[Federal Register Volume 83, Number 63 (Monday, April 2, 2018)]
[Proposed Rules]
[Pages 14110-14172]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-06167]



[[Page 14109]]

Vol. 83

Monday,

No. 63

April 2, 2018

Part II





 Department of Agriculture





-----------------------------------------------------------------------





Agricultural Marketing Service





-----------------------------------------------------------------------





7 CFR Part 1051





 Milk in California; Proposal To Establish a Federal Milk Marketing 
Order; Proposed Rule

  Federal Register / Vol. 83 , No. 63 / Monday, April 2, 2018 / 
Proposed Rules  

[[Page 14110]]


-----------------------------------------------------------------------

DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Part 1051

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


Milk in California; Proposal To Establish a Federal Milk 
Marketing Order

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Proposed rule; order for referendum; notice of public meeting.

-----------------------------------------------------------------------

SUMMARY: The Agricultural Marketing Service (AMS) proposes the issuance 
of a Federal Milk Marketing Order (FMMO) regulating the handling of 
milk in California. This proposed rule proposes adoption of a 
California FMMO incorporating the entire state of California and would 
adopt the same dairy product classification and pricing provisions used 
throughout the current FMMO system. The proposed California FMMO 
provides for the recognition of producer quota as administered by the 
California Department of Food and Agriculture. This proposed FMMO is 
subject to producer approval by referendum.

DATES: The Agricultural Marketing Service (AMS) will conduct a public 
meeting at 9:00 a.m. on April 10, 2018, to explain and answer questions 
relating to how the proposed California FMMO contained in this proposed 
rule, if adopted, would operate and review the producer referendum 
process that will be followed to obtain producer approval of the 
proposed rule.

ADDRESSES: The public meeting will be held at the Clovis Veterans 
Memorial District Building, 808 Fourth Street, Clovis, California 
93612. 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 proposed rule, in accordance to 7 CFR 
part 900.13a, is the Secretary's final decision in this proceeding and 
proposes the issuance of a marketing order as defined in 7 CFR part 
900.2(j). AMS finds that a FMMO for California would provide more 
orderly marketing conditions in the marketing area, warranting 
promulgation of a California FMMO. 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 AMS 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 AMS finds that the proposed California FMMO meets 
that standard.
    AMS has considered all record evidence presented at the hearing. 
Pursuant to a February 14, 2018 Memorandum from Secretary of 
Agriculture Sonny Perdue, Judicial Officer William Jensen conducted an 
independent de novo review of the hearing record. The Judicial Officer 
issued an Order on March 9, 2018 whereby he ratified all decisions and 
rulings made by Administrative Law Judge (ALJ) Jill Clifton during the 
hearing. The Judicial Officer ratified ALJ Clifton's Certification of 
the Transcript, except that he revised the list of exhibits that ALJ 
Clifton identified as not having been admitted into evidence by adding 
``Exhibit 108-Exhibit D'' to that list. AMS has also considered the 
arguments and proposed findings submitted in post-hearing briefs, 
officially noticed documents, and comments and exceptions filed in 
response to the recommended decision to formulate this proposed FMMO. 
The regulatory provisions proposed herein reflect California marketing 
conditions, while 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 to 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.
    AMS proposes the establishment of a FMMO in 7 CFR part 1051 to 
regulate the handling of milk in California. Where appropriate, AMS 
proposes the adoption of uniform provisions found in 7 CFR part 1000 
that are have been adopted into the 10 current FMMOS established in 
chapter X. These uniform provisions include, but are not limited to, 
product classification, end-product price formulas, Class I 
differential structure, and the 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.
---------------------------------------------------------------------------

    \1\ References to Class I, Class II, Class III and Class IV 
refer to products classified in those classes based on uniform FMMO 
provisions.
---------------------------------------------------------------------------

    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 California FMMO 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, reporting verification, information collection and 
publication, and producer payment enforcement.
    A unique feature of the proposed order is a provision for the 
recognition of the quota value specified in the California quota 
program currently administered by the California Department of Food and 
Agriculture (CDFA). AMS 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, 
AMS 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 proposed FMMO, 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 prices, milk allocation in California and throughout 
the United States, and impacts to consumers. As part of the

[[Page 14111]]

analysis, a regional econometric model was used to project deviations 
from the USDA Agricultural Baseline Projections to 2026 \2\ under the 
provisions of the proposed California FMMO. 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.
---------------------------------------------------------------------------

    \2\ Official Notice is taken of: 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.
---------------------------------------------------------------------------

    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);
    Recommended Decision and Opportunity To File Written Exceptions: 
Issued February 6, 2017; published February 14, 2017 (82 FR 10634);
    Documents for Official Notice: Issued August 8, 2017; published 
August 14, 2017 (82 FR 37827); and
    Submission for OMB Review: Information Collection--Producer 
Ballots: Issued September 27, 2017; published October 2, 2017 (82 FR 
45795);
    Delay of Rulemaking: Issued February 1, 2018; published February 6, 
2018 (83 FR 5215);
    Ratification of Record: Issued March 14, 2018; published March 19, 
2018 (83 FR 11903).
    This proposed rule 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.
    This proposed rule is not expected to be an Executive Order 13771 
regulatory action because this proposed rule is not a significant 
regulatory action under Executive Order 12866.
    The provisions of this proposed rule have been reviewed under 
Executive Order 12988, Civil Justice Reform. They are not intended to 
have a retroactive effect. If adopted, the proposed FMMO 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 proposed rule in accordance with Departmental 
Regulation 4300-4--Civil Rights Impact Analysis (CRIA), to identify and 
address potential impacts the proposal might have on any protected 
groups of people. After a careful review of the proposed rule's intent 
and provisions, AMS has determined that this proposed rule, if adopted, 
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.
    An anonymous commenter took exception to AMS's determination with 
respect to civil rights impact of the proposed rule. The commenter took 
exception with AMS's conclusion that because the proposed California 
FMMO would provide for orderly marketing conditions, its implementation 
would not result in disparate impacts on protected classes, especially 
consumers. The civil rights analysis did not consider consumers because 
consumers are not a protected class. Other observations suggested by 
the commenter regarding consumerism and homelessness are outside the 
scope of the CRIA.

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 regulatory flexibility analysis.
    The purpose of the RFA is to fit regulatory actions to the scale of 
businesses 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 this proposed FMO, 
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.
---------------------------------------------------------------------------

    \3\ Official Notice is taken of: CDFA, California Dairy Review, 
Volume 19, Issue 9, September 2015. https://www.cdfa.ca.gov/dairy/pdf/CDR/2015/CDR_SEPT_15.pdf.
---------------------------------------------------------------------------

    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 are discussed elsewhere

[[Page 14112]]

in this document, 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 indicates 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. In conjunction with the publication of the recommended 
decision (82 FR 10634), AMS released a Regulatory Economic Impact 
Analysis (REIA) to study the possible impacts of the proposed 
California FMMO. AMS received five comments related to the REIA. The 
substance of those comments and AMS's response are provided in the 
documentation that accompanies an updated REIA, which was prepared to 
reflect the provisions proposed in this FMMO. The updated analysis may 
be viewed in conjunction with this proposed FMMO (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\ According to data published 
by CDFA,\5\ over 94 percent of the state's approximately 40.4 billion 
pounds of milk for 2016 was produced in the Northern California region. 
The five leading milk production counties in 2016 were Tulare, Merced, 
Kings, Stanislaus, and Kern, together accounting for approximately 72.4 
percent of the state's milk.
---------------------------------------------------------------------------

    \4\ Official Notice is taken of: CDFA, Stabilization and 
Marketing Plan for Market Milk, as Amended, for the Northern 
California Marketing Area, August 2015. https://www.cdfa.ca.gov/dairy/pdf/hearings/2015/NOCAL_STAB_PLAN61.pdf.
    \5\ Official Notice is taken of: CDFA, California Dairy 
Statistics Annual, 2016. https://www.cdfa.ca.gov/dairy/pdf/Annual/2016/2016_Statistics_Annual.pdf.
---------------------------------------------------------------------------

    According to CDFA, there were 1,392 dairy farms in California in 
2016. Of those, 1,297 were located in Northern California, and 95 were 
in Southern California. The statewide average number of cows per dairy 
was 1,249; in Northern California, the average herd size was 1,265 
cows, and in Southern California, 1,026 cows. Average milk production 
for the state's 1.74 million cows was 23,265 pounds in 2016.
    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.
---------------------------------------------------------------------------

    \6\ Official Notice is taken of: CDFA, Milk and Dairy Food 
Safety Branch, Milk Plant Listings. 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.
---------------------------------------------------------------------------

    CDFA reported \8\ that approximately 98 percent of California's 
2016 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). Eight and three-tenths percent was utilized for Classes 2 and 3 
(soft and frozen dairy products), 32.3 percent was utilized for Class 
4a (butter and dried milk powders), and 46.4 percent was utilized for 
Class 4b (cheese).
---------------------------------------------------------------------------

    \8\ CDFA, California Dairy Statistics Annual, 2016.
---------------------------------------------------------------------------

    According to CDFA, total Class 1 sales in California were 
approximately 642 million gallons in 2016. 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

    AMS 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 proposed 
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 proposed 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 producers 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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 proposed California FMMO 
would receive a pro rata share of the pool revenues through the 
California FMMO uniform blend price. The California FMMO would not 
provide for the quota and non-quota milk pricing tiers found under the 
CSO. Under the proposed California 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

[[Page 14113]]

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 by the proposed California 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 proposed 
California FMMO makes no provision for exempting large producer-
handlers from pricing and pooling regulations under the order.
---------------------------------------------------------------------------

    \10\ Producer-handlers are dairy farmers who process and 
distribute their own farm milk into dairy products.
---------------------------------------------------------------------------

    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 proposed California 
FMMO.\11\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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 proposed California FMMO. Currently, California handlers who 
purchase milk produced outside the state do not account to the CSO 
marketwide pool for that milk. Record 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 proposed 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. Thus, revenues from Class 1 
sales that are not currently regulated would accrue to the California 
FMMO pool and would be shared with all producers who are pooled on the 
California FMMO, including out-of-state producers. If California 
handlers elect to continue processing out-of-state milk into Class I 
products, under the provisions of the proposed California 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 proposed FMMO is 
similar, but not identical. The table below compares CSO and FMMO 
product classes.

------------------------------------------------------------------------
                 CSO Class                      Equivalent FMMO Class
------------------------------------------------------------------------
Class 1...................................  Class I.
Class 2 and 3.............................  Class II.
Class 4b..................................  Class III.
Class 4a..................................  Class IV.
------------------------------------------------------------------------

    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 a 
product based on product type and where the product is sold.\12\ The 
proposed California FMMO would classify all products based solely on 
product type.
---------------------------------------------------------------------------

    \12\ Official Notice is taken of: CDFA, Classification of Dairy 
Products. https://www.cdfa.ca.gov/dairy/pdf/PRDCLASS.pdf.
---------------------------------------------------------------------------

    Under the proposed FMMO, California handlers would no longer 
receive credits for fluid milk fortification. Instead, accounting for 
fortification would be uniform with other FMMOs, as 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 than does the CSO. 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 proposed California FMMO does not contain a transportation 
credit program to encourage milk shipments to Class 1, 2, and 3 plants, 
as is currently provided for in the CSO. AMS proposes that producer 
payments be adjusted to reflect the applicable producer location 
adjustment for the handler location where the milk is received, thus 
providing the incentive to producers to supply Class I plants. 
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 by authorizing transportation credits to 
handlers. This change is not expected to disproportionately impact 
small business entities.

Summary

    AMS continues to find that adoption of the proposed California FMMO 
would promote more orderly marketing of milk in interstate commerce. 
Classified milk prices under the 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 proposed FMMO, 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), the ballot materials that will be used in conducting the 
referendum have been submitted to and approved by OMB (0581-0300). The 
forms to be used to administer the proposed California FMMO have also 
been reviewed by OMB (0581-0032) and would be approved should the 
California FMMO producer referendum pass.
    Any additional information collection and recordkeeping 
requirements that may be imposed under the proposed order would be 
submitted to OMB for public comment and approval.

Secretary's Decision

    Notice is hereby given of the filing with the Hearing Clerk of this 
final decision with respect to the proposed marketing agreement and 
order

[[Page 14114]]

regulating the handling of milk in California.
    This final 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. 
608c.
    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 (80 FR 47210).
    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.
    Upon the basis of evidence introduced at the hearing and the record 
thereof, the Administrator of AMS on February 6, 2017, filed with the 
Hearing Clerk, USDA, a recommended decision and Opportunity to File 
Written Exceptions thereto by May 15, 2017. Twenty-nine comments or 
exceptions were filed. That document also announced AMS's intent to 
request approval of new information collection requirements to 
implement the program. Written comments on the proposed information 
collection requirements were due April 17, 2017. Two comments were 
filed. AMS issued a notice regarding Documents for Official Notice, 
inviting comments on whether the Department should take official notice 
of numerous listed documents submitted for consideration by proponents. 
The notice was issued on August 8, 2017, and published on August 14, 
2017. Comments on the official notice request were due August 29, 2017. 
Three supportive comments were received and are discussed later in this 
decision. Lastly, AMS announced its intent to request approval of a new 
information collection for ballot material to be used in a producer 
referendum in a document issued on April 17, 2017, and published on 
April 21, 2017. Comments on the ballot material information collection 
were due June 20, 2017. One supportive comment was received. A 
Submission for OMB Review seeking OMB approval of the ballot material 
was issued on September 27, 2017, and published on October 2, 2017 (82 
FR 45795).
    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 and the comments and exceptions filed with 
regard to the recommended decision. 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
11. Ruling on Office Notice Documents
12. Rulings on Proposed Findings, Conclusions, and Exceptions

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 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\
---------------------------------------------------------------------------

    \13\ Official Notice is taken of: 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 by 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.
---------------------------------------------------------------------------

    \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

[[Page 14115]]

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 
nonfat 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; 
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.
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 principal means of 
meeting the objectives of the FMMO program are through the use of 
classified milk pricing and the marketwide pooling of returns.

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 
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.

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 central issue 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

[[Page 14116]]

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 here 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, cheese manufacturers, 
and cultured and 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 summarizes the testimony, hearing 
evidence, and comments and exceptions filed regarding the recommended 
decision addressing whether or not promulgation of a California FMMO is 
justified. After careful consideration and review, this final decision 
affirms the finding that

[[Page 14117]]

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. The Secretary has found upon 
the record that the proposed order and all of its terms and provisions 
will tend to effectuate the declared policy of the AMAA 608 c(4).

Summary of Testimony

    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 price 
differences, 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 
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

[[Page 14118]]

that the CSO Class 4b price was lower than the Class III price in 161 
of the 187 months examined. The witness computed the average difference 
over that 15-year time period to be $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 Dairy Market News (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 having two 
different regulatory pricing schemes which has 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 in 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 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 competitors pay for 
regulated milk. By regulating these interstate 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 do 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. The 
witness said it was 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 instances of 
depooling. Currently under the CSO, the witness said, while plants can 
choose to not participate in the marketwide pool, they gain 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 requirement of uniform producer payments. The witness was 
of the opinion that under Proposal 1, 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 regulations 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

[[Page 14119]]

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 expressed 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 capping the value of the dry whey factor in the 
Class 4b formula. Witnesses 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 also said that 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 in 
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 once 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 
and national milk production trends 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 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 regulated 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 regulated minimum 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

[[Page 14120]]

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 opined 
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 that 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 can 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 that the pay price differences between 
dairy farms whose milk is pooled under the CSO and FMMOs are primarily 
due to the difference in the Class 4b and Class III prices and have 
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 put them 
at a 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.
    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

[[Page 14121]]

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 opined 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 seen 
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 that 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 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 the Department 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 
reiterated its opinion that the Department 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 the Department is authorized, but not required, to 
incorporate the California quota program. According to the Institute, 
whatever decision the Department 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 the Department 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

[[Page 14122]]

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 Department 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 the Department 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 the Department has consistently denied 
proposals seeking price enhancement, as they believe is the case in 
this proceeding. Hilmar stated that 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 the Department 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 
the Department 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 the Department 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 witness opined that the CSO maintains an 
orderly market by responding to changing market conditions when 
warranted.
    Should the Department 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.

[[Page 14123]]

    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 opined 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, in their post-hearing briefs, and in comments 
to the recommended decision 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 that 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 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 final 
decision find, that disorderly marketing conditions must exist or are a 
condition of 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 express or implicit declaration 
of a requirement for a finding of disorderly marketing conditions.
    This final decision continues to find, based on the evidentiary 
record, 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 
final decision continues to find 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 continues to find that 
the proposed California FMMO 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.
    Comments filed on behalf of the Cooperatives supported the 
Department's finding that a California FMMO would effectuate the 
declared policy of the AMAA and was therefore warranted. The 
Cooperatives supported the determination that disorderly market 
conditions were not a requirement for FMMO promulgation. Furthermore, 
the Cooperatives wrote, the recommended decision properly found that 
the intent of the AMAA was not to preclude a group of state-

[[Page 14124]]

regulated producers from petitioning for a FMMO. The Cooperatives 
expressed that the recommended California FMMO, with some modifications 
they offered, would provide for more orderly marketing conditions by 
assuring producers that the prices they receive more appropriately 
represent the full value of all the classified use values of raw milk 
in the market. Additionally, wrote the Cooperatives, the proposed 
California FMMO would provide more orderly marketing conditions by 
ensuring that prices paid by handlers would be reflective of the 
national market for manufactured dairy products in which California 
products compete.
    Comments filed on behalf of Select supported the finding that 
disorderly marketing conditions are not a requirement for order 
promulgation and that a California FMMO would provide more orderly 
marketing conditions.
    Additionally WUD, CDC, MPC, and National All-Jersey (NAJ), whose 
comments focused primarily on the specific provisions recommended, 
offered general support for establishing a California FMMO.
    The Institute took exception to the Department's finding that 
disorderly marketing conditions are not a requirement for order 
promulgation. They argued that a FMMO can only be promulgated if the 
regulations ``establish'' order, and they contend that the Department's 
finding that an order can be established if it creates ``more'' order 
unjustly broadens the authority of the AMAA. The Institute wrote that 
to establish orderly marketing conditions, market disorder must first 
exist. Therefore, because the Department did not find disorder in the 
California marketplace, the promulgation of a California FMMO is not 
justified.
    The Institute further argued that the California FMMO promulgation 
standard articulated in the recommended decision was in contrast to 
prior agency decisions that cited disorder as a reason for promulgation 
or amendment. Lastly, the Institute argued that FMMO Supplemental Rules 
of Practice refer to disorder as a condition for submitting an 
amendatory proposal, so such standard should not be ignored in the 
California FMMO proceeding. The Institute concluded that the Department 
does not have the legal authority to change its interpretation of the 
declared policy of the AMAA, and therefore California lacks the market 
disorder needed to justify promulgation of a FMMO.
    Separate comments filed by Leprino Foods (Leprino) and Dean Foods 
supported the arguments by the Institute regarding order promulgation.
    Comments filed by the International Dairy Foods Association (IDFA) 
did not offer an opinion on whether a California FMMO should be 
promulgated, but did take exception with the Department's finding that 
disorderly marketing is not a requirement for FMMO promulgation. IDFA 
opined that if orderly marketing conditions already exist, the 
Department has no basis to promulgate an order. Like the Institute, 
IDFA argued that there should be no differentiation in the threshold 
for Federal government intervention between amendatory and promulgation 
proceedings. IDFA contended that the FMMO Supplemental Rules of 
Practice were adopted through notice and comment rulemaking by which 
the Department adopted the disorderly marketing conditions requirement, 
and the different threshold for promulgation described in the 
recommended decision is not appropriate. Additionally, IDFA reviewed 
multiple amendatory FMMO decisions that cited disorderly marketing 
conditions as a justification for regulatory change. IDFA concluded 
that imposing Federal regulations in a market that exhibits no signs of 
market disorder carries the risk of disrupting the currently existing 
orderly marketing conditions. Comments filed by Hilmar also took 
exception with the Department's finding that disorderly marketing 
conditions are not a requirement for FMMO promulgation. Hilmar wrote 
that the objective of the AMAA is to establish and maintain orderly 
marketing conditions and that the Department ignored past FMMO 
proceedings that cited disorderly marketing conditions as a 
justification for regulatory change. Hilmar contended that the 
Department did not explain why the California FMMO proceeding was held 
to a different standard.
    Another commenter also argued that disorderly marketing conditions 
should be a requirement for FMMO promulgation. The commenter elaborated 
that in order for a FMMO to align with the public interest, the public 
should have access to milk at a reasonable cost, and further study is 
needed to determine the impact to all stakeholders. The commenter wrote 
that it was not in the public interest to establish a FMMO in a market 
where disorderly market conditions have not been found.
    Additional opposition to the Department's finding that disorderly 
marketing conditions are not a requirement for FMMO promulgation was 
also expressed in comments filed by Pacific Gold and HP Hood.
    Comments filed by CPHA were specific to exempt quota; however CPHA 
stressed that it would be unable to offer support or opposition to a 
California FMMO until CDFA has released its plan for operating the 
California quota program.
    The Department recognizes that many commenters took exception to 
the finding that disorderly marketing is not a requirement for FMMO 
promulgation. Similar to arguments made at the hearing and in post-
hearing briefs, the commenters provided numerous rulemaking examples 
where market disorder was found. However, none demonstrated that market 
disorder was a requirement for FMMO promulgation. This final decision 
continues to find that the declared policy of the AMAA to ``establish 
and maintain orderly marketing conditions'' does not require market 
disorder to be the justification for promulgation of an order.
    Numerous commenters noted that the Supplemental Rules of Practice 
in 7 CFR 900.20-900.33 stipulate that petitioners provide examples of 
market disorder to justify requesting an amendatory proceeding. 
Commenters took exception to the fact that the Department was not now 
requiring evidence of market disorder to justify this promulgation 
proceeding. The 2008 Farm Bill required the Department to establish 
these Supplemental Rules specifically to address only amendatory 
proceedings. The rules outline submission requirements for FMMO 
amendatory proposals and specify timeframes the Department must adhere 
to during the amendatory rulemaking process. Congress could have 
extended the reach of the Supplemental Rules to include both amendatory 
and promulgation FMMO proceedings, but did not.
    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 will be discussed later, this 
decision proposes the adoption of the classified price formulas that 
currently exist in the FMMO system. A California FMMO, under the 
provisions contained in this final decision, would ensure that the 
prices handlers pay to purchase pooled California milk would 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

[[Page 14125]]

manufactured dairy products compete in the national market. However, 
the CSO-regulated prices for raw milk paid by California manufacturers 
are different than those paid by manufacturers under FMMOs. This final 
decision continues to find 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 final 
decision finds these prices would provide more orderly market 
conditions for California.
    This final decision continues to find 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 in 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, and in their comments on the 
recommended decision, that because the CSO already provides for 
classified pricing and marketwide pooling, disorderly marketing 
conditions do not exist in California, and therefore there is no 
justification for promulgating a California FMMO. As discussed earlier, 
disorderly marketing conditions are not a precedent or requirement for 
order promulgation. Furthermore, this final decision continues to find 
that it is not the intent of the AMAA to preclude a group of producers 
from petitioning for a FMMO simply because they are otherwise regulated 
by a state order that provides for classified pricing and marketwide 
pooling. Such a restriction 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 unregulated 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 
capture interstate sales, through either full or partial regulation, 
would protect 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 contended that the 2014 Farm 
Bill mandated that a California FMMO be promulgated. The Farm Bill 
merely 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 would meet 
the objective of the AMAA to ``. . . maintain such orderly marketing 
conditions. . . .'' The provisions proposed herein 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 objective analysis of this 
hearing record.
    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 could not be 
promulgated if it would have adverse impacts on other FMMOs, and that 
the Department must act to mitigate those adverse impacts before such 
promulgation.
    FMMOs are a marketing tool that, among other things, establish a 
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 at the time of the 
hearing, California represented 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 would 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 
individual business decisions.
    Comments filed by the Maine Dairy Industry Association (MDIA) 
supported the establishment of the proposed California FMMO, but 
reiterated their opinion that the Department must mitigate potential 
adverse producer impacts in other FMMOs. Specifically, MDIA commented 
that the Department should address four specific adverse impacts: 
Impact on producer welfare and orderly marketing; impact on Class I 
utilization; impact from projected regional changes in milk production; 
and impact from projected depooling in various FMMOs.
    It is to be expected that incorporating an additional 20 percent of 
the U.S. milk supply into a FMMO--milk that is currently state 
regulated--would have an impact in other regions of the country. The 
REIA released in conjunction with this final decision estimates the 
potential impact of regulating California milk handlers under a FMMO 
and its results show impacts in all regions throughout the United 
States. This final decision continues to find that promulgation of a 
California FMMO would enable 80 percent of the United States milk 
supply to fall under the same regulatory framework. Consolidation under 
this Federal milk marketing framework would ensure that prices received 
by all producers participating in the FMMO system would be more 
reflective of the national marketplace for dairy products. This final 
decision finds that changes to other FMMOs to counter projected impacts 
are not warranted and would only serve to send incorrect market signals 
to those producers who need to make individual business decisions based 
on accurate information.

[[Page 14126]]

4. California Quota Program Recognition

    This section reviews and highlights the hearing evidence, post 
hearing briefs, and comments or exceptions submitted in response to the 
recommended decision 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. Currently, the money to pay the quota premium 
is deducted from the CSO marketwide pool before the CSO overbase price 
is calculated. This decision continues to find 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.

Summary of Testimony

    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 1960s, 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 that 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, additional 
revenue was typically assigned to Class 1 and subsequently quota 
holders, and overbase prices were not impacted. The witness said that 
as milk production grew without corresponding increases in quota 
holdings, producers were faced with lower milk prices on their non-
quota production. Therefore, the Gonsalves Act was amended, effective 
January 1, 1994, setting the 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 only to 
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 ranches 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 further 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 that 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 the Department, and said 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 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 than their in-state counterparts who can earn 
California quota premium payments.
    The Cooperatives further argued that Proposal 1 upholds the AMAA's 
uniform pricing provisions, as all quota milk would be paid uniformly, 
all non-quota milk would be paid uniformly, and all milk located 
outside of the proposed marketing area would be

[[Page 14127]]

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 that any change to the quota program would create 
regulatory uncertainty and diminish the economic value of quota. The 
witness opined 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 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, eight 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 to be 
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. 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 the Institute believes 
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 
brief, 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 opined 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, 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 were developed as an alternative to a FMMO. The witness said 
the quota program was originally designed so that farmers who 
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

[[Page 14128]]

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 
of 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 four 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. The witness explained that to head off producer-
handler opposition to marketwide pooling, 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 opined that exempt quota holders have already recovered the 
cost of their exempt quota, which they were last able to purchase 20 
years previous.
    A witness from Dean Foods testified that the competitive advantage 
producer-handlers gain from their exempt quota can be spread out over 
their total volume of Class 1 sales. Dean Foods is a national fluid 
milk manufacturer that operates three Class I plants and one Class II 
plant in California. 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 four 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

[[Page 14129]]

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 producer-handlers 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. The reply brief also asserted that 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 alluded 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 of the 
continued financial benefit quota 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 were 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 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

[[Page 14130]]

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 quota market prices at the time of the hearing, 
the asset value of quota at $1.2 billion.
---------------------------------------------------------------------------

    \19\ The record reflects that CDFA also announces a base price 
that 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 indicates that 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 continues to find 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 proposed California FMMO would similarly 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 if there was no quota program. 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 manufacturing 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 milk as defined by the order. USDA 
and CDFA could cooperate by sharing data through a memorandum of 
understanding to facilitate CDFA administration of the quota program.
    The Department received 13 comments supporting the recommendation 
to continue the California quota program under the authority and 
direction of CDFA, with FMMO cooperation for relevant information 
sharing. Comments expressing support for the proposed recognition of 
California quota program in the recommended California FMMO were 
received from the Cooperatives, the Institute, CPHA, HP Hood, Select, 
Producers, WUD, MPC, Pacific Gold,

[[Page 14131]]

NAJ, The Kroger Company (Kroger), CDC, and other individuals. Several 
commenters stated that the proposed recognition resolved concerns 
raised during the hearing regarding inclusive pooling, uniform pricing 
and interstate trade barriers.
    Comments filed on behalf of the Institute stated that the 
Department's solution acknowledges the ``recognize quota'' language of 
the 2014 Farm Bill without violating the AMAA's requirements for 
uniform pricing. The Institute was also of the opinion that permitting 
CDFA to operate a standalone quota program through authorized 
deductions from producer payments allows the Department to avoid any 
potential interstate commerce issues relating to quota.
    Comments filed on behalf of the Cooperatives also supported the 
Department's proposed recognition of the California quota program, as 
well as CDFA's continued administration of quota as a standalone 
program. The Cooperatives stated that the Department's decision 
properly recognized quota values and protected the financial investment 
of the California quota holders. The Cooperatives stated their support 
is contingent upon CDFA continuing the quota program as proposed by the 
Department, and added that if CDFA were unable or unwilling to maintain 
the program without diminishing quota value, the Cooperatives would 
withdraw their support of the Department's decision. The Cooperatives 
proposed that specific references to the applicable California statute 
and regulations that pertain to the California quota program be added 
to the proposed California FMMO.
    Comments submitted on behalf of WUD supported the Department's 
treatment of the quota program, but requested that the producer 
referendum be postponed until CDFA determines how it will operate the 
program.
    CDFA submitted a comment confirming its ability to establish a 
standalone, producer-funded quota program as proposed by the 
Department, and stated its aim to reach a conclusion prior to a 
California FMMO producer referendum. In its filed comments, CDFA 
indicated that it would work toward a solution with the intent of 
concluding its process before a California FMMO producer referendum was 
held so California producers would have the pertinent information 
needed to make an informed decision.
    The Department continues to find the proper recognition of quota 
under the proposed California FMMO is to allow for authorized 
deductions from producer payments in accordance with the California 
quota program, as determined and administered by CDFA. As the 
Department finds this rulemaking proceeding is separate from CDFA's 
handling of the quota program, language referencing the CDFA 
regulations for administering quota is not included in the proposed 
California FMMO. Standalone language in the proposed California FMMO 
references the California quota program.
    Regarding the treatment of exempt quota as addressed in Proposal 3, 
this decision continues to find 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 continues to find 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 for their exempt quota 
holdings. Such compensation cannot be made by reducing the minimum 
Class I obligation of FMMO fully-regulated handlers without undermining 
the uniform handler payment provision of the AMAA.
    Comments submitted on behalf of the CPHA expressed provisional 
support for the proposed treatment of quota, assuming all aspects of 
the current program, including exempt quota, would be maintained by 
CDFA. CPHA asked the Department to reopen the comment period pertaining 
to the quota program until CDFA releases a final statement detailing 
their plan to administer the quota program in its entirety. CPHA stated 
that until such time their comments on the recommended decision would 
be incomplete.
    This decision does not find justification for reopening the public 
comment period. CDFA has publically outlined the steps it intends to 
take to preserve, plan for, and operate the California quota program. 
CDFA has publically stated it intends to complete a producer referendum 
and release the results before a FMMO producer referendum is held. 
California producers will be able to consider that information when 
voting on the proposed California FMMO.
    Throughout the hearing, and in post-hearing briefs and comments 
filed in response to the recommended decision, 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 final decision continues to find that the package of FMMO 
provisions 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.

Summary of Testimony

    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.

Findings

    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.

[[Page 14132]]

    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 final decision continues to find that a set of uniform 
provisions should continue to be maintained throughout the FMMO system 
to ensure consistency between the uses of terms. Therefore, this final 
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 for a California FMMO in this final decision are 
similarly tailored to the California market where appropriate. This 
section provides a brief description of the uniform definitions and 
provisions 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.
    Two commenters expressed support for adopting the uniform 
provisions as proposed in the recommended decision to ensure 
consistency between uses of terms and application of principles and 
practices in FMMO areas.
    Comments filed by the Cooperatives supported adoption of all but 
four of the recommended uniform provisions, for which they offered 
modifications: Pool plant, exempt plant, producer, and producer milk. 
Their specific exceptions are discussed later in this decision. The 
Cooperatives' comments also confirmed their support for adoption of the 
``miscellaneous and administrative'' provisions generally used 
throughout the FMMO system, which specify the reporting, accounting, 
and payment procedures under the orders.
    This decision continues to propose a set of uniform definitions 
consistent with the ten current FMMOs. The definitions for a California 
FMMO are explained below:
    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.
    Pool Plant. A Pool Plant should mean a plant serving the market to 
a degree that warrants its 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 for a California FMMO are discussed 
in detail in the Pooling section of this final decision.
    Comments filed by the Cooperatives took exception to the 
Department's recommended definition of Pool Plant, preferring instead 
the definition detailed in their post-hearing brief, which defined a 
pool plant as any California plant receiving milk from a California 
producer, unless otherwise exempt. The Cooperatives' definition was 
aligned with their inclusive pooling proposal, which is not proposed 
for adoption in this final decision. Therefore, this decision continues 
to find the Department's proposed pool plant definition appropriate. 
Specific details regarding pooling standards for a California FMMO are 
discussed in the Pooling section of this final decision.
    Nonpool Plant. A Nonpool Plant should be defined as a plant that 
receives, processes, or packages milk, but does not satisfy the 
standards for being a pool plant. Nonpool plant 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.

[[Page 14133]]

    The exempt plant definition was standardized as part of Order 
Reform to provide a uniform definition of distributing plants that, 
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 continues to 
find 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.
    The recommended decision found that the performance-based pooling 
provisions would make such additional exemptions unnecessary, as plants 
with manufacturing uses would have the option to elect not to pool 
their milk supply. In their filed comments, the Cooperatives took 
exception to the recommended definition of exempt plant as it did not 
contain the necessary language for inclusive pooling. This final 
decision continues to find the recommended exempt plant definition 
appropriate, as this decision does not propose adopting inclusive 
pooling for a California FMMO, negating the need for language tailored 
to inclusive pooling provisions. Specific details regarding pooling 
standards for a California FMMO are discussed in the Pooling section of 
this final decision.
    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. No comments were filed in regard to this 
provision as proposed in the recommended decision. 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 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 continues to 
find 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.

[[Page 14134]]

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 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 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.

---------------------------------------------------------------------------

[[Page 14135]]

    The recommended decision found 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.
    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 that the larger than average herd size 
of dairy farms in the western United States lent 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\ Federal Order Reform Proposed Rule: 63 FR 4965.
---------------------------------------------------------------------------

    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. Therefore, the 
recommended decision found 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. The recommended decision found that extending the producer-
handler definition to include manufacturing uses would not be necessary 
because the recommended package of pooling provisions would allow for 
optional pooling of milk used in manufacturing.
    Individual comments filed by HP Hood, Kroger, and the CDC expressed 
support for the producer-handler provision contained in the recommended 
decision. Commenters agreed that producer-handlers should be treated in 
California the same way they are treated in the rest of the FMMO 
system, and that allowing exemptions for production above 3 million 
pounds per month would create disorder. Comments filed by the 
Cooperatives also confirmed their support for the recommended producer-
handler definition, which mirrors the definition used in the other 
western orders.
    This final decision continues to find that the producer-handler 
definition, including additional language related to producer-handler 
qualification, as proposed in the recommended decision would be 
appropriate for a California FMMO. As well, the proposed California 
FMMO should contain the uniform FMMO producer-handler provision that 
limits monthly Class I route disposition to three million pounds. 
Because this final decision does not propose adoption of inclusive 
pooling, dairy product manufacturers of all sizes are allowed to opt 
out of the marketwide pool, making it unnecessary to provide additional 
allowances for small producer-handlers under the proposed California 
FMMO.
    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, record 
evidence, and this decision's findings regarding appropriate 
recognition of the California quota program were discussed earlier in 
this decision.
    Comments filed by the Cooperatives recommended modifying language 
for the California Quota Program definition to ensure all applicable 
statutory and regulatory language is referenced and incorporated. This 
comment was addressed in the Quota section of 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.
    Comments filed by the Cooperatives took exception to the definition 
of Producer, as the definition does not contain language necessary for 
inclusive pooling. This decision continues to find the recommended 
producer definition appropriate, as this final decision does not 
recommend adopting inclusive pooling for a California FMMO, negating 
the need for language tailored to inclusive pooling provisions. The 
details of the proposals, record 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 it provides the 
parameters for the efficient movement of milk between dairy farms and 
processing plants.
    Comments filed by the Cooperatives took exception to the definition 
of Producer Milk as the definition does not contain language necessary 
for inclusive pooling. This decision continues to find the definition 
of producer milk appropriate, as this final decision does not recommend 
adopting inclusive pooling for a California FMMO, negating the need for 
language tailored to inclusive pooling provisions. The details of the 
proposals, record 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

[[Page 14136]]

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 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. 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 continues to find 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, post-hearing arguments, and 
comments or exceptions submitted regarding the proposed milk 
classification provisions under a California FMMO.

Summary of Testimony

    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

[[Page 14137]]

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, in 
addition to California.
    A consultant witness, appearing on behalf of the Institute, 
testified in support of the portion of Proposal 2 that 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 a 
shrinkage allowance of an additional 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, that excess shrinkage 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 that 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 points 
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. Additionally, 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 previously 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

[[Page 14138]]

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 support the product 
classification provisions already 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 continues to find 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 continues to find that 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.
    A comment submitted on behalf of the Cooperatives expressed support 
for the Department's recommendations to adopt a uniform classification 
system under a California FMMO. They wrote that, with the exception of 
the issue regarding ESL shrinkage, which is discussed below, all major 
proponents at the hearing endorsed the Department's findings that 
uniform classification helps equalize competing handlers throughout the 
system.
    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, shrinkage on milk 
physically received at the plant directly from producers based on farm 
weights and tests is limited to 2 percent, whereas, shrinkage on 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.
    The recommended decision did not propose an additional shrinkage 
allowance for ESL products. Comments filed by HP Hood opposed the 
Department's recommendation, noting that ESL products have gained 
popularity while overall fluid milk consumption has declined, and 
processors should be compensated for the investments they have made to 
buoy the fluid milk sector.
    Comments filed by the Cooperatives supported the Department's 
recommendation that no additional shrinkage allowance be provided for 
ESL production. The Cooperatives wrote that adopting a different 
shrinkage allowance for ESL products would deviate from national 
uniformity in the FMMO system.
    This final 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. 
This decision continues to find that 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 method to value producer milk. This 
section further explains the finding that the recommended California 
FMMO include adoption of the same end-product price formulas used in 
the 10 existing FMMOs and addresses comments and exceptions received in 
response to the recommended decision.

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 milk produced in the United States 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

[[Page 14139]]

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 the Department 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 justifies 
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 of the opinion 
that 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 
the Department in 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 the Department'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 Cooperative 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 Cooperative witness testified that Proposal 1 includes 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 Cooperative 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 PPD value 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

[[Page 14140]]

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.
    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 to 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 position 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, the Department 
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 being 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 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 by the 
Institute 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

[[Page 14141]]

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 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 based 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 in California. 
Leprino is a member of the Institute and supports adoption of Proposal 
2 if the Department 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 the Department suspend the California FMMO proceeding 
to defer implementation until after a national hearing could be held to 
review and revise the existing Class III formula. The witness added 
that the Department 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 the Department might rely on 
surveyed commodity prices from other western states, if necessary, to 
overcome any data confidentiality issues. In its brief, Leprino 
encouraged the Department 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.

[[Page 14142]]

    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 use 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 on 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 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 it 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

[[Page 14143]]

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 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 regard 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

[[Page 14144]]

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, the Department 
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 no 
verifiable price series for WPC-34 exists, nor did the Institute 
present 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 $0.70 per cwt 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 $0.007 per pound 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\
---------------------------------------------------------------------------

    \29\ Federal Order Reform Final Rule: 64 FR 70868.
    \30\ FMMO Class III and IV Price Formula Final Rule: 78 FR 
24334.
---------------------------------------------------------------------------

    The pricing methodology described above was proposed by the 
Cooperatives to apply in a California FMMO and is contained in Proposal 
1. The Cooperatives maintain that the Department 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. Proponents 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. The Cooperatives 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 California 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. The 
Institute argued that these conditions make it hard for its 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 they asserted are representative of manufacturing 
costs in California. Third, they proposed 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

[[Page 14145]]

be included as they are in current FMMOs.
    Class III and Class IV Pricing. The record evidence supports the 
finding that the classified and component price formulas used in the 10 
current FMMOs \31\ be utilized without change in the proposed 
California FMMO. These national formulas were adopted as part of 
Federal Order Reform and are described earlier in this decision. 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.
---------------------------------------------------------------------------

    \31\ 7 CFR 1000.50 and 1000.52.
    \32\ Official Notice is taken of Federal Order Reform Final 
Decision: 64 FR 16026.
---------------------------------------------------------------------------

    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 
more accurate method for 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 national supply 
and demand for dairy products and the national demand for milk.'' \33\
---------------------------------------------------------------------------

    \33\ Federal Order Reform Final Decision: 64 FR 16026.
---------------------------------------------------------------------------

    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 between 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\
---------------------------------------------------------------------------

    \34\ Official Notice is taken of: FMMO Class III and IV Final 
Decision: 67 FR 67906.
---------------------------------------------------------------------------

    The evidentiary record of this proceeding supports and validates 
the same conclusion that prices used in a California FMMO should 
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, and 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, the record evidence supports the finding 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.
    FMMO price formulas already account for California market 
conditions; therefore, it is reasonable and appropriate 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. Yield 
factors 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.
---------------------------------------------------------------------------

    \35\ FMMO Class III and IV Price Formula Final Rule: 78 FR 
24334.
---------------------------------------------------------------------------

    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. 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 NFDM 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.
---------------------------------------------------------------------------

    \36\ 7 CFR 1170.8.
    \37\ FMMO Class III and IV Price Formula Final Rule: 78 FR 
24334.
---------------------------------------------------------------------------

    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, the 
Department has not received a hearing request to amend the levels. It 
may be appropriate to amend these levels in the future, and the 
Department would evaluate any changes to those levels on

[[Page 14146]]

the basis of a formal rulemaking record in that proceeding.
    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 to not pool milk used in manufacturing 
as determined appropriate for their individual business operations. 
Further, 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\ 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 a make allowance, times a yield 
factor, 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 moves 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 the 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. While, the data and testimony presented by the Institute may 
warrant further consideration for that purpose, to consider such a 
change for only one FMMO is not appropriate. 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.
    Comments filed by the Cooperatives in response to the recommended 
decision supported the Class III and IV price formulas contained in the 
proposed California FMMO. Their comments reiterated that because 
manufactured dairy products, including those manufactured in 
California, compete in a national market, classified prices paid by all 
regulated handlers should reflect that national market through the 
uniform, national Class III and IV end-product price formulas.
    Additional comments submitted by Select, CDC, and WUD supported 
adoption of the end-product price formulas contained in the recommended 
decision. These entities were of the opinion that through national 
uniform manufacturing prices, California producers would receive the 
same prices as producers in the rest of the country, and milk movements 
would be based on economic decisions, not government regulation.
    Comments filed by the Institute, Hilmar and Leprino took exception 
to the classified prices contained in the proposed California FMMO. The 
Institute maintained that the Department did not properly analyze all 
record evidence nor indicate what record evidence was accepted and 
rejected when making its determination. The Institute specifically took 
exception to the factors contained in the Class III price formula, 
arguing that they did not take into account local marketing conditions 
that demonstrate higher manufacturing costs and lower Class III product 
values. The Institute was of the opinion that the Department provided 
no basis for why record evidence on whey data was not considered.
    Hilmar argued that the Department relied on past decisions and 
outdated data to wrongly conclude that the proposed California FMMO 
should contain the same price formulas as the current 10 FMMOs. Hilmar 
objected to the recommended decision's finding that adoption of the 
proposed price formulas would not result in competitive harm. Hilmar 
provided extensive comments on the competitive harm, in the form of 
loss in manufacturing revenue, profits, or market share they assert 
would result if the proposed California FMMO is established.
    Hilmar reiterated comments similar to the Institute's that the 
proposed price formulas are not justified because they do not take into 
account local marketing conditions. It contended that the proposed 
price formulas would require California manufacturers to pay more for 
milk than is needed to clear the market and make a profit. Hilmar 
argued that because the Department did not rule on each proposed 
finding of fact, interested parties do not know what data did or did 
not factor into the Department's recommendation.
    Hilmar also took exception with the Department's finding that 
changes to the pricing formulas should be done on a national, not 
individual market level. Hilmar concluded that adoption of the proposed 
California FMMO as contained in the recommended decision would, at a 
minimum, put California manufacturers in a less competitive position 
than they are in now. It further objected to waiting for a future 
national hearing to address any changes to the national uniform end-
product product formulas.
    Leprino was of the opinion that the Department did not consider 
record evidence regarding local California marketing conditions that 
they assert should result in different product price formula factors. 
Leprino wrote the Department incorrectly found the national uniform 
minimum regulated price structure should remain throughout the FMMO 
system, including a proposed California FMMO. Leprino reiterated a 
California FMMO should have different price formulas that recognize the 
different manufacturing costs, commodity prices received, and whey 
products produced in California.
    Leprino contended that incorporation of Western-based commodity 
prices and manufacturing allowances, as contained in Proposal 2, was 
the only method for accurately valuing manufactured dairy products 
produced in California. It also reiterated support for deriving the 
whey value in the Class III product price formula through liquid whey 
rather than dry whey values, the latter being more representative of 
California whey production.
    Leprino noted that a national hearing should be held to address 
these factors throughout the FMMO system, and that promulgation of a 
California FMMO should be delayed until such hearing is held.
    Comments filed by Cacique Cheese (Cacique), Farmdale Creamery, and 
Pacific Gold Creamery took exception to the proposed end-product price 
formulas as appropriate for the California market. Cacique argued that

[[Page 14147]]

the recommended make allowances underestimate the cost of manufacturing 
and should be updated to reflect current costs. Cacique took exception 
to the Department's finding to price other solids on dry whey, instead 
of proposed liquid whey. Pacific Gold was of the opinion that regional 
differences should be accounted for through a Western-based price 
series and California-specific make allowances.
    As detailed above, the primary theme of exceptions filed regarding 
the recommend price formulas revolve around the assertion that the 
Department ignored record evidence demonstrating local market 
conditions warrant different price formulas for California. Commenters 
suggested that because a California FMMO is only now being proposed, 
the pricing formulas in a California FMMO must only reflect the local 
marketing conditions of California. Additional exceptions were raised 
that the Department did not rule on every proposed finding of fact and 
only took Official Notice of a selected number of documents that were 
requested by stakeholders in post-hearing and reply briefs.
    The decision to recommend promulgating a California FMMO and its 
specific provisions was based on the entire hearing record. The record 
reveals that during Order Reform, end-product price formulas were found 
to be an appropriate methodology for reflecting the national market for 
manufactured products as well as the local marketing conditions for the 
consolidated orders. Because of California's prominence in the national 
marketplace, California local marketing conditions were considered and 
factored into the end-product price formulas when those formulas were 
established, even though California did not join the FMMO system at 
that time.
    As proposed, California regulated handlers would pay FMMO minimum 
classified prices that already account for their local marketing 
conditions, rather than a different set of state-regulated prices. By 
incorporating manufacturing costs and commodity prices received 
throughout the country, FMMO minimum classified prices reflect national 
supply and demand conditions. California products, sold throughout the 
country, are an integral part of the national supply and demand 
conditions of manufactured products. Therefore, adoption of these 
national end-product price formulas, without change, into a California 
FMMO is appropriate as they will continue to include California local 
marketing conditions and meet the pricing requirement of the AMAA.
    It should be noted that regulated handler minimum prices throughout 
the country are currently affected by California marketing conditions 
through California plants whose DPMRP prices are incorporated in the 
NDPSR, and through California manufacturing costs that were 
incorporated into the current FMMO manufacturing allowances. In a 
national uniform pricing system, it is appropriate for California 
plants that become regulated by a FMMO to pay minimum classified prices 
that likewise incorporate local marketing conditions in other parts of 
the country through the same factors.
    This final decision continues to find that any change to the 
nationally coordinated pricing system should be considered through a 
national rulemaking. FMMOs hearings are requested by the industry. To 
delay implementation of a California FMMO for a national pricing 
hearing that may or may not be requested, as suggested by some 
commenters, is not appropriate.
    Evidence was introduced in the record regarding specific California 
manufacturing costs, commodities produced, and prices received. 
However, the FMMO system has a nationally coordinated pricing system 
and any changes to that system must be evaluated together in a 
rulemaking where all industry stakeholders can participate and all 
factors can be considered. While changes to the nationally coordinated 
FMMO pricing system may or may not be found to provide for more orderly 
marketing conditions, the current pricing system already takes into 
account marketing conditions from throughout the country, including 
California, which are incorporated in the pricing system on a monthly 
basis.
    Comments received took exception to the finding that adoption of 
the recommended price formulas would not cause competitive harm by 
citing examples of reduced revenue, profits, and market share. The REIA 
released in conjunction with this decision demonstrates there would be 
an impact in all sectors of the industry and throughout the country. 
This final decision continues to find the recommended end-product price 
formulas appropriate for California and clarifies that manufacturers 
would not face competitive harm in the form of different minimum 
regulated prices than their competitors located in the other FMMOs.
    One comment received stated that because the CSO had already 
increased prices to offset higher milk production costs, adoption of a 
California FMMO with higher minimum prices is not warranted. Throughout 
this decision, it has been repeated that adoption of the recommended 
end-product price formulas is warranted because they more accurately 
reflect the national commodity markets where dairy products are sold. 
The recommended decision did not find, nor does this final decision 
find, that these price formulas should be adopted in order to offset 
higher milk production costs, except to the extent that the prices 
indirectly reflect higher production costs through the supply and 
demand conditions that generate the resulting commodity prices 
received.
    Some commenters took exception to the fact that the Department did 
not rule on each offered finding of fact presented in post-hearing and 
reply briefs. The Department is required to discuss relevant issues and 
the evidence relied upon in making its findings. The recommended 
decision encompassed those issues, taking into account arguments made 
on all sides of the issues presented. Particularized rulings on every 
argument presented by interested parties are not required.
    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, the Department should conclude that 
the study results contradict the Cooperatives' justification for 
adopting the price formulas contained in Proposal 1 without a need to 
draw any inferences about documents not in the record.
    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 Department 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.
    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 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 continues to find, that milk 
pricing in

[[Page 14148]]

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.
    No comments or exceptions were received in regard to the Class II 
price as proposed in the recommended decision.
    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 those in 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 briefs, that 
the Class I differential surface adopted as part of Order Reform did 
not consider California in its inception, and is not appropriate for 
adoption here. The Institute did not offer an alternative.
    This decision continues to find that the Class I price formula 
contained in Proposal 1, and as currently used in all current FMMOs, 
and proposed in the recommended decision, would be 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 continues to be 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, 
adjusted by the Class I differential at a plant's location.
    This decision continues to recommend 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 not appropriate on the basis of this 
hearing record to make a change to 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\ Federal Order Reform Final Decision: 64 FR 16044.
---------------------------------------------------------------------------

    Comments filed by the Cooperatives supported the proposed Class I 
price surface and concurred that California market conditions were 
considered when the surface was first established. Their comments 
stressed that the nationally coordinated price surface accounted for 
California market conditions and is appropriate for adoption in the 
proposed California FMMO.
    Exceptions filed by the Institute in response to the recommended 
decision continued to assert that California was not considered when 
the price surface was developed and the Department did not provide an 
evidentiary citation from which to conclude otherwise. The Order Reform 
Recommended Decision outlined the committee process undertaken by the 
Department to address specific issues during the Reform process. The 
decision explained that partnerships were established with two 
university consortia to provide expert analysis on issues relating to 
price structure. The decision referenced two published papers by 
researchers at Cornell University, ``U.S. Dairy Sector Simulator: A 
Spatially Disaggregated Model of the U.S. Dairy Industry'' (USDSS) and 
``An Economic and Mathematical Description of the U.S. Dairy Sector 
Simulator''.\41\ The Department also explained the USDSS model results 
were used as a basis for developing the Class I price surface.\42\
---------------------------------------------------------------------------

    \41\ Federal Order Reform Proposed Rule: 63 FR 4802.
    \42\ Federal Order Reform Proposed Rule: 63 FR 4807.
---------------------------------------------------------------------------

    The ``U.S. Dairy Sector Simulator: A Spatially Disaggregated Model 
of the U.S. Dairy Industry'' paper \43\ expressly explains how the 
USDSS transshipment model took into account milk production, 
manufacturing and consumption points for all states, including 
California. This final decision continues to find that California 
marketing conditions were accounted for in the development of the FMMO 
Class I price surface, and therefore inclusion of that price surface in 
a California FMMO is appropriate.
---------------------------------------------------------------------------

    \43\ Official Notice is taken of: Cornell University: U.S. Dairy 
Sector Simulator: A Spatially Disaggregated Model of the U.S. Dairy 
Industry, November 1996. https://dairymarkets.org/pubPod/pubs/SP9606.pdf.
---------------------------------------------------------------------------

    The Institute argued in their exceptions the Department did not 
take into account changes in the dairy industry after Federal Order 
Reform which should lead to a finding that a different price surface 
for California is justified.
    As reiterated in other parts of this decision, establishing a 
California FMMO is not done in isolation. California is seeking to 
enter a Federally regulated system with current policy predicated on a 
system of nationally coordinated regulated prices. This includes the 
current Class I price surface. The record of this proceeding 
demonstrates that California market conditions, which continue to be 
reflected in the price formulas, were considered when the end-product 
pricing and Class I price surface provisions were developed. This 
nationally coordinated system has been

[[Page 14149]]

in place since January 1, 2000, and this decision does not find it 
appropriate on the basis of this record to alter the system for one 
region of the country.
    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 record of this proceeding does not contain sufficient evidence 
to justify deviation from the uniform FMMO treatment of Class I 
pricing. Therefore, Class I milk pooled on the proposed California FMMO 
is proposed to be paid on a skim and butterfat basis. This uniform 
treatment would avoid disorderly marketing with adjacent or other 
Federal orders, as otherwise handlers could engage in inefficient milk 
movements solely for the purpose of seeking a Class I price advantage.
    Comments and exceptions received in response to the recommended 
decision uniformly supported 3-factor Class I pricing.
    The Institute, Dean, HP Hood, and Kroger requested that the 
Department reconsider this issue. The Institute was of the opinion that 
the State-mandated higher nonfat solids standard, a local marketing 
condition, should be recognized in the California FMMO through 3-factor 
Class I pricing and the fortification allowances outlined in Proposal 
2.
    Dean said the Department did not provide an adequate justification 
to reject 3-factor Class I pricing, which they contend would prevent 
disorderly marketing conditions and was supported by the Cooperatives 
in their reply-brief. Dean reiterated its hearing arguments that 3-
factor Class I pricing is necessary to avoid unequal raw product costs 
for products requiring fortification to meet state-mandated standards 
and would remove incentives for processors to seek higher nonfat solids 
content producer milk. Dean contended that without 3-factor Class I 
pricing, fortification costs between handlers would vary such that 
handlers would face non-uniform raw milk costs for the same end 
product. Dean wrote that the Department erred when finding for uniform 
Class I pricing among all FMMOs instead of recognizing the local 
California marketing conditions that Dean contends require 3-factor 
Class I pricing.
    Comments filed by the Cooperatives and CDC supported the 
reconsideration of 3-factor Class I pricing but did not support 
reconsideration of the fortification credits denied in the recommended 
decision.
    This decision continues to find that additional fortification 
credits as contained in Proposal 2 are not justified. 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 FMMO fortification classification provisions without resulting 
in a double credit for fortification. Dean contends in their exceptions 
that the proposed fortification credits are for the handling of 
fortification ingredients, not a reduction in the cost of those 
ingredients and therefore would not be double counting.
    The record indicates the current CSO fortification credit system 
accounts for the fortification ingredients as Class 1 and then provides 
the handler with a per pound fortification credit based on the amount 
of the nonfat solids in the fortifying ingredient used. This is 
different than how current FMMOs provide for fortification by 
allocating the fortifying ingredients to Class IV, and then classifying 
the incremental volume increase as Class I. If the fortification 
credits provided for in Proposal 2 were adopted, it would result in the 
handler not only receiving the lower Class IV allocation for its 
fortifying ingredients (as opposed to accounting for them as Class 1 as 
is currently done under the CSO), but they would then also receive a 
handling credit based on the amount of product used to fortify. This 
would result in the handler receiving two forms of credit for 
fortifying, as opposed to only one form of credit currently provided 
for in some way in both the FMMO and CSO.
    Furthermore, the record of this proceeding does not provide a 
justification for why the fortification credit levels contained in 
Proposal 2 are appropriate. Those credit levels, of $0.1985 per pound 
of nonfat solids in nonfat dry milk and $0.0987 per pound of nonfat 
solids in condensed milk, were established by CSO. No evidence was 
presented at the hearing to justify how the credits for handling were 
determined and why they might still be set at appropriate levels.
    In regard to 3-factor pricing, record evidence offered by 
proponents concentrated on the pricing impact for reduced fat and 
lowfat milk products that have to be fortified to meet minimum state 
requirements using theoretical component tests for milk supplies. While 
record evidence does examine how 3-factor pricing would equalize costs 
between reduced fat and lowfat products, the analysis is incomplete as 
it does not address the net effect of such pricing across all Class I 
products, including whole and nonfat milk. Considering that a typical 
fluid processor makes a full array of Class I products, the total 
impact must be considered, given that each product has its own 
associated costs per gallon and a fluid processor would not typically 
process one or two products. Lastly, theoretical component tests may 
provide an understanding of relationships in manufacturing costs of 
different products. However, in the absence of actual tests of Class I 
handler milk supplies and an analysis encompassing the net effect 
across all Class I products, record evidence is not sufficient to 
justify deviation from 2-factor pricing of Class I milk.
Producer's Value of Milk
    Currently, six of the 10 FMMOs utilize multiple component pricing 
to determine both the handler's and producer's value of milk. In those 
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

[[Page 14150]]

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 final decision continues to recommend 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 continues to propose that producers under the 
proposed California FMMO be paid a PPD calculated in the same manner as 
in six current FMMOs. The PPD represents to the producer the value from 
the Class I, Class II, and Class IV uses they are entitled to share for 
supplying the market and participating 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 
being 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 final 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 months 
when the PPD is negative.
    While the proponents claim a negative PPD is confusing, this 
decision continues to find 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.
    Comments filed by the Cooperatives, the Institute and MPC in 
response to the recommended decision expressed support for the proposed 
producer milk pricing provisions. The Cooperatives noted in their 
comments they did not object to the PPD provisions as proposed in the 
recommended decision.
    Comments filed by NAJ also expressed support for the producer 
payment provisions, and contended any changes to the producer price 
formulas should occur through a national hearing.
    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 final decision does not 
recommend a SCC adjuster for the California FMMO, as the record does 
not contain evidence to support its inclusion.
    This final 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 Program 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 necessarily 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. Similar arguments were presented 
in

[[Page 14151]]

some comments and exceptions filed in response to the recommended 
decision. This final 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 proposed 
California FMMO. A summary of the proposals, hearing testimony, post-
hearing briefs, and comments on and exceptions to the recommended 
decision related to pooling provisions is provided below. Additionally, 
the proposed treatment of out-of-state milk is addressed in this 
section, as one of the initial proposals submitted to AMS sought to 
allow handlers to elect partially regulated distributing plant status 
with respect to milk received from farmers located outside of the 
marketing area. The proposal would have continued the reported practice 
of handlers paying the plant blend price--instead of the market's blend 
price--for milk produced from outside of the state, since such 
interstate transactions cannot be regulated by the CSO. Essentially, 
the proposal addressed whether out-of-state milk should be incorporated 
into the proposed California FMMO marketwide pool. Therefore, the topic 
is addressed in this section.
    This final decision recommends pooling provisions for a California 
FMMO conceptually similar to those in the 10 current FMMOs, but 
tailored for the California market. The recommended pooling provisions 
are performance-based and are designed to identify those producers who 
consistently supply the Class I market and therefore should share in 
the revenues from the market. There would be no regulatory difference 
in producer payments for milk based on the location of the dairy farm 
where it was produced.

Summary of Testimony

    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 between current 
producer and handler prices in California and those under 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's analysis showed that in every month, the 
estimated CSO blend price was less than the FMMO blend price, and that 
when considering only 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 into 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 all milk had not been pooled, producers would have received 
different minimum prices: Those producers whose milk was pooled would 
have received the minimum FMMO blend price, while the producers whose 
milk was not pooled would have had the potential to receive a higher 
price because the handler could have 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 have been 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. Provisions requiring all milk to be pooled 
cannot be found in any other current FMMO.
    However, 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 Cooperative witness proceeded to describe the 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 producer milk. The witness said 
Proposal 1 also provides 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 not more than 25 percent of its 
total route disposition is 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 definition would allow 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

[[Page 14152]]

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 on the order if the milk 
is received by a cooperative handler, the witness noted.
    The Cooperative witness explained that Proposal 1 would prohibit 
milk from being diverted to nonpool plants outside of the marketing 
area and qualifying for pooling on a California FMMO until five days' 
production is delivered to a pool plant; subsequent diversions would be 
limited according to 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 
Federal Order Reform provided a FMMO foundation national in scope, 
while also allowing for some provisions to be tailored to meet the 
marketing conditions of individual orders. The witness concluded 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 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 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 under 
Proposal 1.
    A witness testifying on behalf of WUD 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 
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 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. The witness asserted that if regulated 
classified prices are set above what plants can pay for that milk, 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.
    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 who 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 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 prohibited by the AMAA. The brief stressed that with no way to 
avoid minimum regulatory pricing, California handlers would be at

[[Page 14153]]

a disadvantage, since handlers regulated by other FMMOs can elect not 
to pool milk and avoid minimum regulated prices. The Institute was of 
the opinion that if manufacturing handlers couldn't elect not to pool, 
they would be discouraged from expanding plant capacity to handle 
surplus milk because they would be required to pay prices above market-
clearing values for that surplus. Lastly, as it pertains to the 
proposed pooling provisions, the Institute expressed the opinion that 
inclusive pooling would de facto regulate farmers, something 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 are 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 would allow 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 would require one of the 
plants to qualify as a distributing plant and other plant(s) in the 
unit to process 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 an adequate milk supply to meet Dean 
Foods' needs because the provisions offered 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 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 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 regulated minimum 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 that would 
regulate all milk are over-reaching and inconsistent with the goals of 
the AMAA. Leprino stated that

[[Page 14154]]

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 FMMO areas, 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 under other 
FMMOs, Proposal 1 would not allow handlers the option 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, which 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 disadvantage with competitors in other FMMOs that can avoid 
regulated minimum 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 the manufactured 
dairy powder products it utilizes in its international plants are 
purchased in California. The witness said that if California regulated 
prices increase and pooling becomes mandatory, 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 could continue 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 Proposal 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 practice is 
neither enforced nor 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 necessarily 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 they 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 the 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 it would be harmed financially if 
Proposal 4 is not adopted. Otherwise, the witness claimed, its milk 
would be pooled on a California FMMO and the price it currently 
receives for milk shipped to California would be reduced by more than 
$1.00 per cwt.
    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 would not erect trade barriers as it would provide for uniform 
payment to California producers in similar circumstances by 
establishing uniform payments for milk covered by quota, and 
establishing a uniform blend price for milk not covered by quota.
    An Institute witness explained that under Proposal 2, out-of-state 
producers

[[Page 14155]]

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 bases of quota/non-quota prices 
and whether handlers elected to pool their milk. But the witness said 
that upon further consideration they realized this solution would 
present additional problems.
    The Institute witness provided hypothetical examples of two 
producers shipping into the same California plant receiving different 
prices by virtue of their farms' locations. The witness was of the 
opinion that this treatment would erect a trade barrier, provide non-
uniform payments to producers, and violate the AMAA.
    The Institute witness said Proposal 2 would address these issues by 
providing for out-of-state producers to receive the traditional FMMO 
blend price for their milk pooled on a California FMMO. According to 
the witness, no trade barrier would be erected with respect to out-of-
state milk by paying the traditional blend to out-of-state producers 
rather than the non-quota price. 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 a large portion of 
one of those classes of milk because of price. The Cooperatives 
estimated there could be an incentive to not pool one or both classes 
of manufacturing milk 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, relies on 
performance-based pooling standards that are more typical of the 10 
current 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 unregulated plants. The 
provisions set out standards for which 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 that performance-based pooling 
standards are the only means of ensuring 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 which producers have demonstrated a 
reasonable measure of service to the Class I market and thereby should 
share in the marketwide distribution of pool proceeds. Performance-
based pooling standards 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 value to the pool, and it is reasonable to expect that only 
producers who consistently bear the costs of supplying the market's 
fluid needs should 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. Pooling 
of Class II, III and IV milk is optional at unregulated plants. 
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. By 
delivering a portion of their milk receipts to Class I distributing 
plants, handlers can benefit from the marketwide pool and receive 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. The record supports adoption of performance-based pooling 
provisions as appropriate for the proposed California FMMO.
    Ten public comments filed in regard to the recommended decision 
supported the recommended pooling provisions, agreeing that they would 
be consistent with those in other FMMOs, would fairly determine those 
producers and milk eligible to participate in the marketwide pool, and 
would enable dairy product manufacturers to manage costs and remain 
competitive in the national market.
    The Institute, which continued to argue against the need for a 
California FMMO, nevertheless concurred with the Department's position 
that performance-based pooling standards are the appropriate method for 
determining handlers who are ready, willing, and able to serve the 
fluid market and should share the benefits of the Class I market. 
Similar sentiments were expressed in comments from HP Hood, Select, 
Kroger, Farmdale, NAJ, Dean, and an anonymous commenter, noting that 
the pooling provisions in the proposed California FMMO would be 
consistent with the Department's principles and with other FMMOs in the 
system. Kroger added that the recommended pooling provisions and 
performance standards are appropriately tailored to local California 
marketing conditions.
    Cacique noted in their comment that the ability to opt out of the 
marketwide pool allows manufacturers to compete fairly with their 
counterparts elsewhere in the country. A comment from Pacific Gold 
added that voluntary depooling is essential to ensure survival for 
California cheese manufacturers, who would otherwise be faced with 
Class III prices that are too high under Proposal 1, prices that would 
not recognize the cost to make or transport California cheese to 
market.
    Comments filed by the Cooperatives took exception to the proposed 
pooling

[[Page 14156]]

provisions and continued to support the inclusive pooling provisions in 
Proposal 1. The Cooperatives reiterated their argument that California 
FMMO provisions should be tailored to address local marketing 
conditions. The Cooperatives argued that relying on pooling provisions 
that work in other FMMOs because of certain similarities such as Class 
I utilization fails to recognize California's unique market 
characteristics, such as the size and location of its handlers, wide 
differences in location differentials, and high Class III and IV 
utilization. The Cooperatives stressed that divergence from the 
prevailing performance-based pooling model is authorized under the AMAA 
and is necessary for California.
    DFA filed a separate comment to supplement the Cooperatives' 
comments and exceptions. DFA concurred with the Cooperatives on the 
need for inclusive pooling, and opined that voluntary pooling in 
California would create disparate producer prices and shifting handler 
advantages on a scale different from any other FMMO.
    A comment submitted by WUD stated that allowing high percentages of 
milk to go in and out of the pool each month would undermine the pool's 
integrity and lead to unstable producer pricing. WUD said that allowing 
depooling defeats the California industry's purpose for seeking a 
FMMO--to enjoy class prices like the rest of the country. CDC echoed 
WUD's sentiment, commenting that less certainty about milk prices would 
jeopardize California's dairy farm futures and fail to establish 
orderly marketing.
    While the Cooperatives have continued to argue that inclusive 
pooling is authorized by the AMAA, the analysis of the record of this 
proceeding, including the comments on and exceptions to the recommended 
decision, finds that performance-based pooling standards remain the 
appropriate method for identifying the producers and producer milk that 
serve the Class I market. Therefore, performance-based pooling 
provisions, tailored to the local market, are recommended for a 
California FMMO.
    Pool Plant. The Pool Plant definition for 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 proposed in this final 
decision reflect a combination of those offered in both Proposal 1 and 
Proposal 2. Both proposals recommended 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, while 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 continues to find that 
pooling provisions should be performance based, and therefore it is not 
appropriate to propose provisions that would regulate plants based 
solely on location.
    There are two performance standards applicable to distributing 
plants. First, this decision continues to find that a minimum of 25 
percent of the total quantity of fluid milk products physically 
received at a pool distributing plant (excluding concentrated milk 
received from another plant by agreement for other than Class I use) 
should be disposed of as route disposition or transferred in the form 
of packaged fluid milk products to other distributing plants. This 
decision continues to find 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 
criterion 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 that is found in the 10 current FMMOs, specifying that 
25 percent of the pool distributing plant's route distribution or 
transfers must be to outlets in the marketing area.
    The Pool Plant definition would also provide 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 plants to shift regulatory 
status. This shifting can be considered disorderly to the producers and 
cooperatives who supply those plants. Regulating those plants according 
to their location, as is done in other FMMOs, would provide regulatory 
stability, and continues to be proposed for a California FMMO. Under 
current FMMOs, these plants are regulated in the marketing areas where 
they are located, as long as they process a minimum percentage of their 
milk receipts into ultra-pasteurized or aseptically-processed fluid 
milk products during the month.
    The record indicates 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,\44\ this standard 
in each order was set equal to the total route disposition standard 
required for pool distributing plants in the respective FMMOs. In this 
final decision, the pool distributing plant standard continues to be 
proposed at 25 percent. Accordingly, this final decision continues to 
propose 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.
---------------------------------------------------------------------------

    \44\ Federal Order Reform Final Decision: 64 FR 16026.
---------------------------------------------------------------------------

    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 shows 
that California utilizes significant volumes of manufacturing milk, 
while California Class 1 utilization in 2015 was only 13 percent.
    The recommended decision proposed that a pool supply plant should 
deliver at least 10 percent of its 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.
    In response to the recommended decision, the Cooperatives commented 
that a lower supply plant shipping standard of 7.5 percent would 
prevent uneconomic deliveries made just for the sake of pool 
eligibility. According to the Cooperatives, the recommended 10 percent 
performance standard would likely disrupt current supply relationships 
and cause disorder. The Cooperatives noted that the supply plant 
shipping standard for the Upper Midwest FMMO had recently been lowered, 
which should signal a comparably appropriate level for California. In 
any event, the commenter added that the Market Administrator should be 
authorized to adjust the level as appropriate.
    MPC also urged the Department to propose a lower supply plant 
shipping

[[Page 14157]]

standard to better reflect California's geography and market 
characteristics and encourage maximum pool participation.
    This final decision continues to find that the recommended 10 
percent supply plant shipping standard would be appropriate for the 
proposed California FMMO. The record of this proceeding lacks data from 
which to justify changing the proposed standard. Given the market's 
approximate Class I utilization and the fact that the Market 
Administrator would be able to make adjustments in response to changing 
circumstances, the standard is reasonable and should help identify the 
milk that should be associated with the pool. The adjustment to the 
Upper Midwest FMMO standards was based on market conditions in that 
marketing area and does not automatically justify a similar adjustment 
to the proposed standards for California.
    To prevent uneconomic shipments of milk solely for the purpose of 
pool qualification, this final decision continues to propose two 
additional pooling provisions. First, a unit pooling provision is 
proposed that would allow two or more plants located in the marketing 
area and operated by the same handler to qualify for pooling as one 
unit. This would apply as long as one or more of the plants in the unit 
qualified as a pool distributing plant and the other plant(s) processed 
at least 50 percent of its bulk fluid milk products into Class I or II 
products. The unit pooling provision is designed to provide regulatory 
flexibility and deter uneconomic milk movements in markets, like 
California, where there is often specialization in plant operations.
    Second, a system pooling provision is proposed to allow 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 jointly as a single plant. The system 
pooling provision recognizes the role supply plants play in balancing 
the market's fluid needs, while ensuring that the plants in the system 
are consistent market suppliers and therefore eligible to benefit from 
participation in the marketwide pool. Both unit and system pooling 
provisions are included 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. Public comments filed in 
response to the recommended decision supported the inclusion of such a 
provision. This final decision continues to find it appropriate to 
adopt such a provision, should the market administrator conclude, after 
conducting an investigation, that 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 would ensure that California FMMO 
provisions can quickly be adapted to changing market conditions and 
that orderly marketing can be maintained. Additionally, this 
flexibility would negate 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 would allow 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 manufacturing plants that would otherwise be regulated under 
the inclusive pooling provisions of Proposal 1. However, since any size 
plant with manufacturing uses could elect not to participate in the 
marketwide pool under the proposed California FMMO, there is no need to 
alter the exempt plant definition.
    Proposal 2 offered a sliding scale supply plant shipping standard 
that would automatically be adjusted 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. However, under the proposed 
supply plant shipping standards, the market administrator would have 
flexibility to adjust supply plant shipping standards if warranted by 
changing market conditions. Therefore, it is not necessary to 
incorporate automatic adjustments to the standards.
    This final decision does not propose separate pooling standards for 
plants receiving California quota milk, as offered in Proposal 2. As 
discussed previously, this decision continues to find that proper 
recognition of the California quota program could be through an 
authorized deduction from producer payments, if deemed appropriate by 
CDFA. Therefore, it would not be appropriate for the supply plant 
shipping standards to differ on the basis of whether a plant receives 
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. The recommended decision did not find it appropriate to 
regulate a supply plant based on its location and not in combination 
with some form of performance standard. No public comments were 
submitted on this finding. This final decision continues to find it 
unnecessary to include such a provision. 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 final decision continues to propose the incorporation 
of 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. No 
comments were received regarding this proposal, other than the 
previously mentioned comments generally supporting the provisions that 
are similar in all FMMOs.
    Producer. The Producer definition identifies 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

[[Page 14158]]

Proposals 1 and 2 were virtually identical. This final decision 
continues to find that the proposed California FMMO should recognize a 
producer 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 
would exempt 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.
    The Cooperatives proposed an additional provision that would 
identify 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 final decision continues to recommend 
performance-based pooling provisions, making such a provision as 
proposed by the Cooperatives unnecessary. The performance-based pooling 
provisions would serve to identify dairy farmers who meet the producer 
definition and should be entitled to share in the marketwide pool. 
Under the proposed order, any dairy farmer who delivers Grade A milk to 
a pool plant would 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 
proposed definition reflects a combination of the provisions contained 
in Proposals 1 and 2, and upholds the performance-based pooling 
philosophy advanced in this final decision.
    This decision finds that, for the proposed California FMMO, 
producer milk should be 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 
milk diversion is a desirable and necessary FMMO feature because it 
facilitates the orderly and efficient disposition of milk when it is 
not needed for fluid use.
    Accordingly, the proposed 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 could not be diverted to a nonpool plant and remain 
priced and pooled under the terms of the proposed California FMMO 
unless at least one day of the dairy farmer's production was physically 
received as producer milk at a pool plant during the first month the 
dairy farmer was qualifying as a producer on the order. Given the large 
supply of milk for manufacturing use in California, the record supports 
a one-day ``touch base'' provision during the first month 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 final decision continues to 
find 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 proposed 
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 final decision proposes that diversions be limited to 
100 percent minus the supply plant shipping percentage (or 90 percent 
of all milk 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 
distant producers from associating with the California FMMO pool, and 
thus receiving the order's blend price, when most of the milk is 
diverted to distant plants and not a legitimate reserve supply of the 
market.
    The proposed California FMMO includes repooling limits 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 opting 
to not pool all their eligible milk in order to avoid payment to the 
marketwide pool for a given month. The Department has found 
unrestricted repooling conditions in some FMMO's to be inequitable and 
contrary to the intent of the FMMO system based on the hearing record 
of those proceedings.\45\ The recommended decision found that the 
proposed repooling limits would not prevent manufacturing handlers or 
cooperatives from electing to not pool milk, but they should serve to 
maintain and enhance orderly marketing by encouraging participation in 
the marketwide pooling of all classified uses of milk.
---------------------------------------------------------------------------

    \45\ 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.
---------------------------------------------------------------------------

    In comments to the recommended decision, the Institute was of the 
opinion that the proposed repooling standards were an appropriate 
starting level given the lack of historical California data that could 
be used as a basis for change.
    In their comments to the recommended decision, the Cooperatives and 
MPC supported lowering the repooling standards to 110 percent in order 
to further discourage handlers from electing to not pool large volumes 
of milk if inclusive pooling standards are not adopted.
    Cacique commented that the recommended repooling limits proposed 
for California are more restrictive than those in other low Class I 
utilization orders and advocated for uniform repooling limits 
throughout the FMMO system.
    Hilmar noted that even through the proposed California FMMO would 
provide manufacturers the option to not pool, the proposed repooling 
limits would competitively harm California manufacturers who compete 
with manufacturers in nearby FMMOs (Pacific Northwest and Arizona) 
whose provisions do not contain repooling limits.
    In their exceptions to the recommended decision, DFA cautioned that 
significant volumes of milk could be depooled under the proposed 
California FMMO, a condition that the Department previously 
characterized as disorderly. DFA explained that because

[[Page 14159]]

of the relatively high percentages of both Class III and Class IV 
utilization in California, repooling standards would not adequately 
deter handlers from electing to not pool large volumes of milk from 
month-to-month. Using updated hearing data, DFA provided an analysis to 
demonstrate how handlers could opt to not pool large volumes of milk in 
one month and then opt to pool essentially 100 percent of its milk the 
following month without any financial penalty.
    Several factors were considered when evaluating the need for 
repooling standards and the appropriate levels. When determining 
appropriate levels, it was important to not set levels so low that they 
could not account for normal fluctuations in production volumes due to 
the number of days in each month and to the natural seasonality of milk 
production and manufacturing. As well, handlers need the ability to 
absorb unexpected surpluses while continuing to have the option to pool 
all the producer milk associated with that handler. If repooling limits 
are too restrictive, handlers may be unwilling to manufacture 
additional milk volumes because they would not have the flexibility to 
pool the additional milk volume.
    This final decision continues to find repooling standards are 
justified for the proposed California FMMO to ensure orderly marketing 
conditions. The hearing record reflects that the proposed repooling 
standards were offered because of the similarities between California 
and the Upper Midwest FMMO, which currently has the same repooling 
standards.
    Typically, when determining repooling standards, record data 
considered includes monthly and daily fluctuations in handler pooled 
volumes. As California is currently regulated by the CSO, which does 
not provide for voluntary pooling, there is no data on the record to 
discern which milk plants would qualify as pool plants, and how much 
milk would be associated with those plants on the recommended 
California FMMO. Lacking additional record evidence, the proposed 125 
and 135 percent repooling standards serve as a starting point for 
identifying a handler's consistent supply of milk available to service 
the market's fluid milk needs under a California FMMO.
    FMMOs are tailored to the local Class I market and therefore their 
provisions may not be identical in all cases. The Hilmar comment 
mentioned that two of California's neighboring marketing areas have no 
repooling limits which Hilmar claims put California manufacturers at a 
competitive disadvantage as they would be subject to repooling limits. 
The pooling provisions for those areas were established based on the 
dairy industry market characteristics of those marketing order areas. 
Likewise, the pooling provisions proposed in this final decision are 
intended to fit the specific needs of the California milk market.
    It should be noted that 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 
would also authorize the market administrator to waive these 
restrictions for new handlers, or for existing handlers with 
significant changes in their milk supplies due to unusual 
circumstances.
    Lastly, milk that is subject to inclusion and participation in a 
State-authorized marketwide equalization pool and classification system 
should 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 indicates that milk serving the California Class 1 
market, but produced from outside the state, is not currently priced 
and pooled under the CSO. According to witnesses, out-of-state 
producers commonly receive the plant blend price. Proposal 4 seeks to 
allow plants that would 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 proposed California FMMO would enforce 
payment to out-of-state producers of at least the plant blend price on 
the out-of-state milk and out-of-state producers would presumably 
continue to receive the same prices they do now.
    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 do so 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, like all other states, is 
prohibited from regulating interstate commerce. One benefit of Federal 
regulation is the ability to regulate interstate milk marketing. 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.
    Three commenters, the Cooperatives, CDC and MPC, supported the 
recommended regulation of milk from outside the state, which would be 
pooled on the proposed California FMMO in the same manner of treatment 
as in other FMMOs. CDC wrote that California producers have been harmed 
by out-of-state milk sales not subject to the CSO because handlers can 
purchase that milk for less than the price of CSO pooled milk. Both the 
Cooperatives and MPC commented that regulating out-of-state milk would 
enhance orderly marketing.
    As explained earlier, this final decision continues to propose that 
a California FMMO operate independent of the State's quota program. 
Under the proposed 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

[[Page 14160]]

authorized deductions. Therefore, all producers would be paid 
uniformly, as specified by the uniform payments provision of the AMAA.
    Accordingly, this final decision continues to find no justification 
for differential producer treatment for milk servicing California's 
Class I needs when it is produced outside the marketing area. If an 
out-of-state dairy farmer qualifies as a producer under the proposed 
California FMMO, the producer's milk would be priced and pooled 
uniformly with the milk of 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 final decision continues to propose no 
transportation credit provisions for a California FMMO.

Summary of Testimony

    A witness appearing on behalf of the Cooperatives testified in 
support of the transportation credit provisions 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 Cooperative 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,\46\ 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.
---------------------------------------------------------------------------

    \46\ 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 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 the 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 servicing 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.
    Comments filed by the Cooperatives took exception with the 
Department's finding on this issue. According to the

[[Page 14161]]

Cooperatives, the proposed Class I price differentials do not 
adequately account for the higher cost of moving milk from production 
points to California Class I markets. The Cooperatives argued that 
failure to provide transportation credits undermines the foundation of 
the FMMO system by eroding both producer and handler price uniformity. 
The Cooperatives reiterated their position that the Department should 
adopt Class I transportation credits at rates indicated in Proposal 1, 
adjusted for the location price difference between the point of origin 
and the receiving plant. In their exceptions, the Cooperatives proposed 
that the credits be processor-, not producer-funded. The Cooperatives 
opined that if a system of transportation credits is not adopted, the 
California FMMO as proposed would lead to significant tension between 
similarly located producers supplying local manufacturers and those 
supplying distant Class I plants. The Cooperatives argued that either 
the Class I plants would pay significant over order charges on all milk 
delivered to them, or that supplying producers would need to accept 
significantly less in their mailbox price than neighboring producers 
supplying local markets.
    Comments filed by Dean Foods expressed support for the 
Cooperatives' position on transportation credits. Other commenters 
opined that the proposed Class I differentials would not be adequate to 
draw the necessary milk supplies to the Southern California deficit 
area, and argued that lack of transportation assistance of some sort 
would be detrimental to producers, handlers, and ultimately consumers.
    Comments filed by HP Hood recognized that while Class I 
differentials were intended to attract milk to processing plants, 
California has long had a transportation assistance program funded 
through the pool that has helped attract milk to fluid plants.
    Comments filed by Kroger noted that both the Cooperatives and the 
Institute offered workable proposals for transportation assistance. 
Kroger stated that existing location differentials are not adequate to 
draw enough milk into the Southern California deficit area, which is 
why the CSO adopted its current system of transportation credits and 
allowances.
    Comments filed by the Institute urged the Department to reconsider 
its position on transportation credits, but agreed with the 
Department's finding that flat producer pricing must not be implemented 
in a California FMMO.
    Comments filed by MPC supported the Department's recommendation and 
reiterated its opposition to any producer-funded transportation subsidy 
system that would deduct producer revenue from the pool.
    This decision continues to find that including a producer-funded 
transportation credit program in a California FMMO is not warranted. In 
their exceptions, the Cooperatives suggested implementing a processor-
funded transportation credit program. This suggestion was not part of 
any proposal evaluated at the hearing and the record lacks evident to 
support its adoption.
    Currently, the CSO uses a flat producer payment, which contains no 
built-in incentive for moving milk from production to population areas. 
The CSO accomplishes this milk movement through transportation credits. 
Implementing a FMMO would change the current CSO flat producer payment 
structure into a Class I differential structure with higher 
differentials for California's population centers. The incentive to 
producers to supply Class I plants is therefore embodied within the 
FMMO Class I differential structure, as producers would receive the 
higher location differential for supplying plants located in major 
metropolitan areas, as the cost to supply those plants is higher. Some 
commenters noted that this would result in neighboring producers 
receiving different prices based on where there milk is delivered. The 
objective of the producer price surface is to encourage producers to 
service Class I plants through a higher location differential. While 
this will lead to producers receiving different prices, those producers 
receiving the higher differential also incur higher costs to service 
those plants. 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 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 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.

Findings

    Handler Reports. Handlers subject to a California FMMO would be 
required to submit monthly reports detailing the sources and uses of 
milk and milk products so 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 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 established and administered by the Market 
Administrator.
    The producer-settlement fund ensures 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

[[Page 14162]]

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 expenses 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 are 
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 provides 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 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.

[[Page 14163]]

    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.

11. Ruling on Official Notice Documents

    In accordance with 7 CFR 900.8, USDA published a Request for Public 
Comments (82 FR 37827; published August 14, 2017) (request) inviting 
interested parties to submit comments on whether various documents were 
relevant to the material issues of this proceeding. Three public 
comments were received. All the commenters supported taking official 
notice of the documents listed in the request. Accordingly, official 
notice is taken of the documents listed in the notice (82 FR 37827).
    In addition to the documents referenced above, commenters 
highlighted the unintentional omission of 31 documents for 
consideration. Those documents are either previous Federal Register 
publications, USDA and CDFA publically available data, or previous AMS 
publications. As all of these documents are published government 
resources, the Department does not object to their inclusion in the 
hearing record. Three of the 31 documents were already contained in the 
list within the request, but two did not reflect the exact lines 
referenced in the requests for official notice. As a result, AMS is 
taking official notice of the 29 documents as listed below. A complete 
list of these documents, along with links and sources to access them, 
is available at www.ams.usda.gov/caorder.
    Agricultural Marketing Service (AMS) Data and Publications:
     AMS FMMO Reform Basic Formula Price Committee, Preliminary 
Report, April 1997;
     AMS FMMO Reform Classification Committee, Preliminary 
Report, November 1996;
     AMS FMMO Reform Identical Provisions Committee, 
Preliminary Report, November 1996;
     AMS FMMO Reform Price Structure Committee, Preliminary 
Report, November 1996; and
     AMS National Dairy Product Sales Reports National Average 
Survey Prices for Commodity Butter and Nonfat Dry Milk, January 2016-
July 2016
    California Department of Food and Agriculture (CDFA) Data and 
Publications:
     CDFA Commodity Butter Market Price Reports, January 2016-
July 2016;
     CDFA Nonfat Dry Milk Market Price Reports, January 2016-
July 2016;
    USDA Office of the Chief Economist Publication:
     North American Drought Monitor Map: April 2017, released 
May 12, 2017;
    Federal Register Publications:
     30 FR 13143, 13144 regarding milk in the Tampa Bay 
marketing area, October 1965;
     31 FR 7062, 7065 regarding a Puget Sound, Washington, 
market area expansion and amendments to producer-handler definition, 
May 1966;
     34 FR 960, 962 regarding milk in the Georgia marketing 
area, January 1969;
     46 FR 21944, 21950-21951 regarding milk in the 
Southwestern Idaho and Eastern Oregon marketing area, April 1981;
     47 FR 5214, 5125-5128 regarding milk in the Alabama-West 
Florida marketing area, February 1982;
     52 FR 38240 regarding Milk in the Chicago marketing area, 
October 1987;
     53 FR 49154, 49169-49170 regarding milk in the Oregon-
Washington and Puget Sound-Inland Empire marketing areas, December 
1988;
     54 FR 27179, 27182 regarding milk in the Texas and 
Southwest Plains marketing areas, June 1989;
     56 FR 42240, 42248 regarding milk in the Rio Grande Valley 
and Other Marketing Areas, August 1991;
     59 FR 12436, 12461-12462 regarding milk in the 
Minneapolis-St. Paul and Other Marketing Areas, March 1976;
     64 FR 16026-16169 regarding milk in the Northeast and 
Other Marketing Areas, April 1999;
     67 FR 67906, 67939 regarding Milk in the Northeast and 
Other Marketing Areas, November 2002;
     68 FR 37674, 37678 regarding Milk in the Upper Midwest 
Marketing Area, April 2004;
     69 FR 18834, 18838 regarding Milk in the Pacific Northwest 
Marketing Area, April 2004;
     69 FR 19292, 19298 regarding Milk in the Mideast Marketing 
Area, April 2004;
     69 FR 57233, 57238-57239 regarding Milk in the Northeast 
and Other Marketing Areas, September 2004;
     70 FR 4932, 4943 regarding Milk in the Northeast Marketing 
Area, January 2005;
     70 FR 74166, 74185-74186, 74188 regarding amendments to 
the Pacific Northwest and Arizona-Las Vegas Marketing Areas, December 
2005;
     71 FR 54152, 54157 regarding Milk in the Central Marketing 
Area, September 2006;
     75 FR 10122, 10151-1015 regarding Milk in the Northeast 
and Other Marketing Areas, March 2010; and
     79 FR 12963, 12976 regarding Milk in the Appalachian, 
Florida and Southeast Marketing Areas, March 2014.

12. Rulings on Proposed Findings, Conclusions, and Exceptions

    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, comments and exceptions, and the 
evidence in the record were considered in making the findings and 
conclusions set forth in this final decision. To the extent that the 
suggested findings and conclusions filed by interested parties are 
inconsistent with the findings and conclusions of this final 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 AMAA, 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

[[Page 14164]]

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

Marketing Agreement and Order

    The proposed order regulating the handling of milk in the 
California marketing area is recommended as the detailed and 
appropriate means by which the foregoing conclusions may be carried 
out. The proposed 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.

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

    It is hereby directed that a referendum be conducted and completed 
on or before the 45th day from the date this decision is published in 
the Federal Register, in accordance with the procedures for the conduct 
of referenda [7 CFR 900.300-311], to determine whether the issuance of 
the order regulating the handling of milk in the California marketing 
area is approved or favored by producers, as defined under the terms of 
the order, who during such representative period were engaged in the 
production of milk for sale within the aforesaid marketing area. The 
representative period for the conduct of such referenda is hereby 
determined to be May 2017.
    The agent of the Secretary of Agriculture to conduct such referenda 
is hereby designated to be the Director of Operations and 
Accountability, Dairy Program, AMS, USDA.

List of Subjects in 7 CFR Part 1051

    Milk marketing orders.

0
For the reasons stated in the preamble, 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.

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 of this chapter.


Sec.  1051.4  Plant.

    See Sec.  1000.4 of this chapter.


Sec.  1051.5  Distributing plant.

    See Sec.  1000.5 of this chapter.


Sec.  1051.6  Supply plant.

    See Sec.  1000.6 of this chapter.

[[Page 14165]]

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) of this chapter) and handlers described 
in Sec.  1000.9(c) of this chapter, including milk diverted pursuant to 
Sec.  1051.13 of this chapter, 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) of this 
chapter;
    (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 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) of this chapter 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 of this chapter:
    (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

[[Page 14166]]

milk. Subject to the following exclusions:
    (i) The plant is described in Sec.  1051.7(a), (b), or (e) of this 
chapter;
    (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) of this 
chapter; or
    (iv) A producer-handler described in Sec.  1051.10 of this chapter 
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) of this chapter 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) of this chapter;
    (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, 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 of this chapter.


Sec.  1051.9  Handler.

    See Sec.  1000.9 of this chapter.


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:

[[Page 14167]]

    (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 is designated as a producer-
handler to establish through records required pursuant to Sec.  1000.27 
of this chapter 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 of this chapter shall be 
subject to payments into the Order 1131 producer settlement fund on 
such dispositions pursuant to Sec.  1000.76(a) of this chapter 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) of this 
chapter.


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 of this chapter; 
or
    (2) Received by a handler described in Sec.  1000.9(c) of this 
chapter.
    (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) of this chapter;
    (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

[[Page 14168]]

handler described in Sec.  1000.9(c) of this chapter. 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) of this 
chapter 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) of this chapter 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) of this chapter may not exceed 90 percent of the producer 
milk receipts reported by the handler pursuant to Sec.  1051.30(c) of 
this chapter provided that not less than 10 percent of such receipts 
are delivered to plants described in Sec.  1051.7(c)(1)(i) through 
(iii) of this chapter. These percentages are subject to any adjustments 
that may be made pursuant to Sec.  1051.7(g) of this chapter; an
    (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) of this 
chapter may not exceed 90 percent of the Grade A milk received from 
dairy farmers (except dairy farmers described in Sec.  1051.12(b) of 
this chapter) including milk diverted pursuant to this section. These 
percentages are subject to any adjustments that may be made pursuant to 
Sec.  1051.7(g) of this chapter.
    (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) of this chapter 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) of this chapter. 
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 purpose of evading the provisions of this paragraph 
(f).


Sec.  1051.14   Other source milk.

    See Sec.  1000.14 of this chapter.


Sec.  1051.15   Fluid milk product.

    See Sec.  1000.15 of this chapter.


Sec.  1051.16   Fluid cream product.

    See Sec.  1000.16 of this chapter.


Sec.  1051.17   [Reserved]


Sec.  1051.18   Cooperative association.

    See Sec.  1000.18 of this chapter.


Sec.  1051.19   Commercial food processing establishment.

    See Sec.  1000.19 of this chapter.

Market Administrator, Continuing Obligations, and Handler 
Responsibilities


Sec.  1051.25   Market administrator.

    See Sec.  1000.25 of this chapter.


Sec.  1051.26   Continuity and separability of provisions.

    See Sec.  1000.26 of this chapter.


Sec.  1051.27   Handler responsibility for records and facilities.

    See Sec.  1000.27 of this chapter.


Sec.  1051.28   Termination of obligations.

    See Sec.  1000.28 of this chapter.

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) of this chapter; and
    (ii) Receipts of milk from handlers described in Sec.  1000.9(c) of 
this chapter;
    (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

[[Page 14169]]

skim milk in route disposition in the marketing area.
    (c) Each handler described in Sec.  1000.9(c) of this chapter 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 of this 
chapter and each handler described in Sec.  1000.9(c) of this chapter 
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) of this 
chapter.
    (b) Each handler operating a partially regulated distributing plant 
who elects to make payment pursuant to Sec.  1000.76(b) of this chapter 
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 of this chapter, 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 of this chapter.


Sec.  1051.41   [Reserved]


Sec.  1051.42   Classification of transfers and diversions.

    See Sec.  1000.42 of this chapter.


Sec.  1051.43   General classification rules.

    See Sec.  1000.43 of this chapter.


Sec.  1051.44   Classification of producer milk.

    See Sec.  1000.44 of this chapter.


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

    See Sec.  1000.45 of this chapter.

Class Prices


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

    See Sec.  1000.50 of this chapter.


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 of 
this chapter. The Class I price shall be the price computed pursuant to 
Sec.  1000.50(a) of this chapter for Los Angeles County, California.


Sec.  1051.52   Adjusted Class I differentials.

    See Sec.  1000.52 of this chapter.


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

    See Sec.  1000.53 of this chapter.


Sec.  1051.54   Equivalent price.

    See Sec.  1000.54 of this chapter.

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) of this chapter 
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) of this chapter, respectively, and the nonfat 
components of producer milk in each class shall be based upon 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) of this chapter 
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) of this chapter 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) of this chapter 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) of this chapter and the hundredweight of skim milk 
and butterfat subtracted from Class I pursuant to Sec.  
1000.44(a)(3)(i) through (vi) of this chapter 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) of this chapter 
and 1000.44(a)(3)(i) of this chapter 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

[[Page 14170]]

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) of this chapter.


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 of this chapter 
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 of this chapter for all handlers required to file reports 
prescribed in Sec.  1051.30 of this chapter;
    (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 of this chapter 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 of this chapter;
    (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) of this chapter; 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 of this chapter.


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 of this chapter). 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 of this chapter.
    (b) The sum of:
    (1) An amount obtained by multiplying the total hundredweight of 
producer milk as determined pursuant to Sec.  1000.44(c) of this 
chapter by the producer price differential as adjusted pursuant to 
Sec.  1051.75 of this chapter;
    (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) 
of this chapter by the producer price differential as adjusted pursuant 
to Sec.  1051.75 of this chapter 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 of this chapter), the market administrator 
shall pay to each handler the amount, if any, by which the amount 
computed pursuant to Sec.  1051.71(b) of this chapter 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 of this chapter) 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 of this chapter) 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 
of this chapter;
    (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;

[[Page 14171]]

    (vii) Less deductions for marketing services pursuant to Sec.  
1000.86 of this chapter; and
    (viii) Less deductions authorized by CDFA for the California Quota 
Program pursuant to Sec.  1051.11 of this chapter.
    (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 of this chapter), 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 of this 
chapter), 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) of this chapter, 
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) of this chapter 
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 of this chapter, 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) of this chapter as follows:
    (i) The hundredweight of producer milk received times the producer 
price differential as adjusted pursuant to Sec.  1051.75 of this 
chapter;
    (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 of this chapter 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 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) of this chapter, 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 of this chapter 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 of this chapter.


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

    See Sec.  1000.76 of this chapter.


Sec.  1051.77   Adjustment of accounts.

    See Sec.  1000.77 of this chapter.

[[Page 14172]]

Sec.  1051.78   Charges on overdue accounts.

    See Sec.  1000.78 of this chapter.

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 
of this chapter, 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) of this chapter that were delivered to pool plants of other 
handlers;
    (b) Receipts from a handler described in Sec.  1000.9(c) of this 
chapter;
    (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) of this chapter and other source 
milk allocated to Class I pursuant to Sec.  1000.44(a)(3) and (8) of 
this chapter 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) of this chapter; 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) of this chapter.


Sec.  1051.86   Deduction for marketing services.

    See Sec.  1000.86 of this chapter.

Subpart D--Miscellaneous Provisions


Sec.  1051.90   Dates.

    See Sec.  1000.90 of this chapter.

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

Marketing Agreement Regulating the Handling of Milk in the Proposed 
California Marketing Area

    The parties hereto, in order to effectuate the declared policy of 
the Act, and in accordance with the rules of practice and procedure 
effective thereunder (7 CFR part 900), desire to enter into this 
marketing agreement and do hereby agree that the provisions referred to 
in paragraph I hereof, as augmented by the provisions specified in 
paragraph II hereof, shall be and are the provisions of this marketing 
agreement as if set out in full herein.
    I. The findings and determinations, order relative to handling, and 
the provisions of Sec.  1051.1 to 1051.90 \47\ of this chapter all 
inclusive, of the order regulating the handling of milk in the proposed 
California \48\ marketing area (7 CFR part 1051 \49\); and
---------------------------------------------------------------------------

    \47\ First and last section of order.
    \48\ Name of order.
    \49\ Appropriate part number.
---------------------------------------------------------------------------

    II. The following provisions: Sec.  1051.91 \50\ of this chapter 
Record of milk handled and authorization to correct typographical 
errors.
---------------------------------------------------------------------------

    \50\ Next consecutive section number.
---------------------------------------------------------------------------

    (a) Record of milk handled. The undersigned certifies that he/she 
handled during the month of May 2017 \51\, ________hundredweight of 
milk covered by this marketing agreement.
---------------------------------------------------------------------------

    \51\ Appropriate representative period for the order.
---------------------------------------------------------------------------

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

    Signature

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

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

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

(Seal)

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

    Dated: March 23, 2018.
Bruce Summers,
Acting Administrator, Agricultural Marketing Service.
[FR Doc. 2018-06167 Filed 3-30-18; 8:45 am]
 BILLING CODE 3410-02-P