the California FMMO should adopt the 
same provisions as the existing FMMOs regarding the classification of 
milk transfers and diversions, plant shrinkage and overages, and 
allocation of handler receipts to handler utilization.
    The existing FMMOs also contain uniform provisions recognizing that 
some milk loss is inevitable in milk processing. This is referred to as 
shrinkage and is calculated as the difference between the plant's total 
receipts and total utilization. Pool handlers must account for all 
receipts and all utilization. Shrinkage provisions assign a value to 
milk losses at a plant. There is, however, a limit on the quantity of 
shrinkage that may be allocated to the lowest priced class. The limit 
depends on how the milk is received. For instance, milk physically 
received at the plant directly from producers based on farm weights and 
tests is limited to 2 percent, whereas, milk received directly from 
producers on a basis other than farm weights and tests is limited to 
1.5 percent. Similar limits are placed on other types of bulk receipts. 
Quantities of milk in excess of the shrinkage limit are considered 
``excess shrinkage.'' Excess shrinkage is assigned to the highest class 
of utilization at the plant to arrive at gross utilization, from which 
the allocation process begins.
    The CSO provides a shrinkage allowance of up to 3 percent of the 
plant's total receipts, which is allocated on the basis of the plant's 
utilization. Similar to the FMMOs, excess shrinkage in the CSO is 
assigned as Class 1.
    This decision does not find justification for an additional 
shrinkage allowance for ESL production at ESL pool distributing plants. 
While the record contains some ESL plant shrinkage data, data 
pertaining to ESL production at California plants is limited. The 
record does indicate that ESL production occurs throughout the country. 
Therefore, amending provisions that are uniform throughout the FMMO 
system to allow an additional shrinkage allowance on ESL production 
should be evaluated on the basis of a separate national rulemaking 
proceeding.

7. Pricing

    The two main proposals in this proceeding offered end-product price 
formulas as the appropriate method for pricing producer milk pooled on 
a California FMMO, although the factors in the formulas differed. This 
section reviews arguments presented in testimony and post-hearing 
briefs regarding the appropriate way to value producer milk. This 
section further explains the finding that the recommended California 
FMMO should adopt the same end-product price formulas as contained in 
the 10 existing FMMOs.

Summary of Testimony

    A LOL witness, appearing on behalf of the Cooperatives, testified 
in support of the classified price provisions contained in Proposal 1. 
The witness testified that under Proposal 1, California would adopt the 
classified prices (including the commodity price series, product 
yields, and make allowances), the component prices, and the advanced 
pricing factors presently used in the FMMO system. The witness stated 
that 65 percent of the United States milk production is currently 
priced under these common provisions, and the same should apply to the 
20 percent of the national milk supply produced in California.
    The witness provided testimony regarding the evolution of a 
national manufacturing price, starting with the Minnesota-Wisconsin 
price series in the 1960's, and ending with the national classified 
end-product price formulas adopted in 2000. The witness discussed the 
national pricing system that resulted from FMMO Order Reform (Order 
Reform), including the multiple component pricing (MCP) system used in 
6 of the 10 current FMMOs. The witness explained that the MCP system 
met the criteria set forth by Congress to make pricing simple, 
transparent, and based on sound economic theory. Under the MCP system, 
the witness said, prices are derived from actual, observed market 
transactions for wholesale commodity milk products, and utilize yield 
factors and make allowances to determine the value of raw milk in each 
class. The witness explained that through the Dairy Product Mandatory 
Reporting Program (DPMRP), manufacturers of the four commodity dairy 
products (cheese, butter, NFDM, and dry whey) are required to submit 
sales information on current market transactions. The witness said that 
information is aggregated, released in the National Dairy Product Sales 
Report (NDPSR), and utilized in the FMMO price formulas. The witness 
stated that because many large-scale California dairy plants are part 
of the DPMRP, California commodity prices are reflected in the prices 
paid by FMMO handlers and received by producers in the rest of the 
country, and the same prices should be applicable to milk pooled under 
a California FMMO.
    The witness also testified regarding the influence of California 
dairy manufacturing costs on the current FMMO make allowances. The 
witness noted that a USDA Rural Cooperative Business Service (RCBS) 
study, a Cornell University study of processing costs, and a CDFA cost-
of-processing survey were relied upon by USDA to determine appropriate 
make allowance levels for cheese, butter, NFDM, and dry whey. In the 
witness's opinion, the inclusion of CDFA manufacturing cost data in the 
formulation of FMMO manufacturing allowances would justify the use of 
the same manufacturing allowances (butter: $0.1715 per pound; NFDM: 
$0.1678 per pound; cheese: $0.2003 per pound; and dry whey: $0.1991 per 
pound) in a California FMMO. The witness also reviewed the rulemaking 
history on the derivation of the product yields contained in the 
current FMMO price formulas, and was

[[Page 10661]]

of the opinion they are similar to product yields attainable by 
California manufacturing plants. The witness stated that the FMMO make 
allowances and product yields remained relevant, as they had been 
reaffirmed by USDA through a 2013 Final Rule.\27\
---------------------------------------------------------------------------

    \27\ Official Notice is taken of FMMO Class III and IV Price 
Formula Final Rule 78 FR 24334.
---------------------------------------------------------------------------

    The witness also testified regarding the FMMO national Class I 
price surface. The witness said that Order Reform resulted in the 
adoption of a national pricing surface, which assigned a value to milk 
for every county in the United States based on milk supply and demand 
at those locations. The witness was of the opinion that since 
California was factored into USDA's Order Reform analysis to derive the 
price surface, it would be appropriate for the price surface to be 
adopted in a California FMMO. The witness noted the price surface 
identifies five pricing zones covering California, ranging from $1.60 
to $2.10 per cwt. The witness explained that in the FMMO system, the 
Class I differential is added to the higher of the Class III or Class 
IV price to determine the Class I price for a distributing plant at its 
location. The witness elaborated that since Class I processors compete 
with Class III and IV manufacturers for a milk supply, Class I prices 
are linked to manufacturing prices in the FMMO system, and this concept 
should likewise apply to a California FMMO.
    The witness also explained how the base Class I differential, $1.60 
per cwt, was derived during Order Reform. The witness said that the 
$1.60 base differential assumes a cost per cwt of $0.40 to maintain a 
Grade A facility, $0.60 for marketing, and $0.60 for securing a milk 
supply in competition with manufacturers. The witness noted these 
values were established in 2000, and although still relevant, the 
actual costs are higher in the current marketplace. The Cooperatives 
provided additional information in their post-hearing brief, contending 
that current costs support a base Class I differential of $2.40, a 50 
percent increase over the base listed above.
    The witness concluded by saying that California dairy farmers 
should receive prices reflecting the current national market and that 
are comparable to what producers receive from FMMO regulated plants in 
the rest of the country. This position was reiterated in the 
Cooperatives' post-hearing brief.
    Another Cooperative witness provided testimony on the handler's 
value of milk and related provisions. The witness proposed that 
handlers regulated by a California FMMO pay classified prices based on 
the components in the raw milk they receive (otherwise known as 
``multiple component pricing''): Butterfat, protein, and other solids. 
Under Proposal 1, the witness said, regulated handlers would pay for 
milk on the following components:

 Class I: Butterfat and skim
 Class II: Butterfat and solids nonfat
 Class III: Butterfat, protein and other solids
 Class IV: Butterfat and solids nonfat

    The witness reiterated the Federal Order Reform Recommended 
Decision justification for implementing a national pricing structure 
and contended the same reasons apply to extending national pricing to a 
California FMMO. The witness added that while California handlers would 
be paying the same national prices for milk components, there would be 
no need to adjust price formulas for regional product yields because 
handlers only pay for the components they receive. The witness also 
explained that Proposal 1 did not prescribe location adjustments in the 
price formulas because California plants are included in the price 
surveys that determine the national commodity prices used in the FMMO 
formulas.
    The witness also testified that Proposal 1 provides for a 
fortification allowance on milk solids used to fortify Class I products 
to meet California's fluid milk standards, as is currently provided in 
the CSO. The witness noted that Proposal 1 does not propose a somatic 
cell adjustment or producer location differentials since both features 
are not currently contained in the CSO.
    The witness said Proposal 1 seeks to have producers paid on the 
basis of butterfat, protein and other solids, and does not include a 
producer price differential (PPD) adjustment per se. The witness said 
that the PPD is typically viewed as the benefit to FMMO producers for 
participating in the marketwide pool since the PPD reflects the 
additional revenue shared from the higher value class utilizations. 
Instead, the witness explained that under Proposal 1, the California 
FMMO would calculate a monthly PPD, but the value of the PPD would be 
paid to producers according to each component's annual contribution to 
the Class III price. For example, said the witness, if on an annual 
basis butterfat accounted for 32 percent of the total value of the 
Class III price, then 32 percent of the monthly PPD value would be paid 
out through an adjustment to the butterfat price. This same adjustment, 
the witness said, would apply to the producer protein and other solids 
prices. The witness explained that FMMO producers typically find the 
monthly PPD concept confusing and complicated, especially in months 
when it is a negative value. The witness said that California 
producers, who do not receive a PPD adjustment under the CSO, might 
find Proposal 1's method of distributing the PPD value simpler to 
understand.
    The witness also clarified that the Cooperatives were amending the 
proposal regarding announcement of producer prices contained in 
Proposal 1 from ``on or before the 11th'' to ``on or before the 14th 
day after the end of the month.''
    Support for a national uniform pricing system was reiterated in the 
Cooperatives' post-hearing brief. The Cooperatives argued that the 
hearing record demonstrates California cheese competes in the national 
market. Having California milk priced uniformly in the FMMO system 
would not disadvantage California processors, reiterated the 
Cooperatives, but it would diminish the current pricing advantage they 
have under the CSO. The brief noted record evidence that many FMMO 
cheese processors paid higher than FMMO minimum prices for milk as 
proof that FMMO minimum prices are not too high.
    The Cooperatives' brief also discussed California whey processing. 
The brief stated that 85.8 percent of cheese manufactured nationally is 
produced in plants that also process whey. In California, the 
Cooperatives wrote, the percentage is closer to 90 percent. Based on 
these comparable percentages, the Cooperatives stated whey pricing in 
California should be no different from the rest of the country.
    The Cooperatives also stressed opposition to any adjustment to the 
price formulas to reflect a lower location value in California. The 
Cooperatives stated milk prices should not be California centric 
because manufactured products are sold nationally. If California 
classified prices were to be based solely on California product sales, 
the Cooperatives were of the opinion that California handlers would 
receive a raw milk cost advantage over other FMMO regulated handlers. 
The brief noted that the Cooperatives manufacture a majority of the 
butter and NFDM produced in California, and they did not believe the 
proposed California FMMO prices associated with those Class IV products 
would be too high. The Cooperatives stressed that any changes to the 
FMMO pricing system should be considered at a national hearing and not 
in this single-market proceeding.

[[Page 10662]]

    An Institute witness testified regarding the pricing provisions 
included in Proposal 2. The witness explained that Class I products 
have the highest use value in order to encourage adequate milk 
production to meet Class I needs, and to attract milk to Class I rather 
than manufacturing uses. As manufacturing class uses balance the supply 
and demand needs of the marketing area, the witness said it would be 
important that those classified use values not be set above market-
clearing levels.
    The Institute witness testified that historically, as milk began to 
travel greater distances for processing, FMMO pricing policy became 
more coordinated to promote orderly marketing conditions both within 
and between FMMOs. The witness said that the Minnesota-Wisconsin price 
series served as the basis for FMMO pricing because the area surveyed 
represented the largest reserve supply of milk in the country, and 
therefore generated an appropriate market-clearing price for 
manufacturing milk. The witness stated that California is now the 
region with the largest reserve supply and because California products 
must compete for sales in the East, the value of raw milk in California 
is lower than in eastern parts of the country. Therefore, emphasized 
the witness, minimum prices for a California FMMO should not be set 
above market-clearing levels in California. This opinion was reiterated 
in the Institute's post-hearing brief.
    The Institute witness cautioned against setting minimum prices too 
high because it could lead to the inability of dairy farmers to find a 
willing buyer for their milk. Alternatively, the witness said, if 
minimum prices are set too low, dairy farmers could be compensated by 
the market through over-order premiums. The witness said Class III and 
IV prices for a California FMMO need to be reflective of commodity 
prices received by California plants, and reflective of current 
California manufacturing costs. The witness was of the opinion that the 
national values used in the current FMMO Class III and IV formulas are 
not appropriate for California.
    The Institute witness explained their preference would be to use 
western commodity prices in the Class III and IV formulas. However, the 
witness said that, due to data confidentiality issues, USDA is unable 
to report these prices. As an alternative, the witness said, Proposal 2 
contains default commodity values that would adjust the NDPSR prices 
based on the historical difference between the NDPSR prices and 
California or western based prices as reported by either CDFA or Dairy 
Market News. This western adjustment, the witness said, would result in 
commodity prices in the price formulas more representative of the 
prices received by California handlers. The witness noted the only 
exception to how the adjustors are calculated is the default adjustor 
proposed for the Class III protein price. The Class III protein price 
adjustor utilized CME 40-pound block Cheddar cheese prices, because 
CDFA stopped reporting California 40-pound block Cheddar prices after 
August 2011.
    The Institute witness also reviewed the manufacturing allowances 
contained in Proposal 2. Except for the dry whey manufacturing 
allowance, explained the witness, all are based on the most recent CDFA 
manufacturing cost survey for 2013.\28\ The witness explained that CDFA 
no longer reports the dry whey cost data. Therefore, Proposal 2 
provides for a dry whey manufacturing allowance that adds the 
difference between the FMMO manufacturing allowances for nonfat dry 
milk and dry whey to the most recent CDFA weighted average 
manufacturing cost for nonfat dry milk. The witness was of the opinion 
that the yields contained in the FMMO price formulas would be 
appropriate for California, and are therefore also prescribed in 
Proposal 2.
---------------------------------------------------------------------------

    \28\ Proposed manufacturing allowances were later amended to 
incorporate a marketing cost.
---------------------------------------------------------------------------

    The Institute witness testified that many California cheese plants 
manufacture products other than dry whey that often do not generate 
revenues to match the dry whey value in the regulated formulas. Other 
plants, according to the witness, do not have the capability to process 
the whey by-product from their cheese making operations. Therefore, the 
witness offered an alternative Class III other solids price formula 
that would be based on whey protein concentrate (WPC), and would cap 
the whey value to recognize that not all plants are able to capture 
value from their whey stream. The witness testified that a more 
appropriate reference commodity for whey products, one that would be 
more applicable to most California cheesemakers' operations, would be 
WPC. The witness explained that over the previous eight years, the 
production of dry whey declined 3.3 percent, while the production of 
various WPC and Whey Protein Isolate (WPI) products has seen increases 
ranging from 1.1 percent to 9.5 percent.
    The Institute witness testified that cheese and whey markets are 
vastly different, and not all cheese plants find it profitable to 
invest in whey processing. According to the witness, when cheese plants 
do invest, it is usually in the limited processing of whey into 
concentrate solids for transportation savings. The witness said that 
only one plant in California consistently dries whey, and of the 57 
California cheese plants, only 13 process whey in any fashion. The 
witness explained that the alternative other solids price formula 
offered by the Institute incorporates the value of liquid WPC-34 sold 
to a plant that would then process the product further into a dry 
product. While there are a variety of liquid whey products marketed, 
the witness said using WPC-34 prices as a reference price for other 
solids would be most appropriate because WPC-34 is the predominant form 
of liquid whey sold. The witness explained how Proposal 2 would convert 
the WPC-34 reference price to a dry whey equivalent basis so that the 
other parts of the other solids price formula could be retained. The 
witness added that the dry whey make allowance would need to be 
increased to include the cost of cooling and delivering the liquid whey 
to a processing facility. To provide some protection to small 
cheesemakers when the price is very high, and to dairy producers when 
the price is very low, the witness proposed another solids price floor 
of $0.25 per pound and a ceiling of $1.50 per pound.
    The Institute's post-hearing brief discussed several of the unique 
aspects of the California dairy industry. The brief stated that from 
1995 to 2014, while the state's population grew 23 percent, California 
milk production increased 82 percent, which in turn fueled the 
expansion of cheese processing in the state. The brief stated that 
three processing facilities account for 25 percent of California's 
cheese manufacturing, and much of that production is marketed east of 
the Mississippi River. The brief cautioned that increasing minimum 
prices would create an economic trade barrier where California 
processors would no longer have the ability to compete in eastern 
markets due to higher minimum regulated prices.
    The Institute's post-hearing brief also addressed the need for a 
national FMMO pricing hearing. The Institute reiterated hearing 
testimony that current pricing formulas are based on data from the 
1990s, making the prices out of alignment with current market 
realities. The brief stated that pricing formulas need to be updated in 
order to be representative of current marketing conditions. The FMMO 
pricing system, the Institute stressed, needs all pricing

[[Page 10663]]

formulas to be set at market clearing levels that enable over-order 
premiums to be paid when appropriate.
    A witness appearing on behalf of Leprino Foods, a mozzarella cheese 
and whey products manufacturer in Denver, Colorado, testified regarding 
the Class III price formula contained in Proposal 2. Leprino operates 
nine plants in the U.S., three of which are based in California. 
Leprino is a member of the Institute and supports adoption of Proposal 
2 if USDA recommends a California FMMO.
    The Leprino witness stressed the importance of minimizing the 
impacts of minimum regulated pricing on the dairy marketplace. The 
witness testified that the United States dairy industry is increasingly 
integrated with global dairy markets since more than 15 percent of 
United States milk solids are exported, and that many manufacturers, 
including Leprino, have made significant investments in developing 
export markets to increase demand for United States dairy products. The 
witness said it is important that any future California FMMO facilitate 
rather than inhibit the dairy industry's ability to leverage this 
export opportunity.
    The Leprino witness testified about the importance of setting 
minimum regulated milk prices at market clearing levels that would 
allow for reasonable returns achievable under good management practices 
by California manufacturers. The witness testified that 80 percent of 
California milk production is utilized in Class III and IV products, a 
large percentage of which are marketed outside of California. 
Therefore, the witness said, California FMMO minimum prices should 
reflect values of California-manufactured products, f.o.b. the 
manufacturing plant. The witness added that because price formulas 
could only be changed through a hearing process, it would be important 
to set the regulated price formulas at minimum levels that allow market 
forces to function outside of the regulated system. The witness said 
regulated prices that are too high would lead to over-production of 
milk and disorderly marketing conditions. This concept was reiterated 
in the post-hearing briefs submitted by the Institute and Leprino.
    The Leprino witness summarized findings from the Order Reform Final 
Decision that explained how manufacturing plant operators who find 
make-allowances inadequate to cover their actual costs are free to not 
participate in the order. The witness noted this option would not be 
available under Proposal 1, which underscores the importance of setting 
appropriate market clearing prices.
    The Leprino witness testified that a California FMMO would require 
a Class III formula that is set in relation to achievable returns in 
California using the most recent data. The witness explained Leprino's 
preference that USDA suspend the California FMMO hearing to defer 
implementation until after a national hearing could be held to review 
and revise the existing Class III formula. The witness added that USDA 
should hold a national Class III and IV price formula hearing after 
this rulemaking to utilize more current data and account for the 
impacts of a California FMMO, if necessary.
    The Leprino witness testified in support of establishing a DPMRP 
western price survey to determine minimum milk prices under a 
California FMMO. The witness explained how USDA might rely on surveyed 
commodity prices from other western states, if necessary, to overcome 
any data confidentiality issues. In brief, Leprino encouraged USDA to 
establish a definition for the Western Area, and recommended it include 
California, Oregon and Washington. In addition to these three states, 
the witness said that other areas should be considered in order to 
eliminate confidentiality constraints. However, the witness said that 
in the event confidentiality concerns continue to arise, Proposal 2 
contained alternative default equations.
    The Leprino witness discussed the justification for pricing western 
produced products differently than those in the rest of the country. 
The witness stressed that the location value of California manufactured 
products is lower because of the additional transportation costs 
required to deliver products to the population centers in the East. 
This opinion was reiterated in Leprino's post-hearing brief. The 
witness noted that nearly half of Leprino's cheese production sold 
domestically is shipped to markets east of the Mississippi, and they 
incur transportation costs ranging from $0.10 to $0.15 per pound.
    The Leprino witness was of the opinion that bulk Cheddar cheese 
remains the most appropriate product from which to derive the FMMO 
Class III price, but California Class III price formulas should rely on 
40-pound block Cheddar prices because all California Cheddar production 
is in blocks. The adoption of 40-pound block cheddar prices was 
reiterated in Leprino's post-hearing brief.
    The witness testified in support of modifying the make allowances 
in Proposal 2 to incorporate a sales and administrative cost of $0.0015 
per pound. Therefore, the new proposed make allowances per pound of 
product would be as follows: $0.2306 for cheese, $0.1739 for butter, 
$0.2310 for whey, and $0.2012 for NFDM.
    The Leprino witness provided extensive testimony on the appropriate 
valuation of whey in FMMO Class III minimum pricing. The witness 
explained how the explicit whey factor had been a problem for 
cheesemakers and led the Institute to propose an alternative valuation. 
Proposal 2 would value the whey portion of the Class III price formula 
relative to its concentrated liquid whey value, which the witness said 
was the most generic whey product produced. The witness stated that the 
WPC-34 price index is the most common reference used for the sale of 
liquid whey by cheese plants selling concentrated whey in California. 
The witness added that the prices received for liquid whey are 
discounted to reflect additional processing required to produce a full-
value whey product. Accordingly, said the witness, California FMMO 
minimum prices should rely on WPC-34 survey prices to approximate a 
whey value in the Class III price.
    The Leprino witness testified in opposition to the Class III and IV 
formulas contained in Proposal 1. The formulas, the witness said, do 
not reflect California market conditions. The witness warned that 
higher regulated prices in California would lead to disorderly 
marketing conditions. In its post-hearing brief, Leprino stated the 
pricing formulas in Proposal 1 used old manufacturing cost data and the 
national weighted average prices for the four products exceeded the 
prices received in California. Leprino noted that there was no evidence 
provided by the Cooperatives related to the relevance of the Proposal 1 
formulas to California.
    A witness testifying on behalf of Hilmar spoke to how the current 
FMMO Class III and IV pricing formulas, if applied to a California FMMO 
incorporating inclusive pooling, would lead to disorderly marketing 
conditions. In its brief, Hilmar stated that disorderly marketing 
conditions would negate the competitive equilibrium present between 
eastern and western markets and lead to a trade barrier that would 
hinder the California dairy industry.
    The witness testified that Hilmar had not experienced difficulties 
in sourcing raw milk supplies, and that there was currently no disorder 
in California to warrant promulgation of a California FMMO. The witness 
described several scenarios in the past where CSO whey pricing 
methodology over valued whey

[[Page 10664]]

and led to disorderly marketing conditions for Hilmar, its independent 
producer suppliers, and other California dairy farmers, which CDFA was 
able to remedy through an adjustment to the whey factor.
    The Hilmar witness testified that if milk used in California cheese 
production was subject to the whey factor used in the current FMMO 
Class III price, the whey product stream in California would be 
overvalued. Use of that whey factor, along with the inclusive pooling 
provisions in Proposal 1, would give rise to disorderly marketing 
conditions.
    The Hilmar witness was of the opinion that 2015 California milk 
production decreased for reasons not relevant to the differences in CSO 
4b versus FMMO Class III pricing. Instead, the witness said, production 
was influenced by low milk powder prices related to global oversupply 
of milk powder, as well as drought, environmental regulations, and 
competition for land from other crops.
    The Hilmar witness testified that CSO milk prices are minimums, and 
cooperatives have the ability to negotiate for higher milk prices from 
their proprietary plant customers. The witness said that Hilmar paid 
premiums of approximately $120 million for milk above the CSO 4b price 
over the last several years. The witness explained that these premiums 
were paid for milk characteristics such as component content and other 
market-based factors. The witness added that when CSO 4b prices were 
temporarily increased through CDFA's adjustment to the sliding scale 
whey factor, the premiums Hilmar paid for milk decreased.
    The Hilmar witness testified that the make-allowances in the FMMO 
Class III and IV formulas are outdated, and new manufacturing cost 
studies are necessary. The witness stated that Hilmar's manufacturing 
costs for cheese and milk powders are higher than those provided for in 
the FMMO Class III and IV formulas. The witness said that if a 
California FMMO was adopted with inclusive pooling, it would be 
impossible for Hilmar to clear the market, unlike in existing FMMOs 
where manufacturing milk is not required to be pooled.
    The Hilmar witness explained that California FMMO minimum milk 
prices need to reflect local supply and demand conditions. The witness 
entered Hilmar data showing that prices received for the sale of Hilmar 
cheese averaged $0.04 per pound lower than the announced NDPSR weighted 
average cheese price from 2010 to 2013. This price difference, the 
witness explained, is a function of the additional transportation cost 
incurred by Hilmar to transport product to eastern markets. The witness 
made similar price comparisons for NFDM and butter.
    The Hilmar witness stressed that if California FMMO prices are not 
reflective of the California market, the California dairy industry will 
be less competitive in the global marketplace. The witness noted that 
in 2014, Hilmar exported 10 percent of its cheese, 50 percent of its 
WPC, and 95 percent of its lactose; and they planned to export all of 
the skim milk powder to be produced at a manufacturing facility nearing 
completion in Turlock, California. Inclusive pooling and U.S.-centric 
milk pricing in California, said the witness, would lead to competitive 
disadvantages for California manufacturers in international and 
domestic markets.
    The Hilmar witness testified that they produce several types of 
whey products, but not dry whey. The witness was of the opinion that 
dry whey is a poor indicator of the value of Hilmar's WPC products. The 
witness said the potential minimum regulated cost under inclusive 
pooling provisions in a California FMMO would make production of 
Hilmar's whey products unprofitable.
    In the post-hearing brief submitted by Hilmar, concerns regarding 
an adequate return on investment were raised. Hilmar was of the opinion 
that Proposal 1 does not provide an adequate level of return on 
investment to allow for processors to remain viable. The brief stated 
that adoption of provisions allowing for handlers to opt not to pool 
manufacturing milk could alleviate those concerns.
    In its post-hearing brief, Hilmar sought to counter the 
Cooperatives' claim that California manufacturers have a competitive 
advantage over their FMMO counterparts and thus should be able to pay 
FMMO minimum prices. Hilmar countered that California handlers have a 
long-term competitive disadvantage when compared to their FMMO 
counterparts because of the CSO's mandatory pricing and pooling 
provisions. Hilmar maintained that the value of milk in California is 
lower than in the eastern part of the country, and California FMMO 
price formulas should reflect this reality.
    A witness testified in support of Proposal 2 on behalf of Marquez 
Brothers International (Marquez), a Hispanic cheese manufacturer 
located in Hanford, California. The witness explained how their company 
invested in a processing facility in 2004 to address challenges with 
whey disposal. The witness explained that of the total milk solids they 
receive, approximately 48 percent is used in cheese, and 52 percent 
ends up in the whey stream. The formulation of Marquez's whey stream, 
the witness noted, is approximately 5.11 percent whey cream, 9.45 
percent WPC-80, and 85.44 percent lactose permeate.
    The Marquez witness testified that out of 57 California cheese 
plants, 49 plants (19.1 percent of California cheese production) have 
limited or no ability to process whey. The witness testified that whey 
disposal had been a burden for their business in the past, costing $1.5 
million per year with no revenue offset and no recognition in the CSO 
4b price of whey disposal costs. The witness added that the same 
problems existed in the FMMO Class III formula price contained in 
Proposal 1. The witness testified that the reliance on dry whey to 
price the other solids component of the FMMO Class III price would be 
inappropriate since cheesemakers must pay producers for the value of 
whey that can be generated from their milk, regardless of whether that 
price is actually obtained from the market.
    The Marquez witness testified that adoption of Proposal 1 would 
discourage investment in cheese processing technologies. The witness 
said that a system of inclusive pooling coupled with other increases in 
operating costs would lead to competitive difficulties for California 
cheese plants.
    A witness appeared on behalf of BESTWHEY, LLC (BESTWHEY), in 
opposition to adoption of Proposal 1. BESTWHEY provides consulting 
services to cheese manufacturing facilities, with a focus on specialty 
cheeses and whey handling and disposal. According to the witness, 
Proposal 1 would restrict the growth of California's cheese industry 
and eliminate most of the small cheese businesses in the state, and 
Proposal 1's inclusive pricing and pooling would lead to an over-supply 
of California milk. The witness highlighted the limited number of 
California plants with whey processing capabilities. The witness 
supported adoption of Proposal 2 because, according to the witness, it 
would provide a more realistic value for whey in the other solids price 
calculation, based on the actual value of liquid whey sold by cheese 
plants.
    A witness appeared on behalf of Klondike Cheese (Klondike), a 
Wisconsin-based cheese manufacturer. The witness said that Klondike 
cools its liquid whey by-product and sells it to a larger whey 
processing facility. The witness provided detailed descriptions

[[Page 10665]]

of whey processing methodology and the associated costs. The witness 
testified that basing the other solids price on dry whey markets is 
inappropriate and does not accurately reflect the revenues from whey at 
their operation. The witness entered Klondike 2014 data showing an 
average loss on its whey production of $0.6516 per cwt of milk.
    A witness testified on behalf of Decatur Dairy (Decatur), a 
cooperative-owned, Wisconsin-based cheese manufacturer, in regards to 
using dry whey as the basis for the other solids price. The witness 
provided detailed descriptions of whey processing methodology and the 
associated costs. The witness said that Decatur sells warm wet whey to 
a nearby plant for further processing. The witness said that dry whey 
prices contained in the FMMO product-price formulas did not reflect the 
revenue they receive from their liquid whey sales, and it is not 
feasible for them to invest in drying equipment. The witness entered 
Decatur data for 2012 to 2015 showing average annual losses on its whey 
production ranging from $0.0627 to $0.7114 per cwt of milk.
    A consultant witness appeared on behalf Joseph Gallo Farms (Gallo 
Farms). The witness explained that Gallo Farms owns two dairy farms, as 
well as cheese and whey processing facilities in California, and 
supports adoption of Proposal 2. Gallo Farms processes WPC from their 
own cheese operation and from other cheese facilities.
    The Gallo Farms witness testified that if they had been required to 
pay the FMMO Class III price for milk, they would not have been able to 
make updates or improvements to their facilities. The witness estimated 
their cheese costs would have increased by $0.2237 per pound if 
Proposal 1 had been in effect from January 2014 through September 2015. 
The witness was of the opinion that California dairy farmers should not 
compare the prices received in California to prices received in the 
Midwest or East Coast, where significant population centers are 
serviced. The witness characterized the California market as 
significantly different from eastern markets, as it includes not only 
the West Coast population centers, but also Mexico and other export 
markets. The witness was of the opinion that a California FMMO, as 
provided for in Proposal 1, could lead to the closure of small and 
medium sized manufacturing plants.
    The Gallo Farms witness supported the portion of Proposal 2 that 
relies on WPC to determine the other solids price, as most whey pricing 
is related to the WPC market rather than dry whey.
    An Institute witness testified regarding Class I pricing. The 
witness was of the opinion that the policy of assigning Class I milk 
the highest classified value should be reevaluated, given current 
market realities. The witness said that Proposal 1 relied on the 
current Class I price surface and fluid milk pricing system 
incorporated in the existing FMMOs, while other potential fluid milk 
pricing options have not been thoroughly investigated. The witness 
argued that although the ``higher of'' pricing mechanisms dampens Class 
I sales and limits the ability of fluid milk processors to hedge their 
Class I milk volumes, the Institute still supported the Class I milk 
pricing mechanism advanced in Proposal 2.
    The Institute witness also testified regarding a technical 
modification to Proposal 2 that would affect how handlers pay for the 
milk components used in Class I products and how handler credits for 
fortifying fluid milk products would be determined. The witness 
explained that milk standards set by the State of California require a 
higher nonfat solids content than the Food and Drug Administration 
standard used elsewhere in the country. California fluid milk 
processors fortify raw milk with either condensed or nonfat dry milk to 
meet these higher standards.
    The Institute witness described the differences between CSO and 
FMMO accounting for fluid milk fortification. Under FMMOs, the witness 
said, handlers account to the pool at the Class IV price for the solids 
used to fortify milk, but then are charged the two-factor (butterfat 
and skim) Class I price for the volumetric increase in fluid milk 
realized through fortification. Under the CSO, handlers account to the 
pool using a three-factor (butterfat, nonfat solids, and fluid carrier) 
Class 1 price for all solids used in Class 1 products, but then receive 
a credit for the solids used to fortify milk to meet the state 
standards. The Institute witness was of the opinion that the CSO three-
factor system, coupled with its fortification credits, is superior to 
the FMMO system because it encourages orderly milk movements by making 
fluid milk handlers indifferent to the solids content of milk they 
receive, and it ensures that Class 1 handlers do not have a regulated 
milk price advantage over one another. The witness explained that 
plants receiving milk with a higher solids content might pay a higher 
Class 1 price for the raw milk, but less for fortification, while 
plants receiving milk with a lower solids content might pay a lower 
Class 1 price for the milk, but more for fortification, making both 
plants competitive with each other. The witness emphasized that in the 
absence of a fortification credit for meeting the California milk 
solids requirement, handlers under a California FMMO might make milk 
sourcing decisions solely to take advantage of a two-factor Class I 
price formula.
    A witness appeared on behalf of Hilmar to outline the history of 
FMMO surplus milk pricing policies. The witness, referring to decisions 
from previous FMMO rulemakings and reports, stated that FMMO minimum 
pricing should be set at levels aligning with net revenues received by 
manufacturers in the local marketing area in order for milk to 
``clear'' the market. Therefore, the witness concluded, USDA must 
examine the local California market situation when determining 
appropriate minimum prices in a California FMMO.
    A Cooperative witness addressed the alternative Other Solids price 
formula that was offered by the Institute. The witness stressed that 
there was not then available a verifiable price series for WPC-34, nor 
had the Institute presented any third-party WPC-34 manufacturing cost 
studies. The witness estimated that 86 percent of the Class 4b milk was 
processed at plants that had whey drying capabilities. In addition, the 
witness said that the Cooperatives' modified exempt plant provision 
would exempt as many as 25 of the 57 cheese plants from FMMO minimum 
price regulation.

Findings

Handler's Value of Milk
    The FMMO program currently uses product price formulas relying on 
the wholesale price of finished products to determine the minimum 
classified prices handlers pay for raw milk in the four classes of 
products. Class III and Class IV prices are announced on or before the 
5th day of the month following the month to which they apply. The Class 
III and Class IV price formulas form the base from which Class I and 
Class II prices are determined. The Class I price is announced in 
advance of the applicable month. It is determined by adding a Class I 
differential assigned to the plant's location to the higher of an 
advanced Class III or Class IV price computed by using the most recent 
two weeks' DPMRP data released on or before the 23rd of the preceding 
month. The Class II skim milk price is announced at the same time as 
the Class I price, and is determined by adding

[[Page 10666]]

$0.70 to the advanced Class IV skim milk price. The Class II butterfat 
price is announced at the end of the month, at the same time as the 
Class III and Class IV prices, by adding $0.70 to the Class IV 
butterfat price.
    AMS administers the DPMRP to survey weekly wholesale prices of four 
manufactured dairy products (cheese, butter, NFDM and dry whey), and 
releases weekly average survey prices in the NDPSR. The FMMO product 
price formulas use these surveyed products to determine the component 
values in raw milk. The pricing system determines butterfat prices for 
milk used in products in each of the four classes from surveyed butter 
prices; protein and other solids prices for milk used in Class III 
products from surveyed cheese and dry whey prices, respectively; and a 
nonfat solids price for milk used in Class II and Class IV products 
from surveyed NFDM product prices. The skim milk portion of the Class I 
price is the higher of either the protein and other solids prices of 
the advanced Class III skim milk price or the NFDM price of the 
advanced Class IV skim milk price.
    The butterfat, protein, other solids, and nonfat solids prices are 
derived through the average monthly NDPSR survey price, minus a 
manufacturing (make) allowance, multiplied by a yield factor. The make 
allowance factor represents the cost manufacturers incur in making raw 
milk into one pound of product. The yield factor is an approximation of 
the product quantity that can be made from a hundredweight of milk 
received at the plant. The milk received at the plant is adjusted to 
reflect farm-to-plant shrinkage when using farm weights and tests. This 
end-product pricing system was implemented as a part of Order Reform on 
January 1, 2000,\29\ and last amended on July 1, 2013.\30\
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    \29\ See infra.
    \30\ See infra.
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    The pricing methodology described above were proposed by the 
Cooperatives to apply in a California FMMO and are contained in 
Proposal 1. The Cooperatives maintain USDA has for many years held that 
the market for manufactured dairy products is national in scope and 
that the price of milk used to manufacture those products should 
therefore be the same across the nation. Proponents of Proposal 1 
explained that the commodity prices used in the formulas are based on a 
survey of prices for manufactured dairy products from plants across the 
country, including California. They went on to point out that the 
surveyed manufacturing costs were from plants in California, as well as 
in other states. These surveyed costs have been used to determine FMMO 
make allowances in the product-price formulas since their inception.
    The Cooperatives, through witness testimony and post-hearing 
briefs, stressed that prices used to determine California handlers' 
value of milk should be based on the same national average factors as 
those used in the FMMOs. They repeatedly stressed that manufactured 
products compete in a national market, and therefore California dairy 
farmers should receive a milk price reflective of those commodity 
values. The Cooperatives' primary justification for a California FMMO 
is that the CSO does not provide dairy farmers a milk price reflective 
of these national values, and they are now seeking to be included in 
the FMMO system so California dairy farmers can receive prices similar 
to their counterparts in the rest of the country.
    The Institute, through witness testimony and post-hearing briefs, 
argued that classified prices in a California FMMO must be reflective 
of the current market conditions in California. They were of the 
opinion that not only has data used in the formulas become outdated, 
but that the value of California milk is inherently lower because of 
California's geographic location in the West and the additional cost of 
transporting finished product to population centers in the East. They 
argued that these conditions make it hard for the Institute's dairy 
manufacturing member companies to remain competitive in the market.
    In Proposal 2, the Institute proposed several changes to the 
current FMMO pricing formulas that would be applicable in California. 
First, the Institute proposed a western states price series for each 
commodity surveyed by the DPMRP. If a western price could not be used 
because of data confidentiality issues, the Institute proposed that a 
fixed value for each commodity be subtracted from the current NDPSR 
prices to represent the lower value of products in the West. Second, 
the Institute suggested that a Western states manufacturing cost survey 
be conducted to determine relevant California make allowances for each 
commodity, and if this was not feasible, they proposed specific make 
allowance levels that they asserted are representative of manufacturing 
costs in California. Third, they proposed that the NDPSR Cheddar cheese 
price used in the FMMO protein price formula for California only 
consider 40-pound block prices. They proposed that 500-pound barrel 
Cheddar cheese prices should not be included as they are in current 
FMMOs.
    Class III and Class IV Pricing. This decision recommends that the 
classified and component price formulas used in the 10 current FMMOs 
\31\ be utilized without change in the proposed California FMMO. These 
formulas were adopted nationally as part of Federal Order Reform and 
were described at the beginning of this section. The Order Reform Final 
Decision \32\ found that because commodity dairy products compete in 
the national market, it was appropriate that the raw milk used in those 
products be priced uniformly across the FMMO system. This hearing 
record contains testimony explaining the FMMO evolution toward national 
uniform pricing for manufactured products. Such explanation was also 
outlined in the Order Reform Final Decision.
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    \31\ 7 CFR 1000.50 and 1000.52.
    \32\ Official Notice is taken of FMMO Reform Final Decision: 64 
FR 16026.
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    In the early 1960s, FMMOs used a Minnesota-Wisconsin (M-W) 
manufacturing grade milk price series to determine a price for milk 
used in manufactured products based on the supply and demand for Grade 
B milk. As Grade B milk production and the number of plants purchasing 
Grade B milk declined, FMMOs moved to a Basic Formula Price (BFP). The 
BFP price incorporated an updating formula with the base M-W price to 
account for the month-to-month changes in the prices paid for butter, 
NFDM, and cheese. The Order Reform decision recognized that Grade B 
milk would only continue to decline and that the FMMO system needed a 
new way of determining the value of producer milk.
    As outlined in the Order Reform Final Decision, the goals for 
replacing the BFP price were: (1) To meet the supply and demand 
criteria set forth in the AMAA; (2) not to deviate greatly from the 
general level of the current BFP; and (3) to demonstrate the ability to 
change in reaction to changes in supply and demand. The product-price 
and component formulas currently used in the FMMO system were found to 
be the appropriate market-oriented alternative to the BFP. 
Additionally, that final decision specifically addressed the national 
market for commodity dairy products:
    ``. . . the current BFP may have a greater tendency to reflect 
supply and demand conditions in Minnesota and Wisconsin rather than 
national supply/demand conditions. The formulas in this decision use 
national commodity price series, thereby reflecting the

[[Page 10667]]

national supply and demand for dairy products and the national demand 
for milk.'' \33\
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    \33\ See infra.
---------------------------------------------------------------------------

    The Department subsequently reiterated the necessity for FMMO 
classified prices to reflect national markets in a later final decision 
on Class III and IV pricing when it specifically addressed public 
comments pertaining to the relationship of the CSO and FMMOs:
    ``Class III and Class IV dairy products compete in a national 
market. Because of this, Class III and Class IV milk prices established 
for all Federal milk marketing order areas are the same.'' \34\
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    \34\ Official Notice is taken of FMMO Class III and IV Final 
Decision: 67 FR 67937.
---------------------------------------------------------------------------

    This decision finds the prices used in the California FMMO should 
also reflect the national marketplace for cheese, butter, NFDM and dry 
whey. The record reflects that commodity products produced in 
California compete in the same national market as products produced 
throughout the country. Uniform FMMO price formulas ensure similarly 
situated handlers have equal minimum raw milk costs regardless of where 
the handler is regulated. As California is seeking to join the FMMO 
system, it is appropriate that the milk pooled on the California FMMO 
be priced under the same uniform price provisions found in all current 
FMMOs. Additionally, this decision finds that by pricing California 
milk under these uniform pricing provisions, prices received by farmers 
whose milk is pooled on the California FMMO would be more reflective of 
the national market for commodity products for which their milk is 
utilized. Therefore, adopting a western adjusted price series, a 40-
pound only Cheddar cheese price, and California-specific make 
allowances is not appropriate. As explained below, FMMO price formulas 
already account for California market conditions; therefore, it is 
reasonable to use these price formulas in a California FMMO. This 
decision finds that the national FMMO pricing policy continues to 
reflect the marketing conditions of the entire FMMO system and is 
appropriate for adoption in California.
    FMMO product-price formulas generally consist of three factors: 
Commodity price, manufacturing allowance, and yield factor. Product 
yields contained in the formulas reflect standard industry norms. The 
yields were last updated in 2013,\35\ and the record shows that these 
values continue to reflect current market conditions, as there was no 
dispute as to their continued relevancy.
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    \35\ See infra.
---------------------------------------------------------------------------

    Commodity prices used in the FMMO formulas are announced by AMS in 
the NDPSR every month and reflect current commodity prices received for 
products over the previous four or five weeks. While surveyed plant 
names and locations are not released by USDA, several witnesses 
testified that California dairy product sales meeting the reporting 
specifications \36\ are included in the NDPSR. These California sales 
are part of the NDPSR prices used by the FMMOs in the same way that 
sales from plants located in other areas of the United States are 
currently included.
---------------------------------------------------------------------------

    \36\ 7 CFR 1170.8.
---------------------------------------------------------------------------

    FMMO pricing formulas currently contain the following per-pound 
make allowances: Cheese--$0.2003, butter--$0.1715, NFDM--$0.1678, and 
dry whey--$0.1991. These make allowances were last updated in 2013.\37\ 
They were determined on the basis of a 2006 CDFA survey (plants located 
inside of California) and a 2006 Cornell Program on Dairy Markets and 
Policy (CPDMP) survey (plants located outside of California) of 
manufacturing costs. The butter and NDFM make allowances were computed 
by taking a weighted average of the CDFA and CPDMP surveys, weighted by 
national commodity production volumes, and adjusting for marketing 
costs. The cheese make allowance was computed by relying solely on the 
CDFA survey and adjusting for marketing costs. The dry whey make 
allowance was computed by relying solely on the CPDMP survey and 
adjusting for marketing costs. California dry whey data was not 
considered because at the time, it was restricted and therefore not 
available.
---------------------------------------------------------------------------

    \37\ See infra.
---------------------------------------------------------------------------

    As the record demonstrates, most of the manufacturing allowances 
already account for California manufacturing costs. In regard to the 
Institute's position that data used to determine make allowance levels 
is not current, this decision recognizes 2006 data was used to 
determine current make allowance levels. Since that time, USDA has not 
received a hearing request to amend the levels. It may be appropriate 
to amend these levels in the future, and USDA would evaluate any 
changes to those levels on the basis of a formal rulemaking record.
    Institute witnesses stressed that California manufacturers would be 
competitively harmed should California FMMO minimum classified prices 
not reflect a solely western location value. This decision finds that 
California manufacturers would not face competitive harm with the 
adoption of the uniform FMMO prices. Western manufacturing handlers who 
purchase milk pooled on the Pacific Northwest and Arizona FMMOs already 
routinely pay these prices. The record reflects that the Institute's 
primary concern was the adoption of the current FMMO price formulas for 
California, coupled with the adoption of the inclusive pooling 
provisions contained in Proposal 1. The provisions recommended by this 
decision allow handlers to elect not to pool milk used in manufacturing 
as determined appropriate for their individual business operations. The 
proposed California FMMO provisions would not prohibit handlers and 
producers from utilizing the Dairy Forward Pricing Program \38\ to 
forward contract for pooled manufacturing milk.
---------------------------------------------------------------------------

    \38\ See 7 CFR part 1145.
---------------------------------------------------------------------------

    Other Solids Price. Currently, the FMMO system determines the other 
solids price using the same basic formula used to determine the other 
component prices: (Commodity price less make allowance) times yield, 
using dry whey as the NDPSR-referenced commodity price. As the market 
price for dry whey moves and is reflected in the NDPSR price, it moves 
the other solids price accordingly.
    At the hearing, the Institute proposed an alternative method for 
computing the whey value in the other solids formula. The Institute 
argued, in testimony and post-hearing brief, that dry whey is not an 
appropriate reference commodity for California because little dry whey 
is produced in the state. Instead, they testified that prices from the 
more commonly produced WPC-34 should be used. The Institute provided 
evidence regarding WPC-34 production in California. The record contains 
testimony explaining how WPC-34 and dry whey production practices and 
manufacturing costs differ.
    This decision finds that prices adopted in the California FMMO 
should be uniform with all current FMMOs and be reflective of the dry 
whey market. Therefore, it is not appropriate on the basis of this 
hearing record to adopt a change in other solids pricing for only one 
FMMO. The data and testimony presented by the Institute could warrant 
further consideration, but to consider such a change for only one FMMO 
is inappropriate. While an academic expert did provide testimony on the 
record about a WPC-34 manufacturing cost survey, results of the survey, 
which would be of interest if such a proposal was being evaluated, were 
not available.

[[Page 10668]]

    Class II Pricing. The FMMO system currently prices milk used in 
Class II products uniformly. The Class II skim milk price is computed 
as the advanced Class IV skim price plus $0.70 per cwt. The Class II 
butterfat price is the Class III butterfat price for the month, plus 
$0.007 cents per pound. The $0.70 differential between the Class IV and 
Class II skim milk prices adopted in the Order Reform Final Decision 
was an estimate of the cost of drying condensed milk and re-wetting the 
solids for use in Class II products.
    The record reflects--and this decision finds--that milk pricing in 
the FMMO system should be as uniform as possible. Therefore, this 
decision finds that Class II pricing in the California FMMO should be 
the same as in current FMMOs. Class II pricing in the California FMMO 
would result in forward pricing the skim portion of Class II while 
pricing butterfat on a current basis. Butterfat used in Class II 
products competes on a current-month basis with butterfat used in 
cheese and butter, and its price should be determined on the basis of 
the same month's value.
    Class I Pricing. Currently, FMMOs determine Class I prices as the 
higher of the advanced Class III or Class IV price, plus a location-
specific differential referred to as a Class I differential. Class I 
differentials have been determined for every county in the continental 
United States, including California.\39\ Class I prices paid in all 
current FMMO's are on a skim/butterfat basis. Handlers who fortify 
their Class I products have the NFDM or condensed skim used to fortify 
classified as a Class IV use, and pay the Class I price for the 
volumetric increase attributed to fortification.
---------------------------------------------------------------------------

    \39\ 7 CFR 1000.52.
---------------------------------------------------------------------------

    The Cooperatives have proposed that the California FMMO adopt the 
same Class I pricing structure: The higher of the advanced Class III or 
Class IV price plus a Class I differential based on the plant location. 
They argued that the Class I price surface was designed as a nationally 
coordinated structure and already includes differential levels for all 
California counties. According to the Cooperatives, any change to the 
Class I differential surface should be done through a national 
rulemaking hearing where all interested parties can participate.
    The Institute argued, in testimony and post-hearing brief, that the 
Class I differential surface adopted as part of Order Reform did not 
consider California in its inception, and is inappropriate for adoption 
here. The Institute did not offer an alternative.
    This decision finds that the Class I price formula contained in 
Proposal 1, and as currently used in all current FMMOs, is appropriate 
for the proposed California FMMO. This decision finds that prices for 
milk pooled on the California FMMO and used in Class I products should 
be location-specific, since Class I products generally compete on a 
more local market. Therefore, the Class I differential surface that 
applies in all current FMMOs is recommended for the California FMMO. As 
such, Class I prices for milk pooled on the California FMMO would be 
determined by the higher of the advanced Class III or Class IV milk 
price announced on or before the 23rd day of the preceding month, plus 
the Class I differential at a plant's location.
    This decision recommends for a California FMMO the same Class I 
differential surface used in the current FMMOs. Contrary to Institute 
testimony, this differential surface was determined through a United 
States Dairy Sector Simulator (USDSS) model that included California 
supply and demand factors. An academic expert testifying in this 
proceeding was one of the lead authors of the model and stated that 
California was included when the model was constructed. This price 
surface was designed to facilitate the movement of milk to Class I 
markets without causing disorderly marketing conditions within or 
across markets. Therefore, it is inappropriate on the basis of this 
hearing record to make a change to this nationally coordinated Class I 
price surface.
    The Institute repeatedly argued that the Department did not 
consider California when determining the nationally coordinated Class I 
price surface. Prior to January 1, 2000, there were 31 FMMOs. As part 
of the 1996 Farm Bill, the Department was instructed by Congress to 
consolidate the existing orders into as few as 10, and no more than 14, 
FMMOs, reserving one place for California. Since California 
stakeholders did not express a desire to enter the FMMO system at that 
time, the Order Reform process only considered the FMMO marketing areas 
in existence at the time for consolidation. In the Order Reform Final 
Decision, the reference to ``not including the State of California'' 
\40\ pertained to determining appropriate consolidated marketing areas, 
not the analysis pertaining to Class I pricing, which included 
California.
---------------------------------------------------------------------------

    \40\ See infra.
---------------------------------------------------------------------------

    Three-Factor FMMO Class I Pricing and Fortification. The Institute 
proposed that California Class I prices be paid on a 3-factor basis: 
Butterfat, nonfat solids and fluid carrier, as well as incorporate a 
fortification credit similar to what is currently provided for in the 
CSO. The fortification credit offered in Proposal 2 provides a credit 
to a Class I handler's pool obligation for the NFDM or condensed skim 
milk a handler uses to fortify Class I products to meet the State's 
higher nonfat solids content requirement. The proposed fortification 
credit would be paid out of the California FMMO marketwide pool funds.
    The Institute explained these two features are currently provided 
for in the CSO and work together to financially assist Class 1 handlers 
in meeting the State-mandated higher nonfat solids content for Class 1 
products. The Institute explained that handlers receiving high solids 
milk pay a higher Class 1 price, but use less solids to fortify Class 1 
products, and thus incur less cost to meet the state's nonfat solids 
standards for fluid milk products. Conversely, handlers purchasing low 
solids content milk pay a lower Class 1 price, but then incur a higher 
cost to fortify their Class 1 products. The Cooperatives supported this 
concept in their post-hearing brief.
    The current FMMO system prices all Class I skim milk at the same 
price regardless of the solids content. The record does not contain 
enough justification to deviate from the uniform treatment of Class I 
pricing. Therefore Class I milk pooled on the California FMMO will be 
paid on a skim and butterfat basis. This uniform treatment will avoid 
disorderly marketing with adjacent or other Federal orders, as handlers 
could seek to engage in inefficient milk movements solely for the 
purpose of seeking a Class I price advantage.
    Current FMMOs do not provide credits to a handler's pool obligation 
for fortification of Class I products. Instead, NFDM or condensed skim 
used to fortify Class I products is classified as a Class IV product on 
a skim equivalent basis. The volumetric increase due to fortification 
is classified and priced as Class I. Proposal 2 contains this same 
system of credits to a handler's pool obligation for fortification.
    The record reflects that the CSO fortification credit system is 
also included in Proposal 2. The record indicates the CSO fortification 
credit system was designed in response to California's legislatively 
mandated higher nonfat solids standard for Class 1 products. The record 
does not address how incorporation of the CSO fortification credit 
system would operate in the context of the existing

[[Page 10669]]

FMMO fortification classification provisions without resulting in a 
double credit for fortification.
    This decision does not find justification for incorporating into 
the California FMMO a modification to how the FMMO system uniformly 
addresses fortification of Class I products. As described above, and as 
contained in the proposed classification structure in both Proposals 1 
and 2, the California FMMO would provide a lower classification for 
products used to fortify Class I products. Handlers would only be 
charged the Class I price on the volumetric increase in Class I 
products resulting from fortification.
    In its post-hearing brief, the Institute filed a Negative Inference 
Motion asserting that because the Cooperatives did not enter into the 
record of this proceeding a study they commissioned evaluating their 
proposed milk pricing provisions, USDA should conclude that the study 
results contradict the Cooperatives' justification for adopting the 
price formulas contained in Proposal 1.
    It is left to the discretion of the trier of fact to determine 
whether or not a negative inference will be drawn from the failure to 
present any specific piece of evidence under one party's exclusive 
control. The USDA finds that the recommended pricing provisions are 
properly based on testimony of those witnesses who appeared and the 
evidence that has been presented by all parties on the record.
Producer's Value of Milk
    Currently, 6 of the 10 FMMOs utilize multiple component pricing to 
determine both the handler's and producer's value of milk. In the six 
orders, producers are paid for the pounds of butterfat, pounds of 
protein, pounds of other solids of milk pooled, as well as a per 
hundredweight (cwt) price known as the producer price differential 
(PPD). The PPD reflects the producer's pro rata share of the value of 
Class I, Class II, and Class IV use in the market relative to Class III 
use. The Class III butterfat, protein, and other solids prices are the 
same component prices charged to handlers based on the value of the use 
of milk in Class III. In four of these six FMMOs, there is an 
adjustment to the producer's payment for the somatic cell count (SCC) 
of the producers' milk.
    Proposal 1 and Proposal 2 seek to pay producers on a multiple 
component basis for the milk they produce. As will be discussed below, 
the proposals differ on how they would apply a PPD to producer 
payments. Unlike Proposal 2, Proposal 1 does not specify a somatic cell 
adjustment to the producer's value of milk.
    The record reflects that milk use in California is concentrated in 
manufactured dairy products. In 2015, California Class 1 utilization 
was 13 percent, Class 2 and Class 3 utilization combined was 8.6 
percent, while 78.4 percent was used in Class 4a and Class 4b products 
(cheese, butter and dried milk powders). As California is clearly a 
manufacturing market, it is appropriate for producers to be paid for 
the components they produce that are valued by the manufacturers. 
Therefore, this decision recommends producer payments on a multiple 
component basis. Producers would be paid for the butterfat, protein, 
and other solids components in their producer milk and for the cwt of 
milk pooled.
    This decision recommends that producers be paid a PPD calculated in 
the same manner as six current FMMOs. The PPD represents to the 
producer the value from the Class I, Class II, and Class IV uses in the 
pool that they are entitled to share because they participate in the 
FMMO pool. In general, the PPD is computed by deducting the Class III 
component values from the total value of milk in the pool, and then 
dividing the result by the total pounds of producer milk in the pool. 
The PPD paid to producers participating in the California FMMO pool 
would be adjusted to reflect the applicable producer location 
adjustment for the handler location where their milk is received.
    Therefore, under the proposed California FMMO, the minimum payment 
to producers would be determined by summing the result of: Multiplying 
the hundredweight of a producer's milk pooled by the PPD adjusted for 
handler location; multiplying the pounds of butterfat in the producer's 
milk by the butterfat price; multiplying the pounds of protein in a 
producer's milk by the protein price; and multiplying the pounds of 
other solids in a producer's milk by the other solids price.
    Proponents of Proposal 1 proposed distributing the PPD value across 
the butterfat, protein and other solids components, based on the 
average value each component contributed to the Class III price during 
the previous year. The Cooperatives purported that the PPD is confusing 
to producers, particularly when it is negative, and spreading the value 
of the PPD across the components would be a simpler method of 
distribution.
    The PPD is the difference between value associated with all the 
milk pooled during the month and the producers' value for the 
butterfat, protein, and other solids priced at the Class III component 
prices for the month. In general, if the marketwide utilization value 
of all milk in the pool, on a per cwt basis, is greater than the 
marketwide utilization value of the producer's components priced at 
Class III component values, dairy farmers receive a positive PPD.
    A negative PPD occurs when the value of the priced producer 
components in the pool exceeds the total value generated by all classes 
of milk. This is possible since all producer components are priced at 
the Class III components values, but pooled milk is utilized in all 
four classes, each with its own separately derived value.
    Specifically, negative PPDs can happen when large increases occur 
in NDPSR survey prices from one month to the next resulting in the 
Class III price (announced at the close of the month) exceeding, or in 
a close relationship to, the Class I price (announced in advance of the 
month). Negative PPDs can also occur in markets with a large Class IV 
use when the Class IV price is significantly lower than the Class III 
price. A negative PPD does not mean that there is less total revenue 
available to producers. It often means the Class III component values 
are high relative to Class I prices. Because component values are the 
biggest portion of a producer's total revenue, high component prices 
coupled with negative PPDs often result in higher overall revenue to 
producers than when component prices are lower and PPDs are large and 
positive.
    This decision does not find justification for distributing the PPD 
through the component prices as offered in Proposal 1. Current FMMO 
producers receive and understand that the PPD represents the additional 
value from the higher classified markets that they are able to share 
because they participate in the FMMO. This includes times when the PPD 
is negative.
    While the proponents claim a negative PPD is confusing, this 
decision finds that distributing the PPD through the component prices 
would distort market signals to producers. As in the current FMMOs, a 
negative PPD in the California FMMO would inform producers that 
component values are rising rapidly. Regulated FMMO prices should not 
block those market signals. Producers in other FMMOs have been able to 
adapt to a multiple component pricing system that incorporates an 
announced PPD. This decision finds that California producers can do the 
same.

[[Page 10670]]

    Four of the current FMMOs provide for a SCC adjustment on producer 
milk values. The CSO does not include any such adjustment. Proposal 1 
did not include a provision for a SCC adjuster, and a Cooperative 
witness specifically testified against its inclusion. Proposal 2 
included a SCC adjuster, but no Proposal 2 witnesses testified 
regarding this aspect of their proposal. This decision does not 
recommend a SCC adjuster for the California FMMO, as the record does 
not contain evidence to support its inclusion.
    This decision proposes that handlers regulated by the California 
FMMO should be allowed to make various deductions from a producer's 
milk check, identical to what is allowed in the current FMMOs. These 
deductions include such things as hauling expenses and National Dairy 
Promotion charges, as well as other authorized deductions such as 
insurance payments, feed bills, equipment expenses, and other dairy 
related expenses. Authorized deductions from the producer's check must 
be authorized in writing by the producer. For the California FMMO, 
authorized deductions would include any assessment identified by CDFA 
for the payment of California quota values. A quota assessment would be 
authorized upon announcement by CDFA; it would not have to be 
authorized in writing by the producer.
    Some hearing witnesses suggested that changes to the FMMO pricing 
system need to be considered in a separate rulemaking proceeding before 
California producers vote on a FMMO. This decision finds no 
justification for California producers to wait for a decision on a 
California FMMO until after what would most likely be a lengthy 
proceeding on national FMMO pricing. California producers should have 
the opportunity to vote on whether to join the FMMO system and adopt 
the provisions recommended in this decision with the full awareness 
that prices can be re-evaluated at a future hearing.

8. Pooling

    This section addresses the pooling provisions of the recommended 
California FMMO. A summary of testimony for the pooling provisions 
contained in Proposals 1 and 2 is provided below. Additionally, 
Proposal 4 is addressed in this section as it seeks to allow handlers 
the ability to elect partially regulated distributing plant status with 
respect to milk received from farmers located outside of the marketing 
area. Proposal 4 would continue the practice of handlers paying the 
plant blend price for milk produced from outside of the state, instead 
of the market's blend price, since such interstate transactions cannot 
be regulated by the State. Essentially, Proposal 4 pertains to whether 
or not out-of-state milk would be incorporated into the proposed 
California FMMO marketwide pool and therefore it is addressed in this 
section.
    This decision recommends pooling provisions for a California FMMO 
that are conceptually similar to the current 10 FMMOs, but tailored for 
the California market. The recommended pooling provisions are 
performance based and designed to determine those producers who 
consistently supply the Class I market, and therefore should share in 
the revenues from the market. There would be no regulatory producer 
payment difference given to milk based on the location of the dairy 
farm where it was produced.

Summary of Proposals

    A Cooperative witness testified regarding the pooling provisions 
contained in Proposal 1. The witness said the Proposal 1 pooling 
provisions are designed to address the wide disparity in producer and 
handlers prices that currently exists in California when compared to 
the FMMO system. The witness stated that in order to design adequate 
California pooling standards, the Cooperatives evaluated historical 
producer blend prices using both CSO classified prices and the proposed 
California FMMO classified prices, from January 2000 through July 2015. 
The witness estimated that producer blend prices would have averaged 
$14.65 per cwt using CSO classified prices and $15.22 per cwt using the 
proposed California FMMO classified prices, an average difference of 
$0.57 per cwt. The witness' analysis showed that in every month, the 
estimated CSO blend price was less than the FMMO blend price, and that 
in using the most recent data (January 2015 through July 2015) the 
average difference was $0.86 per cwt. The witness stressed that to 
bring California producer blend prices in closer alignment with FMMO 
producer blend prices, the pooling provisions of a California FMMO must 
require the pooling of all classified use values.
    The witness was of the opinion that California's combination of low 
utilization in the higher valued classes (Class 1, 2, and 3) and a 
state-administered quota program requires strict pooling provisions to 
prevent handlers from electing not to pool a significant portion of 
California milk each month. The witness was of the opinion that when 
the California overbase price is below Class 4a or 4b prices, there is 
an incentive to not pool milk in those classes because the handler can 
avoid a payment into the marketwide pool. The witness stated that from 
January 2000 through July 2015, the California overbase price was below 
either the Class 4a or 4b price 91 percent of the time. Thus, in those 
months, if not all milk was pooled, producers would receive different 
minimum prices--those producers whose milk was pooled would receive the 
minimum FMMO blend price, and those producers whose milk was not pooled 
had the potential to receive a higher price because the handler avoided 
sharing the additional revenue with all the producers in the market 
through the marketwide pool. This concern regarding producer price 
disparity was reiterated in the Cooperatives' post-hearing brief.
    The Cooperative witness added that even after adjusting producer 
blend prices to account for quota payments (-$0.37), transportation 
credits (-$0.09), and RQAs ($0.03), there would be a financial 
incentive to not pool a significant portion of California milk in most 
months. Using the pricing provisions contained in Proposal 1, the 
witness estimated that from August 2012 through July 2015, handlers 
would have chosen not to pool Class III or Class IV milk 94 percent of 
the time. The consequence, the witness emphasized, would not only be 
unstable producer prices, but the inability of the FMMO to achieve 
uniform producer prices. The witness stressed that to accumulate the 
revenue needed to provide adequate, uniform producer blend prices and 
facilitate orderly marketing, all the milk delivered to California 
plants must be pooled. While provisions requiring all milk to be pooled 
cannot be found in another FMMO, the witness explained that FMMO 
pooling provisions have always been tailored to the market and the 
pooling provisions contained in Proposal 1 are no different. The 
Cooperatives' post-hearing brief stressed California's need to have 
tailored pooling provisions that are different from other FMMOs. The 
Cooperatives' brief reiterated that allowing for milk to not be pooled 
would inhibit a California producer's ability to receive the national 
FMMO prices they are seeking.
    The witness proceeded to describe the proposed pooling provisions 
contained in Proposal 1. The witness explained that under Proposal 1, 
any California plant receiving milk from California farms would be 
qualified as a pool plant, and all California milk delivered to that 
plant would be qualified as

[[Page 10671]]

producer milk. The witness said Proposal 1 also contains provisions for 
plants located outside of the marketing area that demonstrate adequate 
service to the California Class I market to qualify as pool plants on 
the order. The witness highlighted an additional provision that would 
regulate all plants located in Churchill County, Nevada, and receiving 
milk from farms located in Churchill County or California. According to 
the witness, producers in the Churchill County milkshed have 
historically supplied milk to the California Class 1 market and this 
provision would ensure they could remain affiliated. The witness 
proposed the partially regulated distributing plant (PRDP) provision 
should be the same as in other FMMOs; a plant qualifies as a PRDP if 
the plant does not have more than 25 percent of the plant's total 
disposition within the marketing area.
    The Cooperative witness defined a producer as any dairy farmer 
producing Grade A milk received by a pool plant or a cooperative 
handler. This provision allows for dairy farmers located inside or 
outside of the marketing area to qualify as producers under the order, 
the witness added. The witness said a majority of the producer milk 
pooled on a California FMMO would be milk received by a pool plant 
directly from qualified producers or cooperative handlers. Proposal 1 
also contains a provision to allow producer milk to be pooled in the 
order if it was received by a cooperative handler, the witness noted.
    The Cooperative witness explained that Proposal 1 prohibits milk 
from being diverted to nonpool plants outside of the marketing area and 
remaining qualified for pooling on a California FMMO until five days' 
production is delivered to a pool plant, and subsequently diversions 
are limited by the amount the plant delivers to distributing plants. 
The witness said the California market appears to have an adequate 
reserve supply of Class I milk, so strict diversion limit standards are 
needed to ensure that additional milk being pooled is needed in the 
market.
    The Cooperative witness provided examples of previous FMMO changes 
that the witness described as significant policy shifts, including the 
elimination of individual handler pools in favor of marketwide pools, 
the regulation of large producer-handlers, adoption of multiple 
component pricing, and the establishment of transportation credit 
programs. The witness said that in these examples the Department found 
it appropriate to significantly deviate from historical precedent 
because market conditions justified such changes. The witness stated 
that Federal Order Reform provided a FMMO foundation that was national 
in scope, while also allowing for some provisions to be tailored to 
meet the marketing conditions of individual orders. The witness 
concluded that the AMAA provides the Department the flexibility to 
tailor pooling provisions, and Proposal 1 recognizes the unique needs 
of the California market.
    Another Cooperative witness offered testimony modifying Proposal 1 
to include call provisions. The witness explained that call provisions 
are currently contained in the CSO, and while not often utilized, their 
existence alone encourages milk to be supplied to fluid processing 
plants when needed. As proposed, the witness said, call provisions 
should only be used on a temporary basis when the market's milk supply 
cannot meet distributing plant demand, not when an individual 
distributing plant is short on milk.
    The Cooperatives' post-hearing brief reiterated the justification 
for the inclusive pooling provisions contained in Proposal 1. The brief 
stressed that the AMAA authorizes the pooling of milk, irrespective of 
use.
    The Cooperatives' post-hearing brief also offered a modification to 
extend exempt plant status to small plants that process products other 
than, or in addition to, fluid milk products. The modification would 
increase the exempt plant production limit from route sales under 
150,000 pounds of fluid milk product to sales under 300,000 pounds of 
milk in Class I, II, III or IV products during the month. The brief 
explained that this would allow for small fluid and manufacturing 
plants to be exempt from the pricing and pooling provisions of the 
order that would otherwise be required to participate in the marketwide 
pool.
    A witness testifying on behalf of Western United Dairymen said that 
without inclusive pooling provisions, as outlined in Proposal 1, 
handlers could opt not to pool large amounts of milk. The witness said 
this would have a substantial impact on the pool value and consequently 
lower blend prices to those producers who remain pooled.
    An Institute witness testified regarding the pooling provisions 
contained in Proposal 2. The witness explained how current FMMO 
provisions work together to assure an adequate milk supply for fluid 
use. First, said the witness, higher Class I revenues attract producers 
and producer milk to participate in the pool, then pooling provisions 
direct the producer milk to fluid plants. Class I plants, which by 
regulation are required to be pooled and pay the higher Class I price, 
receive in exchange the assurance that the regulations provide them an 
adequate supply of milk, the witness explained. The witness summarized 
a previous USDA decision finding that performance-based pooling 
provisions are the appropriate method for determining those producers 
who are eligible to share in the marketwide pool. The witness stressed 
that performance-based pooling provisions are essential in maintaining 
orderly milk movements to Class I.
    The Institute witness objected to the Cooperatives' assertion that 
Class I premiums would be sufficient to move milk to Class I use. The 
witness was of the opinion that Class I plants already pay a high 
regulated Class I price and they should not have to pay additional 
over-order Class I premiums to attract milk to their plant. The witness 
questioned the purpose of Class I differentials if the use of premiums 
would be the primary way to attract milk for fluid uses in a California 
FMMO.
    The Institute witness also spoke to Proposal 1's dependence on 
transportation credits to ensure that the Class I market is served. The 
witness was of the opinion that transportation credits are not an 
appropriate substitute for performance-based pooling standards.
    The Institute witness testified that Proposal 1 provides no 
incentive for plants to serve the Class I market in order to qualify 
its producers to share in the market's Class I revenues. Instead, said 
the witness, Proposal 1 would allow plants to gain access to Class I 
revenues for their producers without bearing any burden in servicing 
the Class I market, thus making pooling provisions ineffective.
    Another issue the Institute witness highlighted was inclusive 
pooling provisions in combination with regulated classified prices that 
are not market-clearing. If regulated classified prices are set above 
what a plant can pay for that milk, the witness stressed that many of 
those plants would exit the industry and available market plant 
capacity would shrink. According to the witness, this would lead to 
uneconomic milk movements as excess milk would need to find willing 
processing capacity.
    The Institute witness opposed Proposal 1's provision to 
automatically grant pooling status to any dairy manufacturing plant 
located in Churchill County, Nevada. The witness said that all plants, 
whether located in state or out of state should qualify for pooling by 
meeting appropriate performance-based pooling standards.

[[Page 10672]]

    The Institute witness concluded that pooling standards play a 
pivotal role in ensuring consumers an adequate supply of fluid milk. 
Inclusive pooling challenges the usefulness of pooling standards by 
allowing producers and handlers to benefit from the pool without 
actually being required to serve the Class I market, the witness said. 
The witness urged the Department to adopt the performance-based pooling 
standards contained in Proposal 2.
    The Institute's post-hearing brief reiterated its position that the 
Department's policy has consistently ensured marketwide pool proceeds 
are distributed to those that demonstrate service to the Class I 
market. The brief maintained this standard should be upheld through 
performance-based pooling standards in a California FMMO. The Institute 
stressed that the inclusion of provisions to recognize the California 
quota program is not an adequate justification to exclude performance-
based pooling standards.
    The Institute also raised the issue in its post-hearing brief that 
adoption of mandatory pooling in California would result in trade 
barriers that are prohibited by the AMAA. With no way to avoid minimum 
regulatory pricing, the brief stressed that California handlers would 
be at a disadvantage since handlers regulated by other FMMOs can elect 
not to pool milk and avoid minimum regulated prices. With the inability 
to elect not to pool, the Institute was of the opinion that California 
plants would be discouraged from expanding plant capacity to handle 
surplus milk because they would be required to pay prices above market-
clearing values.
    Lastly, as it pertains to the proposed pooling provisions, the 
Institute expressed the opinion that inclusive pooling would de facto 
regulate farmers, something that is expressly prohibited by the AMAA.
    A Dean Foods witness, on behalf of the Institute, testified 
regarding specific pooling provisions contained in Proposal 2. The 
witness revised Proposal 2 and expressed support for the distributing 
plant in-area route disposition standard of 25 percent offered by the 
Cooperatives. The witness explained the Class I route disposition 
levels that determine a plant's pool status is set by each of the 
individual orders, depending on the Class I utilization of the market, 
among other factors. The witness was of the opinion that a 25 percent 
in-area route disposition standard is appropriate for a California FMMO 
with a low Class I utilization.
    The Dean Foods witness also supported the unit pooling provision 
provided in Proposal 2. The witness testified that the unit pooling 
provision allows two or more plants, operated by the same handler and 
located in the marketing area, to qualify for pooling as a unit by 
meeting the total and in-area route disposition standards as an 
individual distributing plant. Proposal 2 requires one of the plants to 
qualify as a distributing plant and other plant(s) in the unit to 
process at least 50 percent or more of the total milk processed or 
diverted by the plant into Class I or II products.
    The witness expressed concern that the pooling provisions contained 
in Proposal 1 would not ensure Dean Foods an adequate milk supply to 
meet their needs because it provides no incentive to supply Class I 
plants.
    A Hilmar consultant testified on behalf of the Institute regarding 
the pool supply plant performance standards contained in Proposal 2. 
The witness explained that the proposed supply plant performance 
standards and diversion limits would establish the volume of milk that 
could be associated with the California marketwide pool. The witness 
said that 10 percent is an appropriate base shipping standard for 
supply plants seeking to be pooled on a California FMMO. The witness 
explained this standard is similar to that in the Upper Midwest FMMO, 
which has a similar Class I utilization. The witness described Proposal 
2's sliding scale system that would automatically change the supply 
plant shipping standard based on market Class I utilization over the 
previous three months. The witness was of the opinion that the sliding 
scale system would ensure the Class I market is adequately served by 
automatically adjusting should there be a change in the market's Class 
I utilization.
    The Hilmar consultant witness also described different performance 
standards proposed for pool supply plants that receive quota milk. 
Proposal 2 would require 60 percent, or a volume equivalent, of a pool 
supply plant's quota receipts to be delivered to pool distributing 
plants, the witness said. The witness was of the opinion this 
additional requirement on quota milk would ensure that Class I needs 
would always be met. However, if additional milk is needed, that 
responsibility would fall first on quota milk as the Market 
Administrator would have the ability to adjust the quota milk shipping 
standard up to 85 percent if warranted. The witness added that this 
additional standard on quota milk is similar to provisions in the CSO.
    The Hilmar consultant witness also testified that servicing the 
fluid milk needs of the market, the responsibility of quota milk to 
service the fluid market, and flexibility and supply chain efficiency 
should guide the Department in its decision making. The witness 
highlighted additional proposed provisions that would provide 
regulatory flexibility such as allowing for split-plants, the pooling 
of supply plant systems, and a provision to allow the Market 
Administrator to investigate market conditions and adjust shipping 
percentages if warranted by current market conditions.
    The Hilmar consultant witness also addressed what Hilmar believes 
are appropriate producer milk provisions for a California FMMO, namely 
provisions modeled after the Upper Midwest FMMO. The witness was of the 
opinion that an appropriate producer touch-base standard would be the 
lesser of one-day's production or 48,000 pounds of milk, delivered to a 
pool plant during the first month the dairy farmer is a producer. In 
the following months, explained the witness, the producer's milk would 
be eligible for diversion to nonpool plants and still be pooled and 
priced under the terms of a California FMMO. The witness testified that 
handlers should not be allowed to pool more than 125 percent of the 
volume they pooled during the previous month, except during March when 
the appropriate limit should be 135 percent, due to the fewer number of 
days in February. The witness testified that the Institute relied on 
justification and methodology provided in Upper Midwest FMMO rulemaking 
decisions to determine appropriate repooling standards for a California 
FMMO.
    In addition, the Hilmar consultant witness said that a California 
FMMO should not allow milk to be simultaneously pooled on a FMMO and a 
State order with marketwide pooling. Handlers, or a group of handlers, 
should be penalized if they attempt to not pool large volumes of Class 
III or Class IV milk to avoid pooling standards, the witness added.
    A Leprino witness expressed opposition to mandatory-regulated 
minimum prices as advanced in Proposal 1. The witness characterized the 
inclusive pooling provisions of Proposal 1 as actually being mandatory 
minimum pricing provisions because they would cause all California milk 
to be pooled and priced under the terms of the FMMO. The witness 
explained how the CSO has applied minimum regulated pricing to all 
Grade A milk produced and processed in the state for decades, which the 
witness believed has

[[Page 10673]]

led to negative market impacts. For example, the witness described how 
mandatory pricing and pooling has reduced competition across 
manufactured product classes and lessened incentives for milk to move 
to higher-valued uses.
    The Leprino witness did not characterize the CSO as disorderly, but 
rather explained how there had been periods of dysfunction when CDFA 
set minimum-regulated prices that exceeded market-clearing levels, 
leading to overproduction of milk. The witness added that when there 
have been periods of large milk surpluses, milk has been shipped and 
sold outside of the state at discounted rates. The witness said this 
led to losses for California producers that could have been reduced 
under a more flexible regulatory scheme.
    The Leprino witness stressed that a California FMMO should have 
voluntary pricing and pooling for manufactured milk, as is the case in 
all other FMMOs. The witness was of the opinion this promotes market 
efficiency, allowing milk to move to its highest valued use. In its 
brief, Leprino stated that the inclusive pooling provisions are over-
reaching by regulating all milk and are inconsistent with the goals of 
the AMAA. Leprino stated that inclusive pooling standards combined with 
overvalued pricing formulas would result in a disorderly California 
market.
    Another witness appeared on behalf of HP Hood in support of 
adoption of Proposal 2. HP Hood operates fluid milk processing 
facilities in California and in existing FMMOs, and is a member of the 
Institute. The witness testified that if a California FMMO were adopted 
that included inclusive pooling, there would be an oversupply of 
California milk, leading to decreased investment in dairy product 
manufacturing facilities. The witness supported a California FMMO that 
allows for optional milk pooling for non-fluid milk uses.
    A Gallo Farms consultant witness testified that unlike other FMMOs, 
Proposal 1 would not allow handlers to elect not to pool manufacturing 
milk, which would lead to disorderly marketing conditions and increased 
operational costs for cheese plants. The witness supported the ability 
of cheese plants to elect not to pool milk as provided in Proposal 2.
    A witness spoke on behalf of Nestle S.A. (Nestle) in support of 
Proposal 2. Nestle is the world's largest food company, headquartered 
in Switzerland. Its U.S. operations include Nestle USA, Nestle 
Nutrition, Nestle Purina Pet Care Company, and Nestle Waters North 
America.
    The Nestle witness was of the opinion that milk marketing in 
California is orderly. However, if a California FMMO is adopted, Nestle 
supports Proposal 2 that would allow for optional pooling of 
manufactured milk. The witness stated that in all current FMMOs, 
handlers have the option to pool manufacturing milk. Inclusive pooling 
as contained in Proposal 1, according to the witness, would place 
Nestle at a competitive disadvantage with competitors in other FMMOs 
that can avoid minimum-regulated prices. Should mandatory pooling 
standards, in conjunction with the higher-regulated prices contained in 
Proposal 1 be adopted, the witness asserted that Nestle would seek to 
move more of its manufacturing outside of the state.
    The Nestle witness added that the vast majority of its purchased 
California manufactured dairy powder products is utilized in its 
international plants. If California regulated prices increase and 
pooling becomes mandatory, the witness said that Nestle would look 
elsewhere globally to replace those products. The witness concluded 
that Nestle would like to see a consistent approach to regulations in 
all FMMOs so that its business continues to be competitive and grow.
    Proposal 4 was submitted by Ponderosa Dairy (Ponderosa) in response 
to the Cooperatives' original Proposal 1. Proposal 4 would amend the 
provisions that regulate payments by a handler operating a partially-
regulated distributing plant--under either Proposal 1 or 2--to allow 
handlers to elect partially regulated distributing plant status with 
respect to milk received from out-of-state farms.
    A consultant witness on behalf of Ponderosa testified in support of 
Proposal 4. The witness described past judicial decisions regarding the 
treatment of out-of-state milk delivered to California handlers. 
According to the witness, out-of-state producers cannot currently 
obtain quota, are not eligible for transportation benefits under the 
CSO, and do not participate in the CSO marketwide pool. Instead, the 
witness said, they negotiate separate prices with the California 
handlers who buy their milk. The witness speculated that out-of-state 
producers receive the plant's blend price, although that is not 
enforced or verified by CDFA.
    The Ponderosa consultant witness outlined the provisions of 
Proposal 4, which would modify the standard payment provisions for 
partially-regulated plants under a California FMMO. Proposal 4 would 
allow California handlers to elect partially-regulated status with 
respect to milk from out-of-state producers, and out-of-state milk 
would be classified according to the plant's overall utilization and 
receive the plant blend price. Since the milk would not be pooled under 
the FMMO, it would not receive the marketwide blend price. The witness 
clarified that although the out-of-state milk would be isolated for 
payment purposes, the handler's status as a fully regulated pool plant 
should not be lost if it otherwise meets the definition of a pool 
plant.
    The Ponderosa consultant witness said that features of Proposal 4 
are similar to those of individual handler pools that are no longer 
provided in the FMMO system. Such accommodation is needed, the witness 
said, to counter the inherent inequalities of California's unique quota 
system, which would otherwise disadvantage out-of-state producers. In 
the witness's opinion, the provisions of Proposal 4 should be contained 
in any California FMMO recommended by the Department, as it would 
establish a regulated and audited pricing mechanism to ensure out-of-
state producers receive at least the price they would have if they 
shipped to an otherwise fully-regulated plant--something that is not 
provided in the CSO.
    A witness representing Ponderosa explained that Ponderosa Dairy was 
founded in southern Nevada to supply raw milk to the Rockview plant in 
southern California with the expectation of receiving the plant blend 
price reflective of Rockview's plant utilization even though the plant 
was regulated by the CSO. With a Class 1 utilization of approximately 
85 percent, the witness said that the plant blend price compensates 
Ponderosa for its inability to participate in the California quota 
program and for its higher transportation expenses to haul its milk 280 
miles to Rockview.
    Another Nevada producer, representing Desert Hills Dairy (Desert 
Hills), a dairy farm with 4,000 cows that delivers 50 percent of its 
production to California processing plants, testified in opposition to 
any California FMMO. However, the witness said that should a FMMO be 
adopted, Proposal 4 should be included as it most closely resembles the 
current CSO provisions for out-of-state milk. The witness testified 
that Desert Hills receives the plant blend price for the milk shipped 
to California, and that the dairy farm pays all transportation costs. 
The Desert Hills witness said that should Proposal 4 not be adopted, it 
would be financially harmful because Desert Hills would be pooled on a 
California FMMO and

[[Page 10674]]

receive more than $1.00 per cwt less for the milk they ship to 
California.
    Without addressing Ponderosa's concern that out-of-state producers 
are unable to own quota, the Cooperatives modified Proposal 1 in their 
post-hearing brief. Modified Proposal 1 would provide for the payment 
of a blend price adjuster to out-of-state producers so that those 
producers' total receipts would not be diminished by the deduction of 
quota premium payments from the marketwide pool.
    The Cooperatives' brief argued that out-of-state producers have 
taken advantage of the fact that the CSO cannot regulate out-of-state 
milk and have sold milk to California Class 1 handlers for prices 
higher than the CSO regulated blend price but lower than the CSO 
classified use value. According to the Cooperatives, modified Proposal 
1 does not erect trade barriers as it provides for uniform payment to 
California producers in similar circumstances by establishing uniform 
quota premium payments for milk covered by quota, and establishing a 
uniform blend price for production not covered by quota.
    An Institute witness explained that under Proposal 2, out-of-state 
producers would receive the traditional FMMO blend price for their milk 
pooled on a California FMMO. That blend price, the witness said, would 
be determined before the value of quota is deducted from total 
marketwide pool revenues. According to the witness, out-of-state 
producers, who could never own quota under California's current laws, 
and in-state producers should be paid uniformly through a traditional 
FMMO blend price calculation.
    The Institute witness explained they originally considered 
proposing the establishment of two marketwide pools or blend price 
calculations. The first would pay out-of-state producers, and then the 
second would recalculate and apportion all the remaining funds to 
California producers in the pool, on the basis of quota/non-quota 
prices and whether handlers elected to pool their milk. But the witness 
said that upon further consideration they realized that this solution 
would present additional problems.
    The Institute witness provided examples where two producers 
shipping into the same California plant received different prices by 
virtue of their farms' locations. The witness was of the opinion that 
this treatment erects a trade barrier, provides non-uniform payments to 
producers, and violates the AMAA.
    The Institute witness said Proposal 2 addresses these issues by 
providing that out-of-state producers receive the traditional FMMO 
blend price for their milk pooled on a California FMMO. According to 
the witness, by paying the traditional blend to out-of-state producers, 
rather than the non-quota price, no trade barrier is erected with 
respect to out-of-state milk.
    A consultant witness representing Hilmar supported the Institute's 
position regarding the treatment of out-of-state milk.
    Ponderosa's reply brief argued that the Cooperatives' proposed 
remedy--the out-of-state adjustment rate--would not resolve the 
discriminatory trade barrier issue raised in Ponderosa's initial brief. 
Ponderosa asserted the mechanics of the Cooperatives' proposal are 
unclear, but they seemed to add complication to the pooling process 
without fairly compensating out-of-state producers for their inability 
to participate in the quota program. According to Ponderosa, out-of-
state producers can never realize the historic and ongoing benefits of 
quota ownership and can only avoid discriminatory treatment by being 
allowed to receive the plant blend price.

Findings

    Two fundamentally different pooling philosophies have been proposed 
in this proceeding. The first, contained in Proposal 1, has been termed 
``inclusive pooling'' and would automatically pool all California 
produced milk delivered to California plants, similar to how milk 
currently becomes pooled by the CSO. The Cooperatives are of the 
opinion that any change that would allow handlers to opt not to pool 
milk would be disorderly in an industry where all of the milk has 
historically been regulated. The Cooperatives testified that because 
California has a high percentage of both Class III and Class IV milk, 
in any given month handlers would elect to not pool one of those 
classes of milk because of price. The Cooperatives estimated the 
incentive to not pool one or both classes of manufacturing milk could 
occur 94 percent of the time. The resulting fluctuation in uniform 
producer prices, they claim, would be disorderly.
    The second pooling philosophy, offered by the Institute, is 
performance-based pooling standards that are more typical of what 
exists in the current 10 FMMOs. These standards require the pooling of 
plants with predominantly Class I milk sales. Handlers have the option 
of pooling Class II, III and IV milk diverted to nonpool plants. The 
provisions set out standards for what plants, producers, and producer 
milk are eligible to be pooled and priced by the FMMO. The Institute 
testified that the inclusive pooling standards offered in Proposal 1 
are not authorized by the AMAA, and performance-based pooling standards 
are the only means to ensure that Class I demand is always met.
    The pooling standards of all current FMMOs are contained in the 
Pool Plant, Producer and Producer Milk provisions of an order. Taken 
together, these provisions are intended to ensure an adequate supply of 
milk is available to meet the Class I needs of the market, and provide 
the criteria for determining the producers that have demonstrated a 
reasonable measure of service to the Class I market, and thereby should 
share in the marketwide distribution of pool proceeds.
    While the Cooperatives have put forth the argument that inclusive 
pooling is authorized by the AMAA, the analysis of the record of this 
proceeding finds that performance-based pooling standards remain the 
appropriate method for identifying the producers and producer milk that 
serves the Class I market. Therefore, performance-based pooling 
provisions, tailored to the local market, are recommended for the 
proposed California FMMO.
    Pooling standards that are performance based provide a viable 
method for determining those eligible to share in the marketwide pool. 
It is primarily the additional revenue generated from the higher-valued 
Class I use of milk that adds additional revenue, and it is reasonable 
to expect that only producers who consistently bear the costs of 
supplying the market's fluid needs should be the ones to share in the 
returns arising from higher-valued Class I sales. Therefore, FMMOs 
require the pooling of milk received at pool distributing plants, which 
is predominately Class I milk. Handlers of Class II, III and IV uses of 
milk qualify their milk to be pooled by meeting the pooling and 
performance standards of an order. Pooling of Class II, III and IV milk 
is optional. By delivering a portion of their milk receipts to Class I 
distributing plants, handlers benefit from the marketwide pool by 
receiving the difference between their use-value of milk and the 
order's blend price in order to pay their producer suppliers the 
uniform producer blend price. This decision finds that the following 
performance-based pooling provisions are appropriate for the proposed 
California FMMO.
    Pool Plant. The Pool Plant definition of each order provides the 
standards to identify plants engaged in serving the fluid needs of the 
marketing area and that receive milk eligible to share in the 
marketwide pool. The Pool Plant provisions recommended in this decision 
are a combination of those offered in both Proposal 1 and Proposal

[[Page 10675]]

2. Both proposals recommend similar distributing plant and supply plant 
provisions. However, Proposal 1 would automatically regulate any plant 
located in California that receives milk from a producer located in the 
marketing area, and the remaining proposed pool plant provisions (both 
distributing plant and supply plant provisions) would apply to only 
plants located outside of the marketing area. As discussed earlier, 
this decision finds that pooling provisions should be performance 
based, and therefore it is not appropriate to recommend provisions that 
would regulate plants based solely on location.
    There are two performance standards applicable to distributing 
plants. First, this decision finds that a pool distributing plant 
should have a minimum of 25 percent of the total quantity of fluid milk 
products physically received at the plant (excluding concentrated milk 
received from another plant by agreement for other than Class I use) 
that are disposed of as route disposition or are transferred in the 
form of packaged fluid milk products to other distributing plants. This 
decision finds that a 25 percent route disposition standard for the 
proposed California FMMO is adequate to determine those plants that are 
sufficiently associated with the fluid market. The second criteria is 
an ``in-area'' standard and is designed to recognize plants that have 
an adequate association with the fluid market in the California 
marketing area. The record supports the adoption of the same in-area 
standard of 25 percent of total route disposition that is found in the 
current 10 FMMOs.
    The Pool Plant provision also provides for regulation of 
distributing plants that distribute ultra-pasteurized or aseptically-
processed fluid milk products. The record evidence shows that plants 
specializing in these types of products tend to have irregular 
distribution patterns that could cause the plant to shift its 
regulatory status. This shifting can be considered disorderly to the 
producers and cooperatives who supply those plants. Therefore 
regulating those plants based on location, as is done in other FMMOs, 
provides regulatory stability. Current FMMOs allow these plants to be 
regulated in the marketing area where they are located, as long as they 
process a minimum percent of their milk receipts into ultra-pasteurized 
or aseptically-processed fluid milk products during the month.
    The record reveals that both the Cooperatives and the Institute 
used the Upper Midwest FMMO, which contains a 15 percent standard for 
distributing plants producing ultra-pasteurized or aseptically-
processed products, as a template for pooling provisions. However, as 
explained in the Federal Order Reform Final Decision,\41\ this standard 
was set equal to the total route disposition standard required for pool 
distributing plants in the respective FMMO. In this decision, the pool 
distributing plant standard is proposed to be 25 percent. Accordingly, 
this decision recommends that plants located in the marketing area that 
process at least 25 percent of their total quantity of fluid milk 
products into ultra-pasteurized or aseptically-processed fluid milk 
products would be fully regulated by the proposed California FMMO.
---------------------------------------------------------------------------

    \41\ See infra.
---------------------------------------------------------------------------

    Performance standards for pool supply plants are designed to 
attract an adequate supply of milk to meet the demands of the fluid 
milk market by encouraging pool supply plants to move milk to pool 
distributing plants that service the marketing area. The record reveals 
that California has significant volumes of manufacturing milk, and the 
California Class 1 utilization in 2015 was only 13 percent. This 
decision recommends that a pool supply plant should deliver at least 10 
percent of the plant's total milk receipts from producers, including 
milk diverted by the handler, to plants (qualified as pool distributing 
plants, plants in a distributing plant unit, producer-handlers, 
partially regulated distributing plants, or distributing plants fully 
regulated by another order) each month in order to qualify all of the 
milk associated with the supply plant for pricing and pooling under a 
California FMMO. This shipping provision is reasonable given that it 
mirrors the approximate Class I utilization of the market and is low 
enough to avoid uneconomic shipments of milk.
    To prevent uneconomic shipments of milk solely for the purpose of 
pool qualification, this decision finds it appropriate to recommend two 
additional pooling provisions. First, this decision recommends a unit 
pooling provision that allows for two or more plants located in the 
marketing area and operated by the same handler to qualify for pooling 
as one unit. This applies as long as one or more of the plants in the 
unit qualifies as a pool distributing plant and the other plant(s) 
processes at least 50 percent of its bulk fluid milk products into 
Class I or II products. This unit pooling provision is designed to 
provide regulatory flexibility and avoid uneconomic milk movements in 
markets, like California, where there is often specialization in plant 
operations.
    Second, this decision recommends a system pooling provision that 
allows for two or more supply plants, located in the marketing area and 
operated by one or more handlers, to qualify for pooling as a system by 
meeting the supply plant shipping requirements as a single plant. This 
system pooling provision recognizes the benefits supply plants provide 
by balancing the market's fluid needs, while ensuring that the plant is 
a consistent supplier to the market and therefore eligible to benefit 
from participation in the marketwide pool. Both unit and system pooling 
provisions are provided in other FMMOs.
    The Cooperative and Institute witnesses testified in support of 
authorizing the Market Administrator to adjust shipping percentages if 
warranted by changing market conditions. This decision finds it 
appropriate to adopt such provisions should the Market Administrator 
conclude, after conducting an investigation, that justification for 
adjusting shipping standards for supply plants, and systems of supply 
plants to encourage shipments of milk to meet Class I demand, or to 
prevent uneconomic shipments of milk is warranted. This provision will 
ensure that California FMMO provisions can quickly respond to changing 
market conditions and that orderly marketing can be maintained. This 
provision negates the need to add call provisions, as advanced by the 
Cooperatives, to ensure that fluid milk demand is always met.
    Like other FMMOs, the proposed California FMMO allows a plant, 
qualifying as a pool plant in the immediately preceding three months, 
to be granted relief from performance standards for no more than two 
consecutive months if it is determined by the market administrator that 
it cannot meet the performance standards because of circumstances 
beyond the control of the handler operating the plant. Examples of such 
circumstances include natural disaster, breakdown of equipment, or work 
stoppage.
    In their post-hearing brief, the Cooperatives offered a 
modification to the exempt plant definition that would expand exempt 
plant status to plants with less than 150,000 pounds of Class I route 
disposition, and less than 300,000 pounds of total Class I, II, III or 
IV milk usage during the month. This modification was offered to exempt 
smaller plants that would otherwise be regulated under the inclusive 
pooling provisions of Proposal 1. This decision puts forth a package of 
performance-based pooling provisions; therefore,

[[Page 10676]]

there is no need to alter the standard exempt plant definition, as 
plants with manufacturing uses can elect to not participate in a 
California FMMO.
    Proposal 2 offered a sliding scale supply plant shipping standard 
that would automatically adjust if the average Class I utilization 
percentage over the prior three months changed. Justification provided 
for this provision centered on administrative ease and flexibility of 
the regulations to change in order to reflect market conditions, 
without necessitating a formal rulemaking hearing. This decision 
recommends provisions allowing the market administrator to adjust 
supply plant shipping standards if warranted by changing market 
conditions. Therefore, it is not necessary to incorporate automatic 
adjustments to the standards, as that is provided with the 
flexibilities granted to the market administrator.
    This decision does not recommend separate pooling standards for 
plants receiving California quota milk, as offered in Proposal 2. As 
discussed previously, this decision finds that proper recognition of 
the California quota program could be through an authorized deduction 
to payments to producers if deemed appropriate by CDFA. Therefore, it 
is not appropriate for the supply plant shipping standards to differ on 
the basis of whether or not they receive quota milk.
    Proposal 1 contained a provision that would regulate a plant 
located in Churchill County, Nevada, receiving milk from producers 
within the county or in the California marketing area. The Cooperatives 
argued that currently a plant located in Churchill County has a long 
standing association with the California market, and this provision 
would ensure the plant would remain associated within the FMMO 
framework. This decision does not find it appropriate to regulate a 
supply plant based on its location and not in combination with some 
form of performance standard. If the Churchill County plant meets the 
pool plant provisions of the recommended California FMMO, and thus 
demonstrates an adequate association to the market, then that plant 
would become regulated and enjoy the benefits of participating in a 
California FMMO marketwide pool.
    Lastly, this decision incorporates provisions contained in all 
other FMMOs implementing the provisions of the Milk Regulatory Equity 
Act of 2005 (MREA). The MREA amended the AMAA to ensure regulatory 
equity between and among dairy farmers and handlers for sales of 
packaged fluid milk in FMMO areas and into certain non-Federally 
regulated milk marketing areas from Federal milk marketing areas. 
Incorporation of these provisions is required to ensure that the 
proposed California FMMO does not violate the MREA.
    Producer. The Producer definition identifies those dairy farmers 
supplying the market with milk for fluid use, or who are at least 
capable of doing so if necessary. Producers are eligible to share in 
the revenue that accrues from the marketwide pooling of milk. The 
Producer provisions proposed in Proposals 1 and 2 were virtually 
identical. This decision finds that the proposed California FMMO will 
recognize producers as any person who produces Grade A milk that is 
received at a pool plant directly from the producer or diverted from 
the plant, or received by a cooperative in its capacity as a handler. A 
dairy farmer would not be considered a producer under more than one 
FMMO with respect to the same milk. Additionally, the proposed 
California FMMO exempts producer-handlers and exempt plants from the 
pricing provisions, so the term producer would not apply to a producer-
handler, or any dairy farmer whose milk is delivered to an exempt 
plant, excluding producer milk diverted to such exempt plant. Finally, 
the term producer would not apply to a dairy farmer whose milk is 
received at a nonpool plant as other than producer milk. Such a 
provision is commonly referred to as a dairy farmer for other markets 
provision.
    The Cooperatives proposed an additional provision that would 
identify those dairy farmers who had lost their Grade A permit for more 
than 30 consecutive days as dairy farmers for other markets, and 
therefore would lose their ability to qualify as a producer on a 
California FMMO for 12 consecutive months. The Cooperatives explained 
that this provision was part of the inclusive pooling provisions and 
was designed to prevent producers from voluntarily giving up their 
Grade A status to avoid regulation. This decision is recommending a 
package of pooling provisions that are performance based and only those 
dairy farmers who meet the producer definition would be entitled to 
share in the marketwide pool. Therefore, any dairy farmer who delivers 
Grade A milk to a pool plant will be considered a producer.
    Producer milk. The Producer Milk definition identifies the milk of 
producers that is eligible for inclusion in the marketwide pool. The 
recommended provisions are a combination of the provisions contained in 
Proposals 1 and 2, and uphold the performance-based pooling philosophy 
advanced in this decision.
    This decision finds that for the proposed California FMMO, producer 
milk is defined as the milk of a producer that is received at a pool 
plant, or received by a cooperative association in its capacity as a 
handler.
    The proposed California FMMO must also provide for the diversion of 
producer milk to facilitate its orderly and efficient disposition when 
not needed for fluid use. Diversion provisions are needed to ensure 
that milk pooled on the order but not used for Class I purposes is part 
of the legitimate reserve supply of Class I handlers. Providing for the 
diversion of milk is a desirable and needed feature of a FMMO because 
it facilitates the orderly and efficient disposition of milk when not 
needed for fluid use.
    Accordingly, the recommended California FMMO would allow a pool 
plant to divert milk to another pool plant, and pool plants and 
cooperatives in their capacity as handlers could also divert milk to 
nonpool plants located in California, or in the surrounding states of 
Arizona, Nevada and Oregon. Milk would not be eligible to be diverted 
to a nonpool plant and remain priced and pooled under the terms of a 
California FMMO, unless at least one day of the dairy farmer's 
production is physically received as producer milk at a pool plant 
during the first month the dairy farmer is qualifying as a producer on 
the order. Given the large supply of milk for manufactured use in 
California, the record supports that a one-day ``touch base'' provision 
during the first month would be adequate to define the producer milk 
that should be included in a California marketwide pool. Proposal 2 
offered an alternative touch base standard of the lesser of one-day's 
production or 48,000 pounds. This decision finds that a one-day touch 
base standard is an adequate demonstration of a dairy farmer's ability 
to service the market. Conversely, a higher standard, such as the five-
day standard contained in Proposal 1, could lead to uneconomic milk 
movements for the sole purpose of meeting regulatory standards.
    It is equally appropriate to safeguard against excessive milk 
supplies becoming associated with the market as the recommended 
California FMMO one-day touch base standard could lead to milk from far 
distances associating with a California marketwide pool without 
actually being available to service the market's fluid needs. 
Therefore, this decision recommends diversions be limited to 100 
percent minus the supply plant shipping percentage (or 90 percent of 
all milk

[[Page 10677]]

being pooled by the handler). Diversions would further be limited to 
nonpool plants within California and its surrounding states. This limit 
should allow the economic movement of milk to balance the fluid needs 
of the market, while simultaneously preventing the milk of producers 
located in areas distant from the marketing area from being delivered 
to a pool plant once, and then all the milk of that producer being 
diverted to a distant plant and still pooled on and receiving the 
recommended California FMMO blend price.
    The recommended California FMMO also contains repooling standards 
of 125 percent for the months of April through February, and 135 
percent for the month of March of the producer milk receipts pooled by 
the handler in the previous month. The record contains evidence that 
other FMMOs have experienced large swings in the volume of milk pooled 
on the order. This volatility was attributed to manufacturing handlers 
having opted to not pool all their eligible milk received in a month in 
order to avoid payment to the marketwide pool. The unrestricted ability 
of manufacturing handlers and cooperatives to elect not to pool milk 
and avoid payment into the marketwide pool is inequitable and contrary 
to the intent of the FMMO system.\42\ Repooling standards have been 
found to be an appropriate remedy to safeguard marketwide pooling and 
deter the disorderly conditions that occur when milk is not pooled. 
These standards would not prevent manufacturing handlers or 
cooperatives from electing to not pool milk. However, they should serve 
to maintain and enhance orderly marketing by encouraging participation 
in the marketwide pooling of all classified uses of milk.
---------------------------------------------------------------------------

    \42\ Official Notice is taken of Upper Midwest Final Decision 
(71 FR 54136), Central Final Decision (71 FR 54152), and Mideast 
Final Decision (71 FR 54172).
---------------------------------------------------------------------------

    Therefore, this decision finds that repooling standards are 
justified for the proposed California FMMO to avoid known disorderly 
marketing conditions that have occurred in numerous FMMOs. As 
California is currently regulated by the CSO, there is no data on the 
record from which to discern how much milk plants that will qualify as 
pool plants on the recommended California FMMO will seek to pool. 
Therefore, the 125 and 135 percent repooling standards serve as a 
reasonable starting point for determining a handler's consistent supply 
of milk available to service the market's fluid needs. Any milk 
delivered to a pool distributing plant in excess of the previous 
month's pooled volume would not be subject to the repooling standards. 
The recommended California FMMO also contains a provision that allows 
the market administrator to waive these provisions for new handlers, or 
existing handlers with a significant change in their milk supply due to 
unusual circumstances.
    Lastly, milk that is subject to inclusion and participation in a 
State-authorized marketwide equalization pool and classification system 
would not be considered producer milk. Without such exclusion, milk 
could be simultaneously pooled on a California FMMO and on a marketwide 
equalization pool administered by another government entity, resulting 
in a double payment on the same milk and giving rise to competitive 
equity issues between producers.
    The record reflects that under the CSO, milk serving the California 
Class I market but produced from outside the state is not priced and 
pooled, and out-of-state producers commonly receive the plant blend 
price. Proposal 4 seeks to allow plants that otherwise qualify as fully 
regulated distributing plants to elect partially regulated distributing 
plant status with respect to milk received from out-of-state farms. If 
Proposal 4 were adopted, the recommended California FMMO would enforce 
payment to out-of-state producers of at least the plant blend price on 
the out-of-state milk and thus the out-of-state producers would receive 
the same price as they currently do by being exempt from CSO 
regulation.
    Throughout the hearing, California producers extolled the virtues 
of joining the FMMO system and enjoying system-wide uniform product 
classification and pricing, which they believed would put them on a 
level-playing field with their producer counterparts across the 
country. In an effort to fairly compensate out-of-state producers while 
accommodating the California quota program under the proposed FMMO, 
proponents offered various payment alternatives. Under the modified 
provisions of Proposal 1, out-of-state producers would be entitled to a 
uniform blend price adjusted for quota. Under Proposal 2, out-of-state 
producers would be entitled to the traditional FMMO blend price 
calculated before quota premiums are paid.
    Proponents of Proposal 4 argued that out-of-state producers should 
be allowed to continue receiving the plant blend price for milk shipped 
to plants regulated under a California FMMO to compensate for the fact 
that they have not historically been entitled to own and benefit from 
California quota and cannot expect to in the future. Under Proposal 4, 
otherwise fully regulated handlers could elect partially regulated 
distributing plant status with respect to out-of-state milk, for which 
they would pay the plant's blend price, based on classified use.
    The record reflects that out-of-state milk is not priced and pooled 
by the CSO because the State of California is prohibited from 
regulating interstate commerce. One benefit of Federal regulation is 
the ability to regulate the interstate marketing of milk, something 
that states are expressly prohibited from doing. FMMO provisions ensure 
that all milk servicing a market's Class I needs is appropriately 
classified and priced, and the producers who supply that milk share in 
the marketwide revenues from all Class I sales in the market.
    A key feature of FMMOs is that producer milk is classified and 
priced at the plant where it is utilized, regardless of its source. 
Similarly situated handlers pay at least the class prices under each 
order, and producers are paid at least the order's minimum uniform 
blend price, determined through marketwide pooling. This allows 
producers to share equally in the classified use value of milk in the 
market, while minimizing uneconomic milk movements.
    As explained earlier, this decision recommends that a California 
FMMO operate independent of the State's quota program. Under the 
recommended provisions, no quota premium would be subtracted from the 
FMMO pool, and all producers delivering to regulated pool plants under 
the order would be paid at least the same minimum producer blend price, 
less authorized deductions. Therefore, all producers are paid 
uniformly, as is allowed by the uniform payments provision of the AMAA.
    Accordingly, this decision finds no justification for differential 
producer treatment for milk servicing California's Class I needs and 
produced outside the marketing area. If an out-of-state dairy farmer 
qualifies as a producer on the recommended California FMMO, then their 
milk will be priced and pooled uniformly with all other producers 
serving the Class I market.

9. Transportation Credits

    Transportation credits were contained in both Proposals 1 and 2 to 
reimburse handlers for part of the cost of transporting milk to Class I 
and/or Class II use. This decision does not recommend transportation 
credit provisions for a California FMMO.
    A witness appearing on behalf of the Cooperatives testified in 
support of the transportation credit provisions

[[Page 10678]]

contained in Proposal 1. The witness said that transportation credits 
are needed because Class I differentials are not high enough to cover 
the cost of moving milk from the Central Valley where most of the milk 
is produced, to Class I distributing plants which are primarily located 
on the coast where most of the population resides.
    The Cooperative witness utilized April 2013 to October 2014 CDFA 
hauling cost data of milk deliveries to plants with Class 1, 2 and/or 3 
utilization, and compared it to the proposed California FMMO Class I 
differentials that would be applicable for comparable hauls. The 
witness said the average cost to haul a load of milk from a supply 
region to a demand region was $0.75 per cwt, with a range of $0.35 to 
$1.82 per cwt. According to the witness, in all instances, the 
difference in FMMO Class I differentials between the two locations was 
much less than the actual haul cost, therefore an additional cost 
recovery mechanism is needed to assure orderly movements of milk to 
Class I plants.
    The witness explained that Proposal 1 contains transportation 
credit provisions similar to the current CSO where marketwide pool 
monies are used to provide a credit for farm-to-plant milk movements 
within designated transportation zones to handlers with greater than 50 
percent Class 1, 2 and/or 3 utilization. The witness said that the 
transportation credit zones represent current market procurement 
patterns where transportation credit assistance is necessary, and a 
similar credit system should be incorporated into a California FMMO. 
The witness stressed that the proposed credits would be mileage and 
transaction based, with a reimbursement rate cap of 175 miles,\43\ and 
a fuel cost adjustor. The witness noted that the transportation credit 
rate would be calculated on a per-farm basis. So one haul route could 
have more than one farm stop and each farm stop would be eligible 
individually for a transportation credit. In their post-hearing brief, 
the Cooperatives modified their proposal to allow for milk outside the 
marketing area to be eligible for transportation credits.
---------------------------------------------------------------------------

    \43\ The mileage rate cap was modified at the hearing to 175 
miles.
---------------------------------------------------------------------------

    The Cooperative witness explained that their proposed reimbursement 
equations were a result of Cooperative members' transportation cost 
data analyzed by the Pacific Northwest FMMO office. The Cooperatives 
requested that the FMMO office analyze the data and determine cost 
equations based on actual observed costs, minus $0.30 per cwt which 
represents the a producer's responsibility for a local haul. The 
witness said that the resulting equations are valid because they 
calculated a $5.205 million payment which was close to the actual 
observed costs of $5.261 million. The witness explained that because 
diesel prices are a key variable cost to transportation, a monthly fuel 
cost adjustor is needed to ensure that the transportation credit 
provisions maintain an accurate reflection of costs. The witness noted 
that Proposal 1 does not contain transportation credit reimbursement 
for plant-to-plant milk movements.
    The Cooperative witness elaborated that Proposal 1 seeks to pay all 
producers the same FMMO blend price, unadjusted for location. Therefore 
the incentive to supply milk to Class I plants is borne solely through 
their proposed transportation credit provisions. The witness said that 
because all producers share in the higher valued class uses, it is 
appropriate that they share in the cost of supplying and balancing 
those markets by using marketwide pool monies to provide a handler 
credit on those milk movements.
    The Institute, in its post-hearing brief, expressed support for the 
transportation credit provisions contained in Proposal 1, subject to 
the transportation credits being adjusted for the difference in 
location differentials.
    A witness representing Ponderosa testified that any proposed 
California FMMO should allow for transportation credits of out-of-state 
milk that serves the California Class I and/or Class II market. The 
witness explained that Ponderosa experiences high-transportation costs 
because they haul their milk approximately 280 miles to a southern 
California Class I plant. The witness was of the opinion that this milk 
should be eligible for transportation credits if it is serving the 
California fluid market.

Findings

    The record of this proceeding reflects that the California fluid 
market is structured such that some handlers and cooperative 
associations rely on the current CSO transportation credit system to 
assist them in making an adequate milk supply available for fluid use. 
The record reveals that Los Angeles, San Francisco, San Diego and 
Sacramento metropolitan areas contain an overwhelming majority of the 
state's population as well as the Class I plants that service those 
areas. However, these plants must often source milk from milk 
production regions of the state located farther away. The record 
reveals that this supply/demand imbalance, coupled with flat producer 
pricing necessitated the development of the CSO transportation credits 
for milk deliveries from designated supply regions to Class 1, 2 and/or 
3 handlers located in demand regions where a majority of the population 
resides. The Cooperatives designed their transportation credit proposal 
to replicate the transportation credits currently paid by the CSO on 
farm-to-plant milk shipments, but attempted to make the proposed system 
more transaction based.
    As previously discussed, this decision does not recommend flat 
producer pricing. The record of this proceeding supports the finding 
that producer payments should be adjusted to reflect the applicable 
producer location adjustment for the handler location where their milk 
is received. Therefore, the incentive to producers to supply Class I 
plants is embodied within the proposed producer payment provisions. As 
in all FMMOs, producers are responsible for finding a market for their 
milk, and consequently bear the cost of transporting their milk to a 
plant. Therefore the record of this proceeding does not support 
reducing the producers' value of the marketwide pool through the 
payment of transportation credits to handlers. The proposed Class I 
differential structure provides for higher differentials in the major 
metropolitan areas of Los Angeles, San Diego, San Francisco, and 
Sacramento to incentivize movements of Class I milk. If additional 
monies are needed above minimum classified prices to supply Class I 
plants, marketplace principles should dictate the source and amount of 
those additional funds.

10. Miscellaneous and Administrative Provisions

    This section discusses the various miscellaneous and administrative 
provisions that would be necessary to administer the proposed 
California FMMO. All current FMMOs contain administrative provisions 
that provide for the handler reporting dates, announcements by the 
Market Administrator, and payment dates that are necessary to 
administer the provisions of the FMMOs. A California FMMO likewise 
needs similar administrative provisions to ensure its proper 
administration. The provisions outlined below generally conform to 
provisions contained in the 10 current FMMOs with reporting and payment 
dates tailored to the California dairy market.
    Handler Reports. Handlers subject to a California FMMO would be 
required to submit monthly reports detailing the

[[Page 10679]]

sources and uses of milk and milk products so that market average use 
values, or uniform prices, could be determined and administered. Under 
a California FMMO, handler reports of receipts and utilization would be 
due by the 9th day following the end of the month. To ensure the 
minimum payments to producers are made in accordance with the terms of 
a California FMMO, handlers would need to report producer payroll by 
the 20th day following the end of the month to the Market 
Administrator.
    Announcements by the Market Administrator. In the course of 
administering a California FMMO, the Market Administrator would be 
required to make several announcements each month with respect to 
classification, class prices and component prices, an ``equivalent 
price'' when necessary, and various producer prices. Under a California 
FMMO, the Market Administrator would make these announcements on or 
before the 14th day following the end of the month.
    Producer-Settlement Fund. Handlers regulated by a California FMMO 
would be required to pay minimum class prices for the milk received 
from producers. These minimum values would be aggregated in a 
California FMMO marketwide pool so that producers could receive a 
uniform price, or blend price for their milk. The equalization of a 
handler's use value of milk and the uniform value would occur through 
the producer-settlement fund that would be established and administered 
by the Market Administrator.
    The producer-settlement fund ensures that all handlers would be 
able to return the market blend price to producers whose milk was 
pooled under the order. Payments into the producer-settlement fund 
would be made each month by handlers whose total classified use value 
of milk exceeds the values of such milk calculated at the announced 
producer prices. In a California FMMO, handlers would be required to 
pay into the producer-settlement fund by the 16th day following the end 
of the month.
    Payments out of the producer-settlement fund would be made each 
month to any handler whose use value is below the value of their milk 
at producer prices. Under a California FMMO, the Market Administrator 
would distribute payments from the producer-settlement fund by the 18th 
day following the end of the month. This transfer of funds would enable 
handlers with a classified use value of milk below the average for the 
market to pay their producers the same uniform price as handlers whose 
classified use value of milk exceeds the market average.
    In view of the need to make timely payments to handlers from the 
producer-settlement fund, it is essential that money due to the fund is 
received by the due date. Accordingly, payment to the producer-
settlement fund is considered made upon receipt of funds by the Market 
Administrator. Payment cannot be received on a non-business day. 
Therefore, if the due date for a payment, including a payment to or 
from the producer-settlement fund, falls on a Saturday, Sunday, or 
national holiday, the payment would not be due until the next business 
day.
    Payments to Producers and Cooperative Associations. The AMAA states 
that handlers must pay the uniform price to all producers and producer 
associations. As under other FMMOs, a California FMMO would provide for 
proper deductions authorized by the producer in writing. Such 
authorized deductions would be those that are unrelated to the minimum 
value of milk in the transaction between the producer and handler. The 
proposed California FMMO would also allow a deduction for any 
assessment announced by CDFA for the administration of the California 
quota program. The producer would not need to authorize this deduction 
in writing.
    As in other FMMOs, producer associations would be allowed to 
``reblend'' their payments to their producer members. The Capper 
Volstead Act and the AMAA make it clear that cooperative associations 
are unique in this regard.
    A California FMMO would require handlers to make at least one 
partial payment to producers in advance of the announcement of the 
applicable uniform prices. The partial payment rate for milk received 
during the first 15 days of the month could not be less than the lowest 
announced class price for the preceding month, and would be paid to 
producers by the last day of the month. The final payment for milk 
under a California FMMO would be required to be made so that it is 
received by producers no later than the 19th day after the end of the 
month.
    Handlers would pay Cooperatives for bulk milk and skim milk, and 
for bulk milk received by transfer from a cooperative's pool plant, on 
the terms described for individual producers, with the exception that 
payment would be due one day earlier. An earlier payment date for 
cooperative associations is warranted because it would then give 
cooperative associations the time they need to distribute payments to 
individual producer members.
    All payment dates specified in the proposed California FMMO are 
receipt dates. Since payment cannot be received on a non-business day, 
payment dates that fall on a Saturday, Sunday, or national holiday 
would be delayed until the next business day. While this has the effect 
of delaying payments to cooperatives and producers, the delay is offset 
by the shift from ``date of payment'' to ``date of payment receipt.''
    Payment Obligation of a Partially Regulated Distributing Plant. All 
FMMOs provide a method for determining the payment obligations due to 
producers by handlers that operate plants not fully regulated under any 
Federal order. These unregulated handlers are not required to account 
to dairy farmers for their milk at classified prices or to return a 
minimum uniform price to producers who have supplied the handler with 
milk. However, such handlers may sell fluid milk products on routes in 
a regulated area in competition with handlers who are fully regulated. 
To address this, FMMOs provide a minimum degree of regulation to all 
handlers who have route sales in a regulated marketing area. Partial 
regulation preserves the integrity of the FMMO classified pricing and 
pooling provisions and assures that orderly marketing conditions can be 
maintained. Without these provisions, milk prices under an order would 
not be uniform among handlers competing for sales in the marketing 
area, a milk pricing requirement of the AMAA. Like the other FMMOs, a 
California FMMO would partially regulate handlers who have route sales 
into the marketing area, but do not meet the threshold to be fully 
regulated.
    The proposed California FMMO would provide regulatory options for a 
partially regulated plant handler. All partially regulated plant 
handlers would account to the California FMMO producer-settlement fund 
on the volume of packaged Class I sales in the California marketing 
area that exceeds receipts previously priced as Class I under a FMMO. 
Under the first option, a payment could be made by the partially 
regulated plant handler into the producer-settlement fund of the 
California FMMO at a rate equal to the difference between the Class I 
price and the California FMMO uniform price. Under the second option, 
the operator of a partially regulated plant handler could pay any 
positive difference between the gross obligation of the plant, had it 
been fully regulated, and the actual payments made for its milk supply. 
This is commonly referred to as the Wichita

[[Page 10680]]

Option. The third option applies to a partially regulated plant handler 
that is subject to a marketwide pool operated under the authority of a 
State. In this last case, the partially regulated plant handler would 
account to the producer settlement fund at the difference between the 
Federal order Class I value and the value at which the handler accounts 
to the State order pool on such route sales, but not less than zero.
    Adjustment of Accounts. Current FMMOs provide for the audit of 
handler reports by the Market Administrator. The Market Administrator 
may adjust, based on verification of handler records, any amount due to 
or from the Market Administrator, or to a producer or cooperative 
association. Adjustments can affect the Producer-Settlement Fund, the 
Administrative Fund, and/or the Marketing Service Fund. A California 
FMMO would likewise provide for the adjustment of handler accounts 
based on audits of handler reports and records. The Market 
Administrator would promptly notify the handler of any necessary 
adjustments so that payments could be made on or before the next date 
for the payment related to the adjustment.
    Charges for Overdue Accounts. The proposed California FMMO 
provisions require handlers to make payments to producers and 
cooperatives by the dates described earlier in this section. Payments 
not made by the specified due dates would be subject to a late payment 
charge of 1 percent per month by the Market Administrator and would 
accrue to the administrative fund. Additional late payment charges 
would accrue on any amounts that continue to be late on the 
corresponding due dates each succeeding month.
    Assessment of Order Administration. The AMAA provides that the cost 
of order administration be financed by an assessment on handlers. Under 
the proposed California FMMO, a maximum rate of $0.08 per cwt would 
apply to all of a handler's receipts pooled under the order. The 
specific rate would be announced by the Market Administrator. 
Partially-regulated handlers would be assessed the same administrative 
rate on their volume of Class I route disposition inside of the 
marketing area. The money paid to the administrative fund is each 
handler's proportionate share of the cost of administering the FMMO.
    Deduction for Marketing Services. The proposed California FMMO 
would provide marketing services to producers for whom cooperative 
associations do not perform services. Such services include providing 
market information and establishing or verifying weights, samples, and 
tests of milk received from such producers. In accordance with the 
AMAA, these marketing services are intended to benefit all nonmember 
producers under a California FMMO. Accordingly, as is uniform in the 
current FMMOs, each handler regulated by a California FMMO would be 
allowed to deduct a maximum of $0.07 per cwt from amounts due each 
producer for whom a cooperative association does not provide such 
services. The specific allowable rate would be announced by the Market 
Administrator and would be subtracted from the handler's obligation.
    Rulings on Proposed Findings and Conclusions. In accordance with 
the Administrative Procedure Act, 5 U.S.C. 557(c), USDA has analyzed 
and reached a conclusion on all material issues of facts, law, and 
discretion presented on the record. Briefs, proposed findings and 
conclusions, and the evidence in the record were considered in making 
the findings and conclusions set forth in this recommended decision. To 
the extent that the suggested findings and conclusions filed by 
interested persons are inconsistent with the findings and conclusions 
of this recommended decision, the requests to make such findings or 
reach such conclusions are denied for the reasons stated in this 
decision.

General Findings

    (a) The proposed marketing agreement and order, and all of the 
terms and conditions thereof, will tend to effectuate the declared 
policy of the Act;
    (b) The parity prices of milk, as determined pursuant to Section 2 
of the Act, are not reasonable in view of the price of feeds, available 
supplies of feeds, and other economic conditions that affect market 
supply and demand for the milk in the marketing area, and the minimum 
prices specified in the proposed marketing agreement and order are such 
prices as will reflect the aforesaid factors, insure a sufficient 
quantity of pure and wholesome milk, and be in the public interest; and
    (c) The proposed marketing agreement and order will regulate the 
handling of milk in the same manner as, and will be applicable only to, 
persons in the respective classes of industrial and commercial activity 
specified in the marketing agreement and order upon which a hearing has 
been held.
    (d) All milk and milk products handled by handlers covered by the 
proposed marketing agreement and order are in the current of interstate 
commerce or directly burden, obstruct, or affect interstate commerce in 
milk or its products; and
    (e) It is hereby found that the necessary expense of the market 
administrator for the maintenance and functioning of such agency will 
require the payment by each handler, as their pro rata share of such 
expense, 8 cents per hundredweight or such lesser amount as the 
Secretary may prescribe with respect to the milk specified in Sec.  
1051.85 of the aforesaid tentative marketing agreement and the order.

Recommended Marketing Agreement and Order

    The recommended marketing agreement is not included in this 
decision because the regulatory provisions thereof would be the same as 
those contained in the order, as hereby proposed to be established. The 
following order regulating the handling of milk in California marketing 
area is recommended as the detailed and appropriate means by which the 
foregoing conclusions maybe carried out.

List of Subjects in 7 CFR Part 1051

    Milk marketing orders.

    The Agricultural Marketing Service proposes to add 7 CFR part 1051 
to read as follows:

PART 1051--MILK IN THE CALIFORNIA MARKETING AREA

Subpart A--Order Regulating Handling

General Provisions

Sec.

1051.1 General provisions.

Definitions

1051.2 California marketing area.
1051.3 Route disposition.
1051.4 Plant.
1051.5 Distributing plant.
1051.6 Supply plant.
1051.7 Pool plant.
1051.8 Nonpool plant.
1051.9 Handler.
1051.10 Producer-handler.
1051.11 California quota program.
1051.12 Producer.
1051.13 Producer milk.
1051.14 Other source milk.
1051.15 Fluid milk product.
1051.16 Fluid cream product.
1051.17 [Reserved]
1051.18 Cooperative association.
1051.19 Commercial food processing establishment.

Market Administrator, Continuing Obligations, and Handler 
Responsibilities

1051.25 Market administrator.
1051.26 Continuity and separability of provisions.
1051.27 Handler responsibility for records and facilities.
1051.28 Termination of obligations.

[[Page 10681]]

Handler Reports

1051.30 Reports of receipts and utilization.
1051.31 Payroll reports.
1051.32 Other reports.
Subpart B--Milk Pricing

Classification of Milk

1051.40 Classes of utilization.
1051.41 [Reserved]
1051.42 Classification of transfers and diversions.
1051.43 General classification rules.
1051.44 Classification of producer milk.
1051.45 Market administrator's reports and announcements concerning 
classification.

Class Prices

1051.50 Class prices, component prices, and advanced pricing 
factors.
1051.51 Class I differential and price.
1051.52 Adjusted Class I differentials.
1051.53 Announcement of class prices, component prices, and advanced 
pricing factors.
1051.54 Equivalent price.

Producer Price Differential

1051.60 Handler's value of milk.
1051.61 Computation of producer price differential.
1051.62 Announcement of producer prices.
Subpart C--Payments for Milk

Producer Payments

1051.70 Producer-settlement fund.
1051.71 Payments to the producer-settlement fund.
1051.72 Payments from the producer-settlement fund.
1051.73 Payments to producers and to cooperative associations.
1051.74 [Reserved]
1051.75 Plant location adjustments for producer milk and nonpool 
milk.
1051.76 Payments by a handler operating a partially regulated 
distributing plant.
1051.77 Adjustment of accounts.
1051.78 Charges on overdue accounts.

Administrative Assessment and Marketing Service Deduction

1051.85 Assessment for order administration.
1051.86 Deduction for marketing services.
Subpart D--Miscellaneous Provisions
1051.90 Dates.

    Authority:  7 U.S.C. 601-608.

Subpart A--Order Regulating Handling

General Provisions


Sec.  1051.1  General provisions.

    The terms, definitions, and provisions in part 1000 of this chapter 
apply to this part unless otherwise specified. In this part, all 
references to sections in part 1000 refer to part 1000 of this chapter.

Definitions


Sec.  1051.2  California marketing area.

    The marketing area means all territory within the bounds of the 
following states and political subdivisions, including all piers, 
docks, and wharves connected therewith and all craft moored thereat, 
and all territory occupied by government (municipal, State, or Federal) 
reservations, installations, institutions, or other similar 
establishments if any part thereof is within any of the listed states 
or political subdivisions:

California

    All of the State of California.


Sec.  1051.3  Route disposition.

    See Sec.  1000.3.


Sec.  1051.4  Plant.

    See Sec.  1000.4.


Sec.  1051.5  Distributing plant.

    See Sec.  1000.5.


Sec.  1051.6  Supply plant.

    See Sec.  1000.6.


Sec.  1051.7  Pool plant.

    Pool plant means a plant, unit of plants, or system of plants as 
specified in paragraphs (a) through (f) of this section, but excluding 
a plant specified in paragraph (h) of this section. The pooling 
standards described in paragraphs (c) and (f) of this section are 
subject to modification pursuant to paragraph (g) of this section:
    (a) A distributing plant, other than a plant qualified as a pool 
plant pursuant to paragraph (b) of this section or Sec.  ___.7(b) of 
any other Federal milk order, from which during the month 25 percent or 
more of the total quantity of fluid milk products physically received 
at the plant (excluding concentrated milk received from another plant 
by agreement for other than Class I use) are disposed of as route 
disposition or are transferred in the form of packaged fluid milk 
products to other distributing plants. At least 25 percent of such 
route disposition and transfers must be to outlets in the marketing 
area.
    (b) Any distributing plant located in the marketing area which 
during the month processed at least 25 percent of the total quantity of 
fluid milk products physically received at the plant (excluding 
concentrated milk received from another plant by agreement for other 
than Class I use) into ultra-pasteurized or aseptically-processed fluid 
milk products.
    (c) A supply plant from which the quantity of bulk fluid milk 
products shipped to (and physically unloaded into) plants described in 
paragraph (c)(1) of this section is not less than 10 percent of the 
Grade A milk received from dairy farmers (except dairy farmers 
described in Sec.  1051.12(b)) and handlers described in Sec.  
1000.9(c), including milk diverted pursuant to Sec.  1051.13, subject 
to the following conditions:
    (1) Qualifying shipments may be made to plants described in 
paragraphs (c)(1)(i) through (iv) of this section, except that whenever 
shipping requirements are increased pursuant to paragraph (g) of this 
section, only shipments to pool plants described in paragraphs (a), 
(b), and (d) of this section shall count as qualifying shipments for 
the purpose of meeting the increased shipments:
    (i) Pool plants described in Sec.  1051.7(a), (b), and (d);
    (ii) Plants of producer-handlers;
    (iii) Partially regulated distributing plants, except that credit 
for such shipments shall be limited to the amount of such milk 
classified as Class I at the transferee plant; and
    (iv) Distributing plants fully regulated under other Federal 
orders, except that credit for shipments to such plants shall be 
limited to the quantity shipped to (and physically unloaded into) pool 
distributing plants during the month and credits for shipments to other 
order plants shall not include any such shipments made on the basis of 
agreed-upon Class II, Class III, or Class IV utilization.
    (2) Concentrated milk transferred from the supply plant to a 
distributing plant for an agreed-upon use other than Class I shall be 
excluded from the supply plant's shipments in computing the supply 
plant's shipping percentage.
    (d) Two or more plants operated by the same handler and located in 
the marketing area may qualify for pool status as a unit by meeting the 
total and in-area route disposition requirements of a pool distributing 
plant specified in paragraph (a) of this section and subject to the 
following additional requirements:
    (1) At least one of the plants in the unit must qualify as a pool 
plant pursuant to paragraph (a) of this section;
    (2) Other plants in the unit must process Class I or Class II 
products, using 50 percent or more of the total Grade A fluid milk 
products received in bulk form at such plant or diverted therefrom by 
the plant operator in Class I or Class II products; and
    (3) The operator of the unit has filed a written request with the 
market administrator prior to the first day of the month for which such 
status is desired to be effective. The unit shall continue from month-
to-month thereafter without

[[Page 10682]]

further notification. The handler shall notify the market administrator 
in writing prior to the first day of any month for which termination or 
any change of the unit is desired.
    (e) A system of two or more supply plants operated by one or more 
handlers may qualify for pooling by meeting the shipping requirements 
of paragraph (c) of this section in the same manner as a single plant 
subject to the following additional requirements:
    (1) Each plant in the system is located within the marketing area. 
Cooperative associations or other handlers may not use shipments 
pursuant to Sec.  1000.9(c) to qualify supply plants located outside 
the marketing area;
    (2) The handler(s) establishing the system submits a written 
request to the market administrator on or before July 15 requesting 
that such plants qualify as a system for the period of August through 
July of the following year. Such request will contain a list of the 
plants participating in the system in the order, beginning with the 
last plant, in which the plants will be dropped from the system if the 
system fails to qualify. Each plant that qualifies as a pool plant 
within a system shall continue each month as a plant in the system 
through the following July unless the handler(s) establishing the 
system submits a written request to the market administrator that the 
plant be deleted from the system or that the system be discontinued. 
Any plant that has been so deleted from a system, or that has failed to 
qualify in any month, will not be part of any system for the remaining 
months through July. The handler(s) that have established a system may 
add a plant operated by such handler(s) to a system if such plant has 
been a pool plant each of the 6 prior months and would otherwise be 
eligible to be in a system, upon written request to the market 
administrator no later than the 15th day of the prior month. In the 
event of an ownership change or the business failure of a handler who 
is a participant in a system, the system may be reorganized to reflect 
such changes if a written request to file a new marketing agreement is 
submitted to the market administrator; and
    (3) If a system fails to qualify under the requirements of this 
paragraph (e), the handler responsible for qualifying the system shall 
notify the market administrator which plant or plants will be deleted 
from the system so that the remaining plants may be pooled as a system. 
If the handler fails to do so, the market administrator shall exclude 
one or more plants, beginning at the bottom of the list of plants in 
the system and continuing up the list as necessary until the deliveries 
are sufficient to qualify the remaining plants in the system.
    (f) Any distributing plant, located within the marketing area as 
described in Sec.  1051.2:
    (1) From which there is route disposition and/or transfers of 
packaged fluid milk products in any non-federally regulated marketing 
area(s) located within one or more States that require handlers to pay 
minimum prices for raw milk, provided that 25 percent or more of the 
total quantity of fluid milk products physically received at such plant 
(excluding concentrated milk received from another plant by agreement 
for other than Class 1 use) is disposed of as route disposition and/or 
is transferred in the form of packaged fluid milk products to other 
plants. At least 25 percent of such route disposition and/or transfers, 
in aggregate, are in any non-federally regulated marketing area(s) 
located within one or more States that require handlers to pay minimum 
prices for raw milk. Subject to the following exclusions:
    (i) The plant is described in Sec.  1051.7(a), (b), or (e);
    (ii) The plant is subject to the pricing provisions of a State-
operated milk pricing plan which provides for the payment of minimum 
class prices for raw milk;
    (iii) The plant is described in Sec.  1000.8(a) or (e); or
    (iv) A producer-handler described in Sec.  1051.10 with less than 
three million pounds during the month of route disposition and/or 
transfers of packaged fluid milk products to other plants.
    (2) [Reserved]
    (g) The applicable shipping percentages of paragraphs (c) and (e) 
of this section and Sec.  1051.13(d)(2) and (3) may be increased or 
decreased, for all or part of the marketing area, by the market 
administrator if the market administrator finds that such adjustment is 
necessary to encourage needed shipments or to prevent uneconomic 
shipments. Before making such a finding, the market administrator shall 
investigate the need for adjustment either on the market 
administrator's own initiative or at the request of interested parties 
if the request is made in writing at least 15 days prior to the month 
for which the requested revision is desired effective. If the 
investigation shows that an adjustment of the shipping percentages 
might be appropriate, the market administrator shall issue a notice 
stating that an adjustment is being considered and invite data, views, 
and arguments. Any decision to revise an applicable shipping or 
diversion percentage must be issued in writing at least one day before 
the effective date.
    (h) The term pool plant shall not apply to the following plants:
    (1) A producer-handler as defined under any Federal order;
    (2) An exempt plant as defined in Sec.  1000.8(e);
    (3) A plant located within the marketing area and qualified 
pursuant to paragraph (a) of this section which meets the pooling 
requirements of another Federal order, and from which more than 50 
percent of its route disposition has been in the other Federal order 
marketing area for 3 consecutive months;
    (4) A plant located outside any Federal order marketing area and 
qualified pursuant to paragraph (a) of this section that meets the 
pooling requirements of another Federal order and has had greater route 
disposition in such other Federal order's marketing area for 3 
consecutive months;
    (5) A plant located in another Federal order marketing area and 
qualified pursuant to paragraph (a) of this section that meets the 
pooling requirements of such other Federal order and does not have a 
majority of its route disposition in this marketing area for 3 
consecutive months, or if the plant is required to be regulated under 
such other Federal order without regard to its route disposition in any 
other Federal order marketing area;
    (6) A plant qualified pursuant to paragraph (c) of this section 
which also meets the pooling requirements of another Federal order and 
from which greater qualifying shipments are made to plants regulated 
under the other Federal order than are made to plants regulated under 
the order in this part, or the plant has automatic pooling status under 
the other Federal order; and
    (7) That portion of a regulated plant designated as a nonpool plant 
that is physically separate and operated separately from the pool 
portion of such plant. The designation of a portion of a regulated 
plant as a nonpool plant must be requested in advance and in writing by 
the handler and must be approved by the market administrator.
    (i) Any plant that qualifies as a pool plant in each of the 
immediately preceding 3 months pursuant to paragraph (a) of this 
section or the shipping percentages in paragraph (c) of this section 
that is unable to meet such performance standards for the current month 
because of unavoidable circumstances determined by the market 
administrator to be beyond the control of the handler operating the 
plant, such as a natural disaster (ice storm, wind storm, flood, fire, 
earthquake,

[[Page 10683]]

breakdown of equipment, or work stoppage, shall be considered to have 
met the minimum performance standards during the period of such 
unavoidable circumstances, but such relief shall not be granted for 
more than 2 consecutive months.


Sec.  1051.8  Nonpool plant.

    See Sec.  1000.8.


Sec.  1051.9  Handler.

    See Sec.  1000.9.


Sec.  1051.10  Producer-handler.

    Producer-handler means a person who operates a dairy farm and a 
distributing plant from which there is route disposition in the 
marketing area, from which total route disposition and packaged sales 
of fluid milk products to other plants during the month does not exceed 
3 million pounds, and who the market administrator has designated a 
producer-handler after determining that all of the requirements of this 
section have been met.
    (a) Requirements for designation. Designation of any person as a 
producer-handler by the market administrator shall be contingent upon 
meeting the conditions set forth in paragraphs (a)(1) through (5) of 
this section. Following the cancellation of a previous producer-handler 
designation, a person seeking to have their producer-handler 
designation reinstated must demonstrate that these conditions have been 
met for the preceding month:
    (1) The care and management of the dairy animals and the other 
resources and facilities designated in paragraph (b)(1) of this section 
necessary to produce all Class I milk handled (excluding receipts from 
handlers fully regulated under any Federal order) are under the 
complete and exclusive control, ownership, and management of the 
producer-handler and are operated as the producer-handler's own 
enterprise and at its sole risk.
    (2) The plant operation designated in paragraph (b)(2) of this 
section at which the producer-handler processes and packages, and from 
which it distributes, its own milk production is under the complete and 
exclusive control, ownership, and management of the producer-handler 
and is operated as the producer-handler's own enterprise and at its 
sole risk.
    (3) The producer-handler neither receives at its designated milk 
production resources and facilities nor receives, handles, processes, 
or distributes at or through any of its designated milk handling, 
processing, or distributing resources and facilities other source milk 
products for reconstitution into fluid milk products or fluid milk 
products derived from any source other than:
    (i) Its designated milk production resources and facilities (own 
farm production);
    (ii) Pool handlers and plants regulated under any Federal order 
within the limitation specified in paragraph (c)(2) of this section; or
    (iii) Nonfat milk solids which are used to fortify fluid milk 
products.
    (4) The producer-handler is neither directly nor indirectly 
associated with the business control or management of, nor has a 
financial interest in, another handler's operation; nor is any other 
handler so associated with the producer-handler's operation.
    (5) No milk produced by the herd(s) or on the farm(s) that supplies 
milk to the producer-handler's plant operation is:
    (i) Subject to inclusion and participation in a marketwide 
equalization pool under a milk classification and pricing program under 
the authority of a State government maintaining marketwide pooling of 
returns; or
    (ii) Marketed in any part as Class I milk to the non-pool 
distributing plant of any other handler.
    (b) Designation of resources and facilities. Designation of a 
person as a producer-handler shall include the determination of what 
shall constitute milk production, handling, processing, and 
distribution resources and facilities, all of which shall be considered 
an integrated operation, under the sole and exclusive ownership of the 
producer-handler.
    (1) Milk production resources and facilities shall include all 
resources and facilities (milking herd(s), buildings housing such 
herd(s), and the land on which such buildings are located) used for the 
production of milk which are solely owned, operated, and which the 
producer-handler has designated as a source of milk supply for the 
producer-handler's plant operation. However, for purposes of this 
paragraph (b)(1), any such milk production resources and facilities 
which do not constitute an actual or potential source of milk supply 
for the producer-handler's operation shall not be considered a part of 
the producer-handler's milk production resources and facilities.
    (2) Milk handling, processing, and distribution resources and 
facilities shall include all resources and facilities (including store 
outlets) used for handling, processing, and distributing fluid milk 
products which are solely owned by, and directly operated or controlled 
by the producer-handler or in which the producer-handler in any way has 
an interest, including any contractual arrangement, or over which the 
producer-handler directly or indirectly exercises any degree of 
management control.
    (3) All designations shall remain in effect until canceled pursuant 
to paragraph (c) of this section.
    (c) Cancellation. The designation as a producer-handler shall be 
canceled upon determination by the market administrator that any of the 
requirements of paragraph (a)(1) through (5) of this section are not 
continuing to be met, or under any of the conditions described in 
paragraph (c)(1), (2), or (3) of this section. Cancellation of a 
producer-handler's status pursuant to this paragraph (c) shall be 
effective on the first day of the month following the month in which 
the requirements were not met or the conditions for cancellation 
occurred.
    (1) Milk from the milk production resources and facilities of the 
producer-handler, designated in paragraph (b)(1) of this section, is 
delivered in the name of another person as producer milk to another 
handler.
    (2) The producer-handler handles fluid milk products derived from 
sources other than the milk production facilities and resources 
designated in paragraph (b)(1) of this section, except that it may 
receive at its plant, or acquire for route disposition, fluid milk 
products from fully regulated plants and handlers under any Federal 
order if such receipts do not exceed 150,000 pounds monthly. This 
limitation shall not apply if the producer-handler's own-farm 
production is less than 150,000 pounds during the month.
    (3) Milk from the milk production resources and facilities of the 
producer-handler is subject to inclusion and participation in a 
marketwide equalization pool under a milk classification and pricing 
plan operating under the authority of a State government.
    (d) Public announcement. The market administrator shall publicly 
announce:
    (1) The name, plant location(s), and farm location(s) of persons 
designated as producer-handlers;
    (2) The names of those persons whose designations have been 
cancelled; and
    (3) The effective dates of producer-handler status or loss of 
producer-handler status for each. Such announcements shall be 
controlling with respect to the accounting at plants of other handlers 
for fluid milk products received from any producer-handler.
    (e) Burden of establishing and maintaining producer-handler status. 
The burden rests upon the handler who

[[Page 10684]]

is designated as a producer-handler to establish through records 
required pursuant to Sec.  1000.27 that the requirements set forth in 
paragraph (a) of this section have been and are continuing to be met, 
and that the conditions set forth in paragraph (c) of this section for 
cancellation of the designation do not exist.
    (f) Any producer-handler with Class I route dispositions and/or 
transfers of packaged fluid milk products in the marketing area 
described in Sec.  1131.2 of this chapter shall be subject to payments 
into the Order 1131 producer settlement fund on such dispositions 
pursuant to Sec.  1000.76(a) and payments into the Order 1131 
administrative fund, provided such dispositions are less than three 
million pounds in the current month and such producer-handler had total 
Class I route dispositions and/or transfers of packaged fluid milk 
products from own farm production of three million pounds or more the 
previous month. If the producer-handler has Class I route dispositions 
and/or transfers of packaged fluid milk products into the marketing 
area described in Sec.  1131.2 of this chapter of three million pounds 
or more during the current month, such producer-handler shall be 
subject to the provisions described in Sec.  1131.7 of this chapter or 
Sec.  1000.76(a).


Sec.  1051.11  California quota program.

    California Quota Program means the applicable provisions of the 
California Food and Agriculture Code, and related provisions of the 
pooling plan administered by the California Department of Food and 
Agriculture (CDFA).


Sec.  1051.12  Producer.

    (a) Except as provided in paragraph (b) of this section, producer 
means any person who produces milk approved by a duly constituted 
regulatory agency for fluid consumption as Grade A milk and whose milk 
is:
    (1) Received at a pool plant directly from the producer or diverted 
by the plant operator in accordance with Sec.  1051.13; or
    (2) Received by a handler described in Sec.  1000.9(c).
    (b) Producer shall not include:
    (1) A producer-handler as defined in any Federal order;
    (2) A dairy farmer whose milk is received at an exempt plant, 
excluding producer milk diverted to the exempt plant pursuant to Sec.  
1051.13(d);
    (3) A dairy farmer whose milk is received by diversion at a pool 
plant from a handler regulated under another Federal order if the other 
Federal order designates the dairy farmer as a producer under that 
order and that milk is allocated by request to a utilization other than 
Class I; and
    (4) A dairy farmer whose milk is reported as diverted to a plant 
fully regulated under another Federal order with respect to that 
portion of the milk so diverted that is assigned to Class I under the 
provisions of such other order.


Sec.  1051.13  Producer milk.

    Except as provided for in paragraph (e) of this section, producer 
milk means the skim milk (or the skim equivalent of components of skim 
milk), including nonfat components, and butterfat in milk of a producer 
that is:
    (a) Received by the operator of a pool plant directly from a 
producer or a handler described in Sec.  1000.9(c). All milk received 
pursuant to this paragraph (a) shall be priced at the location of the 
plant where it is first physically received;
    (b) Received by a handler described in Sec.  1000.9(c) in excess of 
the quantity delivered to pool plants;
    (c) Diverted by a pool plant operator to another pool plant. Milk 
so diverted shall be priced at the location of the plant to which 
diverted; or
    (d) Diverted by the operator of a pool plant or a cooperative 
association described in Sec.  1000.9(c) to a nonpool plant located in 
the States of California, Arizona, Nevada, or Oregon, subject to the 
following conditions:
    (1) Milk of a dairy farmer shall not be eligible for diversion 
unless at least one day's production of such dairy farmer is physically 
received as producer milk at a pool plant during the first month the 
dairy farmer is a producer. If a dairy farmer loses producer status 
under the order in this part (except as a result of a temporary loss of 
Grade A approval or as a result of the handler of the dairy farmer's 
milk failing to pool the milk under any order), the dairy farmer's milk 
shall not be eligible for diversion unless at least one day's 
production of the dairy farmer has been physically received as producer 
milk at a pool plant during the first month the dairy farmer is re-
associated with the market;
    (2) The quantity of milk diverted by a handler described in Sec.  
1000.9(c) may not exceed 90 percent of the producer milk receipts 
reported by the handler pursuant to Sec.  1051.30(c) provided that not 
less than 10 percent of such receipts are delivered to plants described 
in Sec.  1051.7(c)(1)(i) through (iii). These percentages are subject 
to any adjustments that may be made pursuant to Sec.  1051.7(g); and
    (3) The quantity of milk diverted to nonpool plants by the operator 
of a pool plant described in Sec.  1051.7(a), (b) or (d) may not exceed 
90 percent of the Grade A milk received from dairy farmers (except 
dairy farmers described in Sec.  1051.12(b)) including milk diverted 
pursuant to this section. These percentages are subject to any 
adjustments that may be made pursuant to Sec.  1051.7(g).
    (4) Diverted milk shall be priced at the location of the plant to 
which diverted.
    (e) Producer milk shall not include milk of a producer that is 
subject to inclusion and participation in a marketwide equalization 
pool under a milk classification and pricing program imposed under the 
authority of a State government maintaining marketwide pooling of 
returns.
    (f) The quantity of milk reported by a handler pursuant to either 
Sec.  1051.30(a)(1) or (c)(1) for April through February may not exceed 
125 percent, and for March may not exceed 135 percent, of the producer 
milk receipts pooled by the handler during the prior month. Milk 
diverted to nonpool plants reported in excess of this limit shall be 
removed from the pool. Milk in excess of this limit received at pool 
plants, other than pool distributing plants, shall be classified 
pursuant to Sec.  1000.44(a)(3)(v) and (b). The handler must designate, 
by producer pick-up, which milk is to be removed from the pool. If the 
handler fails to provide this information, the market administrator 
will make the determination. The following provisions apply:
    (1) Milk shipped to and physically received at pool distributing 
plants in excess of the previous month's pooled volume shall not be 
subject to the 125 or 135 percent limitation;
    (2) Producer milk qualified pursuant to Sec.  ___.13 of any other 
Federal Order and continuously pooled in any Federal Order for the 
previous six months shall not be included in the computation of the 125 
or 135 percent limitation;
    (3) The market administrator may waive the 125 or 135 percent 
limitation:
    (i) For a new handler on the order, subject to the provisions of 
paragraph (f)(4) of this section; or
    (ii) For an existing handler with significantly changed milk supply 
conditions due to unusual circumstances; and
    (4) A bloc of milk may be considered ineligible for pooling if the 
market administrator determines that handlers altered the reporting of 
such milk for the

[[Page 10685]]

purpose of evading the provisions of this paragraph (f).


Sec.  1051.14  Other source milk.

    See Sec.  1000.14.


Sec.  1051.15  Fluid milk products.

    See Sec.  1000.15.


Sec.  1051.16  Fluid cream product.

    See Sec.  1000.16.


Sec.  1051.17   [Reserved]


Sec.  1051.18  Cooperative association.

    See Sec.  1000.18.


Sec.  1051.19  Commercial food processing establishment.

    See Sec.  1000.19.

Market Administrator, Continuing Obligations, and Handler 
Responsibilities


Sec.  1051.25  Market administrator.

    See Sec.  1000.25.


Sec.  1051.26  Continuity and separability of provisions.

    See Sec.  1000.26.


Sec.  1051.27  Handler responsibility for records and facilities.

    See Sec.  1000.27.


Sec.  1051.28  Termination of obligations.

    See Sec.  1000.28.

Handler Reports


Sec.  1051.30  Reports of receipts and utilization.

    Each handler shall report monthly so that the market 
administrator's office receives the report on or before the 9th day 
after the end of the month, in the detail and on the prescribed forms, 
as follows:
    (a) Each handler that operates a pool plant shall report for each 
of its operations the following information:
    (1) Product pounds, pounds of butterfat, pounds of protein, pounds 
of solids-not-fat other than protein (other solids) contained in or 
represented by:
    (i) Receipts of producer milk, including producer milk diverted by 
the reporting handler, from sources other than handlers described in 
Sec.  1000.9(c); and
    (ii) Receipts of milk from handlers described in Sec.  1000.9(c);
    (2) Product pounds and pounds of butterfat contained in:
    (i) Receipts of fluid milk products and bulk fluid cream products 
from other pool plants;
    (ii) Receipts of other source milk; and
    (iii) Inventories at the beginning and end of the month of fluid 
milk products and bulk fluid cream products;
    (3) The utilization or disposition of all milk and milk products 
required to be reported pursuant to this paragraph (a); and
    (4) Such other information with respect to the receipts and 
utilization of skim milk, butterfat, milk protein, and other nonfat 
solids as the market administrator may prescribe.
    (b) Each handler operating a partially regulated distributing plant 
shall report with respect to such plant in the same manner as 
prescribed for reports required by paragraph (a) of this section. 
Receipts of milk that would have been producer milk if the plant had 
been fully regulated shall be reported in lieu of producer milk. The 
report shall show also the quantity of any reconstituted skim milk in 
route disposition in the marketing area.
    (c) Each handler described in Sec.  1000.9(c) shall report:
    (1) The product pounds, pounds of butterfat, pounds of protein, 
pounds of solids-not-fat other than protein (other solids) contained in 
receipts of milk from producers; and
    (2) The utilization or disposition of such receipts.
    (d) Each handler not specified in paragraphs (a) through (c) of 
this section shall report with respect to its receipts and utilization 
of milk and milk products in such manner as the market administrator 
may prescribe.


Sec.  1051.31  Payroll reports.

    (a) On or before the 20th day after the end of each month, each 
handler that operates a pool plant pursuant to Sec.  1051.7 and each 
handler described in Sec.  1000.9(c) shall report to the market 
administrator its producer payroll for the month, in the detail 
prescribed by the market administrator, showing for each producer the 
information described in Sec.  1051.73(f).
    (b) Each handler operating a partially regulated distributing plant 
who elects to make payment pursuant to Sec.  1000.76(b) shall report 
for each dairy farmer who would have been a producer if the plant had 
been fully regulated in the same manner as prescribed for reports 
required by paragraph (a) of this section.


Sec.  1051.32  Other reports.

    In addition to the reports required pursuant to Sec. Sec.  1051.30 
and 1051.31, each handler shall report any information the market 
administrator deems necessary to verify or establish each handler's 
obligation under the order.

Subpart B--Milk Pricing

Classification of Milk


Sec.  1051.40  Classes of utilization.

    See Sec.  1000.40.


Sec.  1051.41   [Reserved]


Sec.  1051.42  Classification of transfers and diversions.

    See Sec.  1000.42.


Sec.  1051.43  General classification rules.

    See Sec.  1000.43.


Sec.  1051.44  Classification of producer milk.

    See Sec.  1000.44.


Sec.  1051.45  Market administrator's reports and announcements 
concerning classification.

    See Sec.  1000.45.

Class Prices


Sec.  1051.50  Class prices, component prices, and advanced pricing 
factors.

    See Sec.  1000.50.


Sec.  1051.51  Class I differential and price.

    The Class I differential shall be the differential established for 
Los Angeles County, California, which is reported in Sec.  1000.52. The 
Class I price shall be the price computed pursuant to Sec.  1000.50(a) 
for Los Angeles County, California.


Sec.  1051.52  Adjusted Class I differentials.

    See Sec.  1000.52.


Sec.  1051.53  Announcement of class prices, component prices, and 
advanced pricing factors.

    See Sec.  1000.53.


Sec.  1051.54  Equivalent price.

    See Sec.  1000.54.

Producer Price Differential


Sec.  1051.60  Handler's value of milk.

    For the purpose of computing a handler's obligation for producer 
milk, the market administrator shall determine for each month the value 
of milk of each handler with respect to each of the handler's pool 
plants and of each handler described in Sec.  1000.9(c) with respect to 
milk that was not received at a pool plant by adding the amounts 
computed in paragraphs (a) through (h) of this section and subtracting 
from that total amount the values computed in paragraphs (i) and (j) of 
this section. Unless otherwise specified, the skim milk, butterfat, and 
the combined pounds of skim milk and butterfat referred to in this 
section shall result from the steps set forth in Sec.  1000.44(a), (b), 
and (c), respectively, and the nonfat components of producer milk in 
each class shall be based upon

[[Page 10686]]

the proportion of such components in producer skim milk. Receipts of 
nonfluid milk products that are distributed as labeled reconstituted 
milk for which payments are made to the producer-settlement fund of 
another Federal order under Sec.  1000.76(a)(4) or (d) shall be 
excluded from pricing under this section.
    (a) Class I value.
    (1) Multiply the hundredweight of skim milk in Class I by the Class 
I skim milk price; and
    (2) Add an amount obtained by multiplying the pounds of butterfat 
in Class I by the Class I butterfat price; and
    (b) Class II value.
    (1) Multiply the pounds of nonfat solids in Class II skim milk by 
the Class II nonfat solids price; and
    (2) Add an amount obtained by multiplying the pounds of butterfat 
in Class II times the Class II butterfat price.
    (c) Class III value.
    (1) Multiply the pounds of protein in Class III skim milk by the 
protein price;
    (2) Add an amount obtained by multiplying the pounds of other 
solids in Class III skim milk by the other solids price; and
    (3) Add an amount obtained by multiplying the pounds of butterfat 
in Class III by the butterfat price.
    (d) Class IV value.
    (1) Multiply the pounds of nonfat solids in Class IV skim milk by 
the nonfat solids price; and
    (2) Add an amount obtained by multiplying the pounds of butterfat 
in Class IV by the butterfat price.
    (e) Multiply the pounds of skim milk and butterfat overage assigned 
to each class pursuant to Sec.  1000.44(a)(11) and the corresponding 
step of Sec.  1000.44(b) by the skim milk prices and butterfat prices 
applicable to each class.
    (f) Multiply the difference between the current month's Class I, 
II, or III price, as the case may be, and the Class IV price for the 
preceding month and by the hundredweight of skim milk and butterfat 
subtracted from Class I, II, or III, respectively, pursuant to Sec.  
1000.44(a)(7) and the corresponding step of Sec.  1000.44(b).
    (g) Multiply the difference between the Class I price applicable at 
the location of the pool plant and the Class IV price by the 
hundredweight of skim milk and butterfat assigned to Class I pursuant 
to Sec.  1000.43(d) and the hundredweight of skim milk and butterfat 
subtracted from Class I pursuant to Sec.  1000.44(a)(3)(i) through (vi) 
and the corresponding step of Sec.  1000.44(b), excluding receipts of 
bulk fluid cream products from plants regulated under other Federal 
orders and bulk concentrated fluid milk products from pool plants, 
plants regulated under other Federal orders, and unregulated supply 
plants.
    (h) Multiply the difference between the Class I price applicable at 
the location of the nearest unregulated supply plants from which an 
equivalent volume was received and the Class III price by the pounds of 
skim milk and butterfat in receipts of concentrated fluid milk products 
assigned to Class I pursuant to Sec. Sec.  1000.43(d) and 
1000.44(a)(3)(i) and the corresponding step of Sec.  1000.44(b) and the 
pounds of skim milk and butterfat subtracted from Class I pursuant to 
Sec.  1000.44(a)(8) and the corresponding step of Sec.  1000.44(b), 
excluding such skim milk and butterfat in receipts of fluid milk 
products from an unregulated supply plant to the extent that an 
equivalent amount of skim milk or butterfat disposed of to such plant 
by handlers fully regulated under any Federal milk order is classified 
and priced as Class I milk and is not used as an offset for any other 
payment obligation under any order.
    (i) For reconstituted milk made from receipts of nonfluid milk 
products, multiply $1.00 (but not more than the difference between the 
Class I price applicable at the location of the pool plant and the 
Class IV price) by the hundredweight of skim milk and butterfat 
contained in receipts of nonfluid milk products that are allocated to 
Class I use pursuant to Sec.  1000.43(d).


Sec.  1051.61  Computation of producer price differential.

    For each month the market administrator shall compute a producer 
price differential per hundredweight. The report of any handler who has 
not made payments required pursuant to Sec.  1051.71 for the preceding 
month shall not be included in the computation of the producer price 
differential, and such handler's report shall not be included in the 
computation for succeeding months until the handler has made full 
payment of outstanding monthly obligations. Subject to the conditions 
of this introductory paragraph, the market administrator shall compute 
the producer price differential in the following manner:
    (a) Combine into one total the values computed pursuant to Sec.  
1051.60 for all handlers required to file reports prescribed in Sec.  
1051.30;
    (b) Subtract the total values obtained by multiplying each 
handler's total pounds of protein, other solids, and butterfat 
contained in the milk for which an obligation was computed pursuant to 
Sec.  1051.60 by the protein price, other solids price, and the 
butterfat price, respectively;
    (c) Add an amount equal to the minus location adjustments and 
subtract an amount equal to the plus location adjustments computed 
pursuant to Sec.  1051.75;
    (d) Add an amount equal to not less than one-half of the 
unobligated balance in the producer-settlement fund;
    (e) Divide the resulting amount by the sum of the following for all 
handlers included in these computations:
    (1) The total hundredweight of producer milk; and
    (2) The total hundredweight for which a value is computed pursuant 
to Sec.  1051.60(i); and
    (f) Subtract not less than 4 cents nor more than 5 cents from the 
price computed pursuant to paragraph (e) of this section. The result 
shall be known as the producer price differential for the month.


Sec.  1051.62  Announcement of producer prices.

    On or before the 14th day after the end of each month, the market 
administrator shall announce publicly the following prices and 
information:
    (a) The producer price differential;
    (b) The protein price;
    (c) The nonfat solids price;
    (d) The other solids price;
    (e) The butterfat price;
    (f) The average butterfat, nonfat solids, protein and other solids 
content of producer milk; and
    (g) The statistical uniform price for milk containing 3.5 percent 
butterfat, computed by combining the Class III price and the producer 
price differential.

Subpart C--Payments for Milk

Producer Payments


Sec.  1051.70  Producer-settlement fund.

    See Sec.  1000.70.


Sec.  1051.71  Payments to the producer-settlement fund.

    Each handler shall make payment to the producer-settlement fund in 
a manner that provides receipt of the funds by the market administrator 
no later than the 16th day after the end of the month (except as 
provided in Sec.  1000.90). Payment shall be the amount, if any, by 
which the amount specified in paragraph (a) of this section exceeds the 
amount specified in paragraph (b) of this section:
    (a) The total value of milk to the handler for the month as 
determined pursuant to Sec.  1051.60.
    (b) The sum of:
    (1) An amount obtained by multiplying the total hundredweight of

[[Page 10687]]

producer milk as determined pursuant to Sec.  1000.44(c) by the 
producer price differential as adjusted pursuant to Sec.  1051.75;
    (2) An amount obtained by multiplying the total pounds of protein, 
other solids, and butterfat contained in producer milk by the protein, 
other solids, and butterfat prices respectively; and
    (3) An amount obtained by multiplying the pounds of skim milk and 
butterfat for which a value was computed pursuant to Sec.  1051.60(i) 
by the producer price differential as adjusted pursuant to Sec.  
1051.75 for the location of the plant from which received.


Sec.  1051.72  Payments from the producer-settlement fund.

    No later than the 18th day after the end of each month (except as 
provided in Sec.  1000.90), the market administrator shall pay to each 
handler the amount, if any, by which the amount computed pursuant to 
Sec.  1051.71(b) exceeds the amount computed pursuant to Sec.  
1051.71(a). If, at such time, the balance in the producer-settlement 
fund is insufficient to make all payments pursuant to this section, the 
market administrator shall reduce uniformly such payments and shall 
complete the payments as soon as the funds are available.


Sec.  1051.73  Payments to producers and to cooperative associations.

    (a) Each handler shall pay each producer for producer milk for 
which payment is not made to a cooperative association pursuant to 
paragraph (b) of this section, as follows:
    (1) Partial payment. For each producer who has not discontinued 
shipments as of the date of this partial payment, payment shall be made 
so that it is received by each producer on or before the last day of 
the month (except as provided in Sec.  1000.90) for milk received 
during the first 15 days of the month from the producer at not less 
than the lowest announced class price for the preceding month, less 
proper deductions authorized in writing by the producer.
    (2) Final payment. For milk received during the month, payment 
shall be made so that it is received by each producer no later than the 
19th day after the end of the month (except as provided in Sec.  
1000.90) in an amount not less than the sum of:
    (i) The hundredweight of producer milk received times the producer 
price differential for the month as adjusted pursuant to Sec.  1051.75;
    (ii) The pounds of butterfat received times the butterfat price for 
the month;
    (iii) The pounds of protein received times the protein price for 
the month;
    (iv) The pounds of other solids received times the other solids 
price for the month;
    (v) Less any payment made pursuant to paragraph (a)(1) of this 
section;
    (vi) Less proper deductions authorized in writing by such producer, 
and plus or minus adjustments for errors in previous payments to such 
producer subject to approval by the market administrator;
    (vii) Less deductions for marketing services pursuant to Sec.  
1000.86; and
    (viii) Less deductions authorized by CDFA for the California Quota 
Program pursuant to Sec.  1051.11.
    (b) Payments for milk received from cooperative association 
members. On or before the day prior to the dates specified in 
paragraphs (a)(1) and (2) of this section (except as provided in Sec.  
1000.90), each handler shall pay to a cooperative association for milk 
from producers who market their milk through the cooperative 
association and who have authorized the cooperative to collect such 
payments on their behalf an amount equal to the sum of the individual 
payments otherwise payable for such producer milk pursuant to 
paragraphs (a)(1) and (2) of this section.
    (c) Payment for milk received from cooperative association pool 
plants or from cooperatives as handlers pursuant to Sec.  1000.9(c). On 
or before the day prior to the dates specified in paragraphs (a)(1) and 
(2) of this section (except as provided in Sec.  1000.90), each handler 
who receives fluid milk products at its plant from a cooperative 
association in its capacity as the operator of a pool plant or who 
receives milk from a cooperative association in its capacity as a 
handler pursuant to Sec.  1000.9(c), including the milk of producers 
who are not members of such association and who the market 
administrator determines have authorized the cooperative association to 
collect payment for their milk, shall pay the cooperative for such milk 
as follows:
    (1) For bulk fluid milk products and bulk fluid cream products 
received from a cooperative association in its capacity as the operator 
of a pool plant and for milk received from a cooperative association in 
its capacity as a handler pursuant to Sec.  1000.9(c) during the first 
15 days of the month, at not less than the lowest announced class 
prices per hundredweight for the preceding month;
    (2) For the total quantity of bulk fluid milk products and bulk 
fluid cream products received from a cooperative association in its 
capacity as the operator of a pool plant, at not less than the total 
value of such products received from the association's pool plants, as 
determined by multiplying the respective quantities assigned to each 
class under Sec.  1000.44, as follows:
    (i) The hundredweight of Class I skim milk times the Class I skim 
milk price for the month plus the pounds of Class I butterfat times the 
Class I butterfat price for the month. The Class I price to be used 
shall be that price effective at the location of the receiving plant;
    (ii) The pounds of nonfat solids in Class II skim milk by the Class 
II nonfat solids price;
    (iii) The pounds of butterfat in Class II times the Class II 
butterfat price;
    (iv) The pounds of nonfat solids in Class IV times the nonfat 
solids price;
    (v) The pounds of butterfat in Class III and Class IV milk times 
the butterfat price;
    (vi) The pounds of protein in Class III milk times the protein 
price;
    (vii) The pounds of other solids in Class III milk times the other 
solids price; and
    (vii) Add together the amounts computed in paragraphs (c)(2)(i) 
through (vii) of this section and from that sum deduct any payment made 
pursuant to paragraph (c)(1) of this section; and
    (3) For the total quantity of milk received during the month from a 
cooperative association in its capacity as a handler under Sec.  
1000.9(c) as follows:
    (i) The hundredweight of producer milk received times the producer 
price differential as adjusted pursuant to Sec.  1051.75;
    (ii) The pounds of butterfat received times the butterfat price for 
the month;
    (iii) The pounds of protein received times the protein price for 
the month;
    (iv) The pounds of other solids received times the other solids 
price for the month; and
    (v) Add together the amounts computed in paragraphs (c)(3)(i) 
through (v) of this section and from that sum deduct any payment made 
pursuant to paragraph (c)(1) of this section.
    (d) If a handler has not received full payment from the market 
administrator pursuant to Sec.  1051.72 by the payment date specified 
in paragraph (a), (b), or (c) of this section, the handler may reduce 
pro rata its payments to producers or to the cooperative association 
(with respect to receipts described in paragraph (b) of this section, 
prorating the underpayment to the volume of milk received from the 
cooperative association in proportion to the total milk received from 
producers by the handler), but not by more than the amount of the 
underpayment. The

[[Page 10688]]

payments shall be completed on the next scheduled payment date after 
receipt of the balance due from the market administrator.
    (e) If a handler claims that a required payment to a producer 
cannot be made because the producer is deceased or cannot be located, 
or because the cooperative association or its lawful successor or 
assignee is no longer in existence, the payment shall be made to the 
producer-settlement fund, and in the event that the handler 
subsequently locates and pays the producer or a lawful claimant, or in 
the event that the handler no longer exists and a lawful claim is later 
established, the market administrator shall make the required payment 
from the producer-settlement fund to the handler or to the lawful 
claimant, as the case may be.
    (f) In making payments to producers pursuant to this section, each 
handler shall furnish each producer, except a producer whose milk was 
received from a cooperative association handler described in Sec.  
1000.9(a) or (c), a supporting statement in a form that may be retained 
by the recipient which shall show:
    (1) The name, address, Grade A identifier assigned by a duly 
constituted regulatory agency, and payroll number of the producer;
    (2) The daily and total pounds, and the month and dates such milk 
was received from that producer;
    (3) The total pounds of butterfat, protein, and other solids 
contained in the producer's milk;
    (4) The minimum rate or rates at which payment to the producer is 
required pursuant to the order in this part;
    (5) The rate used in making payment if the rate is other than the 
applicable minimum rate;
    (6) The amount, or rate per hundredweight, or rate per pound of 
component, and the nature of each deduction claimed by the handler; and
    (7) The net amount of payment to the producer or cooperative 
association.


Sec.  1051.74   [Reserved]


Sec.  1051.75  Plant location adjustments for producer milk and nonpool 
milk.

    For purposes of making payments for producer milk and nonpool milk, 
a plant location adjustment shall be determined by subtracting the 
Class I price specified in Sec.  1051.51 from the Class I price at the 
plant's location. The difference, plus or minus as the case may be, 
shall be used to adjust the payments required pursuant to Sec. Sec.  
1051.73 and 1000.76.


Sec.  1051.76  Payments by a handler operating a partially regulated 
distributing plant.

    See Sec.  1000.76.


Sec.  1051.77  Adjustment of accounts.

    See Sec.  1000.77.


Sec.  1051.78  Charges on overdue accounts.

    See Sec.  1000.78.

Administrative Assessment and Marketing Service Deduction


Sec.  1051.85  Assessment for order administration.

    On or before the payment receipt date specified under Sec.  
1051.71, each handler shall pay to the market administrator its pro 
rata share of the expense of administration of the order at a rate 
specified by the market administrator that is no more than 8 cents per 
hundredweight with respect to:
    (a) Receipts of producer milk (including the handler's own 
production) other than such receipts by a handler described in Sec.  
1000.9(c) that were delivered to pool plants of other handlers;
    (b) Receipts from a handler described in Sec.  1000.9(c);
    (c) Receipts of concentrated fluid milk products from unregulated 
supply plants and receipts of nonfluid milk products assigned to Class 
I use pursuant to Sec.  1000.43(d) and other source milk allocated to 
Class I pursuant to Sec.  1000.44(a)(3) and (8) and the corresponding 
steps of Sec.  1000.44(b), except other source milk that is excluded 
from the computations pursuant to Sec.  1051.60 (h) and (i); and
    (d) Route disposition in the marketing area from a partially 
regulated distributing plant that exceeds the skim milk and butterfat 
subtracted pursuant to Sec.  1000.76(a)(1)(i) and (ii).


Sec.  1051.86  Deduction for marketing services.

    See Sec.  1000.86.

Subpart D--Miscellaneous Provisions


Sec.  1051.90  Dates.

    See Sec.  1000.90.

    Dated: February 6, 2017.
Bruce Summers,
Acting Administrator.
[FR Doc. 2017-02732 Filed 2-9-17; 4:15 pm]
 BILLING CODE 3410-02-P