[Federal Register Volume 75, Number 42 (Thursday, March 4, 2010)]
[Proposed Rules]
[Pages 10122-10154]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-4046]



[[Page 10121]]

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Part IV





Department of Agriculture





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Agricultural Marketing Service



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7 CFR Parts 1000, 1001, 1005, et al.



Milk in the Northeast and Other Marketing Areas; Final Decision on 
Proposed Amendments to Tentative Marketing Agreements and Orders; 
Proposed Rule

Federal Register / Vol. 75, No. 42 / Thursday, March 4, 2010 / 
Proposed Rules

[[Page 10122]]


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DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Parts 1000, 1001, 1005, 1006, 1007, 1030, 1032, 1033, 1124, 
1126 and 1131

[Doc. No. AMS-DA-09-0007; AO-14-A78, et al.; DA-09-02]


Milk in the Northeast and Other Marketing Areas; Final Decision 
on Proposed Amendments to Tentative Marketing Agreements and Orders

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Proposed rule.

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SUMMARY: This decision proposes that the producer-handler definitions 
of all Federal milk marketing orders be amended to limit exemption from 
pooling and pricing provisions to those with total route disposition 
and sales of packaged fluid milk products to other plants of 3 million 
pounds or less per month. The exempt plant definition would continue to 
limit route disposition and sales of packaged fluid milk products to 
other plants to 150,000 pounds or less per month. This final decision 
is subject to producer approval by referendum.

FOR FURTHER INFORMATION CONTACT: Gino M. Tosi or Jack Rower, Senior 
Marketing Specialists, Order Formulation and Enforcement Branch, USDA/
AMS/Dairy Programs, Stop 0231-Room 2971, 1400 Independence Avenue, SW., 
Washington, DC 20250-0231, (202) 720-7183, e-mail addresses: 
<a href="/cdn-cgi/l/email-protection#f2959b9c9ddc869d819bb2939f81dc87819693dc959d84"><span class="__cf_email__" data-cfemail="c4a3adaaabeab0abb7ad84a5a9b7eab1b7a0a5eaa3abb2">[email protected]</span></a> and <a href="/cdn-cgi/l/email-protection#c4aea5a7afeab6abb3a1b684a5a9b7eab1b7a0a5eaa3abb2"><span class="__cf_email__" data-cfemail="d7bdb6b4bcf9a5b8a0b2a597b6baa4f9a2a4b3b6f9b0b8a1">[email protected]</span></a>.

SUPPLEMENTARY INFORMATION: This decision proposes that the producer-
handler provisions of all Federal milk marketing orders be amended to 
limit exemption from pooling and pricing to those with total route 
disposition and sales of packaged fluid milk products to other plants 
of 3 million pounds or less per month. The exempt plant definition 
would continue to limit route disposition and sales of packaged fluid 
milk products to other plants to 150,000 pounds or less per month.
    This administrative action is governed by the provisions of 
sections 556 and 557 of Title 5 of the United States Code and, 
therefore, is excluded from the requirements of Executive Order 12866.
    The amendments to the rules proposed herein have been reviewed 
under Executive Order 12988, Civil Justice Reform. They are not 
intended to have a retroactive effect. The Agricultural Marketing 
Agreement Act of 1937, as amended (7 U.S.C. 601-674) (AMAA), provides 
that administrative proceedings must be exhausted before parties may 
file suit in court. Under section 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.

Regulatory Flexibility Act and Paperwork Reduction Act

    In accordance with the Regulatory Flexibility Act (5 U.S.C. 601-
612), the Agricultural Marketing Service has considered the economic 
impact of this action on small entities and has certified that this 
proposed rule will not have a significant economic impact on a 
substantial number of small entities. For the purpose of the Regulatory 
Flexibility Act, a dairy farm is considered a ``small business'' if it 
has an annual gross revenue of less than $750,000, and a dairy products 
manufacturer is a ``small business'' if it has fewer than 500 
employees. For the purpose of determining which dairy farms are ``small 
businesses,'' the $750,000 per year criterion was used to establish a 
milk marketing guideline of 500,000 pounds per month. Although this 
guideline does not factor in additional monies that may be received by 
dairy producers, it should be an inclusive standard for most ``small'' 
dairy farms. For purposes of determining a handler's size, if the plant 
is part of a company operating multiple plants that collectively exceed 
the 500-employee limit, the plant will be considered a large business 
even if the local plant has fewer than 500 employees.
    Producer-handlers are dairy farms that process their own milk 
production. These entities must operate one or more dairy farms as a 
pre-condition to operating processing plants as producer-handlers. The 
size of the dairy farm(s) determines the production level of the 
operation and is a controlling factor in the capacity of the processing 
plant and possible sales volume associated with the producer-handler 
entity. Determining whether a producer-handler is considered a small or 
large business is therefore dependent on the capacity of its dairy 
farm(s), where a producer-handler with annual gross revenue in excess 
of $750,000 is considered a large business.
    The proposed amendments would obligate some large producer-handlers 
under the Federal milk marketing order system to the same terms as 
other fully regulated handlers of their respective orders provided they 
meet the criteria for qualification as fully regulated plants. Entities 
currently defined as producer-handlers under the terms of their order 
will be subject to the pooling and pricing provisions of the order if 
their total route disposition and sales of packaged fluid milk products 
to other plants is more than 3 million pounds per month.
    Producer-handlers with total route disposition and sales of 
packaged fluid milk products to other plants of 3 million pounds or 
less during the month will not be subject to the pooling and pricing 
provisions of any order as a result of this rulemaking. To the extent 
that current producer-handlers have route disposition and sales of 
packaged fluid milk products to other plants outside of the order's 
marketing areas, such route disposition and sales of packaged fluid 
milk products to other plants will be subject to the pooling and 
pricing provisions of the orders if such measure causes them to become 
fully regulated.
    If current producer-handlers have total route disposition and sales 
of packaged fluid milk products to other plants of more than 3 million 
pounds during a month, such producer-handlers will be regulated under 
the pooling and pricing provisions of the orders like other fully 
regulated handlers. Such large producer-handlers will account to the 
pool for their uses of milk at the applicable minimum class prices and 
pay the difference between their use-value of milk and the blend price 
of the order to that order's producer-settlement fund.
    While this may cause an economic impact on those entities with more 
than three million pounds of total monthly sales that are currently 
considered producer-handlers under the Federal order system, the impact 
is offset by the benefit to other small businesses. With respect to 
dairy farms whose milk is pooled on Federal marketing orders, such 
dairy farms who have not heretofore shared in the additional revenue 
that accrues from the marketwide pooling of Class I sales by producer-
handlers will share in such revenue. All producer-handlers who dispose 
of more than 3 million pounds

[[Page 10123]]

of fluid milk, including sales of packaged fluid milk products to other 
plants per month will account to all market participants at the 
announced Federal order Class I price for such use.
    To the extent that some large producer-handlers become subject to 
the pooling and pricing provisions of Federal milk marketing orders, 
such will be determined in their capacity as handlers. Such entities 
will no longer have restrictions applicable to their business 
operations that were conditions for producer-handler status and 
exemption from the pooling and pricing provisions of the orders. In 
general, this includes being able to buy or acquire any quantity of 
milk from dairy farmers or other handlers instead of being limited by 
the current constraints of the orders. Additionally, the burden of 
balancing their milk production is relieved. Milk production in excess 
of what is needed to satisfy their Class I route disposition and sales 
of packaged fluid milk products to other plants may receive the minimum 
price protection established under the terms of the Federal milk 
marketing orders. The burden of balancing milk supplies will be borne 
by all producers who are pooled and handlers who are regulated under 
the terms of the orders.
    During May 2009 the Northeast order had 57 pool distributing 
plants, 10 pool supply plants, 16 partially regulated distributing 
plants, 13 producer-handler plants and 40 exempt plants. Of the 83 
regulated plants, 49 plants or 59 percent were considered large 
businesses. Of the 13,050 dairy farmers whose milk was pooled on the 
order, 628 farms or 5 percent were considered large businesses and 
12,422 farms or 95 percent of dairy farms in the Northeast order were 
considered small businesses. Most of these dairy farms, large and 
small, could benefit by receiving a higher blend price, if the 
recommended 3-million pound monthly Class I route disposition 
limitation for producer-handlers is adopted.
    During May 2009, the Appalachian order had 21 pool distributing 
plants, 1 pool supply plant, 2 partially regulated distributing plants, 
1 producer-handler plant and 4 exempt plants. Of the 24 regulated 
plants, 21 plants or 88 percent were considered large businesses. Of 
the 2,516 dairy farmers whose milk was pooled on the order, 159 farms 
or 6 percent were considered large businesses and 2,357 farms or 94 
percent of dairy farms in the Appalachian order were considered small 
businesses. Most of these dairy farms, large and small, could benefit 
by receiving a higher blend price, if the recommended 3-million pound 
monthly Class I route disposition limitation for producer-handlers is 
adopted.
    During May 2009, the Florida order had 11 pool distributing plants, 
5 partially regulated distributing plants and 2 exempt plants. The 
order had no pool supply plants or producer-handler plants as of May 
2009. Of the 16 regulated plants, 12 plants or 75 percent were 
considered large businesses. Of the 249 dairy farmers whose milk was 
pooled on the order, 105 farms or 42 percent were considered large 
businesses and 144 farms or 58 percent of dairy farms in the Florida 
order were considered small businesses. Most of these dairy farms, 
large and small, could benefit by receiving a higher blend price, if 
the recommended 3-million pound monthly Class I route disposition 
limitation for producer-handlers is adopted.
    During May 2009, the Southeast order had 22 pool distributing 
plants, 3 pool supply plants, 6 partially regulated distributing plants 
and 12 exempt plants. The order had no producer-handler plants as of 
May 2009. Of the 31 regulated plants, 28 plants or 90 percent were 
considered large businesses. Of the 2,992 dairy farmers whose milk was 
pooled on the order, 187 farms or 6 percent were considered large 
businesses and 2,805 farms or 94 percent of dairy farms in the 
Southeast order were considered small businesses. Most of these dairy 
farms, large and small, could benefit by receiving a higher blend 
price, if the recommended 3-million pound monthly Class I route 
disposition limitation for producer-handlers is adopted.
    During May 2009, the Upper Midwest order had 24 pool distributing 
plants, 53 pool supply plants, 2 partially regulated distributing 
plants, 5 producer-handler plants and 11 exempt plants. Of the 79 
regulated plants, 37 plants or 47 percent were considered large 
businesses. Of the 15,336 dairy farmers whose milk was pooled on the 
order, 1,001 farms or 7 percent were considered large businesses and 
14,335 farms or 93 percent of dairy farms in the Upper Midwest order 
were considered small businesses. Most of these dairy farms, large and 
small, could benefit by receiving a higher blend price, if the 
recommended 3-million pound monthly Class I route disposition 
limitation for producer-handlers is adopted.
    During May 2009, the Central order had 30 pool distributing plants, 
12 pool supply plants, 1 partially regulated distributing plant, 7 
producer-handler plants and 19 exempt plants. Of the 43 regulated 
plants, 35 plants or 81 percent were considered large businesses. Of 
the 3,600 dairy farmers whose milk was pooled on the order, 413 farms 
or 11 percent were considered large businesses and 3,187 farms or 89 
percent of dairy farms in the Central order were considered small 
businesses. Most of these dairy farms, large and small, could benefit 
by receiving a higher blend price, if the recommended 3-million pound 
monthly Class I route disposition limitation for producer-handlers is 
adopted.
    During May 2009, the Mideast order had 22 pool distributing plants, 
2 pool supply plants, 4 partially regulated distributing plants, 1 
producer-handler plant and 17 exempt plants. Of the 28 regulated 
plants, 8 plants or 29 percent were considered large businesses. Of the 
7,238 dairy farmers whose milk was pooled on the order, 504 farms or 7 
percent were considered large businesses and 6,734 farms or 93 percent 
of dairy farms in the Mideast order were considered small businesses. 
Most of these dairy farms, large and small, could benefit by receiving 
a higher blend price, if the recommended 3-million pound monthly Class 
I route disposition limitation for producer-handlers is adopted.
    During May 2009, the Pacific Northwest order had 15 pool 
distributing plants, 8 pool supply plants, 13 partially regulated 
distributing plants, 5 producer-handler plants and 2 exempt plants. Of 
the 36 regulated plants, 20 plants or 56 percent were considered large 
business. Of the 657 dairy farmers whose milk was pooled on the order, 
326 farms or 50 percent were considered large businesses. Because the 
Pacific Northwest order already fully regulates producer-handlers with 
monthly route distribution in excess of three million pounds per month, 
the proposed action will have a minimal effect on small farmers whose 
milk is pooled on the order.
    During May 2009, the Southwest order had 19 pool distributing 
plants, 2 pool supply plants, 1 partially regulated distributing plant, 
5 producer-handler plants and 2 exempt plants. Of the 79 regulated 
plants, 19 plants or 24 percent were considered large businesses. Of 
the 588 dairy farmers whose milk was pooled on the order, 318 farms or 
54 percent were considered large businesses and 270 farms or 46 percent 
of dairy farms in the Southeast order were considered small businesses. 
Most of these dairy farms, large and small, could benefit by receiving 
a higher blend price, if the recommended 3-million pound monthly Class 
I route disposition limitation for producer-handlers is adopted.

[[Page 10124]]

    During May 2009, the Arizona order had 5 pool distributing plants, 
1 pool supply plant, 15 partially regulated distributing plants and 1 
exempt plant. The order had no producer-handler plants as of May 2009. 
Of the 21 regulated plants, 13 plants or 62 percent were considered 
large businesses. Of the 100 dairy farmers whose milk was pooled on the 
order, 95 farms or 95 percent were considered large businesses. Because 
the Arizona order already fully regulates producer-handlers with 
monthly route distribution in excess of 3 million pounds, the proposed 
action will have a minimal effect on small farmers whose milk is pooled 
on the order.
    As of May 2009, in their capacity as producers, 15 producer-
handlers would be considered large producers as their annual marketings 
exceed 6 million pounds of milk (500,000 pounds per month). During the 
same month, 22 producer-handlers would be considered small producers. 
Record evidence indicates that as of March 2009, seven large producer-
handlers had total route sales of two million pounds or more per month. 
Therefore, seven or fewer large producer-handlers could potentially 
become subject to the pooling and pricing provisions of Federal milk 
marketing orders because of route disposition of more than three 
million pounds per month.
    A review of reporting requirements was completed under the 
Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35). It was 
determined that these proposed amendments would have minimal impact on 
reporting, recordkeeping, or other compliance requirements for entities 
currently considered producer-handlers under Federal milk marketing 
orders because they would remain identical to the current requirements 
applicable to all other regulated handlers who are subject to the 
pooling and pricing provisions. No new forms are proposed and no 
additional reporting requirements would be necessary.
    This notice does not require additional information collection that 
requires clearance by the Office of Management and Budget (OMB) beyond 
currently approved information collection. The primary sources of data 
used to complete the forms are routinely used in most business 
transactions. Forms require only a minimal amount of information that 
can be supplied without data processing equipment or a trained 
statistical staff. Thus, the information collection and reporting 
burden is relatively small. Requiring the same reports for all handlers 
does not significantly disadvantage any handler that is smaller than 
the industry average.
    Interested parties are invited to submit comments on the probable 
regulatory and informational impact of this proposed rule on small 
entities.

Prior Documents in This Proceeding

    Notice of Hearing: Issued April 3, 2009; published April 9, 2009 
(74 FR 16296).
    Recommended Decision: Issued October 15, 2009; published October 
21, 2009 (74 FR 54383).

Preliminary Statement

    Notice is hereby given of the filing with the Hearing Clerk of this 
final decision with respect to proposed amendments to the tentative 
marketing agreement and the order regulating the handling of milk in 
the Northeast and all other marketing areas. This notice is issued 
pursuant to the provisions of the AMAA and the applicable rules of 
practice and procedure governing the formulation of marketing 
agreements and marketing orders (7 CFR part 900).
    A public hearing was held upon proposed amendments to the marketing 
agreements and the orders regulating the handling of milk in all 
Federal milk marketing orders. The hearing was held pursuant to the 
provisions of the AMAA, as amended (7 U.S.C. 601-674), and the 
applicable rules of practice and procedure governing the formulation of 
marketing agreements and marketing orders (7 CFR part 900).
    The proposed amendments set forth below are based on the record of 
a public hearing held in Cincinnati, Ohio, on May 4-20, 2009, pursuant 
to a notice of hearing published April 9, 2009 (74 FR 16295); and a 
recommended decision published October 21, 2009 (74 FR 54383).
    The material issues on the record of hearing relate to:
    1. Producer-handler and exempt plant definitions in all Federal 
milk marketing orders.

Findings and Conclusions

    All orders should be amended to limit producer-handlers to total 
Class I route disposition and packaged sales of fluid milk products to 
other plants to not more than 3 million pounds per month as a condition 
for exemption from pooling and pricing provisions. The exempt plant 
definition of all orders continues to limit disposition of Class I milk 
products, including sales of packaged fluid milk products to other 
plants to 150,000 pounds or less per month.

The Regulatory Status of Producer-Handlers

    Currently, several orders define and describe a special category of 
handler known as producer-handler. Under the Pacific Northwest and 
Arizona orders (Orders 124 and 131, respectively) producer-handlers are 
subject to provisions that limit Class I route disposition to 3 million 
pounds or less per month within the respective marketing areas. The 
other 8 orders have no similar route disposition limit. The 3 
southeastern orders (Orders 5, 6 and 7) do not allow producer-handlers 
to purchase supplemental milk while the remaining 5 orders provide 
producer-handlers the opportunity to purchase limited amounts. With 
noted exceptions, the producer-handler definitions of all Federal milk 
marketing orders exempt producer-handlers from the pooling and pricing 
provisions.
    As a result of their exemption from pooling and pricing, producer-
handlers, as handlers, are not required to pay the minimum class prices 
established under the orders nor are they, as producers, granted 
minimum price protection for disposal of 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. As such, producer-handlers retain the full 
value of milk processed and disposed of as fluid milk products by their 
operation within the marketing areas.
    Entities defined as 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 to the Market 
Administrator to ensure compliance with the requirements for their 
regulatory status as producer-handlers. In this sense, producer-
handlers are regulated under the orders but are not ``fully regulated'' 
as are other handlers who are subject to an order's pooling and pricing 
provisions.

The Regulatory Status of Exempt Plants

    The current exempt plant definition was implemented in January 2000 
and is uniform across all orders. Exempt

[[Page 10125]]

plants are not subject to full regulation on the basis of size. At or 
below the monthly Class I disposition threshold, including sales of 
packaged fluid milk products to other plants for exempt plants, these 
entities do not impact competitive relationships among handlers in the 
market such that full regulation is warranted. Exempt plants may 
operate solely as processing operations or may have the structure of 
producer-handlers. Operational structure is irrelevant insomuch as 
qualification for exempt plant status is based solely upon Class I 
sales volume. Exempt plants are required to occasionally submit reports 
and information to the Market Administrator to ensure compliance with 
the exempt plant definition.

Summary of Testimony

Overview of Proposals

    This proceeding was held in response to two proposals jointly 
submitted by the National Milk Producers Federation (NMPF) and the 
International Dairy Foods Association (IDFA). These proposals, marked 
as Proposals 1 and 2 would: (1) Eliminate the producer-handler 
provision from all Federal milk orders; (2) Increase the exempt plant 
monthly limit on disposition of fluid milk products from 150,000 to 
450,000 pounds; and (3) Require unique labeling for fluid milk products 
distributed by exempt plants.
    This proceeding also considered 17 alternative proposals received 
in response to the initial proposals. These proposals suggested a range 
of amendments to the producer-handler, exempt plant and pooling 
provisions.
    The following summary of evidence presented during the proceeding 
is organized as follows:
    1. Elimination of the producer-handler provisions and amendment of 
the exempt plant definition to include an increased limit on monthly 
Class I disposition.
    2. Elimination of the producer-handler provisions and adoption of 
grandfathering.
    3. Adoption of producer-handler provisions to include a limit on 
monthly Class I disposition.
    4. Exemption of vertically integrated operations with retail and 
home delivery distribution.
    5. Exemption of own-farm milk.
    6. Establishment of individual handler pools.

Elimination of the Producer-Handler Provisions and Amendment of the 
Exempt Plant Definition to Include an Increased Limit on Monthly Class 
I Disposition

    Proposed by NMPF and IDFA, proposals published in the hearing 
notice as Proposal 1 and Proposal 2, seek to simultaneously eliminate 
the producer-handler definition from all Federal milk orders and 
increase the monthly Class I route disposition limit from the current 
150,000 pounds to 450,000 pounds and require unique labeling for fluid 
milk products distributed by exempt plants. Proposals published in the 
hearing notice as 19 and 22 reiterated the positions contained in 
Proposals 1 and 2.
    Representative members and supporters of NMPF including dairy 
farmer members, employees and representatives of Dairy Farmers of 
America (DFA), Mid-West Dairymen's Company (Mid-west), Lakeshore 
Federated Dairy Cooperative (Lakeshore), Michigan Milk Producers 
Association (MMPA), Prairie Farms Dairy (Prairie Farms), Maryland & 
Virginia Milk Producers Cooperative Association, Inc. (MD&VA), United 
Dairymen of Arizona (UDA), Northwest Dairy Association-Darigold (NDA-
Darigold), and St. Albans Cooperative Creamery, Inc. (St. Albans) 
supported either the elimination of the producer-handler provisions or 
an increase in the exempt plant Class I route disposition limit, or 
both during the hearing.
    A representative of NMPF testified in support of Proposals 1 and 2. 
NMPF is a trade association that represents 31 dairy farmer 
cooperatives. The witness was of the opinion that the exemption for 
producer-handlers was originally based upon the assumption that 
producer-handlers have limited sales of fluid milk products and little 
influence in the market. Using USDA data, the NMPF witness demonstrated 
that producer-handlers have a growing share of fluid milk sales in the 
markets that do not restrict the Class I disposition of producer-
handlers. Given that some producer-handlers now sell large volumes of 
fluid milk products and significantly impact the market, larger 
producer-handlers should not be exempt from pooling and pricing, the 
witness asserted.
    According to the NMPF witness, large producer-handlers have a 
regulatory advantage associated with the price at which they acquire 
milk for processing and the sales revenues they retain because of the 
exemption they enjoy. Specifically, the witness testified that 
producer-handlers are essentially able to acquire their milk at the 
uniform price rather than the Class I price and as a result, enjoy a 
cost advantage over fully regulated handlers in procuring milk. The 
witness asserted that the uniform price is effectively the market price 
for producer milk and as such, the appropriate transfer price (the 
price at which producer-handlers transfer their internal milk supply to 
their plant) for analysis of the regulatory impact of producer-
handlers. Additionally, producer-handlers' exemption from payment into 
the producer-settlement fund deprives Federal order pools of money that 
would otherwise be distributed among producers, the witness stated. 
Producer-handlers, the witness asserted, encounter the same costs from 
cow to bottle as other enterprises but are exempt from pool payment.
    The NMPF witness testified that the potential exists for large 
dairy farms to become large producer-handlers. A more than 100 percent 
increase in dairy farms with more than 2,000 cows from 1998 to 2007 has 
occurred, the witness stated, noting that the monthly milk production 
of a 2,000-cow dairy is nearly 4 million pounds. Collectively, farms at 
this level of production, upon conversion to producer-handler status, 
could capture a large share of the Class I sales in an individual 
market, or nationally, the witness asserted. The witness testified that 
both dairy farms and handler operations are threatened by the potential 
for large farms to become producer-handlers. According to the witness, 
producer-handlers are already disruptive in most Federal order 
marketing areas and particularly in the Central order (Order 32) 
marketing area. The witness acknowledged that producer-handlers are not 
currently disruptive in all orders but asserted that the preemptive 
adoption of some uniform standards regarding producer-handler 
operations is necessary.
    The NMPF witness explained that Proposal 2, seeking an increase in 
the exempt plant limit on monthly Class I disposition from 150,000 to 
450,000 pounds, is based in part on a three-fold increase in milk 
production at the farm-level since the time when the current exempt 
plant limit was set. The witness testified that plants with less than 
450,000 pounds of route distribution per month have trouble competing 
with larger plants on a cost basis even when exempt from full 
regulation because the milk procurement price advantage is outweighed 
by higher processing costs. The witness also testified that farm size 
and economies-of-scale should be considered in setting an exempt plant 
limit, citing evidence of cost

[[Page 10126]]

disadvantages for producer-handlers with less than 500,000 pounds of 
monthly production.
    The NMPF witness testified that the unique labeling provision of 
Proposal 2 is designed to prevent milk buyers from exploiting exempt 
plants' price advantage through the purchase of a large supply of 
identically labeled milk at prices lower than those of other, fully 
regulated plants. Additionally, the witness testified that NMPF intends 
the 450,000-pound monthly limit on Class I disposition for exempt 
plants to apply to total sales rather than sales in a single market. 
According to the witness, Proposals 1 and 2 in combination would allow 
all but the largest producer-handlers to retain an exemption from 
pooling and pricing while newly exempting an additional 30 to 35 
regulated or partially regulated plants. Furthermore, the witness 
asserted, adoption of Proposals 1 and 2 would establish more equitable 
rules for dairy farmers whose milk is pooled and priced under the terms 
of Federal milk orders.
    A panel of three dairy farmer members of DFA, a separate witness 
representing DFA, and a witness representing both Mid-West and 
Lakeshore testified separately in support of Proposals 1 and 2. The DFA 
dairy farmer panelists own and operate separate farms in Wisconsin, 
Texas and Kentucky. DFA is a Capper-Volstead cooperative of 
approximately 10,500 farms that produce milk in 49 States. Mid-West is 
a Capper-Volstead cooperative representing 163 dairy farms. Lakeshore 
is comprised of Manitowoc Milk Producers Cooperative, Milwaukee 
Cooperative Milk Producers, Mid-West and Scenic Central Milk Producers 
Cooperative. Mid-West and Lakeshore are located primarily in Illinois 
and Wisconsin.
    Both the DFA dairy farmer panel and the Mid-West-Lakeshore witness 
testified that the producer-handler exemption reduces revenues for all 
dairy farmers whose milk is pooled on Federal orders. The DFA witness 
and the Mid-West-Lakeshore witness asserted that producer-handlers also 
disadvantage fully regulated handlers. Specifically, the DFA witness 
and the Mid-West-Lakeshore witness explained that producer-handlers 
retain the difference between the minimum Class I price and the 
statistical uniform price while fully regulated handlers that are 
similarly situated are required to account for milk at minimum class 
prices and pay into the producer-settlement fund. The Mid-West-
Lakeshore witness added some dairy cooperatives that own and operate 
fluid milk plants have assumed the same risk as producer-handlers 
without enjoying the ability producer-handlers have, because of their 
exemption, to balance surplus production by adjusting packaged milk 
prices relative to production volume. The Mid-West-Lakeshore witness 
asserted that a producer-handler in the Upper Midwest (Order 30) 
marketing area, for example, has a $0.14 per gallon ``advantage,'' on 
average, over fully regulated handlers due to its pool exemption. 
Similarly, the DFA witness testified that since a producer-handler in 
Order 32 began supplying a regional grocer about a year ago, its milk 
has consistently been the lowest priced brand. In some of the markets 
where DFA markets milk, price concessions, including premium discounts, 
have been needed to meet competition from producer-handlers, and some 
of DFA's processor-customers have expressed concern that producer-
handlers are marketing milk at such low prices that it is difficult to 
compete, the DFA witness stated.
    The DFA dairy farmer panel stated that if fully regulated 
processing plants were closed due to unfair producer-handler 
competition, outlets for milk would become fewer and located further 
away from producers, which would result in higher hauling costs. 
Ultimately, the DFA dairy farmer panel was of the opinion that the 
integrity of the order system would be undermined, and the future of 
dairy farmers jeopardized, if the producer-handler provisions were 
allowed to remain. The Mid-West-Lakeshore witness echoed this position, 
noting that while Mid-West and Lakeshore do not currently compete with 
any producer-handlers, a large farm under construction near a Mid-West 
plant was identified as a potential producer-handler whose operations 
could lower the revenues of Lakeshore dairy farmers. The DFA witness 
provided data on the number of ``larger'' dairy farms across the 
country, estimating the potential negative impacts on producer minimum 
blend prices if these farms were to become producer-handlers. 
Accordingly, the DFA witness asserted that Proposals 1 and 2, if 
adopted, would add stability to the order system, and assure regulated 
handlers that their competitors pay the same minimum prices.
    The DFA witness testified that many producer-handlers have 
maintained their businesses within the 150,000-pound per month exempt 
plant limit on Class I disposition and the proposal to triple this size 
limit for the exempt plant provision would allow a reasonable expansion 
path for many of these operations. Furthermore, the DFA dairy farmer 
panel and the DFA witness asserted that a 450,000-pound per month limit 
would provide a majority of dairy farmers the opportunity to try on-
farm processing and marketing, and if an operation is successful enough 
to grow the business beyond this level it would become fully regulated. 
The DFA witness also testified that the unique labeling component of 
Proposal 2 is essential because without it an incentive would exist for 
an integrator to ``daisy-chain'' a group of plants to process and 
package under the same label for the same customer. The DFA witness 
agreed with the position of NMPF and IDFA that the unique labeling 
provision would still allow for bottling under multiple labels as long 
as the labels were not shared across processors.
    Witnesses representing MMPA, Prairie Farms and MD&VA testified 
separately in support of Proposals 1 and 2. MMPA is Capper-Volstead 
cooperative in Michigan. Prairie Farms is a Capper-Volstead 
cooperative, based in Illinois, operating 35 fluid milk and dairy 
product processing plants, 26 of which are regulated under 5 Federal 
orders. MD&VA is a Capper-Volstead cooperative with more than 1,500 
members, marketing member and non-member milk in 3 Federal orders in 
the Mid-Atlantic and Southeast. MD&VA owns and operates three fully 
regulated fluid milk plants, one balancing plant and has a majority 
interest in a second balancing plant.
    The MMPA, Prairie Farms and MD&VA witnesses provided testimony that 
was largely in agreement with the testimony of the DFA dairy farmer 
panel, and the DFA and Mid-West-Lakeshore witnesses. The MMPA witness 
testified specifically to the increased average size of Michigan dairy 
farms and the possibility that these larger dairy farms may become 
producer-handlers. The Prairie Farms witness joined in this concern, 
stating that while there are currently only a few ``large'' producer-
handlers in operation across the country, the potential for new ones 
exists. Similarly, the MD&VA witness asserted that despite the 
relatively small number of producer-handlers in the Appalachian and 
Southeast (Orders 5 and 7) marketing areas, the potential for growth in 
producer-handler numbers still exists. The MD&VA witness explained that 
the combined growth of large farms and discontinuation of smaller farm 
operations has created the potential for construction of bottling 
plants on large farms. Additionally, the MD&VA witness testified that 
the Appalachian and Southeast marketing areas, as deficit markets that 
source out-of-area

[[Page 10127]]

milk, face the possibility of large farms located outside of the 
marketing areas obtaining producer-handler status and gaining 
advantages over fully regulated handlers who consistently supply the 
two markets. The MD&VA witness was of the opinion that producer-
handlers should pay the same minimum prices as MD&VA's customers.
    The Prairie Farms witness testified that as a fully regulated 
handler, Prairie Farms can compete with any other fully regulated 
handler but not with a producer-handler that has an unfair advantage 
owed to its exemption from full regulation. The MD&VA witness stated 
that MD&VA is billed on a monthly basis because of its pool obligation 
while producer-handlers are exempt, the MD&VA witness stated. Producer-
handlers' exemption from pool payment is equivalent to a price 
advantage of $0.23 per gallon in the areas in which MD&VA markets milk, 
according to the MD&VA witness.
    The Prairie Farms witness testified that adoption of Proposals 1 
and 2 would not harm those that want to process, package and sell own-
farm milk. Rather, the proposed changes recognize that when a handler 
reaches a certain size, the size of that operation could negatively 
impact fully regulated handlers and producers alike. Similarly, the 
MD&VA witness noted that the adoption of the NMPF proposals would 
provide protection to the pool which is necessary because marketwide 
pooling is the only way all producers and cooperatives share in the 
higher value associated with Class I products.
    The MMPA witness also testified that an increase in the exempt 
plant Class I route disposition limit to 450,000 pounds per month would 
allow relatively small processors to meet the needs of niche markets 
without causing disorder, and increase overall consumer demand for 
dairy products and encourage the development of new dairy products.
    A dairy farmer witness representing UDA testified in support of 
Proposals 1 and 2. UDA is the only Capper-Volstead cooperative in the 
State of Arizona. The witness testified in support of Proposal 1 as a 
preventative measure, and noted that producers in the Arizona (Order 
131) marketing area have realized higher blend prices since a cap was 
placed on producer-handler Class I dispositions in a prior rulemaking. 
The UDA witness stated that plants with 450,000 pounds or less of 
monthly Class I disposition serve small niche markets, are not 
disruptive and should not be subject to full regulation.
    A witness representing NDA and Darigold testified in support of 
Proposals 1 and 2. NDA is a Capper-Volstead cooperative comprised of 
530 producers located in Washington, Oregon, Idaho, Utah, and 
California. NDA and Darigold Inc., wholly owned by NDA, own and operate 
bottling plants and manufacturing plants in the Pacific Northwest 
(Order 124) marketing area and Idaho.
    The NDA-Darigold witness testified that the buyers in the region 
where NDA and Darigold operate are sophisticated and price conscious. 
Drawing from conversations with milk buyers, the witness illustrated 
that when buyers are presented the opportunity to buy Class I milk at a 
lower price, ruinous competition between fully regulated and 
unregulated handlers develops. The witness went on to explain that the 
combination of a buyer's desire for lower prices and the occurrence of 
similarly situated handlers competing on an uneven playing field 
creates disorderly marketing conditions within the market which drive 
prices below commercially reasonable levels.
    The NDA-Darigold witness stated that the disorderly marketing and 
unfair competition that led to the changes in Orders 124 and 131 no 
longer exist since the implementation of the 3-million-pound limit on 
monthly Class I disposition in the marketing areas. The witness also 
noted that producers now receive a slightly higher blend price and 
three of the producer-handler operations affected by the rulemaking 
continue to operate.
    The NDA-Darigold witness testified that handlers with 450,000 
pounds or less of Class I sales per month should be treated uniformly 
under the exempt plant provision. The witness asserted that this 
proposed change closely reflects the AMAA's intent that regulation 
should apply equally to all handlers. The witness offered that aside 
from grandfathering certain current producer-handlers, the exempt plant 
provision should be the only basis for exemption from pooling and 
pricing in the future.
    A witness appeared on behalf of St. Albans in support of Proposals 
1 and 2. St. Albans is a dairy Capper-Volstead cooperative based in 
Vermont that processes and markets milk pooled on the Northeast order 
(Order 1). The witness testified that the Northeast order has more 
producer-handlers and exempt plants than any other order. Relying on 
the Order 1 Annual Statistical Bulletin for 2008, the witness stated 
that the Class I sales from 15 producer-handlers and 46 exempt plants 
are not included in the marketwide pool. The witness was of the opinion 
that most of the exempt plants are also producer-handlers.
    The St. Albans witness testified that large producer-handlers 
impact Federal order pools and a producer-handler located outside the 
Northeast marking area marketed milk into that area during every month 
of 2008 in direct competition with fully regulated plants supplied by 
local producers. The witness asserted that while St. Albans currently 
faces no competition from producer-handlers located in the Northeast 
marketing area, the location of the producer-handler is irrelevant 
since milk shipped from outside the order competes with local 
production. As such, the witness stated that the rapid growth in volume 
of producer-handler milk sales represents a potential market 
disruption.
    The following handler members and other supporters of IDFA 
including the Northeast Dairy Foods Association (NDFA), Worcester 
Creameries (Worcester), Elmhurst Dairy (Elmhurst), Mountainside Farms 
(Mountainside), Steuben Foods (Steuben), Harrisburg Dairies 
(Harrisburg), the Pennsylvania Association of Milk Dealers (PAMD), 
Anderson Erickson Dairy (AE), Price's Creameries (Price's), and Bareman 
Dairy (Baremen) testified in support of either the elimination of the 
producer-handler provisions or the increase of the exempt plant limit 
on Class I route disposition, or both.
    A witness appeared on behalf of IDFA in support of Proposals 1 and 
2. According to the witness, IDFA is a trade association representing 
manufacturers, marketers, distributors and suppliers of fluid milk and 
related products including ice cream, frozen dairy desserts and cheese. 
The witness noted that most of the milk purchased and processed by IDFA 
members is regulated under the Federal order system.
    The IDFA witness testified that the elimination of the producer-
handler provisions is necessary for a number of reasons, all of which 
give rise to disorderly marketing. According to the witness, exemption 
from pooling and pricing allows producer-handlers to, in effect, pay 
the uniform price rather than the Class I price for own-farm milk. As a 
result, producer-handlers have a milk acquisition cost advantage over 
fully regulated plants, solely on the basis of a regulatory exemption, 
the witness stated. The witness asserted that disorderly marketing 
conditions arise when some but not all handlers are subject to payment 
of the Class I minimum price. According to the witness, handlers not 
subject to full regulation can use their artificial cost

[[Page 10128]]

advantage to offer customers a lower price than can be offered by a 
fully regulated handler.
    The IDFA witness also asserted that the need for the elimination of 
the producer-handler exemption stems from significant structural 
changes which have occurred at all levels of the dairy industry. The 
witness explained that in 1998 only 235 farms reportedly had more than 
2,000 cows and by 2008 that number had increased to 730 and accounted 
for 30.5 percent of all U.S. milk production. Providing additional 
perspective, the witness noted that farms with more than 500 milk cows 
accounted for 58.5 percent of U.S. milk production in 2008. Cows in the 
top 5 milk producing States now produce on average, 23,000 pounds of 
milk per year, the witness stated. The witness illustrated that a 500-
cow farm in these States could have monthly production of, on average, 
nearly 1 million pounds. Additionally, the witness explained that a 
2,000-cow herd with the same average would be expected to produce 
nearly 46 million pounds annually, or 4 million pounds monthly. The 
witness was of the opinion that large farms, with milk production 
levels never contemplated when producer-handlers first became exempt 
from pooling and pricing, are present in the marketplace today.
    With regard to Proposal 2, the IDFA witness asserted that IDFA and 
NMPF jointly support an increase of the limit on Class I disposition 
for exempt plants. The witness further explained that an increase in 
the exempt plant limit is intended to preserve regulatory exemption for 
those plants too small to cause material market disruption, including 
those small plants previously exempted as producer-handlers. The 
current 150,000 pounds per month threshold was adopted in all Federal 
orders as part of Federal order reform as it was the highest volume 
threshold in existence at the time, the witness noted. Furthermore, the 
witness asserted that since 1990, the time period for which data was 
available when the exempt plant provision was adopted, the average 
volume of fluid milk products produced by U.S. fluid milk bottling 
plants operated by commercial processors has roughly doubled, from 93.9 
million pounds annually in 1990 to 189.8 million pounds in 2007. The 
witness noted that while the data might suggest a doubling of the 
threshold, the overall upward trend clearly shows that average fluid 
milk bottling plant volumes continue to increase over time, which 
warrants the adoption of a limit that allows for future growth while 
remaining tied to the structural trends of the industry.
    Proposal 2, according to the IDFA witness, also requires that an 
exempt plant sell its fluid milk products using unique labels, lest 
this exemption be abused through the establishment of numerous 
``small'' plants effectively linked together to market their milk 
jointly and to garner the advantages of a large plant without being 
subject to full regulation. The witness noted that this particular 
feature is not intended to prevent an exempt plant from marketing 
packaged fluid milk products under more than one label. The witness 
provided the example of an exempt plant with its own label and other 
labels distributed to a local grocery store and via home delivery to 
illustrate this assertion. Ultimately, the witness stated that an 
exempt plant should not be able to distribute fluid milk products under 
the same name used by any other handler.
    A witness appeared on behalf of NDFA in support of Proposal 22 
seeking elimination of the producer-handler provisions. NDFA is a trade 
association based in New York, representing dairy processors, 
manufacturers and distributors The NDFA witness provided testimony 
similar to others regarding the outdated nature of the producer-handler 
exemption. The NDFA witness added that an exemption for both producer-
handlers and exempt plants is inappropriate because producer-handlers 
and exempt plants are in direct competition with fully regulated 
handlers. The witness cited the procurement of raw milk at lower 
prices, ease of balancing and the ability to make pricing adjustments 
more quickly as advantages that accrue to exempt handlers. Furthermore, 
the NDFA witness asserted that exempt handlers retain the difference 
between the Class I price and uniform price which reduces the blend 
price to producers. However, the NDFA witness was not opposed to the 
current exempt plant provision.
    A witness appeared on behalf of Worcester, Elmhurst, Mountainside 
and Steuben (Worcester et al.). With the milk of approximately 200 
producers and additional purchases of cooperative milk, Worcester 
supplies Elmhurst, Mountainside and Steuben, all of which are fluid 
milk plants. The witness echoed the testimony of the NDFA witness in 
support of the elimination of producer-handler and exempt plant 
provisions. The Worcester et al. witness testified in exclusive support 
of Proposal 1 in the event that the exempt plant provision was not 
eliminated.
    By example, the Worcester et al. witness asserted that an existing 
New York producer with 4 million pounds of monthly production would 
have a cost advantage as a producer-handler and would reduce the amount 
of business that proximate fully regulated handlers could secure. The 
witness also testified that any increase in exempt plant volume would 
further contribute to handler inequity.
    A witness representing Harrisburg and PAMD testified in support of 
Proposals 1 and 19. Proposal 19 would adopt the 450,000 pound per month 
limit on Class I disposition for exempt plants as proposed jointly by 
NMPF and IDFA. The witness testified that Harrisburg is a member of 
PAMD. Harrisburg is fully regulated under Order 1 with monthly Class I 
route distribution of 4 to 6 million pounds.
    The Harrisburg witness stated that Harrisburg Dairies is not 
presently in direct competition with producer-handlers. The witness 
asserted that there is a threat presented by Western Pennsylvania 
producer-handlers servicing the same type of retail chains as 
Harrisburg Dairies. The witness testified that their operation would 
not survive in its current form if producer-handlers move into eastern 
Pennsylvania. Based on Harrisburg Dairies' experience as a regulated 
handler, the witness estimated that a producer-handler of similar size 
would have an average cost advantage of $100,000 per month over a fully 
regulated plant because of the pool payment exemption. The witness 
testified that Harrisburg Dairies was recently asked to become a 
producer-handler and declined. The witness asserted that it is not 
reasonable for some processors to enjoy regulatory privileges that 
other processors do not.
    A consultant witness,\1\ a witness representing AE and a witness 
representing Price's, each testified to the characteristics and impacts 
of producer-handlers. The consultant witness appeared on behalf of 
Prairie Farms, Dairy Institute of California, NDFA, AE, PAMD, Dean 
Foods Company (Dean), National Dairy Holdings, LP, Shamrock Foods 
Company (Shamrock), Shamrock Farms and partner farms.
---------------------------------------------------------------------------

    \1\ Corrections to the Wilcox witness's testimony are reflected 
in this Final Decision.
---------------------------------------------------------------------------

    The consultant witness stated that he has been involved in the 
dairy industry for more than two decades and is currently a shareholder 
in Wilcox Farms (Wilcox), a former large fluid milk processor that 
discontinued its dairy operations and the witness' former employer. AE 
is private family business with 525 full-time employees and a 
processing plant in the Central Order (Order 32) marketing area. AE 
offers

[[Page 10129]]

fluid milk and other dairy products that are distributed in Iowa and 
portions of six other States. Price's, a division Dean, has 170 
employees and serves the El Paso, Texas, area.
    The consultant witness and the AE and Price's witnesses did not 
testify in specific support or opposition to any proposals under 
consideration. Rather, each of the witnesses provided examples of 
producer-handler competition with fully regulated handlers. The 
consultant witness testified that in 1974, a large regional grocery 
chain asked Wilcox, which had dairy production operations at the time, 
to build a fluid processing plant and qualify as a producer-handler as 
a means of supplying the customer at a lower cost. During the period 
that Wilcox was a producer-handler, the grocer was able to balance 
supply through another source, the consultant witness stated. The 
consultant witness further testified as to the nature of customer-
driven competition, noting that after conversion to fully regulated 
status in 1987, Wilcox was occasionally asked to lower its price to 
meet a competitor even when the competitor could serve only a small 
number of stores.
    The Price's witness testified to having recently lost business to a 
producer-handler in the El Paso area. The Price's witness opined that 
the producer-handler's processing capacity to be as much as 752,000 
gallons per week--enough to supply 80 percent of the demand in the 
area. In March and April 2009, Price's stopped supplying several stores 
in the El Paso area when an operation that had gained producer-handler 
status in January 2009 assumed that portion of a national retailer's 
business, the witness testified. According to the witness, the national 
retailer had been purchasing 66,000 gallons per week from Price's 
before it switched to the producer-handler supplier. The witness was of 
the opinion that Price's lost business to the producer-handler solely 
on the basis of price. The witness further stated that after Price's 
lost the account, a Price's employee observed a $0.34 per gallon 
reduction in the customer's retail price, translating to a wholesale 
loss of about $4 per hundredweight (cwt) However, the Price's witness 
acknowledged that lower milk prices in El Paso were not solely 
attributable to the producer-handler in the area.
    The AE witness testified that AE shares a large customer in the 
Kansas City area with Heartland Creamery (Heartland), a producer-
handler. The witness went on to explain that the shared customer 
traditionally uses a bid process to secure a supply of milk for two 
private labels and in 2007, AE successfully bid on the account 
consisting of the two private labels in addition to the branded product 
account AE already held. According to the AE witness, the customer's 
pricing scheme is such that the brand name product is priced about 
$0.10 above the private label product displaying the store's name while 
the private label product with the more generic name is priced about 
$0.20 below the store name product. Based on observations of the dairy 
cases in a number of locations and additional knowledge as to 
purchasing practices of the customer, the witness offered that AE 
continued supplying the customer with the generic label product until 
it was gradually replaced by Heartland's branded product at a lower 
price point. The witness testified that AE went from annualized sales 
of 185,000 to 40,000 gallons of the generic label in one year, and the 
generic label product is now no longer produced.
    It was noted by the AE witness that the replacement of a low-cost 
generic labeled product with a branded product is somewhat unusual. 
Given that AE continues to supply the customer with the AE branded 
product and the private label store name product, the fact that, the AE 
generic label product was replaced by the Heartland branded product and 
the AE generic label product was in the most price sensitive category, 
the witness concluded that Heartland's ability to obtain the customer's 
business was solely on the basis of price not quality or service. In 
addition, based on AE employee conversations with the retailer, the 
witness asserted that the retailer account was lost on the basis of 
price, and in particular because of Heartland's pricing strategy of 
supplying the account at a lower price than the AE price.
    The AE witness further asserted that sales of the AE-produced 
private label store name product have decreased approximately 200,000 
gallons annually since the Heartland product was introduced. The 
witness estimated that Order 32 has lost approximately 3.25 million 
pounds from the pool due to the discontinuation of the AE private label 
generic name product and the reduction in sales of the AE private label 
store name product attributable to Heartland's direct competition.
    The consultant witness and the AE witness both testified that 
regulated handlers are able to compete with producer-handlers in terms 
of service, quality, advertising and packaging, but producer-handlers 
have a clear advantage in terms of price. The AE witness specifically 
noted that AE is able to respond to more efficient operations but the 
presence of regulation which creates inequality is not something that 
can necessarily be overcome.
    The consultant witness went on to testify regarding producer-
handler proliferation. For a producer with 10,000 cows it is 
comparatively easier to add a processing plant than for a processor 
with the capacity to process the milk of 10,000 cows to add dairy 
cattle, the consultant witness stated. In support of this assertion, 
the consultant witness testified that in the late 1990s, Wilcox built a 
plant with capacity for the milk of 5,000 cows for less than $7 
million, and the investment to double that capacity would likely have 
been less than $3 million. The consultant witness stated that a recent 
University of Florida study found construction of a processing plant 
for the milk of a 10,000-cow herd would require about $40 million.
    The consultant witness described several recent trends that enhance 
producer-handler viability: Many dairy farms are large enough to 
exclusively supply a processing plant; producer-handlers are attractive 
investments; and many milk buyers have multiple suppliers capable of 
balancing producer-handlers' supply. The witness testified that 
uncertainty of the future regulation of very large producer-handlers 
has constrained investment in these businesses, but if USDA does not 
modify the producer-handler provisions as a result of this proceeding, 
the number of producer-handlers will grow.
    A witness representing Bareman, a fluid processer in Michigan, 
testified in support of Proposals 1 and 2. According to the witness, 
Bareman purchases milk from cooperatives and is fully regulated under 
the Mideast order (Order 33). The witness noted that Bareman competes 
against a number of large fluid milk processors and Country Dairy, a 
producer-handler.
    The Bareman witness reiterated the testimony of others regarding 
the advantage created by the producer-handler exemption and its 
associated effects on pooled producers and fully regulated handlers. 
The witness added that Bareman, as a fully regulated handler, is 
assured that other fully regulated handlers pay minimum prices in the 
same manner that it does.
    The Bareman witness testified to having lost some accounts to a 
producer-handler, often on the basis of price. The witness provided an 
example wherein Bareman engaged in price competition with Country Dairy 
(a producer-handler) for a convenience

[[Page 10130]]

store account during the spring flush. Bareman, the witness testified, 
was ultimately unable to meet the low price offered by the producer-
handler. The disruption noted in this example, the witness asserted, 
arises because of producer-handlers' need to balance sales with milk 
production and their resultant willingness to turn to ``fire sales'' 
for established customers and any others that might be receptive.
    Additionally, representatives of the Federation of Organic Dairy 
Farmers (FOOD), Cornucopia Institute (Cornucopia), National All Jersey 
(NAJ), and the State Departments of Agriculture in New Hampshire (NH), 
New York (NY), Pennsylvania (PA), Vermont (VT), and Wisconsin (WI), 
testified in support of the elimination of the producer-handler 
provisions, the increase of the exempt plant limit on Class I route 
disposition, or both.
    A panel of three dairy farmers representing FOOD and a witness on 
behalf of Cornucopia testified in support of Proposal 2. FOOD is an 
umbrella organization that represents the Western Organic Dairy 
Producers Alliance (WODPA), the Midwest Organic Dairy Producers 
Alliance (MODPA) and the Northeast Organic Dairy Producers Alliance 
(NODPA). According to the panel, FOOD represents nearly two-thirds of 
the organic dairy farmers in the country. The Cornucopia witness 
testified that the Cornucopia Institute is a charitable organization 
serving the organic industry.
    By example, the Cornucopia witness illustrated the ways that Aurora 
Organic Dairy's (Aurora) exempt status as a producer-handler is 
disruptive. The Cornucopia witness was of the opinion that Aurora used 
the regulatory loophole to establish one of the largest market shares 
in the organic dairy industry. The witness testified that adoption of a 
limit of 450,000 pounds of Class I sales per month for exempt plants, 
as suggested by Proposal 2, would be reasonable and sufficiently large 
to accommodate ``legitimate'' family farmers seeking to engage in 
processing and marketing dairy products, while minimizing disruption 
associated with the current producer-handler provisions.
    The FOOD panel testified in support of a hard-cap limit of 450,000 
pounds of Class I route disposition per month for both producer-
handlers and exempt plants. The FOOD panel was of the opinion that a 
450,000-pound per month limit on Class I disposition would honor the 
original intent of the producer-handler exemption. Furthermore, the 
FOOD panel testified, an exempt plant limit of 450,000 pounds of Class 
disposition per month would ensure a level playing field while allowing 
small scale operations to package and sell their product locally.
    The FOOD panel also testified that Aurora has been able to use the 
scale of its operation in combination with its exemption from full 
regulation to capture a great deal of the organic market in the 
Northeast. According to the FOOD panel, Aurora's significant presence 
in the Northeast marketing area has negatively impacted the price local 
organic producers receive for their milk and threatened the viability 
of the handlers that purchase local milk supplies.
    A witness representing NAJ testified in agreement with Proposal 2. 
The witness testified that NAJ is a membership organization that 
represents over 1,100 dairy producers and is an affiliate member of 
both NMPF and IDFA. The NAJ witness testified that the current Federal 
order producer-handler and exempt plant provisions are inequitable. The 
witness was of the opinion that handlers with own-farm milk production 
can be treated very differently for outside purchases of milk depending 
on the marketing area where they have disposition. The witness 
testified that some Class I milk should be exempt from Federal order 
pooling and pricing, and as such, NAJ supports Proposal 2.
    A panel of witnesses on behalf of the New Hampshire Department of 
Agriculture, Markets and Food; the New York Department of Agriculture 
and Markets; the Pennsylvania Department of Agriculture; the Vermont 
Agency of Agriculture, Food and Markets; and the Wisconsin Department 
of Agriculture, Trade and Consumer Protection (State Departments of 
Agriculture); and 19 producer-handlers and exempt plants located in 
Wisconsin adopted Proposal 2 in lieu of Proposal 9.
    The State Departments of Agriculture panel supported the unique 
labeling provision of Proposal 2. The panel was of the opinion that 
this provision is necessary to prevent the aggregation of exempt milk 
for mass distribution, but was not in support of the adoption of any 
other labeling restrictions.
    Conversely, a panel of consultant witnesses representing the 
American Independent Dairy Alliance (AIDA) and representatives of 
Braum's Ice Cream and Dairy Stores (Braums), Kreider Farms (Kreider), 
Aurora Organic Dairy (Aurora), GH Dairy--El Paso (GH Dairy), Heartland 
Creamery (Heartland), Snowville Creamery (Snowville), Northeastern 
State legislators, Shamrock, Diamond D Dairy (Diamond D), a 
Southeastern dairy farm, Shatto Farms, Inc. (Shatto), Country Dairy, 
Mallorie's Dairy (Mallorie's), Hatchland Dairy (Hatchland), Dunajski 
Dairy (Dunajski), NDFA and Country Morning Farms (Country Morning) 
testified in opposition to the elimination of the producer-handler 
provisions, an increase in the exempt plant monthly Class I disposition 
limit, or both.
    The panel of consultants testifying on behalf of the American 
Independent Dairy Alliance (AIDA) provided testimony as to the lack of 
foundation for Proposals 1 and 2. The panel testified that producer-
handlers do not create disorderly marketing conditions since they 
supply only 1.46 percent of the national fluid milk market. The 
significant concentrations of market power enjoyed by cooperatives and 
processors result in producer-handler market share that is minuscule by 
comparison, the panel asserted. The panel further asserted that a 
primary objective of the AMAA is the consistent supply of fluid milk to 
consumers and given the Class I utilization levels of the orders it 
would appear there is no disruption present in the marketing areas.
    Furthermore, the AIDA consultant panel asserted there is no 
realistic threat that producer-handlers will ever achieve such a scale 
of operation to become a source of disorder as defined by the AMAA. The 
panel was also of the opinion that if producer-handlers had a 
substantial competitive advantage as alleged, there would be more new 
producer-handlers. The panel acknowledged that one factor influencing 
the decision to become a producer-handler is the regulatory risk 
associated with the elimination or amendment of the provision. In 
addition, the panel provided its opinion of conditions which could be 
considered disorderly and those which could not and asserted that 
producer-handlers are not causing disorder. The panel was of the 
opinion that the crucial issue is whether treatment is equitable in 
light of the objectives of the AMAA.
    The AIDA consultant panel stated that its analysis revealed a 
number of relevant considerations. The panel identified these 
considerations as follows: producer-handlers are frequently engaged in 
the production of unique and growing niche market products such as 
organic, kosher, and grass-fed milk, which are inherently much more 
costly to produce; some producer-handlers continue the tradition of 
home delivery; producer-handlers adjust their production patterns to 
minimize surplus production, which would otherwise be sold at a 
substantial loss; the managers

[[Page 10131]]

of producer-handler operations have to divide their attention between 
both the farming and the processing sides of the operation and as such, 
do not realize cost advantages associated with specialization; and 
producer-handlers have substantial capital investments in their 
production, processing and distribution. The panel asserted that 
ignorance of these realities would lead conclusions about producer-
handlers to be drawn without foundation. The panel also explained that 
niche market products can take many forms, primarily based on the 
unique consumer preferences associated with a given product and a 
product can lose the ``niche'' categorization as it becomes relatively 
less unique due to a greater availability of products with similar 
attributes. The panel asserted that even producer-handlers who do not 
serve a niche market remain constrained by the costs of their operation 
and that producer-handler status is the only way they can compete in a 
monopolistic market situation.
    The AIDA consultant panel was of the opinion that its survey of 
AIDA producer-handler members revealed a great level of diversity 
across the operations. More specifically, the panel noted that AIDA 
producer-handlers members: Are all small businesses relative to many 
cooperatives and processors; each have their own market niches that 
serve particular consumer tastes and preferences reflective of the ever 
increasing diversity of the consumer market; sometimes provide home 
delivery services; sometimes operate their own stores; market to 
smaller wholesale outlets with smaller volumes per account; market 
products with consumer prices that generally exceed those of 
conventional products; and provide necessary competition.
    Based on analysis performed using USDA data, the AIDA consultant 
panel concluded that the average producer-handler increase in size lies 
between that of the producer and processor size increases between 1969 
and 2008. Furthermore, the panel noted that USDA plant structure data 
shows that of the 45 producer-handlers in May 2008, 40 had sales volume 
of less than 2 million pounds and 5 had volume of over 2 million 
pounds. In comparison, 46 conventional pool plants had a volume of less 
than 2 million pounds and 210 had volume of over 2 million pounds--73 
of which had volume of over 20 million pounds. The panel asserted that 
these figures clearly indicate that producer-handler growth is 
constrained, and the requirement that producer-handlers must maintain 
sole ownership and control over their operations places a de facto 
limit on the size of producer-handlers dictated by the realities of 
integrated operations. However, the panel acknowledged that those 
producers who recently constructed bottling plants and intend upon 
seeking producer-handler status were not known at the time the analysis 
was conducted and as such, were not included. The panel also 
acknowledged that both producer and processor operations could realize 
lower costs with scale.
    The AIDA consultant panel noted that USDA data indicates that 
producer-handler numbers have decreased from 421 in 1969 to 37 in March 
2009. Additionally, the panel was of the opinion that USDA data does 
not indicate an increasing trend in producer-handler sales volumes. 
However, the panel acknowledged that the calculations used to arrive at 
these conclusions were for total volumes not Class I volumes, although 
the panel asserted that specific concentration on Class I volumes was 
not a necessary condition of a complete analysis. The panel also 
acknowledged that the analysis did not represent a scenario in which 
figures related to sales volumes for entities that had producer-handler 
status prior to the rulemaking in the Pacific Northwest and Arizona 
marketing area, which limited producer-handlers with a volume cap.
    Cost-of-production, the AIDA consultant panel asserted, is the only 
figure relevant in assessing the cost of raw milk faced by the handler 
portion of producer-handler operations. The panel further asserted that 
the appropriate transfer price for use in any analysis of producer-
handler impacts should be based on costs of production, not the 
difference between the blend price and Class I price. The panel 
testified that in general, the cost of milk production for all size 
farms exceeds the uniform price by $5 to $8 per cwt. The panel did not 
utilize specific producer-handler data in the cost-of-production 
research presented, and the panel was of the opinion that producer-
handler data would not be substantially different from other dairy farm 
sector data. The panel noted that the prices analyzed were selected 
arbitrarily and the panel was not aware of the locations from which 
they were collected. The panel further stated that regardless of herd 
size, dairy farmers cannot rely on simply marketing their raw milk to 
ensure long-term economic viability. The producer-handler exemption 
helps farmers who opt to process their own milk compete with large 
fluid plants, the panel asserted. However, the panel asserted that 
producer-handlers do not have a price advantage as a result of their 
regulatory status. The AIDA consultant panel stated that disorder 
existed during the period when the AMAA was enacted due to the 
relatively few number of milk buyers and a large number of producers 
seeking outlets. The panel further asserted that a lack of marketing 
alternatives is currently an issue in some areas where producers are 
reduced to either marketing milk through a single cooperative or 
marketing as a producer-handler. By example, the panel provided the 
opinion that two producers in the same market may not equivalently 
enjoy the benefits of the pool, despite the fact that each producer 
delivers to the same cheese plant, because one producer markets through 
a cooperative classified as a buyer, while the other remains 
independent. The panel was also of the opinion that Federal orders do 
not provide uniform prices to producers because prices vary based on 
component values, over-order premiums and hauling charges. However, the 
panel testified that the analysis of producer prices presented did not 
take into account the formulas used to calculate paychecks based on the 
various factors. Ultimately, the panel asserted that if producer equity 
is a goal of Federal milk marketing orders, producer-handlers do not 
inhibit realization of such a goal.
    According to the AIDA consultant panel, pooling producer-handler 
milk would add $0.01 to $0.02 per cwt to the average statistical 
uniform price, an amount the panel described as insignificant. The 
panel also asserted that uniform and Class I prices could not be used 
as a basis for determining disorder. The panel arrived at this 
conclusion based on the opinion that prices determined via regulation 
are not real; instead prices determined in the marketplace are real and 
should be the basis for examination and identification of disorderly 
conditions. Furthermore, the panel testified that the additional burden 
of paying into the pool and completing associated paperwork would put 
some producer-handlers out of business, although the panel did not 
provide a characterization of those that would be expected to go out of 
business.
    The AIDA consultant panel addressed concerns that producer-handlers 
shift balancing costs. The panel argued that cooperative balancing is 
not just a service to the market because it is an integral part of 
cooperatives' marketing strategy. As part of that strategy, 
cooperatives gain market power from performing the balancing function 
as it provides the benefit of milk supply control, which allows for the

[[Page 10132]]

negotiation of full supply contracts, the panel asserted. It was the 
opinion of the panel that without balancing, cooperatives could not 
negotiate either full supply contracts or premiums. Based on its survey 
of AIDA members and USDA data, the panel concluded that producer-
handlers manage production levels to correspond with product sales plus 
a sufficient surplus capacity and producer-handlers bear the burden of 
selling their small surpluses on the market at a price that is almost 
always at a loss.
    Witnesses representing Braums, Kreider, Aurora, GH Dairy, Heartland 
and Snowville testified separately as members of AIDA. The AIDA members 
all testified in opposition to amendments to the current producer-
handler provisions. Braums, a producer-handler, milks 12,000 cows with 
Class I utilization of about 50 percent and operates retail stores in 
Oklahoma, Texas, Arkansas, Kansas and Missouri. Kreider is a family 
operation located in Order 1 and has been a producer-handler since 
1972. Aurora, a producer-handler, has 345 employees and is a national 
supplier of private-label and store-brand organic milk and butter. 
Aurora milks about 12,000 cows every day at 5 farms in Colorado and 
Texas, and is treated as a partially-regulated distributing plant under 
Order 131. GH Dairy, a producer-handler, with a plant located El Paso, 
Texas, sells milk to distributors and national retailers. Heartland is 
a producer-handler located in Missouri with distribution in Missouri, 
Kansas, Iowa, and Illinois. Snowville is an exempt plant located in 
Pomeroy, Ohio.
    The Kreider witness testified that Kreider produces less than 2.5 
million pounds of Class I products per month and has Class I 
utilization between 64 and 77 percent. The witness expanded upon the 
characteristics of Kreider's operation noting that surplus milk is 
often marketed to an ice cream plant or to a cheese manufacturer. While 
Kreider is currently below the level of 3 million pounds of monthly 
Class I disposition, the implementation of a 3-million pound per month 
cap on Class I disposition may work for Kreider in the short-run but 
would not be sustainable or profitable in the long-run, the witness 
stated. The witness revealed that Kreider temporarily lost producer-
handler status at one time, and that the associated pool obligations 
precluded its profit-making ability. Ultimately, the witness asserted, 
the processing portion of the enterprise would likely cease operations 
should Kreider have to make payments into the pool.
    The Kreider witness asserted that Kreider fluid products are often 
priced at a premium to the store brand price. The witness testified 
that Kreider operates in a niche market within its local region, 
selling milk to customers at above-average prices based on the 
perceived value of the product. Kreider markets both non-kosher and 
kosher milk. According to the witness, Kreider products are higher 
quality because they are locally and sustainably produced, chilled 
rapidly, rbST-free and produced on a farm that allows for consumer 
visits, the witness asserted. All of these characteristics, the witness 
explained, add to operating costs.
    According to the witness, Kreider produces kosher milk for Jewish 
communities in several East Coast States, and is under rabbinical 
supervision at the farm and in the plant and the same individual 
supervises both facilities. The witness was of the belief that while 
pool plants possess the ability to produce kosher milk, producer-
handler operations are better suited to kosher milk production as a 
result of, in Kreider's case, smaller scale and vertical integration. 
The witness elaborated on this point, explaining that a pool plant with 
multiple lines and sources of milk would require kosher supervision of 
a greater magnitude than is the case for producer-handler operations 
wherein the plant and the farm are more proximate and under identical 
control.
    The Aurora witness testified that one of the responsibilities of a 
producer-handler is to balance its own-farm milk supply. The witness 
indicated that Aurora balances through careful management of its 
finished goods inventory, powder and butter production with co-packers, 
bulk sales and farm production. The witness further explained that 
Aurora uses its longer life finished goods inventory to even out the 
peaks and valleys of customer orders relative to farm production. The 
witness noted that powder and butter serve as medium and long-term 
balancers as their shelf lives are substantially longer than that of 
fluid milk.
    The Aurora witness testified that their cost-of-production is 
considerably higher relative to conventional producers because Aurora 
does not produce anything other than certified organic milk. The 
witness testified that a producer-handler acquires milk at the cost-of-
production on the farm, and that the cost-of-production for organic 
milk always exceeds Federal order class and uniform prices. The witness 
testified that Aurora has a $30 per cwt cost-of-production, and that 
this figure includes the capital and operating expenses of the farms, 
but does not include transportation of milk from the farms to the 
processing plant or capital and operating costs associated with the 
processing plant. The witness also noted Aurora is not similarly 
situated to others in the organic marketplace because of the 
operation's investment in both organic dairy farming and processing, 
and the burden associated with the full risk and responsibilities of 
both.
    According to the Aurora witness, retailers select private label 
suppliers who have the ability to provide the needed product and 
volume; prioritize the customer's business to meet all expectations and 
challenges; and deliver product orders reliably. The witness also noted 
that customers want private label suppliers that demonstrate rigorous 
quality assurance capabilities, maintain supply chain control and can 
implement corrective action effectively and quickly. The witness 
testified that one of the benefits of being vertically integrated is 
the ability to provide traceability and complete control of organic 
milk, characteristics that are important to Aurora's clientele. To 
demonstrate the importance of good customer service, the witness noted 
two examples in which acquisition and maintenance of customer accounts 
is not a function of price.
    The Aurora witness indicated that in the organic market, the 
marketwide pool does not facilitate the balancing function due to the 
fragmented and dispersed nature of organic milk supplies and plants. 
The witness asserted that if the proposal to eliminate producer-
handlers is adopted, Aurora would have to restructure and essentially 
completely revise its business model.
    The Aurora witness was of the opinion that it is not possible to 
determine the presence or absence of orderly marketing conditions 
without considering the actual prices being paid to producers and the 
actual cost of milk incurred by handlers. The witness testified that 
based on the actual prices and costs, Aurora has not observed any 
unfair competition or the creation of any disruption in the market as a 
result of producer-handlers, nor has Aurora observed any producer-
handlers with a price advantage that resulted in a competitive 
advantage.
    The Aurora witness was of the opinion that any national policy that 
is adopted should preserve options and not foreclose them. The witness 
suggested that some of the proposals punish vertical integration in any 
form other than a cooperative, which is anticompetitive and bad for 
consumers.

[[Page 10133]]

The witness asserted that some of the proposals pick one business model 
as the winner, stifle entrepreneurial enterprises, and eliminate 
independent vertically-integrated operations that meet changing 
consumer demand.
    The GH Dairy witness strongly opposed elimination of the producer-
handler provisions and was of the opinion that producer-handlers are 
more diversified, innovative and responsive than cooperatives. The 
witness testified that GH Dairy's customers appreciate the source 
verification they get as a result of GH Dairy having its own dedicated 
milk supply. Additionally, the witness noted the benefits of total 
control over processing and milk quality.
    The witness testified that GH Dairy's major competitor has 86 or 87 
plants, while the witness's portfolio includes only 3. The witness 
asserted that producer-handlers are good for consumers because they 
bring competition to the marketplace. The witness further stated that 
dairy farmers have only two options, become a producer-handler or join 
a cooperative. The witness was of the opinion that while deregulation 
of the milk industry is preferable, most producers want regulation. The 
witness further testified that a producer-handler is not competitive 
until it distributes 1 million gallons per week (approximately 34 
million pounds per month) so 34 million pounds of Class I disposition 
per month should be the limit for the producer-handler exemption. The 
witness affirmed that the transition of Sarah Farms, another entity 
owned by the witness, from producer-handler to fully regulated plant 
did not put the operation out of business. The witness testified that 
after becoming a fully regulated plant in April 2006, Sarah Farms 
underwent restructuring to increase production capacity and lower its 
costs.
    The GH Dairy witness also offered rebuttal to the testimony of the 
Price's witness. According to the GH Dairy witness, GH Dairy was not a 
producer-handler at the time it successfully bid on school district 
business that had previously been held by Price's. Furthermore, the 
witness noted, the fluid products being supplied to the school 
districts originated at the Anderson plant in Nevada and were being 
transported by the witness' firm to the El Paso area. The witness also 
explained that the several El Paso area stores in which GH Dairy 
replaced Price's as the supplier belong to a national retailer that 
uses one of the witness's other fluid processing operations, Sarah 
Farms (a fully regulated handler) as a supplier in another part of the 
country.
    A panel of witnesses representing Heartland provided details 
regarding its operation. The panel noted that Heartland is a 
diversified operation which includes a goat dairy, a cow dairy and a 
milk plant.
    The Heartland panel noted that Heartland recently obtained kosher 
certification to produce 11 products. Echoing the Kreider witness' 
testimony, the panel stated that Heartland was sought out by the kosher 
certification body, in part because of the dairy's proximity to the 
plant and the associated potential for a single individual to supervise 
both operations. The panel further elaborated that Heartland's kosher 
products could be marketed anywhere in the United States through the 
broker and distribution center that Heartland uses.
    The Heartland panel testified that as a producer-handler, Heartland 
faces competitive constraints that regulated handlers do not; and 
alternatively, regulated handlers face competitive constraints that 
Heartland does not. To this point, the panel explained that Heartland 
is unable to purchase milk while regulated handlers can. More 
specifically, the panel was of the opinion that Heartland does not have 
a disruptive impact on the market, as the operation has neither an 
effect on blend price to the farmers nor an unfair competitive 
advantage relative to fully regulated processing plants. The panel 
further asserted that Heartland is at a substantial disadvantage when 
compared with regulated processors paying Class I prices because 
Heartland acquires milk at its internal cost-of-production. It was also 
the opinion of the panel that Heartland has no advantage of size or 
scale. The panel further noted that in a recent attempt to secure a new 
customer, Heartland was refused because the customer conveyed it was 
not worth the effort to switch suppliers based on a $0.02 difference.
    The Snowville witness was of the opinion that the operation of a 
fluid milk plant with only 450,000 pounds of Class I route distribution 
per month would not be feasible and as such, a 1 million pound per 
month limit on Class I disposition is more realistic.
    The Snowville witness recounted earlier testimony that smaller 
dairy farmers have a $4 to $5 per cwt disadvantage, and speculated that 
if these farms are able to survive into the future, it would be through 
adding value or government subsidies. The witness was of the opinion 
that if the option to become a producer-handler were to be eliminated, 
all small dairy farms below 1,000 cows would effectively disappear.
    A panel testified on behalf of two dairy farms and Homestead. 
Homestead is a regulated plant located in the Order 5 marketing area. 
The panel testified in support of an increase in the exempt plant 
monthly Class I disposition limit. Homestead, according to the panel, 
is a family run operation that primarily packages milk in glass bottles 
and distributes, in part, via home delivery. The panel noted that 
Homestead also has limited arrangements with Kroger.
    The Homestead panel suggested that 450,000 pounds of Class I 
disposition as the standard for the exempt plant provision is not high 
enough, and instead suggested a limit of 1 million pounds of Class I 
disposition per month. The panel acknowledged that the cumulative 
effect of numerous 1000-cow operations would be disruptive, but that 
numerous 100-cow operations would not be due to the financial 
constraints associated with such smaller operations.
    A witness appearing on behalf of several Northeastern legislators 
testified in opposition to the elimination of the producer-handler 
provisions. The witness testified that the national impact of producer-
handler dairy operations is very small and producer-handlers bear the 
true costs of production and delivery in the production of products 
that meet the demands of their consumers. In fact, the witness noted, 
State legislators have significant concerns about consolidation and 
concentration among the largest cooperatives and handlers and the 
associated impacts on the marketplace. Finally, the witness asserted 
that the problems in the dairy industry are not the result of a small 
number of producer-handlers, regardless of the sizes of the operations. 
The witness asserted that legislators in the Northeast think that a 
lack of competition in the dairy processing sector is damaging to both 
consumers and dairy producers in the Northeast.
    A witness on behalf of Shamrock,\2\ an Arizona milk processor, 
testified in support of the limits on route distribution currently in 
place for producer-handlers under Order 131. According to the witness, 
Shamrock is unique in that it owns a dairy farm, Shamrock Farms, aside 
from its milk processing business.
---------------------------------------------------------------------------

    \2\ Corrections to the Shamrock witness's testimony are 
reflected in this Final Decision.
---------------------------------------------------------------------------

    The Shamrock witness testified that there are four primary fluid 
milk processors in Arizona. According to the witness, Shamrock's 
primary competitor

[[Page 10134]]

is a former producer-handler out of Yuma, Arizona. The witness 
testified that this former producer-handler is Shamrock's primary 
competitor because two of the other processors are primarily focused on 
own-store sales, leaving the balance of the retail supermarket channel, 
the mass merchandiser channel, convenience stores and foodservice 
operations to Shamrock and Sarah Farms.
    The Shamrock witness stated that they are not particularly averse 
to the producer-handler exemption. However, the witness was of the 
opinion that the exemption is incompatible with having a market order 
system that all other players are required to operate under. The 
witness was also of the opinion that producer-handlers have a 
competitive advantage over regulated handlers because they do not pay 
the Class I price. The Shamrock witness testified that prior to the 
rulemaking which capped producer-handler's Class I sales in the Pacific 
Northwest and Arizona marketing areas, Shamrock supplied an identical 
private label as was also supplied by a producer-handler. The witness 
noted that producer-handlers' ability to share identical labels creates 
a situation in which regulation can be evaded.\3\ However, the witness 
testified that the elimination of the entire producer-handler 
provisions is not particularly necessary.
---------------------------------------------------------------------------

    \3\ Corrections to the Shamrock witness's testimony are 
reflected in this Final Decision.
---------------------------------------------------------------------------

    A witness appeared on behalf of Diamond D Dairy, a dairy farm with 
a fluid milk processing plant in Colorado. The witness urged USDA to 
leave the current producer-handler regulations unchanged. The witness 
testified that Diamond D services 1,200 home delivery customers and 175 
wholesale accounts in Colorado.
    The Diamond D witness testified that approximately 50 percent of 
the Diamond D operation's milk is processed by its on-farm plant and 
the balance is sold to DFA. The witness indicated that Diamond D is 
currently a producer and fully regulated distributing plant intent 
upon, should business continue to grow, conversion to producer-handler 
status. According to the witness, Diamond D is both a producer member 
and a processor customer of DFA. The witness testified to paying DFA 
all of the normal fees and charges associated with milk marketing. The 
witness stated that those charges include balancing, milk hauling, 
forward haul, administrative and milk promotion fees, handling and 
services charges including over-order premiums. The witness testified 
that DFA charges approximately $5 per cwt for certain services, which 
is an out-of-pocket cost. The witness also indicated that as a 
processor customer, Diamond D must purchase own-farm milk back from DFA 
for bottling. The witness stated that Diamond D's cost-of-production is 
around $17 per cwt.
    The Diamond D witness testified that rising costs left few options 
for survival. The witness further explained that they either had to 
become larger and presumably more efficient or increase revenues from 
the current operation. The witness stated that the first option was 
unrealistic for a number of reasons including land constraints, and 
taking on responsibility of bottling and marketing was the only way to 
grow the bottom line. The witness testified that the operation's 
survival now is conditioned upon the option to become a producer-
handler. Additionally, the witness was of the opinion that there exists 
no need to change producer-handler regulations under Order 32.
    A dairy farmer witness, a member of DFA, testified in support of 
the current producer-handler provisions. The witness testified to 
operating a dairy farm in Southeast Florida and milking over 1,400 
cows. The witness' operation opened a bottling plant in March 2009.
    The operation does not currently have producer-handler status and 
is not causing any market disruption, the Southeast Florida dairy 
farmer witness stated. The witness was of the opinion that producer-
handlers can better meet the demands of niche markets than fully 
regulated handlers. The witness testified that one of the reasons to 
become a producer-handler is to avoid payment into the marketwide pool. 
The witness was of the opinion that everyone should have the 
opportunity to be able to produce and bottle milk within the same 
operation. The witness testified to investments made in pursuit of 
qualification for producer-handler status.
    A witness representing Shatto, a producer-handler located in 
Missouri, testified in opposition to any changes to the producer-
handler provisions. The witness stated that Shatto milks 300 cows and 
distributes fluid products in the Kansas City area. The witness noted 
that Shatto constructed an on-farm bottling facility in 2003, and 
became a producer-handler as a means of adding value and selling 
locally. The witness testified that Shatto's small family operation 
does not compete with any other organization serving the area, and that 
its pricing is not comparable to others in the market. According to the 
witness, Shatto's pricing is higher across the board because of the 
premium, niche products it markets.
    The Shatto witness was of the opinion that disorderly market 
conditions do not exist, and that Shatto's small operation, in 
particular, does not create disruption. The witness further asserted 
that Shatto does not obtain any price advantage over any other 
cooperative or similar sized producer-handler, and would not do so even 
with Class I disposition of one million pounds per month. Furthermore, 
the witness noted, Shatto does not have problems balancing supply with 
demand.
    The Shatto witness testified that Shatto faces additional costs 
resulting in higher production costs than those faced by other 
operations. Further, the witness stated the level of these costs remove 
Shatto from competition on the basis of ``milk cost-of-production by 
size'' as referenced in Proposal 1. Thus, the ability to suggest that a 
limit should be based upon some average economies of scale has been 
eliminated, the witness asserted. Additionally, the witness asserted 
that the economies of scale rationale employed by NMPF is misleading 
and unjust in light of the actual costs related to production, since a 
farm cannot significantly reduce production costs without transitioning 
away from best management practices. The witness testified that 
Shatto's per cwt on-farm cost, with nearly 300 cows, far exceeds the 
$18 noted in Proposal 1, and is likely closer to $25 or $30 per cwt. As 
such, the witness explained that Shatto is at a significant cost 
disadvantage compared to not only operations of a similar size, but 
also cooperatives of all sizes.
    The Shatto witness was of the opinion that the proposal to 
eliminate the producer-handler provision is unjust and inconsistent 
with the original intent of exempting producer-handlers serving small 
niche markets that would otherwise be left alone by large entities. The 
witness also asserted that the proposal will eliminate many small 
operations like Shatto, and reduce one component USDA claims is 
necessary for perfect competition.
    The witness testified that Shatto would be unable to absorb the 
cost of regulation associated with NMPF's proposals and Shatto would be 
required to pay into the pool for use of own-farm milk. The witness 
testified that overall, Proposal 1 penalizes operations for taking 
steps to save the small family farm with an on-the-farm bottling 
facility. The witness testified that small family farms would be unable 
to expand relative to increased customer demand and meet rational 
business goals, and a large number of producer-handlers,

[[Page 10135]]

specifically those with fewer than 600 cows, would go out of business 
if the NMPF proposals are adopted. The witness was of the opinion that 
this would shift more sales to large, multistate operations and 
cooperatives.
    A witness representing Country Dairy, a producer-handler, testified 
in opposition to any changes to the producer-handler provisions. 
Country Dairy, located in Michigan, has monthly production of 2.4 to 
2.6 million pounds and markets through Cedar Crest Dairy.
    In the 1990s, Country Dairy's milk was sold at a $0.15 to $0.25 
premium because it was rbST-free and an account was secured based on 
its rbST-free milk supply, the Country Dairy witness stated. The 
witness was also of the opinion that Country Dairy's products are sold 
at retail for a premium because consumers perceive the products to be 
of a higher quality. The witness revealed that 93 to 98 percent of 
Country Dairy's production is Class I, and that Country Dairy has had 
an exclusive distribution agreement with Cedar Crest Dairy, a dealer, 
since 2001. According to the witness, most of Country Dairy's milk is 
sold under the Country Dairy label although some is store branded. The 
witness acknowledged that some of the store branded milk is also 
supplied by another processor within the same market, through Cedar 
Crest.
    The Country Dairy witness testified that Country Dairy bears all 
risks of milk production and processing. The witness explained that 
Country Dairy's prices tend to follow Class I prices, but at times of 
high production, prices are reduced to sell milk and further establish 
retail relationships. The witness noted that in the past, when Country 
Dairy was responsible for product distribution, this high production 
discount ranged from $0.10 up to $0.20 per gallon. The witness 
testified that Country Dairy competes with regulated processors to 
supply the same kinds of retailers. Michigan retailers, even those 
supplied by fully regulated handlers, advertise and sell milk at very 
low prices, the witness asserted. The witness was of the opinion that 
this practice may reflect retailers' willingness to sell at a loss. 
Ultimately, the witness asserted that producer-handlers are not a 
disruptive factor and should not be subject to limitations on monthly 
Class I disposition.
    A panel of witnesses testified on behalf of Mallorie's, a producer-
handler located in Oregon. The panel testified that Proposals 1 and 2 
should be rejected, and if some rules are necessary to regulate large 
producer-handlers, the existing rules in Order 124 should be used as a 
model for other milk orders.
    The Mallorie's panel stated that the decision to regulate producer-
handlers with Class I disposition in excess of 3 million pounds per 
month in the Pacific Northwest required Mallorie's to significantly 
restructure its operation and lay off a number of employees. The panel 
further asserted that the complete elimination of the producer-handler 
provisions would likely disadvantage small stores dependent on 
producer-handlers to supply their limited needs, which are not 
attractive to larger, fully regulated handlers. The panel asserted that 
Mallorie's operation, with Class I disposition below 3 million pounds 
per month, is too small to solicit larger accounts. The panel further 
testified that Mallorie's faces costs much higher than those faced by 
larger fluid milk processors, and as a producer-handler, nets $2.50 to 
$3.50 below the Class IV price for surplus milk.
    A witness testified on behalf of Brunton Dairy Farm (Brunton), a 
producer-handler located in Pennsylvania, milking 106 cows. According 
to the witness, Brunton consists primarily of a glass bottle home 
delivery component and an on-farm retail store. The witness testified 
that producer-handlers do not have any price advantage over fully 
regulated handlers, and that any advantage producer-handlers have over 
fully regulated handlers is on the basis of product quality. The 
witness testified to producing products priced above other brands of 
milk, and to replacing other brands in the marketplace because 
consumers desire better milk not cheaper milk. The witness was of the 
opinion that amendment to the producer-handler provisions could change 
the way in which Brunton conducts business, resulting in a change in 
the quality of product produced. As such, the witness testified that 
the current regulations should not be changed. The witness was also of 
the opinion that increased regulation for producer-handlers, or the 
complete elimination of the producer-handler provisions, would increase 
the costs of certain niche products such as those produced by Brunton.
    Witnesses representing Hatchland, Mountain Dairy and Dunajski 
testified in support of the current producer-handler provisions. 
Hatchland, a producer-handler located in New Hampshire; Mountain Dairy, 
a producer-handler located in Connecticut; and Dunajski, a producer-
handler located in Massachusetts all market milk in the Order 1 
marketing area. The Hatchland witness and the Dunajski witness 
testified in specific opposition to Proposals 1 and 2. The NDFA witness 
testified in opposition to Proposal 2. The NDFA witness testified that 
the pooling and pricing exemption for plants with less than 150,000 
pounds of Class I route disposition should be maintained.
    A witness testified on behalf of Country Morning, a producer-
handler located in Othello, Washington. The witness testified in 
support of the current producer-handler provisions. The witness 
acknowledged that Country Morning is subject to the 3-million pound cap 
on producer-handlers under Order 124. The witness testified that 
Country Morning is the only processing plant in Washington State that 
markets milk directly from the farm to the consumer without blending 
milk from other farms. The witness testified that Country Morning 
bottles milk under a private label owned by a distributor, and 
acknowledged that the same label may be used for milk from other 
plants. The witness indicated Country Morning does not actively seek 
sales under a particular label or sell surplus through co-labeling.
    The Country Morning witness testified that if it lost producer-
handler status, Country Morning would owe between $50,000 and $60,000 
to the pool each month, and neither the farm nor the plant would 
survive. The witness further testified that the producer-handler issue 
was debated and settled in the Pacific Northwest decision three years 
ago and does not need to be revisited.

Elimination of the Producer-Handler Provisions and Adoption of 
Grandfathering

    Proposals 17 and 26 were offered by NMPF and Mallorie's, 
respectively, as applicable should the producer-handler provisions be 
eliminated. These proposals seek to ``grandfather'' the exemption from 
pooling and pricing for operations that currently have producer-handler 
status, provided they are compliant with certain limitations. NMPF was 
joined by MD&VA, UDA, NDA-Darigold, the DFA dairy farmer panel and a 
DFA representative in support of Proposal 26. Proposal 17 was supported 
by NAJ, with modifications.
    Proposal 20, proposed on behalf of Continental Dairy Products, Inc. 
and Select Milk Producers, Inc., was withdrawn on the basis that it was 
closely related to Proposal 17.
    Those in opposition to either Proposal 17 or Proposal 26, or both, 
included Aurora, Snowville, Kreider, Mountain Dairy, the FOOD panel, 
Dunajski, the State Departments of Agriculture, Hatchland, Diamond D, 
the

[[Page 10136]]

Southeastern Florida dairy farmer, MMPA, Bareman and Cornucopia.
    NMPF testified that taken together, Proposals 1, 2, and 26 would 
only regulate 3 to 5 of the largest producer-handlers in the country, 
all of whom have estimated annual sales of at least $10 million and 
packaged fluid milk product sales in excess of 15 million pounds per 
month. The NMPF witness stated that it is necessary to both regulate 
all producer-handlers distributing more than 3 million pounds of 
packaged fluid milk products per month, and limit the proliferation of 
producer-handlers marketing between 450,000 and 3 million pounds per 
month. The witness testified that if adopted, Proposal 26 would reduce 
the regulatory impact of Proposal 1 on existing producer-handlers that 
fall within the range of 450,000 to 3 million pounds of monthly Class I 
disposition.
    Several witnesses representing cooperatives testified in support of 
Proposal 26. The MD&VA witness testified in support of Proposal 26 as a 
part of the package of proposals offered by NMPF. The UDA witness 
explained that UDA supports the creation of a new category of exempt 
plant to include plants with producer-handler status in 2008, providing 
those plants have 3 million pounds or less of Class I sales of uniquely 
branded products. The St. Albans witness supported the right of small, 
existing producer-handlers to continue operation. The NDA-Dairgold 
witness testified in support of ``grandfathering'' provided that it 
only applies to current producer-handler operations under 3 million 
pounds of monthly Class I disposition, and the producer-handler 
exemption is phased out. The NDA-Darigold witness also asserted that if 
a provision allowing entities with producer-handler status as of the 
date of enactment of the new regulation was adopted then a significant 
number of entities may engage in a quick shift to obtain producer-
handler status prior to the regulatory change.
    The DFA dairy farmer panel and the DFA witness testified in support 
of Proposal 26. The panel further stated that allowing an existing 
producer-handler to retain their status up to the 3-million pound limit 
on monthly Class I disposition would be fair and have little impact on 
the market provided that if the business exceeds 3 million pounds of 
Class I disposition per month it will be treated as a fully regulated 
handler.
    Proposal 17 received supporting testimony by the Mallorie's panel. 
The panel testified that if Proposals 1 and 2 are adopted, existing 
producer-handlers should be able to retain their exemption through 
grandfathering, as suggested in Proposal 17. The panel testified that 
during 2008, Mallorie's milk production averaged 3.1 million pounds per 
month, with average Class I utilization of 63 percent; average Class II 
use of 15 percent; and Class IV utilization ranging from 9 to 29 
percent, with an average of 22 percent for the year.
    The Mallorie's panel testified that the producer-handler provisions 
were reviewed extensively in Orders 124 and 131, and limits on Class I 
disposition went into effect in 2006. The panel testified that 
producer-handlers in these orders have adjusted to the new rules and 
that there is no reason to readdress the subject. The panel was of the 
opinion that a growing number of consumers are concerned about where 
their milk comes from and how it is produced. The panel asserted that 
larger processors cannot meet these concerns, but operations like 
Mallorie's, as a producer-handler, can.
    The Mallorie's panel further testified that if its operation were 
to become fully regulated the effect would be catastrophic. The panel 
testified that when the Federal Order 124 producer-handler exemption 
was set at a maximum of 3 million pounds, Mallorie's responded with a 
herd size reduction, and discontinuation of both a heifer raising 
facility and a leased 300-cow dairy. The panel stated that about 25 
employees lost their jobs and purchases of feed, other supplies and 
services were reduced by nearly one-third or over $3 million a year. 
The panel also testified that if Mallorie's were to go out of business, 
the local and Oregon State economies would lose over $6 million per 
year.
    The Mallorie's panel submitted a modification to Proposal 17, 
explaining that if it is adopted, then a limit of 6 million pounds of 
monthly Class I route disposition should become the point at which a 
grandfathered producer-handler loses the exemption from pooling and 
pricing.
    The NAJ witness testified that NAJ supports Proposal 17 with some 
suggested modifications. According to the witness, NAJ suggests the 
replacement of language that calculates a volume of exempt own-farm 
milk dependent on historical sales limited to 3 million pounds per 
month, with a simple limit on the exemption at 3 million pounds per 
month of own-farm production.
    The NAJ witness testified in opposition to the portion of Proposal 
17 that outlines the calculation of the amount of own-farm milk 
production to be considered exempt, and all of Proposals 20 and 26, 
because these proposals advocate using a handler's historical 
processing and sales of own-farm milk to establish an exemption from 
future pool obligations. These proposals, the witness noted, would 
penalize handlers beyond a given point in time. This would also be the 
case, added the witness, for new processors without previous sales 
figures to establish a base, despite planning for bottling operations 
that occurred under existing provisions. The witness was also of the 
opinion that it is inequitable to treat existing producer-handlers 
differently from producers with the desire to become future producer-
handlers.
    As members of AIDA, the Aurora and Snowville witnesses testified in 
specific opposition to Proposal 26, and the Kreider witness testified 
in opposition to all proposed grandfathering of the producer-handler 
exemption. The Hatchland witness also testified in specific opposition 
to Proposal 26. The FOOD panel testified in opposition to any type of 
``grandfathering'' provisions for either producer-handlers or exempt 
plants. The State Departments of Agriculture panel also testified in 
opposition to any grandfathering provisions. The MMPA and the Bareman 
witnesses testified in opposition to any proposals that would allow for 
the grandfathering of producer-handlers should the exemption be 
eliminated.
    The Mountain Dairy and Dunajski witnesses testified in opposition 
to the adoption of grandfather clauses on the basis that these types of 
proposals would limit exempt status to include only those operations 
currently classified as producer-handlers. The Diamond D witness and 
the Southeast dairy farmer witness testified in opposition to 
grandfathering clauses. The Diamond D witness asserted that 
grandfathering would exclude Diamond D from becoming a producer-handler 
in the future. The Southeast dairy farmer witness testified that such 
clauses would prevent new producer-handlers from entering the market. 
Similarly, the Homestead panel testified in opposition to Proposal 26 
and was of the opinion that future generations should have the ability 
to become producer-handlers.
    The Cornucopia witness testified in opposition to 
``grandfathering'' existing producer-handlers unless qualification for 
grandfathering included a 3-million pound per month limit on route 
disposition and packaged fluid sales.

[[Page 10137]]

Adoption of Producer-Handler Provisions To Include a Limit on Monthly 
Class I Disposition

    Many hearing participants were in support of maintaining the 
producer-handler provision but limiting the Class I disposition a 
producer-handler could have to remain exempt. There were 10 proposals 
that would meet this intent, published in the hearing notice as 
Proposals 3, 4, 7, 8, 9, 11, 12, 13, 14 and 21. The proposed changes 
regarding Class I sales limits for producer-handlers were recommended 
as either ``hard-caps'' or ``soft-caps.'' Hard-caps would limit the 
Class I route disposition of producer-handlers, and if exceeded, would 
fully regulate the producer-handler on their entire volume of Class I 
sales. Soft-caps would only regulate the producer-handler on the volume 
of Class I sales over a certain limit. Hatchland, Lochmead Dairy 
(Lochmead), FOOD, Monument Farms (Monument), Mountain Dairy, Dunajski, 
Shatto, the State Departments of Agriculture, Homestead, Country 
Morning and NDFA all testified in support of amending the current 
producer-handler provisions to include a Class I sales volume 
limitation.
    Opposition to either general limitations of, or the specific 
application of soft-cap limitations to, the producer-handler provisions 
was expressed on behalf of IDFA, Diamond D, the Dairy Institute of 
California (DIOC), NMPF, DFA and NDA-Darigold.
    The Hatchland witness testified as the proponent of Proposal 3, 
which would regulate producer-handlers in the Northeast order with more 
than 3 million pounds of monthly Class I route disposition. Hatchland, 
according to the witness, produces nearly 800,000 pounds of milk per 
month. As such, the witness testified, a 3-million pound limit on 
monthly route disposition by producer-handlers would allow Hatchland to 
grow in the future.
    The witness testified that Hatchland is a unique dairy operation 
with an on-farm store and delivery business providing milk in glass 
bottles to homes throughout the Northeast. The witness emphasized that 
Hatchland occasionally buys from, or sells to, a cooperative, but 
ultimately must balance own-farm production. The witness was of the 
opinion that given the extra costs incurred by Hatchland's unique 
operation, the exemption from the pooling and pricing provisions does 
not result in a competitive advantage over regulated handlers.
    A witness representing Lochmead, a producer-handler, testified in 
support of Proposal 4. Lochmead, based in Oregon, has average monthly 
sales of nearly 1 million pounds and operates 42 Dari-Mart retail 
stores.
    The Lochmead witness testified that both producers and producer-
handlers have increased in size since the producer-handler provisions 
were first established. According to the witness, this increase in size 
necessitates a limit on monthly route disposition to remain exempt from 
pooling and pricing provisions. The witness testified that Lochmead 
would be unable to compete with the larger, more efficient bottlers and 
would go out of business, were it to become fully regulated.
    The FOOD panel testified in support of establishing a 450,000-pound 
hard-cap on monthly Class I route disposition for producer-handlers. 
The panel testified that this proposed change honors the original 
intent and purpose of the exemption.
    The FOOD panel testified that WODPA, MODPA and NODPA members face 
unfair competition from a large producer-handler that sells organic 
milk nationally. The FOOD panel testified that this producer-handler 
sells milk through national supermarket chains, thereby competing with 
locally produced organic milk at an economic advantage based on the 
pooling and pricing exemption. The FOOD panel was of the opinion that 
the regulatory exemption for large organic producer-handlers lowers the 
prices received by organic dairy farmers whose milk is pooled and 
priced under the terms of Federal milk orders. The FOOD panel testified 
in opposition to any type of soft-cap limitations for either producer-
handlers or exempt plants.
    A witness appeared on behalf of Monument, a Vermont-based producer-
handler, in support of establishing a 3-million pound per month 
exemption on Class I route distribution for producer-handlers. The 
witness also testified in support of Proposal 13 submitted by the New 
England Producer-Handler Association, Inc.
    The witness testified that Monument produces approximately 1 
million pounds of milk per month. The witness stated that Monument does 
not have any advantage over fully regulated handlers due to costs of 
production that typically exceed the Class I price. The witness added 
that Monument must continually balance demand with available supply, 
pay a premium to purchase additional milk if necessary, and receive the 
lowest class price or less to sell excess milk.
    As a proponent of Proposal 13, the witness for Mountain Dairy 
expressed support for a 3-million pound limit on the monthly volume of 
milk a producer-handler may distribute while retaining a regulatory 
exemption. The witness testified that Mountain Dairy delivers milk to 
individual homes and also supplies retail customers. The witness 
testified that Mountain Dairy milks about 500 cows. The witness was of 
the opinion that the exemption of producer-handlers from the pooling 
and pricing provisions of Federal milk orders is not contributing to 
disorderly marketing conditions in the Order 1 marketing area.
    Proposal 7 received supporting testimony by the Dunajski witness. 
The witness testified that Dunajski Dairy is located and markets nearly 
350,000 pounds of Class I products per month in the Greater Boston 
area. The witness was of the opinion that Dunajski Dairy does not 
compete with large bottlers on the basis of price, and is not 
disruptive in Order 1.
    The Dunajski witness was of the opinion that the current producer-
handler exemption should not be changed. However, the witness was also 
of the opinion that three million pounds of Class I sales per month 
would be an acceptable cap on the producer-handler exemption providing 
that no labeling restrictions accompany the cap.
    The Shatto witness presented testimony as the proponent of 
Proposals 11 and 12. The witness stated that Shatto's proposals address 
the reduction in competition, the negative impact on small businesses, 
and the overall regulation of the dairy industry as alternatives to 
Proposal 1. The witness proposed the producer-handler exemption be kept 
in place with a limit of 1 million pounds of Class I sales per month 
because, according to the witness, producer-handlers under this limit 
are not disruptive to the market, and would be unable to survive the 
financial impact if the producer-handler exemption were to be 
eliminated entirely. The witness asserted that the effects of Proposals 
11 and 12 on small business are more appropriate than Proposal 1.
    The Homestead panel of witnesses testified in support of a 3-
million pound per month limit on the Class I sales of producer-
handlers. The Homestead panel testified that Homestead Creamery and the 
two associated farms supplying its milk are collectively recognized as 
a producer-handler by the State of Virginia but not by the Federal 
order system. Homestead Creamery, according to the panel, is currently 
a regulated handler. The panel was of the opinion that the producer-
handler definition should change to accommodate Homestead, a processor 
that has farms operated in common rather than owned in common.

[[Page 10138]]

    The Country Morning witness testified that a limit of 3 million 
pounds on monthly Class I sales volume for retention of producer-
handler status would be acceptable. Similarly, the Shamrock witness did 
not object to establishment of an upper limit on the route disposition 
of producer-handlers.
    Proposal 8 was testified to by the panel representing the State 
Departments of Agriculture. The panel testified that farmers in NH, NY, 
PA, VT, and WI, are moving toward vertical integration, particularly 
with regard to cheese manufacturing. The panel testified that the 
producer-handler provision is important in those States because 
consumers have shown significant interest in the locally-produced, 
niche products producer-handlers provide.
    The State Departments of Agriculture panel testified that total 
producer-handler volume in NH, NY, PA, VT, and WI is small relative to 
total milk production, and that producer-handlers do not create 
disorderly marketing conditions. The panel asserted that one producer-
handler with production greater than three million pounds of route 
disposition per month could be disruptive. The panel provided specific 
examples to justify their position that producer-handlers need room to 
grow. The panel stated that a 2-million pound per month figure is 
appropriate as it appears to be the level at which economies of scale 
are realized. The panel further stated that three million pounds per 
month would be the absolute upward bound as a cap on the producer-
handler exemption.
    The State Departments of Agriculture panel also testified that 
marketwide pooling is crucial to dairy farms in the five States 
represented, and an unlimited producer-handler exemption will 
ultimately destroy Federal order pooling as it erodes minimum prices 
and sharing of Class I revenues. The panel advocated a 2-million pound 
per month limit on producer-handler route disposition.
    The NDFA witness suggested that if the producer-handler provisions 
were not eliminated and a limit was established on the Class I sales 
volume of producer-handlers, Order 1 should have a lower limit than 
other Federal orders. The witness supported this assertion by noting 
that in Order 1 there are significant differences in geographic size 
and population, and a relatively high number of producer-handlers and 
exempt plants. Based on a characterization of general statistics, the 
witness asserted that from 2002 to 2008, total fluid milk sales for 
producer-handlers across 8 of the 10 Federal orders has increased by 
over 60 percent and fluid milk sales from exempt plants increased by 
over 20 percent, while at the same time, total fluid milk sales from 
fully regulated plants decreased nearly 4 percent. Similarly, for Order 
1, total fluid milk sales from producer-handlers from 2000 to 2008 
increased nearly 106 percent, and total fluid milk sales from exempt 
plants increased nearly 44 percent. The witness also testified that 
dairy farms managed by governments and colleges should be excluded from 
any hard-cap on the volume of Class I route disposition to maintain an 
exemption from the pooling and pricing provisions of Federal orders.
    The IDFA witness argued that the proposals seeking to continue the 
producer-handler exemption from pooling and pricing provisions with 
some volume limit could, in effect, continue the problem of disorderly 
marketing created by this exemption.
    The Diamond D witness testified in opposition to limitations to the 
producer-handler exemption on the basis that a 3-million pound cap on 
route disposition may affect Diamond D in the future if the operation 
grows.
    A witness representing the Dairy Institute of California (DIOC) 
appeared at the request of NMPF for the purpose of describing the 
producer-handler exemption under California's State milk pooling 
system. According to the witness, DIOC is a California based trade 
association representing fluid milk handlers and dairy product 
processors. The witness opined that USDA may find California's 
experience with producer-handlers relevant in formulating Federal order 
policy.
    The DIOC witness stated that there are two regulatory schemes for 
producer-handlers in California. According to the witness, the first 
option, the ``exempt producer-handler,'' allows for the pool exemption 
of own-farm production provided that both milk production and sales 
average less than 500 gallons per day (129,000 pounds) and 95 percent 
of both production and sales are disposed to retail/wholesale outlets. 
The second option, the ``option exempt producer-handler,'' effectively 
operates under a soft-cap, allowing for deduction of exempt milk volume 
from any Class I pool obligation in a similar manner as suggested by 
Proposal 17.
    The DIOC witness provided opinion and evidence as to producer-
handlers' raw milk cost advantage compared to fully regulated handlers. 
The witness, using data provided by the California Department of Food 
and Agriculture (CDFA), calculated the advantage for California milk 
testing 3.5 percent butterfat and 8.7 percent nonfat solids by 
subtracting the quota price per cwt from the Class I price. The witness 
stated that the raw product cost advantage for producer-handlers was 
calculated by dividing the advantage per cwt by the number of whole 
milk gallons in a cwt of milk. The witness noted that this cost 
advantage varies greatly depending on the relationship between the 
Class I price and the pool quota price. For the period of January 2000 
to March 2009, stated the witness, the raw milk cost advantage for 
producer-handlers averaged $0.113 per gallon. The witness added that 
for the most recent 12-month period, the cost advantage averaged $0.177 
per gallon. Overall, the witness was of the opinion that producer-
handlers have a lower raw milk cost than fully regulated handlers, 
leading to a producer-handler competitive advantage.
    The DIOC witness testified that producer-handlers have increased 
their share of Class I sales at the expense of fully regulated 
competitors. Relying on CDFA data, the witness compared the ``option 
exempt producer-handler'' share of the California Class I market with 
the share attributed to regulated handlers from July 1995 to August 
2008. The witness testified that the producer-handler share of the 
Class I market increased from 14.8 to 23.4 percent.
    In summary, the DIOC witness testified that the soft-cap type 
producer-handler exemption in California has significantly advantaged 
producer-handlers and disadvantaged fully regulated handlers. The 
witness was of the opinion that the provision has created a dilemma for 
policy makers who struggle to reconcile the goal of providing equal 
prices to competing handlers.
    A second witness appeared on behalf of DIOC \4\ to provide a 
description of soft-cap producer-handler provisions, similar to those 
advanced in Proposal 17, and the resultant impact on the competitive 
landscape in the northern California milk market.
---------------------------------------------------------------------------

    \4\ Corrections to the second DIOC witness's testimony are 
reflected in this Final Decision.
---------------------------------------------------------------------------

    The second DIOC witness testified that the Crystal Cream and Butter 
Company, the witness's former employer, was a regional milk processor 
that operated out of Sacramento, California until its assets were sold 
to HP Hood in 2007. The witness testified that Crystal Cream and Butter 
Company repeatedly lost business to producer-handlers who could sell 
milk at a lower price. The witness testified that the exemption for 
producer-handlers under the California milk pooling plan has

[[Page 10139]]

decreased the revenues of producers whose milk is pooled and allowed 
producer-handlers to increase their share of the California Class I 
market. The witness noted that the intent of government-controlled 
dairy pricing systems should be to provide market stability for both 
producers and processors and avoid the creation of opportunities for 
one party to benefit at the expense of another.
    The NMPF witness echoed testimony provided by the DIOC witnesses, 
noting that soft-caps have been problematic in California. The witness 
was of the opinion that soft-caps, applied in the Federal order system, 
would have a negative effect on uniform pricing.
    The DFA witness and the NDA-Darigold witness testified in 
opposition to all proposals seeking establishment of soft-caps 
regulating only a portion of a producer-handler's sales. The DFA 
witness stated that minimum order prices would be unclear to buyers, 
causing them to wonder if competitors had access to lower priced milk 
due to the soft-cap. The DFA witness also asserted that a soft-cap 
would require a greater level of administration. The NDA-Darigold 
witness stated that the adoption of soft-cap provisions would further 
increase the advantages associated with producer-handler status.

Exemption of Vertically Integrated Operations With Retail and Home 
Delivery Distribution

    Proposal 24 would exempt from regulation milk sold by producer-
handlers through ``handler-controlled retail channels'' including home 
delivery and handler-controlled retail outlets, regardless of sales 
volume.
    The AIDA consultant panel testified that Proposal 24 is intended 
for adoption only if USDA amends the producer-handler provisions. The 
rationale for this proposal, the panel explained, is that sales through 
home delivery and handler-controlled retail outlets are entirely 
controlled by the handler and do not have an impact on the pool.
    The Braums witness testified in support of Proposal 24. The Braums 
witness testified that Braums' business model is unique, as the company 
sells own-farm milk and related dairy products in company-owned retail 
stores that do not carry any other fluid milk brand. The witness 
further testified that Braums serves a niche market that other fluid 
milk retailers do not. According to the witness, as a producer-handler, 
Braums must self-balance and cannot use outside suppliers. The witness 
further asserted that Braums' supply is limited to only what its farm 
is able to produce.
    The witness testified that Braums' products are not available 
anywhere other than Braum's retail stores, and the operation has never 
been approached to begin supplying milk to other retailers. The witness 
noted that no other operation produces or sells Braums' branded milk 
products, and since Braums sells its product all the way through to the 
retail level, the operation incurs all the same costs and risks of 
other producer-handlers along with the additional costs and risks 
associated with its exclusive distribution and retail business. The 
witness also stated that Braums does not enjoy a price advantage 
because the operation has had to make substantial investments in the 
milk production side of the business.
    The Braums witness was of the opinion that they are not a 
disruption in the market, and that depooling has had a far greater 
impact on blend prices in Order 32 than the exemption of producer-
handlers from pooling and pricing provisions. The witness added that if 
Braums were to become fully regulated, the blend price in Order 32 
could actually decrease based on Braums' utilization.
    The Kreider witness testified in opposition to Proposal 24. The 
witness did not support an exemption from pool obligation for volumes 
of milk sold at retail by producer-handlers. Kreider, the witness 
testified, does not currently sell to retail customers, direct to 
consumers through home delivery, or via farm store.
    The IDFA witness noted that the adoption of Proposal 24 would 
create new incentives for existing regulated handlers to invest in 
dairy farms and retail stores for the sole purpose of gaining an 
exemption from pooling and pricing regulations. The Shamrock witness 
agreed with the IDFA witness, stating that the adoption of a retail and 
home delivery exemption may result in the creation of a loophole that 
would possibly need to be revisited in the future.
    The NMPF witness stated that an exemption granted for handler sales 
conducted exclusively through handler-controlled outlets, as advocated 
by Proposal 24, is inequitable and would allow those handlers to 
balance their supply through the rest of the market. The DFA witness 
echoed the NMPF witness' position, adding that an Order 32 producer-
handler selling milk entirely through its own retail outlets currently 
aggressively competes for retail sales, which has lead to disorderly 
marketing.

Exemption of Own-Farm Milk

    Proposal 23, proposed by AIDA, would remove the producer-handler 
provision from all milk orders and exempt from regulation milk procured 
from a farm owned by a handler. Additionally, this proposal would treat 
handlers with own-farm production as partially regulated distributing 
plants.
    The AIDA consultant panel testified that under Proposal 23, 
handlers with own-farm milk would be allowed to down-allocate the 
volumes of own-farm milk to their lowest value of use in their 
producer-settlement fund obligation calculation. Additionally, the 
panel stated that adoption of this proposal would allow handlers with 
own-farm production to purchase milk from pool sources, providing that 
all purchased milk would be up-allocated to the handler's highest value 
use. The panel also offered that handlers with own-farm production 
could elect partially-regulated distributing plant status for own-farm 
milk volume as an alternative to full exemption of own-farm milk. The 
panel concluded that adoption of this proposal would allow producer-
handlers to remain in business and compete in an orderly manner.
    The Braums, Kreider, Aurora, GH Dairy, Heartland and Snowville 
witnesses testified in conditional support of Proposal 23. The 
witnesses supported its adoption should the current producer-handler 
provisions be eliminated or restricted.
    The NAJ witness testified in support of Proposal 23, with the 
modification that own-farm milk production should be exempt up to 3 
million pounds per month, and any additional own-farm or purchased 
volume should be subject to pooling and pricing. The witness testified 
that expansion of the existing partially-regulated distributing plant 
provisions to include an exemption of the first 3 million pounds of 
own-farm milk would be equitable for producer-handlers with less than 3 
million pounds of own-farm milk, those with more than 3 million pounds 
of own-farm milk, and those with a combination of own-farm and 
purchased milk.
    The NMPF, IDFA and DFA witnesses testified in opposition to 
Proposal 23. The NMPF witness stated that the exemption of own-farm 
milk would disproportionately benefit large producer-handlers, while 
the IDFA witness noted that the adoption of Proposal 23 would create 
new incentives for existing regulated handlers to invest in dairy 
farms.

[[Page 10140]]

Establishment of Individual Handler Pools

    Proposal 25, as proposed by the members of AIDA, would establish 
individual handler pooling provisions in all Federal milk orders. The 
AIDA consultant panel was of the opinion that adoption of individual 
handler pools would encourage milk in higher class uses to move where 
needed and assure that Class I revenues accrue to producers serving the 
Class I market. Additionally, the panel asserted that there would be 
little incentive for the supply area to expand beyond what is 
sufficient to serve the needs of the market, thus saving transportation 
costs. The panel concluded that Proposal 25 would treat producer-
handlers the same as any other handler because producer-handlers would 
function as a regulated handler under the order, and would be able to 
buy milk from other producers at the blend price. Finally, adoption of 
Proposal 25 would allow producer-handlers to compete in an orderly 
manner, and allow producers and cooperatives to benefit from producer-
handlers' sales in excess of own-farm production, the panel asserted. 
The panel acknowledged reliance on the Nourse Commission Report (Nourse 
Report) in the preparation of its testimony, and encouraged USDA to 
reference it in making a determination. The panel represented that its 
heavy reliance on the Nourse Report in lieu of past decisions of the 
Secretary stemmed from its useful guidance on disorderly conditions.
    The Braums, Kreider, Aurora, GH Dairy, Heartland and Snowville 
witnesses testified in conditional support of Proposal 25. The 
witnesses advocated its adoption in the event that the current 
producer-handler exemption be eliminated or restricted.
    The Aurora witness acknowledged that if Proposal 25 were adopted, 
Aurora could continue to operate as a vertically-integrated business, 
although some modification might be necessary. The witness testified in 
support of individual handler pools on the basis that organic producers 
and processors obtain very limited benefits from the marketwide pooling 
system. The witness was also of the opinion that this is also true of 
other differentiated milk markets such as grass-fed and kosher. 
Individual handler pools would result in differentiated producers and 
processors gaining equity with respect to pooling, the witness 
asserted.
    A witness representing Oberweis Dairy (Oberweis) testified in 
specific support of Proposal 25. Oberweis operates a distributing plant 
in Order 30 with 3 to 5 million pounds of monthly Class I disposition 
and home delivery.
    The Oberweis witness testified that individual handler pools would 
benefit Oberweis and its producer suppliers. The witness testified that 
Oberweis competes with producer-handlers in the Virginia and Detroit 
markets. The witness stated that it is perfectly acceptable for 
regulated plants to compete with producer-handlers. The witness also 
testified that the government should not set minimum milk prices 
because prices are better determined in the marketplace.
    The St. Albans witness testified in opposition to individual 
handler pools. The witness was of the opinion that individual handler 
pools would only benefit producers in close proximity to fluid plants. 
The witness stated that marketwide pooling is crucial to the economic 
survival of St. Alban's members because St. Albans is based in a rural 
area where most of the milk goes into manufactured products not fluid 
milk products.
    The NDA-Darigold witness, the NAJ witness and State Departments of 
Agriculture panel testified in opposition to all individual handler 
pool proposals. The NDA-Darigold witness was of the opinion that 
individual handler pools would damage the marketwide pooling system--a 
system NDA and Darigold have found to be essential for producer support 
of Federal orders. The NAJ witness asserted that the establishment of 
individual handler pools would lead to disorderly marketing conditions 
because returns generated by sales of higher priced Class I milk would 
only be shared among those producers with access to a Class I 
processing plant.
    The NMPF, DFA, IDFA, Mid-West-Lakeshore and UDA witnesses also 
testified in opposition to individual handler pooling. The DFA witness 
testified that individual handler pools should not be adopted because 
handlers operating fluid plants would gain market power and increase 
competition for access to the Class I market. Furthermore, the DFA 
witness was of the opinion that individual handler pooling is not 
compatible with the AMAA's basic tenet of minimum order prices for both 
producers and handlers. The IDFA witness echoed the DFA witness, noting 
that rather than being innovative, Proposal 25 instead proposes going 
back many years despite the findings of a number of hearings over the 
years which found individual handler pools contribute to disorderly 
marketing. The NMPF witness testified that individual handler pools 
threaten the Federal order system because producers supplying milk that 
balances the market would not benefit from Class I revenues.

Post-Hearing Briefs

    Post-hearing briefs filed on behalf of proponents and opponents for 
the elimination of or amendment to the producer-handler definitions in 
all Federal milk marketing orders reiterated testimony and provided 
legal arguments as to why producer-handlers should or should not be 
fully regulated under the orders. Proponents and opponents alike 
stressed testimony and evidence purported to strengthen their specific 
positions. Presented below is a summary of the briefs as they related 
to the economic and marketing conditions in all marketing areas.
    A brief filed on behalf of the New England Producer-Handlers 
Association, Inc., Willard J. Stearns & Sons dba Mountain Dairy, 
Monument Farms, Inc. and Homestead Creamery (New England Producer-
Handlers Association, Inc. et al.) reiterated positions given at the 
hearing: producer-handlers in Order 1 do not give rise to disruption 
resulting from a significant impact on the blend price paid to 
producers; there exists no evidence to support the conclusion that 
producers with a large number of cows intend to construct bottling 
facilities and seek producer-handler status; consumer interest is a 
factor to be weighed during the determination of the regulatory 
treatment of producer-handlers; the producer-handler definition should 
be broadened to include entities operating in common; the exempt plant 
limit of 150,000 is inadequate and should be increased to 1 million 
pounds per month; and the exempt plant limit should be increased to 3 
million pounds of monthly Class I route disposition in the event that 
the producer-handler provisions are eliminated.
    In their brief, New England Producer-Handlers Association et al. 
requested that findings regarding the regulatory treatment of producer-
handlers be separate for each of the Federal milk marketing orders. New 
England Producer-Handlers Association et al. argued that record 
evidence indicates that each order's findings should be based upon 
existing conditions within that order's marketing area. Specifically, 
it was argued that the circumstances that existed prior to amendment of 
the producer-handler provisions of Order 131, and the circumstances 
that currently exist in the Order 126 marketing area, do not exist in 
either the Order 1 or 5 marketing areas. Accordingly, the position 
taken in the New England Producer-Handler Association et al. brief was 
that

[[Page 10141]]

proposals to eliminate the producer-handler provisions of Orders 1 and 
5 are not relevant to the prevailing conditions in either of the two 
marketing areas.
    A brief filed on behalf of Land O'Lakes, Inc (LOL) agreed with 
testimony given in support of Proposals 1 and 2. LOL is a Capper-
Volstead cooperative with more than 4,000 dairy farmer members 
marketing in and pooling milk on 5 Federal orders. The LOL brief also 
detailed support for the grandfathering of existing producer-handler 
operations at a level to be determined by the Secretary and opposition 
to Proposals 23, 24 and 25.
    In their brief, LOL noted that record evidence regarding the 
entrance of GH Dairy into the El Paso market supports the conclusion 
that a producer can transition their farm into a producer-handler 
operation with relative ease in a short period of time. LOL identified 
testimony that the conversion of a dairy farm into a producer-handler 
operation is more favorable, given the economics of market entry, than 
the conversion of a dairy processing plant into a producer-handler 
operation.
    The LOL brief also detailed market disorder associated with the 
current producer-handler provisions. LOL stressed that the impact of 
producer-handler operations varies by size of order and the number of 
producer-handlers selling into a given marketing area. LOL further 
noted that record evidence indicates an impact on the blend price of as 
much as $0.12 per cwt for Order 32. LOL identified testimony that shows 
disorderly marketing exists as a result of pricing inequity between 
producer-handlers and fully regulated handlers. Previously, according 
to LOL, pricing discrepancies were not as significant when producer-
handler operations were smaller, and larger regulated handlers could 
compete through increased plant efficiency but as producer-handler 
operations have grown, regulated handlers' advantage based on scale 
efficiency has eroded.
    A brief filed on behalf of a Florida dairy producer reiterated 
testimony given on the record in support of maintaining producer-
handler provisions in Federal orders and detailed the producer's 
opposition to Proposals 1 and 26.
    A brief filed on behalf of Midwest and Lakeshore reiterated Midwest 
and Lakeshore's support for Proposals 1 and 2 and opposition to all 
other proposals presented at the hearing. In their brief Midwest-
Lakeshore noted by illustration that raw milk production cost 
differences are not relevant to an operation's status as a producer-
handler. Midwest-Lakeshore concluded that a distinct exemption for 
producers who elect to bottle their own milk is not necessary, instead 
an exemption for all handlers with 500,000 or fewer pounds of monthly 
Class I disposition is sufficient to accommodate vertically integrated 
entities and others whose presence does not give rise to disorderly 
marketing conditions.
    A brief filed on behalf of NAJ reiterated and clarified positions 
taken by NAJ at the hearing. NAJ claimed in its brief that NAJ's 
modification to Proposal 17 would result in the addition of at least 17 
million pounds of milk to Federal order pools each month. In brief, NAJ 
reasserted that the exemption of producer-handler's first three million 
pounds of own-farm milk disposed of as Class I during the month is 
equitable for producer-handlers who use less or more than three million 
pounds of own-farm, or use a combination of own-farm and purchased 
milk.
    A brief filed on behalf of Select and Continental articulated 
support for the goals of Proposals 1, 2 and 26, albeit with certain 
noted exceptions to Proposal 26. In their brief, Select and Continental 
highlighted evidence presented by proponents and opponents and offered 
current and historical overviews regarding the regulatory treatment of 
producer-handlers. Select and Continental supported their position that 
producer-handlers should not gain economic advantage as a result of 
their exemption from pooling and pricing. Select and Continental 
asserted that amendments to the regulations governing producer-handlers 
should be based upon economic fundamentals.
    The Select and Continental brief included details regarding the 
important role played by producer-handlers in the marketplace through 
their service of a full range of consumer demands and provision of 
competition to markets that would otherwise be characterized by 
imbalances in market power. The brief detailed a number of arguments 
supportive of the use of transfer prices faced by producer-handlers as 
the basis for determining competitiveness with fully regulated 
handlers. Select and Continental asserted that any limit on the monthly 
Class I sales volume of producer-handlers should be determined 
according to the level of advantage enjoyed by producer-handlers. The 
level of this advantage, according to Select and Continental, can be 
identified by comparing producer-handler transfer prices and the Class 
I price. Select and Continental further argued that while the 
determination of an appropriate limit on the producer-handler 
provisions is necessary because economic advantages accrue with 
increased size, a finite limit number cannot be determined on basis of 
the hearing record. However, Select and Continental asserted that an 
appropriate limit would allow producer-handlers with less than 3 
million pounds of monthly Class I route disposition to continue 
operations with exemption from pooling and pricing. Select and 
Continental also asserted that the adoption of a limit on the basis of 
total producer-handler sales rather than merely in-area sales is 
justifiable and warranted.
    In their brief, Select and Continental also opposed the adoption of 
an exempt plant threshold in excess of 450,000 pounds of monthly Class 
I route disposition. The rationale for the exemption of ``exempt 
plants'' is distinct from the rationale for the exemption of producer-
handlers and as such, a single definition intended to encompass the two 
types of entities would be inappropriate, Select and Continental 
argued. In this regard, the Select and Continental also pointed out 
that the exempt plant threshold limit is not based on farm size or 
production but on the level of Class I distribution. The rationale 
underlying the exemption of plants with 450,000 or fewer pounds of 
monthly Class I disposition relates, at least in part, to 
administrative convenience, asserted Select and Continental.
    The Select and Continental brief detailed arguments in opposition 
to using retail price data in the determination of disorderly marketing 
conditions and the amendment of the producer-handler provisions to 
include labeling restrictions. Select and Continental argued that the 
analysis of retail price data does not provide a clear illustration of 
disorder due to handler inequity because such analysis is unable to 
disaggregate handler pricing to consumers from other factors involved 
in setting retail prices. As to proposed unique labeling restrictions, 
Select and Continental asserted that since any relative advantage 
between producer-handlers and regulated handlers should be determined 
on the basis of the regulatory treatment of producer-handlers, there is 
no need for adoption of labeling restrictions.
    Furthermore, Select and Continental argued in their brief that when 
average dairy farm size data is compared with producer-handler numbers, 
opposite trends are revealed and as such, there is insufficient basis 
for concern that the growth in the number of large farms suggests the 
potential for the growth in the number of producer-handlers. The brief 
also indicated that the presence of organic producers and organic

[[Page 10142]]

producer-handlers in the market should not result in different 
regulatory treatment by marketing orders as production methods are not 
relevant.
    The Select and Continental brief detailed agreement with the 
adoption of provisions that would provide for a ``grandfathering'' 
clause to be applied to current producer-handlers. Continental and 
Select asserted that such a clause should allow entities classified as 
producer-handlers prior to July 1, 2009, with monthly Class I route 
disposition of no more than 3 million pounds to retain their exemption 
from pooling and pricing. According to Select and Continental, whatever 
method is selected for limiting producer-handler disposition of Class I 
sales, it is more important that current producer-handlers operations 
within the proposed limit not be fully regulated.
    A brief was filed on behalf of Upstate Niagara Cooperative, Inc. 
(Upstate Niagara). Upstate Niagara is a Capper-Volstead cooperative 
that owns fluid processing and manufacturing plants regulated under 
several Federal orders, including Orders 1 and 33. Their brief detailed 
support of the positions taken by NMPF and IDFA.
    A brief filed on behalf of the State Departments of Agriculture of 
New York, Pennsylvania, New Hampshire, Vermont and Wisconsin (State 
Departments of Agriculture) stressed support for a 3-million pound 
limit on monthly Class I route disposition for producer-handlers. The 
State Departments of Agriculture also detailed opposition to an 
unlimited pooling and pricing exemption for Class I sales through 
producer-handler-controlled retail channels, and the adoption of a 
producer-handler grandfather clause.
    According to the State Departments of Agriculture brief, a limit on 
producer-handler Class I sales volume is necessary as it would allow 
producers processing own-farm milk to continue to meet growing demand 
for locally produced, single-source milk while also preventing the 
erosion of the value of marketwide pools. In their brief, the State 
Departments of Agriculture stressed that any limitation on producer-
handler Class I sales volume should apply to total sales. The State 
Departments of Agriculture also indicated that producer-handlers with 
three million or fewer pounds of monthly Class I route sales should be 
allowed to make temporary purchases of limited amounts of supplemental 
milk from other sources without loss of producer-handler status.
    A brief filed was on behalf of DIOC. In their brief, DIOC provided 
analysis of specific proposals and testimony presented during the 
hearing. More specifically, the DIOC discussed the impact of 
California's producer-handler provisions that allow for soft-cap limits 
on Class I sales volume. The brief also stressed the relevance of 
California's producer-handler experiences to the current proceeding, 
the concept of transfer pricing as related to producer-handlers' cost 
advantage and the concept of economic rents.
    In their brief, DIOC reiterated its testimony given on the 
substantial negative effects of producer-handlers in the California 
milk marketing system. Producer-handlers, according to DIOC, realize 
greater economic returns than similarly situated farms and plants that 
are not fully integrated. DIOC went on to assert that advantage arises 
because of producer-handler exemption from pooling and pricing. That 
exemption, DIOC stressed, allows the integrated producer-handler firm 
to either earn a greater return at the farm level by paying itself the 
Class I price, or earn a greater return at the plant level by paying 
the farm side of the operation less than the Class I value for milk 
supplied. DIOC concluded that the advantage enjoyed by producer-
handlers is not a direct result of realized scale economies but rather 
is the result of revenue that is not shared with the pool.
    A brief filed on behalf of Mallorie's Dairy, Nature's Dairy and 
Country Morning Farms (Mallorie's Dairy et al.) reiterated arguments 
against the adoption of Proposal 1 and for the adoption of Proposal 17 
should Proposal 1 be adopted. The majority of these arguments rest upon 
the opinion that proponents lack evidence supporting adoption of their 
proposals. Mallorie's Dairy et al. also proposed that should the 
Secretary determine that changes to the producer-handler definitions 
are necessary, then the current size limitation on producer-handlers in 
Orders 124 and 131 should be adopted in other markets as dictated by 
record evidence of the need for change in those orders.
    In their brief, Mallorie's Dairy et al. stressed that calculation 
of producer-handler advantage as the difference between the Class I 
price and the blend price is in error. Rather, Mallorie's Dairy et al. 
asserted that producer-handlers, like fully regulated handlers, use 
own-farm milk in other classes and as such, their pool obligation would 
likely be something less than the Class I price minus the blend price 
applied to total production. Mallorie's et al. further stated that 
proponents' use of erroneous calculations resulted in an overstatement 
of producer-handlers' purported competitive advantage.
    The Mallorie's Dairy et al. brief also articulated additional 
factors determinant in producer-handlers competitive position relative 
to fully regulated handlers. According to the brief, smaller producer-
handlers' processing, balancing and distribution costs exceed those of 
larger pool distributing plants and as a result, smaller producer-
handlers are unable to compete with fully regulated plants, or to cause 
disruption in the fluid market on the basis of price.
    A brief filed on behalf of IDFA reiterated its support for 
Proposals 1 and 2 exclusively, and highlighted testimony supportive of 
its position. IDFA also purported a lack of evidence supporting other 
proposals and detailed its opposition to the adoption of any proposals 
other than Proposals 1 and 2. IDFA asserted that the adoption of 
Proposal 1 is warranted based on the testimony of dairy farmers, 
cooperative representatives, and regulated fluid milk processors that 
provided numerous examples of producer-handlers' presence giving rise 
to disorderly marketing in several Federal milk marketing orders.
    In its brief, IDFA stressed that significant structural changes 
within the dairy industry have nullified any historical justification 
of the producer-handler exemption from pooling and pricing provisions. 
Movements toward concentration and consolidation in the dairy farm 
sector combined with unbounded producer-handler provisions in many 
Federal orders, has caused producer-handlers to have a significant 
negative impact on orderly marketing conditions and the potential for 
an even greater negative impact is present, according to IDFA.
    IDFA also asserted in its brief that the adoption of Proposal 2 is 
warranted. IDFA revealed that an increase of the exempt plant 
qualification threshold from 150,000 pounds to 450,000 pounds of 
monthly Class route disposition will allow small handlers, including 
previously exempt small producer-handlers, to enjoy an exemption from 
pooling and pricing provisions because they are too small to cause 
material market disruption. IDFA further asserted that Proposal 2 
should be adopted in its entirety. According to the IDFA brief, the 
unique labeling restriction feature in Proposal 2 is necessary to avoid 
linking together the sales of numerous small exempt plant handlers in 
an effort to gain the volume advantages of larger, fully regulated 
handlers.
    A brief filed on behalf of AE, Dean, National Dairy Holdings, NDFA, 
PAMD, Parker Farms, Shamrock and Shamrock

[[Page 10143]]

Farms (AE et al.) articulated collective support for Proposal 1. In 
their brief, AE et al. also noted that all parties represented in brief 
except NDFA support Proposal 2. The brief detailed opposition to an 
increased exempt plant Class I distribution limit should USDA decline 
adoption of any proposals under consideration in this proceeding or if 
USDA adopts any proposal other than Proposal 1. AE et al. also detailed 
specific opposition to any proposals that include soft-cap provisions. 
Finally, AE et al. acknowledged that certain parties represented in 
their brief could accept an amendment of the orders that would 
establish a 3-million pound hard-cap limit on monthly Class route sales 
for producer-handlers. Adoption of this limit, according to AE et al., 
would restore orderly conditions in most circumstances.
    In their brief, AE et al. asserted that record evidence reflects 
the threat of producer-handler proliferation. In particular, AE et al. 
argued that recent growth in producer-handler volumes, retailing 
customers search for producer-handler suppliers and the presence of 
producers actively structuring their operations with the express intent 
of becoming a producer-handler, is precisely the sort of evidence 
indicative of a potential threat to the maintenance of orderly 
marketing conditions. AE et al. also argued on behalf of NDFA that the 
exempt plant qualification threshold in Order 1 should not be increased 
due to the potential aggregate impact of such an amendment. According 
to the brief, record evidence shows a substantially larger number of 
exempt plants in Order 1 than in any other order.
    The AE et al. brief detailed a number of reasons to support its 
position that Federal orders should include unique label requirements 
in the event that the exempt plant qualification threshold is increased 
or the producer-handler provisions are not entirely eliminated. 
Requirements for the unique labeling of packaged fluid milk products, 
according to the brief, will prevent the Class I sales volumes of 
exempt handlers, used in aggregate, from being balanced against the 
Class I sales volumes of fully regulated handlers. AE et al. provided 
several illustrations in support of this assertion and noted that 
unique labeling requirements would not prevent an exempt handler from 
bottling under several labels or bottling under a label other than one 
bearing its own name. Rather, the brief related that the only 
circumstance which would be prevented by unique labeling requirements 
is when any exempt handler or producer-handler bottles milk under the 
same label used by other handlers.
    The AE et al. brief cited several examples from the record that 
they assert establish the presence of producer-handler driven 
disorderly marketing conditions in individual orders as well as across 
all orders. AE et al. further asserted that producer-handlers do not 
actually face balancing costs high enough to eliminate the price 
discrepancy between their operation and fully regulated handlers. The 
testimony of regulated handlers and producer-handlers alike, according 
to the AE et al., addressed this very issue. AE et al. furthered this 
assertion, noting examples where producer-handlers were balanced by 
fully regulated suppliers, or supplied fluid milk products at retail 
under a label used by another [fully regulated] handler. Producer-
handlers have a market impact across multiple marketing areas because 
some producer-handlers have distribution that is national, noted AE et 
al. The effect of producer-handler's multi-order distribution, 
according to AE et al., is amplified by retailers' common practice of 
requiring fully regulated handlers to match producer-handler low-cost 
competing offers in an entire region.
    In their brief, AE et al. also asserted that record evidence 
supports the conclusion that producer-handlers' market share has 
increased even as the number of producer-handlers in operation has 
decreased. AE et al. stressed that this trend leads to concluding that 
producer-handlers, as individual entities, have grown in size and that 
they present a greater potential for further growth and disorderly 
marketing. In this regard, the brief cited testimony provided by two 
dairy farmers who recently constructed processing plants with the 
intent of seeking producer-handler status. The potential for growth in 
producer-handler market share combined with retailers' knowledge of the 
pricing advantage enjoyed by producer-handlers is indicative of 
existing and future disorder, according to AE et al. Furthermore, AE et 
al. asserted, if producer-handlers' cost of surplus disposal exceeded 
the advantage of their exemption from full regulation, then it would be 
irrational for those operations to continue. AE et al. concluded that 
if no action is taken to limit or eliminate the producer-handler 
definitions in all orders, then fully regulated handlers will be put at 
further disadvantage and the benefits of marketwide pooling will be 
threatened.
    A brief submitted on behalf of NMPF summarized its position and 
highlighted record evidence in support of adopting Proposals 1, 2 and 
26. In its brief, NMPF stated that the adoption of Proposals 1, 2 and 
26 would: allow plants meeting a small business definition to continue 
operations with an exemption from the pooling and pricing provisions of 
the Orders; prevent the aggregation of exempt plant Class I sales to 
circumvent regulation; improve revenues paid to producers via increased 
blend prices; and allow handlers to face uniform classified prices. 
According to NMPF, any provisions regarding exempt handlers adopted as 
a result of this proceeding should apply to total sales and not only to 
sales in a particular marketing area, and should include unique 
labeling restrictions to prevent integration of many small exempt 
handlers in search of a cost advantage based upon exempt milk supplies. 
NMPF further asserted that the amendments presented in Proposals 1, 2 
and 26 are warranted given current and potential disorder, and taken 
collectively would restore orderly conditions within the system. NMPF 
reiterated its opposition to Proposals 3, 4, 5, 7, 8, 11, 13, 15, 17, 
18, 20, 21, 23, 24, 25, 27 and 28.
    In its brief, NMPF asserted that both farm sizes and handler 
operations are growing and the increasing availability of new 
technologies has drawn the industry to seek scale efficiencies. This 
new climate presents greater potential for producer-handler 
proliferation since many dairy farms are now large enough to enjoy 
economies of scale in milk production and processing and the cost 
advantage associated with the producer-handler exemption, NMPF 
emphasized. Some producer-handlers, according to NMPF, have already 
reached the size and scale necessary to compete directly with fully 
regulated handlers and that some current producer-handlers have grown 
to distribute nationally and internationally. Additionally, NMPF 
stressed in its brief that producer-handlers in low- and high-Class I 
utilization marketing areas, exhibit Class I utilization significantly 
in excess of area averages of fully regulated distributing plants. 
Record evidence, the brief asserted, indicates that producer-handler 
sales comprise a significant and growing share of the Class I sales in 
several markets. Furthermore, when full regulation occurs, producer-
handlers can and do survive.
    In brief, NMPF pointed out that producer-handlers' costs-of-
production are not relevant in assessing their impact on orderly 
marketing conditions. NMPF further asserted that establishment of a 
transfer price at which producer-handlers acquire own-

[[Page 10144]]

farm milk is unnecessary because the correct comparison is between the 
regulatory costs of producer-handlers and similarly situated plants and 
the farms that supply them. On this basis, producer-handlers face costs 
that are no different, except that producer-handlers have obligation to 
the producer-settlement fund, NMPF concluded.
    In its brief, NMPF reiterated that producer-handlers are a cause of 
disorderly marketing conditions because their exemption from pooling 
and pricing regulation decreases revenue that is otherwise paid to 
producers and interferes in setting uniform class prices to handlers. 
NMPF furthered this position noting that marketwide pooling is 
necessary for the integrity of the Federal order system and the 
exemption from pooling and pricing of producer-handlers erodes its 
effectiveness. The larger individual producer-handler operations 
become, the more a producer-handler's exempt status undermines producer 
equity, NMPF indicated. The cost advantage of producer-handlers, 
according to NMPF, equals the difference between the average value of 
milk used and the uniform price. This advantage is significant in an 
industry where bids are often considered and awarded on differences of 
less than a penny, NMPF maintained. The magnitude of producer-handlers' 
impact revealed by record evidence to be as high as $0.12 during 
certain months in Order 32, NMPF noted in its brief. The brief cited 
other record testimony revealing that producer-handlers also impact the 
blend price in Order 1.
    The NMPF brief articulated the fiercely competitive nature of the 
retail-level grocery market. According to NMPF, retailers have sought 
to gain producer-handlers as suppliers in search of price advantages at 
retail, and producer-handlers can effectively avoid balancing their 
production when retailers first rely on all of the milk that a 
producer-handler can offer by meeting the remainder of their needs 
through other regulated sources. NMPF also noted the testimony of a 
producer-handler with national distribution which revealed that 
producer-handlers balance against alternative suppliers.
    NMPF, in its brief, explained how the adoption of any proposals 
other than Proposals 1, 2 and 26 would be ineffective in addressing the 
current disorderly marketing conditions caused by producer-handlers. 
Specifically, NMPF stands in opposition to all other proposals. NMPF 
noted particular concern that the adoption of individual handler 
pooling in lieu of marketwide pooling would result in disorderly 
marketing and be detrimental to the Federal order system. In this 
regard, NMPF explained that individual handler pooling would reward 
handlers who can selectively recruit larger producers to supply milk 
needed for Class I use without acknowledging the balancing services 
provided by other handlers in the market.
    In its brief, NMPF argued that the record supports grandfathering 
current producer-handlers with no more than three million pounds of 
monthly Class I route disposition provided grandfathering also includes 
provisions requiring unique labeling of package fluid milk products and 
farm and plant ownership exclusive of ownership in other farms or 
distributing plants. According to NMPF, these conditions collectively 
ensure the independent nature of producer-handlers as was intended when 
this category of handler was first created.
    NMPF concluded in its brief that adoption of their package of 
proposals on a national basis is appropriate and is required to correct 
current disorderly marketing conditions and to preempt future disorder, 
noting adoption would eliminate the need for numerous and redundant 
hearings. With a national view, NMPF asserted that the collective 
adoption of Proposals 1, 2, and 26 would likely result in the full 
regulation of not more than five current producer-handler entities.
    A brief submitted on behalf of AIDA reiterated the testimony of 
AIDA members and further articulated AIDA members' positions. AIDA 
asserted that Proposals 1 and 26 and other proposals that would 
eliminate or restrict producer-handler operations should be denied and 
the status quo maintained. Should the Secretary find that change to the 
producer-handler provisions is necessary, AIDA asserted, only Proposals 
23, 24, and 25 should be considered for adoption.
    In their brief, AIDA asserted that the preemptive regulation of 
producer-handlers and measures to prevent their proliferation are not 
warranted. In this regard, AIDA highlighted testimony that producer-
handler competition is not currently an issue. AIDA concluded that the 
decreasing number of producer-handlers should be evidence enough that 
no threat of proliferation exists. Furthermore, the AIDA also 
concluded, while the volume of producer-handler milk has increased, the 
total percentage of Class I sales attributable to producer-handlers is 
at its lowest level in more than 40 years.
    AIDA reiterated their assertion that the record supports concluding 
that producer-handler raw milk costs are equivalent to farm-level cost-
of-production and not the Federal order blend price. In this regard, 
AIDA referenced USDA statistics that demonstrate farm-level cost-of-
production exceeds both the blend price and the Class I price and as 
such, producer-handlers acquire own-farm milk at costs higher than 
either of these prices. Accordingly, AIDA asserted that the blend price 
is not the appropriate transfer price of milk from a producer-handler's 
farm to its plant. Instead, AIDA asserted, the only economically 
rational transfer price is the farm cost-of-production incurred by the 
producer-handler. Among other things, AIDA maintained, without evidence 
of an unfair cost advantage, no basis can be established to conclude 
that producer-handlers give rise to disorderly marketing conditions.
    Expanding upon the argument that disorderly marketing conditions 
are not evident, AIDA stressed in its brief that disorderly marketing 
can only be found when consumers are unable to obtain a sufficient 
supply of fluid milk at reasonable prices. Applying this definition to 
the current record, which AIDA asserts does not show any consumer 
inability in buying milk, AIDA concluded that disorderly marketing is 
not present. AIDA also referred to testimony of proponent witnesses 
that acknowledged that producer-handlers are not currently causing 
disorderly marketing conditions. AIDA went further to suggest that any 
decisions regarding the regulatory treatment of producer-handlers must 
be based upon economic conditions and equity rather than equality 
amongst regulated parties.
    In their brief, AIDA indicated that producer-handlers do compete 
with fully regulated handlers on the basis of price, but also stressed 
that price alone is not the only determinant factor of competition and 
producer-handlers are evidence of nothing more than healthy 
competition. AIDA insisted that competition is not the same as 
disorderly marketing and asserted that Federal orders are not intended 
to limit or eliminate competition. AIDA relied on several examples from 
the record which they purport to show that producer-handlers do not 
compete solely on the basis of price and also countered testimony 
intended to show the competitive advantages producer-handlers enjoy by 
being exempt from pooling and pricing.
    AIDA cited in their brief record testimony demonstrating that 
producer-handlers meet the regulatory test of bearing the burden of 
balancing their milk supply. Based on the testimony of

[[Page 10145]]

several producer-handlers, AIDA concluded that producer-handlers are 
price-takers when selling surplus milk and the price received for 
surplus milk is lower than the classified prices. In addition to 
bearing the burden of their surplus, producer-handlers do not enjoy the 
Federal order minimum prices for surplus milk as do pooled producers, 
AIDA asserted.
    AIDA presented several arguments in their brief to demonstrate the 
irrelevance of the impact producer-handlers have on blend prices. While 
AIDA acknowledged an impact, they argued that the impact is not 
significant relative to the impact of several other marketing 
conditions tolerated by Federal orders, including the depooling of 
milk.
    AIDA noted in their brief that the producer-handler model is, in 
many marketing areas, the only alternative for producers outside of 
marketing through a cooperative. AIDA also asserted that through the 
producer-handler option, producers are able to provide differentiated 
products through innovative methods and marketing channels that are 
best served by the producer-handler business model. In this regard, 
AIDA mentioned several prominent regulated handlers serving the current 
marketplace that began as producer-handlers. Accordingly, AIDA 
concluded that USDA should leave the producer-handler definition 
unchanged.
    In the event USDA finds the need for changing the producer-handler 
provision, AIDA asserted in their brief that Proposals 23, 24, and 25 
should be adopted because they are less-burdensome alternatives to the 
other proposals under consideration in this proceeding. According to 
AIDA, the two parts of Proposal 23 would allow handlers to exempt own-
farm milk volumes from pool obligation while also allowing handlers 
with own-farm milk production to elect partially regulated distributing 
plant status.
    In their brief, AIDA reasserted that Proposal 24 is primarily 
intended for adoption in the event that USDA determines that the 
producer-handler provisions need amending to include Class I 
disposition limits, while also maintaining that the proposal could be 
adopted even in the event that the producer-handler provisions were 
completely eliminated. AIDA reiterated that the proposal's intent is to 
exempt producer-handlers with handler-controlled retail channels 
because their control of milk is complete from production through to 
final disposition to the consumer and because there is no impact on the 
pool. AIDA noted that this provision is intended to be liberally 
construed so as to include independent contractor relationships within 
the handler-controlled retail channel.
    In their brief, AIDA reiterated their position that individual 
handler pooling (Proposal 25) is an alternative to marketwide pooling 
as a means to address the producer-handler issue. According to AIDA, 
the adoption of individual handler pools would not only allow producer-
handlers and regulated handlers to enjoy more equal treatment, it would 
also better reflect Class I market demands and the producers serving 
those demands. AIDA asserted that it would also eliminate the need for 
pooling standards and the hearings required to determine them, as well 
as eliminate the disorderly impacts of depooling. AIDA concluded that 
the possibility of unequal producer prices under individual handler 
pools would not be a great issue.
    In their brief, AIDA also detailed support for increasing the 
exempt plant's limit on Class I distribution independent from 
consideration of the regulatory treatment of producer-handlers. Citing 
from the record, AIDA supported a Class I distribution limit of 1 
million pounds per month.

Discussion and Findings

General

    At issue in this proceeding is the reconsideration of the current 
exemption of certain handlers from pooling and pricing provisions of 
Federal milk marketing orders. All milk marketing orders provide for 
the exemption of handlers known as producer-handlers and plants that 
have less than 150,000 pounds of monthly Class I disposition and sales 
of packaged fluid milk products to other plants--commonly referred to 
as exempt plants. While exempt plants are limited to 150,000 pounds or 
less of monthly Class I sales, the producer-handler definitions, except 
in Orders 124 and 131, specify no sales volume limitations.
    A proposal seeking elimination of the producer-handler definitions 
asserts that the pooling and pricing exemption of this category of 
handler has become a source of current or potential disorder in the 
marketplace and should be eliminated across all orders. A companion 
proposal to mitigate regulatory impacts associated with elimination of 
the producer-handler definitions was offered to be adopted 
simultaneously. This companion proposal seeks to increase the exempt 
plant limit of monthly Class I disposition and sales of packaged fluid 
milk products to other plants from 150,000 to 450,000 pounds. As 
proposed, it is intended to allow current small scale producer-
handlers, those with less than 450,000 pounds of Class I sales per 
month, to be exempt from pooling and pricing provisions of the orders.
    Numerous additional proposals were offered and considered as 
alternatives to these two proposals. While all producer-handlers 
endorse the status quo, the alternative proposals are offered in the 
event that USDA determines the producer-handler definitions should be 
amended. Several current producer-handlers and other interested parties 
offered proposals that would add a monthly Class I route disposition 
limit to the producer-handler definitions. Other proposals seek to 
prevent proliferation of new entrants under the producer-handler 
definition while allowing existing producer-handlers to retain their 
current status. One proposal seeks to recast the producer-handler 
definitions to exempt only those entities with the additional risk and 
burden of exclusive distribution through producer-handler-controlled 
retail channels. Another proposal seeks to change the method of pooling 
milk and the classified use-values of milk in the orders. Finally, 
proposals that seek to exempt handlers' own-farm milk production 
disposed of as packaged fluid milk products were offered.
    The record reveals that there are currently over 100 entities 
across the Federal milk marketing order system meeting the current 
exempt plant definition. Many of these entities are operated by dairy 
farmers who bottle and sell their milk production as fluid milk 
products. If not for their monthly Class I route dispositions and sales 
of packaged fluid milk products to other plants being less than 150,000 
pounds, these entities would likely meet the producer-handler 
definition of their respective orders. Although some exempt plant 
handlers fit the producer-handler definition, which requires handlers 
to have integrated production, processing and route disposition at 
their exclusive enterprise and risk, exempt plant handlers have no such 
restrictions. In other words, exempt plants may be exclusively supplied 
with milk purchased from dairy farmers. Irrespective of production, 
processing and route disposition, an exempt plant incurs no Federal 
order minimum payment obligation to the dairy farmer(s) from whom milk 
was purchased.
    The AMAA requires the setting of uniform prices to producers 
regardless of how the milk of any single dairy farmer is used and 
uniform prices to

[[Page 10146]]

similarly situated handlers (section 608c(5)). Handlers who are 
similarly situated pay at least the class prices established under the 
orders for milk. Producers are paid at least the minimum uniform 
(blend) price that is determined through marketwide pooling. A 
marketwide pool, through the mechanism of a producer-settlement fund, 
equalizes the classified use-values of milk pooled on an order among 
handlers and determines a uniform price paid to producers. Marketwide 
pooling allows for equitable sharing of the cost of supplying and 
balancing the Class I market. These two key features of milk orders--
classified pricing and marketwide pooling--provide the basic foundation 
for orderly marketing and address the AMAA's primary objective of 
ensuring orderly marketing.
    There are currently four different producer-handler definitions 
used in Federal milk marketing orders. The three southeastern orders 
(Orders 5, 6 and 7) have no Class I route disposition limits and do not 
provide for the purchase of milk beyond the own-farm production of a 
producer-handler. The producer-handler definitions of 5 other orders 
also have no limit on Class I route disposition but provide for the 
limited purchase of milk of 150,000 pounds or less per month of pooled 
milk beyond own-farm production. Only Orders 124 and 131 have a limit 
on Class I route disposition in their marketing areas that, when 
exceeded, obligates producer-handlers to pooling and pricing provisions 
of these orders in the same manner as the fully regulated plants. The 
producer-handler definition of Order 131 differs from that of Order 124 
in that it also places certain restrictions on product labeling. 
Nevertheless, the common criterion of all producer-handler definitions 
for all orders is the requirement that the entire operation be under 
the sole risk and enterprise of the producer-handler.
    Despite previous rulemaking proceedings which considered full 
regulation of producer-handlers, it was not until 2006 that some 
producer-handlers became subject to pooling and pricing provisions 
under Orders 124 and 131. In that formal rulemaking proceeding, USDA 
adopted a 3-million pound per month Class I disposition limit in the 
marketing area that, when exceeded, results in the full regulation of 
producer-handlers. No changes were made with regard to the exempt plant 
definitions of the two orders. Shortly after implementation of the 
amended Orders 124 and 131, enactment of the Milk Regulatory Equity Act 
of 2005 required implementation of additional regulatory criteria 
affecting handlers and producer-handlers in all Federal milk marketing 
orders.
    In the producer-handler proceeding for Orders 124 and 131, USDA 
found that the exemption of large scale producer-handlers from pooling 
and pricing disrupted the orderly marketing of milk. The record of that 
rulemaking found that large scale producer-handlers enjoyed a price 
advantage over regulated handlers while simultaneously decreasing blend 
(uniform) prices to dairy farmers. The record of this proceeding does 
not support the same findings. Of greater significance, the record of 
this proceeding indicates that all producer-handlers enjoy a 
competitive pricing advantage over fully regulated handlers because of 
their exemption from pooling and pricing provisions. This is not 
surprising as the exemption of any handler from the regulatory plan 
results in nonuniform prices to handlers and lower prices than would 
otherwise be uniform to producers. It is clear from this proceeding 
that as the Class I marketings of a producer-handler increase, the 
order's ability to set prices that are uniform to handlers and 
producers is eroded.
    Depending on the volume of Class I disposition and sales of 
packaged fluid milk products to other plants, the exemption from 
obligation to account for milk at minimum classified prices, and the 
exemption from payment into the producer-settlement fund of the 
difference between a producer-handler's use-value of milk and the blend 
price become critical factors that give rise to disorderly marketing 
conditions. Large producer-handlers become increasingly able to market 
fluid milk at prices below those that can be offered by fully regulated 
handlers because the classified prices set by the order are not 
uniform. The exemption from payment to the producer-settlement fund 
renders the order unable to set uniform prices to producers.
    Comments and exceptions to key findings were considered regarding 
producer-handlers' competitive pricing advantage and the inability of 
the orders to set uniform prices to producers that arises from the 
exemption from pooling and pricing. This final decision emphasizes that 
when any handler is exempted from pooling and pricing, regulated 
handlers and producers whose milk is pooled on an order are affected by 
that exemption. Regulated handlers are affected because they are 
obligated to make pool payments while producer-handlers are not 
obligated. Producers also are affected because handler exemption 
results in fewer dollars available in the pool, thus making the uniform 
price to producers lower. Market Administrator data in the record 
demonstrate this outcome. That data reveals that exclusion of producer-
handler revenue affects the total pool value in any Federal order 
marketing area where producer-handlers are present. Total pool values 
are hundreds of thousands of dollars less every month than they would 
be which directly translates into lower uniform prices paid to 
producers. In markets where producer handlers are not present, no 
impact on total pool value occurs.
    The record of this proceeding demonstrates that producer-handlers 
with monthly Class I route disposition and sales of packaged fluid milk 
products of 3 million pounds or less are not a serious cause of 
disorderly marketing conditions that warrant correction by eliminating 
the producer-handler definition across all Federal milk marketing 
orders. Accordingly, it is reasonable to conclude that the objectives 
of the AMAA can continue to be achieved without the complete 
elimination of the producer-handler definitions across the system of 
orders. It is also reasonable to conclude that all orders should be 
amended so that the producer-handler definitions include some 
limitation on the amount of Class I sales that a producer-handler may 
have before becoming obligated to the system's regulatory plan of 
pooling and pricing. Doing so is necessary to maintain the integrity of 
the Federal order system and orderly marketing conditions.

Elimination of the Producer-Handler Definition and Increasing the 
Exempt Plant Monthly Limitation of Class I Disposition and Sales of 
Packaged Fluid Milk Products to Other Plants

    Record evidence reveals that the elimination of the producer-
handler definitions of the orders is not necessary and an increase in 
the exempt plant threshold from the current 150,000 to 450,000 pounds 
on Class I route disposition and sales of packaged fluid milk products 
to other plants per month is not warranted. Nevertheless, testimony and 
evidence provided by proponents, most notably NMPF and IDFA and 
associated witnesses, identified shortcomings of the current producer-
handler definitions.
    Producer-handler exclusion from pooling and pricing has 
historically been based on the premise that the declared policy and 
objectives of the AMAA, namely orderly marketing, could be achieved 
without the extension of full regulation to this category of handler. 
USDA has articulated its authority to obligate producer-handlers

[[Page 10147]]

to further regulation, including marketwide pooling and minimum pricing 
provisions, if they singularly or collectively have a negative impact 
on the market. USDA found the activity of large scale producer-handlers 
to be a source of significant and measurable disorder in the Arizona 
and Pacific Northwest marketing areas.\5\ Accordingly, those orders' 
were amended to establish a 3-million pound limit on monthly Class I 
disposition in the marketing area in the producer-handler definitions 
beyond which pooling and pricing regulation applies to the handler.
---------------------------------------------------------------------------

    \5\ Official notice is taken of Final Decision, Published 
December 14, 2005 (70 FR 74166).
---------------------------------------------------------------------------

    Prior rulemakings consistently articulated USDA's authority to 
subject producer-handlers to full regulation. For example, in a Final 
Decision for the Puget Sound order, a predecessor to the Pacific 
Northwest order, USDA found that producer-handlers should continue to 
be exempt from pooling and pricing provisions of the order with the 
caveat that producer-handlers could be subject to further regulation if 
justified by prevailing market conditions.\6\ This position was 
amplified in a subsequent Puget Sound Final Decision wherein USDA found 
that a hearing should be held to consider the regulation of producer-
handlers if the marketing area was susceptible to being affected by 
producer-handlers or if producer-handler sales could disrupt or operate 
to the detriment of other producers in the market.\7\ Such policy was 
also articulated in another decision concerning producer-handlers in 
Texas and the Southwest Plains.\8\ That decision concluded that it 
would be appropriate to obligate producer-handlers to the pooling and 
pricing provisions of the order if it could be shown that producer-
handlers cause market disruption.
---------------------------------------------------------------------------

    \6\ Official notice is taken of Final Decision, published May 
13, 1966 (31 FR 7062-7064).
    \7\ Official notice is taken of Final Decision, published July 
21, 1967 (32 FR 1073-1074).
    \8\ Official notice is taken of Recommended Decision, published 
June 28, 1989, (54 FR 27179).
---------------------------------------------------------------------------

    The proposals for elimination of the producer-handler definition 
are primarily based upon issues regarding producer-handler size, 
specifically the volume of Class I marketings. The elimination of the 
producer-handler definition across the system of orders is proposed to 
be offset by an increase in the exempt plant monthly limit on Class I 
route disposition and sales of packaged fluid milk products to other 
plants. This would, as the proponents intend, mitigate the impact of 
the proposed regulatory change on current producer-handlers 
characterized as not having a significant impact on orderly marketing 
conditions.
    Producer-handlers are persons who operate dairy farms and generally 
process and sell only their own milk production. A pre-condition to 
operating a processing plant as a producer-handler is the operation of 
a dairy farm. Consequently, the size of the dairy farm determines the 
production level of a producer-handler's farm operation and is also the 
controlling factor of the volume that is processed by the plant and 
that is available for distribution. Accordingly, the major 
consideration in determining whether a producer-handler is a large or 
small business is its capacity as a dairy farm. Under SBA criteria, a 
dairy farm is considered large if its gross revenue exceeds $750,000 
per year which equates to a production guideline of 500,000 pounds of 
milk per month. Accordingly, a producer-handler with Class I 
disposition and sales of packaged fluid milk products to other plants 
in excess of three million pounds per month is considered by this 
decision to be a large business.
    At what size a producer-handler begins to have a significant impact 
on a market's pooled participants should be determined by whether 
minimum prices are uniform to producers and among handlers. Testimony 
in this proceeding presented the argument that the presence of 
effective prices--or actual prices paid and received--that differ from 
minimum prices set under the orders is indicative of disorder. This 
decision disagrees. The regulatory plan of the milk order program is 
not tasked with setting the effective prices. Rather, the regulatory 
plan of the milk order program provides for setting and enforcing 
minimum prices paid by handlers and received by producers. The 
effective prices producers receive can and do vary, but prices paid to 
producers and their cooperatives cannot be lower than the minimum price 
established under the orders. The fact that cooperatives can re-blend 
the price they pay for the marketing of their producer member milk is 
neither an example of disorderly marketing conditions nor germane to 
evaluation of the conditions appropriate for excluding handlers from 
the pooling and pricing provisions of the orders.
    Because producer-handlers do not share the additional value of 
their Class I sales with a market's producers, their exemption from the 
pooling and pricing provisions is conditioned on the premise that the 
burden of surplus disposal (milk not used for fluid uses) is borne by 
them alone. The surplus milk of a producer-handler may be sold for any 
price, but germane to this condition, such surplus milk does not 
receive the minimum price protection offered by marketwide pooling. 
When a producer-handler is able to avoid the burden of surplus disposal 
while also retaining the entire additional value of milk accruing from 
Class I sales, equity among producers and handlers is jeopardized and 
disorderly marketing conditions can ensue. When uniform minimum price 
conditions exist, the basis for orderly marketing is present. In the 
absence of uniformity of minimum prices among producers and handlers, 
the basis for orderly marketing is undermined.
    The record supports the finding that adoption of a limit on 
producer-handlers' monthly Class I disposition and sales of packaged 
fluid milk products to other plants can mitigate the disorderly 
marketing which arises when producer-handlers are able to avoid bearing 
the burden of surplus disposal. Bearing the burden of surplus disposal 
is a fundamental demonstration of a producer-handler balancing their 
milk production with market demand for their Class I products. 
Disorderly marketing conditions are present when a producer-handler 
becomes able to directly or indirectly balance their Class I marketings 
with the surplus milk of pooled producers. The record indicates 
examples of indirect balancing of producer-handlers on the regulated 
market. The record also indicates that as a producer-handler's Class I 
sales volume increases, conditions arise that offer an even greater 
ability to effectively transfer the balancing burden to the regulated 
market.
    While opponents to the elimination of the producer-handler 
definitions argue otherwise, this decision agrees with proponent 
arguments, presented by witnesses testifying in support of NMPF and 
IDFA positions, that the difference between the Class I price and the 
blend price is a reasonable estimate of the price advantage enjoyed by 
producer-handlers even if it is not possible to determine the precise 
level of the advantage for any individual producer-handler. This price 
advantage is compounded as a producer-handler's Class I utilization 
increases. In addition, allowing producer-handlers to have unlimited 
Class I sales will result in a measureable impact on the blend price 
received by pooled producers.
    This decision finds no reason to consider the higher costs 
purportedly associated with the operation of producer-handlers a 
relevant factor for determining conditions in which handlers should or 
should not be

[[Page 10148]]

subject to full regulation. All handlers face different processing 
costs. These differences may be the result of divergent plant operating 
efficiencies related to size or to that portion, if any, of milk 
supplied, which may be produced and supplied from own-farm sources. 
Whatever the cost differences may be and the reasons for them, all 
fully regulated handlers must pay the same minimum Class I price, and 
equalize their use-value of milk (generally, the difference between the 
Class I price and the blend price) through payment into the order's 
producer-settlement fund. Similarly, all producers face different milk 
production costs. Producer cost differences, for example, may be the 
result of farm size or variation in milk production levels attributable 
to management ability. Producers, regardless of their individual costs, 
receive the same blend price.
    Comments and exceptions to the recommended decision detailed 
support and opposition to the recommendation that the exempt plant 
limit on Class I sales remain unchanged. IDFA and PAMD, proponents of 
increasing the exempt plant limit of Class I sales from 150,000 pounds 
per month to 450,000 pounds per month, made clear their opposition to 
consideration of the proposed amendment in isolation. The comments and 
exceptions offered by IDFA and PAMD reiterated their record argument 
that the proposed increase of the exempt plant threshold was advanced 
only if the producer-handler definition was eliminated from all Federal 
milk marketing orders.
    The record lacks evidence to warrant increasing the current exempt 
plant limit on Class I sales given the decision to retain the producer-
handler definition, albeit with limits. While the comments and 
exceptions of a number of parties constructed support using the 
testimony of proponents, reliance on such testimony to warrant 
increasing the exempt plant Class I monthly sales limit is misplaced. 
The majority of testimony in support of a higher exempt plant limit, 
provided by IDFA, NMPF and PAMD witnesses, makes clear their 
conclusions were drawn based upon the condition that the Federal order 
system would no longer have producer-handlers. It is only in this 
context in which the NMPF, IDFA and PAMD witnesses drew the conclusion 
that exempt plants with Class I sales of up to 450,000 pounds a month 
would not be a disruptive factor to orderly marketing.
    Because the record lacks evidence to support an increase in the 
exempt plant monthly Class I sales limit as a stand-alone proposal, 
concerns associated with its adoption are significant. Exempt plants 
are distinct from producer-handlers, as discussed above, in that the 
source of their milk supply may be from any source, including exclusive 
purchase from dairy farmers. The dairy farmers supplying exempt plants 
do not receive the minimum price protection of the orders or the other 
benefits of the marketing order system including verification of tests 
and weights and audits of the handlers to whom they deliver their milk. 
Dairy farmers delivering to exempt plants can be characterized as the 
``smallest'' of the small dairy farm operations. Tripling the exempt 
plant limit may increase the number of producers who may be harmed by 
not being associated with the regulatory benefits of the orders. In 
other words, the smallest dairy farmers who are the most vulnerable 
would be the ones most likely to have their marketings fall outside the 
scope of the intended regulatory plan if the exempt plant threshold on 
monthly Class I sales volume were increased.

Establishment of Individual Handler Pools

    The marketwide sharing of the classified use-values of milk among 
all producers supplying a marketing area is an essential feature of the 
Federal milk marketing order system. It ensures that producers 
supplying a given marketing area receive the same uniform price for 
their milk, regardless of its end use. In combination with classified 
pricing, marketwide pooling has, among other things, successfully 
mitigated price competition between producers seeking the higher-valued 
fluid outlets for their milk. Abandonment of the marketwide pooling 
system in favor of an individual handler pool system would reverse the 
stability achieved by its adoption in all Federal milk marketing 
orders.
    The record reveals that justification for the adoption of 
individual handler pooling is rooted in a collection of extremely 
selective excerpts of a study authored by dairy industry participants 
and published in 1962. The study, commonly referred to as the Nourse 
Report, examined in great detail the Federal milk marketing order 
system. The few excerpts used to advance the features of individual 
handler pools pale in comparison to the Nourse Report's cautions as to 
its use as well as descriptions of the superior qualities associated 
with marketwide pooling. Over the years, USDA has repeatedly concluded 
that marketwide pooling promotes orderly marketing conditions more 
completely and is one of the most important marketing order tools used 
to ensure uniformity in prices to producers.\9\ In markets where much 
of the milk is handled by operating cooperatives and large surpluses of 
milk are unevenly distributed among handlers, conditions observable 
today, marketwide pooling best ensures orderly marketing. This is the 
same opinion of the Nourse Report.
---------------------------------------------------------------------------

    \9\ Official notice is taken of: Final Decision, published April 
2, 1999 (64 FR 16026); Final Decision, published October 13, 1955 
(20 FR 7689); Final Decision, published June 15, 1990 (55 FR 25618).
---------------------------------------------------------------------------

    Individual handler pooling did have a role to play in the orderly 
marketing of milk, but only under very specific conditions. On the eve 
of milk marketing order reform implementation which instituted, among 
other things, the current large regional milk marketing orders, 
individual handler pooling existed for only one very small marketing 
area that had a single fully regulated handler distributing Class I 
products. When a marketing area has a single fully regulated handler, 
the classified prices established under the order and the blend price 
returned to dairy farmers supplying that handler are uniform. However, 
when a market contains more than a single regulated handler, the 
individual handler pooling system cannot provide uniform prices to 
producers.
    As marketing areas grew in geographic size and in the number of 
handlers competing for Class I sales and manufacturing of other dairy 
products increased, marketwide pooling became the method ensuring 
uniform prices to producers. The pooled milk of producers shared in the 
additional revenue accruing from the higher classified use-value of 
Class I sales and the burdens of lower classified use-values. Under an 
individual handler pooling plan, producers supplying handlers with 
differing utilizations would receive different prices. These 
differences would be particularly notable between producers delivering 
to handlers with high manufactured class utilization and those with a 
majority of Class I uses. Producers supplying a handler with high Class 
I utilization would receive higher prices than producers whose milk was 
delivered to manufacturing handlers. Returns distributed to producers 
in this manner are not uniform nor can they be when a market consists 
of multiple handlers.
    To the extent that individual handler pooling is an alternative to 
the elimination of the producer-handler definitions, USDA long ago 
determined it to be inferior to marketwide pooling. While it may be a 
novel way to address the issues under consideration in this

[[Page 10149]]

proceeding, it does so by a claim that a producer-handler is paying 
itself the use-value of its own milk. Its adoption could not be 
immediately implemented as it would, for example, require an overhaul 
of an order's pooling standards plus the addition of other criteria to 
ensure that distributing plants had an adequate supply of milk for 
fluid uses.
    The central issue of this proceeding is the consideration of the 
conditions that warrant exemption of handlers from full regulation not 
whether the method of pooling should be changed. Individual handler 
pooling does not directly address when and under what circumstances 
handlers can be exempted from pooling and pricing without undermining 
orderly marketing. Accordingly, the proposal for adopting individual 
handler pooling (Proposal 25) is denied.

Grandfathering, Soft-Caps, and Own-Farm Milk Exemptions

    Three proposals, Proposals 17, 23, and 26, submitted in response to 
Proposals 1 and 2 received testimony in support of ``grandfather 
clauses'' and exemptions for ``own-farm'' milk supplies. In the context 
of this proceeding, ``grandfather clause'' refers to an exception that 
would allow current producer-handlers to continue their operations with 
added restrictions. ``Own-farm'' milk here refers to the amount of milk 
processed for use by a handler who is also the producer of that milk. 
These alternative proposals to the elimination or amendment of the 
producer-handler definition calling for these features are not 
recommended for adoption.
    While requesting the elimination of the producer-handler definition 
in all orders, NMPF asserts that their Proposal 26 is consistent with 
this request because it effectively halts the proliferation of new 
producer-handlers. This decision disagrees and does not adopt NMPF's 
Proposal 26. If the position is taken that the exemption of producer-
handlers from pooling and pricing causes disorderly marketing 
conditions, then it would be reasonable to conclude that the current 
producer-handler exemption, regardless of any limitations placed on 
Class I route dispositions, should come to an end. A willingness to 
accept a 3-million pound per month limit on Class I route dispositions 
for current producer-handlers begs the conclusion that producer-
handlers with Class I dispositions at or below this level are not 
disorderly or, at the least, represent a tolerable deviation from 
strict application of pooling and pricing provisions.
    Grandfathering clauses, as proposed, would create inequity between 
persons who are currently producer-handlers and other entities who may 
in the future seek to supply milk as producer-handlers. Adoption of 
these types of provisions would essentially create a new category of 
handler based solely on their regulatory status during a specified time 
period. Dairy farmers that aspire to produce, process and market milk 
at their own enterprise and risk would be denied the opportunity to 
join the new ``grandfathered'' category.
    As previously discussed, the broad purpose of the AMAA is to 
establish and maintain orderly marketing conditions. Its purpose is not 
to create barriers to entry into a viable business or marketing 
alternative. New-to-market operations should not be denied the ability 
to form under the same provisions as current entities that have already 
met the producer-handler definition. Concern for the proliferation of 
producer-handlers is overly proscriptive.
    In their post-hearing brief, Mallorie's Dairy, proponent of 
Proposal 17, articulated a willingness to accept the current size 
limitation of 3 million pounds of Class I route disposition of the PNW 
and Arizona orders as a reasonable alternative to elimination of the 
producer-handler provisions. This willingness was conditioned upon a 
USDA recommendation against the elimination of the producer-handler 
provisions and for the application of the Class I route disposition 
limit common to the PNW and Arizona orders across all other orders. As 
this decision recommends adoption of amendments similar to those 
acceptable to Mallorie's Dairy, no further consideration is given to 
Proposal 17, as proposed by Mallorie's Dairy.
    Modifications to Proposal 17 as offered by NAJ request 
consideration for provisions which would create a new category of 
handler. In their post-hearing brief, NAJ advocated the creation of an 
exemption for handlers with own-farm milk supplies. With NAJ's 
modification to Proposal 17, handlers with own-farm milk would be 
exempting the first three million pounds of own-farm milk disposed of 
as Class I during the month. NAJ asserts that this would be equitable 
for handlers with less or more than the three million pounds of own-
farm Class I dispositions or a combination of own-farm and purchased 
milk. This decision does not find NAJ's proposed changes to be 
equitable as represented by NAJ.
    NAJ suggests that handlers with own-farm milk should be partially 
regulated distributing plants with an exemption from pooling and 
pricing equal to their own-farm milk volume. While this modification 
uses terminology common to current regulation it in fact represents a 
recast meaning of the term ``partially regulated.'' Unlike pool 
distributing plants, partially regulated handlers are handlers that 
distribute fluid milk products into a marketing area but do not meet 
the standards for full regulation under that order. NAJ uses the term 
``partially regulated'' to refer instead to handlers who would only be 
subject to full regulation for own-farm fluid milk product volume in 
excess of three million pounds and all purchased milk volume. This 
would essentially create a unique exemption based upon the origin of 
the milk supplies received by a given handler.
    As proposed, NAJ's modification is grounded in a justification 
based upon the source of a milk supply. It would not be appropriate to 
have differentiated regulatory treatment of milk supplies on the basis 
of origin. The current producer-handler provisions require that 
operations be performed at their exclusive control and through a 
dependence on their own milk production without reliance on purchased 
milk.
    AIDA, proponents of Proposal 23, offered two versions of Proposal 
23 to be considered as distinct from one another. Both versions would 
require the creation of handler categories specific to handlers with 
own-farm milk supplies reflecting certain provisions that currently 
govern the regulatory treatment of pool distributing plants and 
partially regulated plants, save one major exception. Under the first 
variation of Proposal 23, handlers with own-farm milk would be treated 
as fully regulated plants with the ability to down-allocate all own-
farm milk supplies. The second variation would allow handlers 
processing own-farm milk for Class I use to elect partially regulated 
status.
    The first version of Proposal 23 would cause handlers with own-farm 
milk to have a price advantage due to their exemption from pooling and 
pricing while handlers without own-farm milk would be subject to 
pooling and pricing provisions of the orders. The second version of 
Proposal 23 seeking treatment of handlers with own-farm milk as 
partially regulated plants would treat differently those handlers 
without own-farm milk supplies. Adoption of this proposal would cause 
differentiated treatment of similar plant operations solely on the 
basis of supply sourcing. Furthermore, the provisions offered in 
Proposal 23 are far less restrictive than the current producer-handler

[[Page 10150]]

provisions, which proponents of Proposal 23 contend should not be 
changed. Either form of Proposal 23 would cause inequitable treatment 
of similarly situated handlers due to an exemption favoring handlers 
having own-farm milk supplies.
    While AIDA describes their proposed changes using terminology 
common to current regulation, the proposals are different than current 
regulations. The proposals do not consider conditions under which full 
exemption from pooling and pricing regulation is warranted. Proposal 23 
uses needlessly complex methods to address an issue that may be more 
easily fixed by simply modifying the current producer-handler 
definition to include a limit on monthly Class I route disposition. 
Accordingly, this decision does not adopt either version of Proposal 
23.
    The portion of Proposal 23 and the NAJ modification that propose 
total or partial exemption from pooling and pricing based on own-farm 
production disposed of as Class I while allowing for purchase of milk 
from other producers, deviates from the long-held own risk and 
enterprise conditions associated with the producer-handler definition. 
If adopted, each of these two proposed changes would create a soft-cap 
exemption. Soft-caps exempt some Class I disposition while subjecting 
any additional disposition to pooling and pricing. This would cause 
inequitable treatment across similarly situated handlers where handlers 
with own-farm milk could ``smooth'' the price advantage gained on the 
volumes of exempt fluid milk products across any additional Class I 
sales. In turn, this would also allow handlers with own-farm milk to 
undercut prices offered by those handlers without own-farm milk 
strictly as a consequence of regulation.
    This decision has considered the testimony regarding the use of 
similar soft-cap limits for producer-handlers under California's milk 
marketing regulatory plan. California's milk marketing regulatory 
system is similar to that of the Federal order system. The soft-cap 
limits there led to inequity among similarly situated handlers. 
According to the record, other fully regulated handlers with similar 
Class I disposition, but without own-farm milk production, were placed 
at a competitive disadvantage relative to those handlers with own-farm 
production.

Retention of the Producer-Handler Definition With Limits on Class I 
Disposition and Sales of Packaged Fluid Milk Products to Other Plants

    As discussed above, the exemption of handlers of any size (and 
exempt plants) from the regulatory plan of milk orders immediately 
leads to minimum prices under the orders that are not uniform to 
producers and handlers. However, USDA has a long history in which 
certain categories of handlers have not been subject to the full 
regulatory scheme in order to achieve the AMAA's objective of orderly 
marketing.
    While having an absolute impact on milk orders' ability to set 
uniform prices to similarly situated handlers and return uniform prices 
to producers, the volume of milk represented by exempt plant sales has 
had and continues to have a de minimis impact on orderly marketing. As 
such, USDA has concluded that the full regulatory plan need not be 
applicable to such small handlers. The exempt plant limit on Class I 
route disposition and sales of packaged fluid milk products represents 
a measure of participation in the market that while exempt, is 
tolerable and does not undermine the purpose of the order system and 
its treatment of larger handlers.
    The same de minimus impact on orderly marketing owed to producer-
handler Class I sales volume has been, in part, the rationale for their 
exemption from full regulation. Simply stated, producer-handlers have 
historically conducted small scale operations and have been subject to 
certain requirements to remain exempt from full regulation. Those 
requirements have been that the operation: Be under the sole enterprise 
and risk of the producer-handler; bear the full responsibility and 
risks associated with the care and management of the dairy animals and 
other resources necessary for milk production; and engage in and 
exclusively control the processing and distribution of their Class I 
products. Under these and other requirements unique to each order, 
producer-handlers have been determined to have neither an advantage in 
their capacity as producers or as handlers.
    With these conditional requirements for producer-handlers, there 
was no need to consider further regulatory requirements for this 
category of handler. Additional amendments to the producer-handler 
definitions became necessary when producer-handler size was shown to be 
a cause of disorderly marketing conditions in the Arizona and Pacific 
Northwest marketing areas, and a cap of three million pounds per month 
on Class I dispositions in the marketing area was adopted.
    The record reveals that the number of producer-handlers and all 
other categories of handlers is declining. Opponents of change from the 
status quo conclude that this is justification to leave the producer-
handler provisions unchanged. This decision disagrees. In evaluating 
the impact producer-handlers may have on orderly marketing, the volume 
of milk marketed by any individual producer-handler is more important 
than the overall trend in the number of producer-handlers.
    The size of individual producer-handlers will impact orderly 
marketing conditions in any of the Federal order marketing areas if 
left without limit. Size of operation will have a direct bearing on 
competitive equity between producer-handlers and fully regulated 
handlers. Producer-handler size, as discussed above, will increasingly 
affect an order's ability to set uniform prices to similarly situated 
handlers and to producers. Producer-handler size will increasingly 
magnify disorderly marketing conditions and practices where the burden 
of balancing and surplus disposal is effectively transferred to the 
regulated market. These examples of the presence and anticipation of 
disorderly marketing conditions can be largely mitigated by 
establishing a reasonable limit on a producer-handlers' Class I route 
disposition and sales of packaged fluid milk products to other plants.
    Establishing a reasonable limit on total Class I route disposition 
and sales of packaged fluid milk products in all producer-handler 
definitions for all Federal milk marketing orders unifies the policy 
objectives of the AMAA to establish and maintain orderly marketing 
conditions. Establishment of a reasonable limit on Class I disposition 
and sales of packaged fluid milk products does not require changing 
other order-specific features contained in the producer-handler 
definitions that have been provided to address local marketing 
conditions. The addition of a uniform limit on producer-handler total 
monthly Class I route disposition and sales of packaged fluid milk 
products in all orders is consistent with the past establishment of the 
uniform limits, characteristics and features of various milk marketing 
order provisions applicable to other categories of regulated handlers.
    The limit acceptable to or broadly supported by both handler and 
producer interests is three million pounds of monthly sales. This 
decision finds that a 3-million pound per month limit on total Class I 
route disposition and sales

[[Page 10151]]

of packaged fluid milk products is reasonable. The evidence supports a 
conclusion that most producer-handlers continue to be small enterprises 
that have minimal impact in the marketing areas in which they operate. 
Their participation in the market is not giving rise to disorderly 
marketing conditions that warrant establishing a more restrictive limit 
on Class I disposition and sales of packaged fluid milk products. 
Implicit in this finding is that producer-handlers with no more than 3 
million pounds of monthly Class I disposition and sales of packaged 
fluid milk products represent a level of market participation such that 
the AMAA goal of establishing and maintaining orderly marketing is 
achieved.
    The record supports concluding that a direct relationship exists 
between producer-handler size and the potential for disorder. More 
specifically, the record supports the conclusion that adoption of a 
limit on producer-handlers' total monthly Class I route disposition and 
sales of packaged fluid milk products to other plants across all orders 
is necessary to maintain orderly marketing conditions. This represents 
a needed change to the producer-handler provisions of Orders 124 and 
131, which only consider producer-handlers' monthly Class I 
dispositions within the respective marketing area. Adoption of a limit 
on the total Class I route disposition and sales of packaged fluid milk 
products of producer-handlers is reasonable and should mitigate the 
inequitable conditions associated with distribution in other marketing 
areas or where the handling of milk is not regulated. The producer-
handlers with more than three million pounds of total Class I 
disposition and sales of packaged fluid milk products per month and 
which meet the pooling standards of an order will have all of their 
distribution of Class I products pooled and priced no matter where that 
milk is sold. The producer-handlers with more than three million pounds 
of total Class I disposition and sales of packaged fluid milk products 
per month and which do not meet the pooling standards of an order will 
be treated as partially regulated distributing plants for route sales 
in the marketing areas.
    Several comments and exceptions to the recommended decision noted 
that a producer-handler's transfers or sales of packaged fluid milk 
products to other plants are distinguished separately from the 
definition of route disposition. While transfers of packaged fluid milk 
products to other plants are certainly sales, such a measure of sales 
is technically not a component of the route disposition definition 
common to all milk marketing orders. To make more precise the findings 
of the recommended decision, this final decision specifically limits a 
producer-handler's exclusion from full regulation upon both sales of 
packaged fluid milk products to other plants during the month and sales 
that meet the route disposition definition. This decision agrees that 
it is appropriate to include and specify that a producer-handler's 
sales of packaged fluid milk products to other plants, together with 
route disposition during the month, for determining if the 3-million 
pound per month threshold has been met. Doing so provides for a 
complete measure of the Class I marketings of a producer-handler. 
Accordingly, the inclusion of a producer-handler's sales of packaged 
fluid milk products to other plants during the month is reflected in 
the amended producer-handler definitions of all milk marketing orders.
    An additional proposal, Proposal 24, seeking an unlimited exemption 
for producer-handlers marketing own-farm milk disposed of as fluid milk 
products through retail channels under the same handler's exclusive 
control is not adopted. This decision gave consideration to the 
testimony and evidence, which revealed that producer-handlers 
distributing fluid milk products exclusively through their own retail 
channels are self-contained and do not balance against pooled supplies. 
While this seems to adhere to a long-held producer-handler 
characteristic, the responsibility and risk for balancing is still 
relative to producer-handler size, as defined by total monthly Class I 
disposition, which represents a significant contributing factor to 
disorderly marketing. At issue is the ultimate displacement of Class I 
sales that would otherwise be supplied through regulated sources.
    This decision does not amend the producer-handler definitions to 
include unique labeling restrictions. The rationale offered in support 
of establishing labeling restrictions offers interesting scenarios of 
the consequences that may arise without its inclusion. The scenarios 
speak to how the restrictions will provide better assurances that 
producer-handlers cannot balance their Class I dispositions on the 
fully regulated market and cannot act together to effectively 
circumvent otherwise intended regulation. This decision finds such an 
addition to either the producer-handler or exempt plant definition to 
be overly proscriptive. The record lacks evidence, apart from 
theoretical constructions, demonstrating a reasonable need for its 
adoption. This recommended decision finds that producer-handlers with 
total Class I route disposition and sales of packaged fluid milk 
products in excess of three million pounds per month enjoy significant 
competitive sales advantages because they do not pay the Class I price 
for raw milk.
    Several comments and exceptions were filed that opposed the 
recommendation denying unique labeling provisions that were proposed. 
The rationale offered in support of establishing labeling restrictions 
presents a scenario in which exempt handlers would be organized in such 
a way that they could collectively supply fluid products under an 
identical label. This practice could allow securing of accounts that 
any single exempt handler in the arrangement would otherwise be unable 
to service based upon its own marketings (described as ``daisy-
chaining''). The record lacks evidence, apart from theoretical 
construction, demonstrating a reasonable need for its adoption.
    However, this decision does find that producer-handlers with total 
Class I route disposition and sales of packaged fluid milk products to 
other plants of more than three million pounds per month may shift the 
burden of surplus disposal to the regulated market through labeling. A 
central condition underlying the exemption of producer-handlers is that 
they bear the full burden of surplus disposal which prevents balancing 
at the expense of regulated handlers and the milk of producers pooled 
on an order. The record contains examples of producer-handlers 
supplying accounts with fluid products packaged under an identical 
label as supplied by a regulated handler. The Shamrock witness 
testified to a past occurrence in the Arizona marketing area which was 
addressed in a separate rulemaking. The Country Dairy witness testified 
that as a producer-handler, it supplies a retailer's locations within 
Michigan with the same label supplied by other processors. The Country 
Dairy witness also testified to packaging under the same label as 
Country Fresh, a fully regulated handler. While this decision does not 
find the need for adoption of unique labeling provisions, it is 
possible that a producer-handler may fail to meet requirements for 
producer-handler status because such behavior is reasonable evidence 
that bearing the full burden of surplus disposal has been avoided.
    While the adoption of a 3-million pound per month limit on total 
Class I disposition and sales of packaged fluid milk products to other 
plants will not completely eliminate the impact of

[[Page 10152]]

producer-handlers across the order system, it should result in a 
reduction in any current and future market disruption. It is also 
consistent with many of the positions detailed during this proceeding, 
and will likely prevent a significant increase in the magnitude of 
disruption observed in the marketing areas.

Ruling on Motions

    A motion submitted on behalf of Nature's Dairy moved for review and 
reversal of the Administrative Law Judge's decision to exclude the 
testimony of a witness on behalf of a producer-handler, namely Nature's 
Dairy. The motion requested that the hearing be reopened for the 
purpose of cross-examination of the Nature's Dairy witness. New England 
Producer-Handlers Association et al. and AIDA joined Nature's Dairy and 
submitted motions to that effect. The Administrative Law Judge denied 
the Nature's Dairy, New England Producer-Handler Association et al. and 
AIDA motions prior to certification of the record. The recommended 
decision concurred with the ruling of the Presiding Administrative Law 
Judge; accordingly, the motions submitted on behalf of Nature's Dairy, 
New England Producer-Handler Association et al. and AIDA were denied.
    Comments and exceptions to the recommended decision filed by AIDA 
motioned anew for the hearing to be reopened for the same reasons. 
Their comment expressed the opinion that not reopening the hearing 
results in an incomplete hearing record. Conversely, comments and 
exceptions to the recommended decision filed on behalf of the Handler 
Coalition supports USDA's denial of AIDA's motion based predominately 
on largely legal arguments. After careful consideration of the comments 
and exceptions, this final decision concurs with the ruling of the 
Administrative Law Judge. Accordingly, the motions for reopening the 
hearing of this proceeding are denied.

Rulings on Proposed Findings and Conclusions

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

General Findings

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

Rulings on Exceptions

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

Marketing Agreement and Order

    Annexed hereto and made a part hereof are two documents: A 
Marketing Agreement regulating the handling of milk, and an Order 
amending the orders regulating the handling of milk in the Northeast 
and other marketing areas, which has been decided upon as the detailed 
and appropriate means of effectuating the foregoing conclusions.
    It is hereby ordered that this entire decision and the two 
documents annexed hereto be published in the Federal Register.

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

    It is hereby directed that a referenda be conducted and completed 
on or before the 30th day from the date this decision in 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 orders as amended and hereby proposed to be amended, regulating the 
handling of milk in the Northeast, Appalachian, Florida, Southeast, 
Upper Midwest, Central, Mideast, Pacific Northwest, Southwest and 
Arizona marketing areas is approved or favored by producers, as defined 
under the terms of the order, as amended and as hereby proposed to be 
amended, who during such representative period were engaged in the 
production of milk for sale within the aforesaid marketing areas.
    The representative period for the conduct of such referenda is 
hereby determined to be May 2009.
    The agents of the Secretary of Agriculture to conduct such 
referenda are hereby designated to be the respective Market 
Administrators of the aforesaid orders.

List of Subjects in 7 CFR Parts 1001, 1005, 1006, 1007, 1030, 1032, 
1033, 1124, 1126, and 1131

    Milk marketing orders.

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

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

Findings and Determinations

    The findings and determinations hereinafter set forth supplement 
those that were made when the orders were first issued and when they 
were amended. The previous findings and determinations are hereby 
ratified and confirmed, except where they may conflict with those set 
forth herein.

[[Page 10153]]

    (a) Findings. A public hearing was held upon certain proposed 
amendments to the tentative marketing agreements and to the orders 
regulating the handling of milk in the Northeast and other marketing 
areas. The hearing was held pursuant to the provisions of the 
Agricultural Marketing Agreement Act of 1937, as amended (7 U.S.C. 601-
674), and the applicable rules of practice and procedure (7 CFR part 
900).
    Upon the basis of the evidence introduced at such hearing and the 
record thereof, it is found that:
    (1) The said orders as hereby amended, and all of the terms and 
conditions thereof, will tend to effectuate the declared policy of the 
Act;
    (2) The parity prices of milk, as determined pursuant to section 2 
of the Act, are not reasonable in view of the price of feeds, available 
supplies of feeds, and other economic conditions which affect market 
supply and demand for milk in the aforesaid marketing areas. The 
minimum prices specified in the orders as hereby amended are such 
prices as will reflect the aforesaid factors, insure a sufficient 
quantity of pure and wholesome milk, and be in the public interest;
    (3) The said orders as hereby amended regulate the handling of milk 
in the same manner as and are applicable only to persons in the 
respective classes of industrial or commercial activity specified in a 
marketing agreement upon which a hearing has been held; and
    (4) All milk and milk products handled by handlers, as defined in 
the marketing agreements and the orders as hereby amended, are in the 
current of interstate commerce in milk or its products.

Order Relative to Handling

    It is therefore ordered, that on and after the effective date 
hereof, the handling of milk in the Northeast and other marketing areas 
shall be in conformity to and in compliance with the terms and 
conditions of the order, as amended and, as hereby amended, as follows:
    For reasons set forth in the preamble, 7 CFR parts 1001, 1005, 
1006, 1007, 1030, 1032, 1033, 1124, 1126, and 1131 are proposed to be 
amended as follows:
    1. The authority citation for 7 CFR parts 1001, 1005, 1006, 
1007,1030, 1032, 1033, 1124, 1126, and 1131 continues to read as 
follows:

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

PART 1001--MILK IN THE NORTHEAST MARKETING AREA

    2. Amend Sec.  1001.10 by revising paragraph (a) to read as 
follows:


Sec.  1001.10  Producer-handler.

* * * * *
    (a) Operates a dairy farm and a distributing plant from which there 
is route disposition in the marketing area, and from which total route 
disposition and packaged sales of fluid milk products to other plants 
during the month does not exceed 3 million pounds;
* * * * *

PART 1005--MILK IN THE APPALACHIAN MARKETING AREA

    3. Amend Sec.  1005.10 by revising paragraph (a) to read as 
follows:


Sec.  1005.10  Producer-handler.

* * * * *
    (a) Operates a dairy farm and a distributing plant from which there 
is route disposition in the marketing area, and from which total route 
disposition and packaged sales of fluid milk products to other plants 
during the month does not exceed 3 million pounds;
* * * * *

PART 1006--MILK IN THE FLORIDA MARKETING AREA

    4. Amend Sec.  1006.10 by revising paragraph (a) to read as 
follows:


Sec.  1006.10  Producer-handler.

* * * * *
    (a) Operates a dairy farm and a distributing plant from which there 
is route disposition in the marketing area, and from which total route 
disposition and packaged sales of fluid milk products to other plants 
during the month does not exceed 3 million pounds;
* * * * *

PART 1007--MILK IN THE SOUTHEAST MARKETING AREA

    5. Amend Sec.  1007.10 by revising paragraph (a) to read as 
follows:


Sec.  1007.10  Producer-handler.

* * * * *
    (a) Operates a dairy farm and a distributing plant from which there 
is route disposition in the marketing area, and from which total route 
disposition and packaged sales of fluid milk products to other plants 
during the month does not exceed 3 million pounds;
* * * * *

PART 1030--MILK IN THE UPPER MIDWEST MARKETING AREA

    6. Amend Sec.  1030.10 by revising paragraph (a) to read as 
follows:


Sec.  1030.10  Producer-handler.

* * * * *
    (a) Operates a dairy farm and a distributing plant from which there 
is route disposition in the marketing area, and from which total route 
disposition and packaged sales of fluid milk products to other plants 
during the month does not exceed 3 million pounds;
* * * * *

PART 1032--MILK IN THE CENTRAL MARKETING AREA

    7. Amend Sec.  1032.10 by revising paragraph (a) to read as 
follows:


Sec.  1032.10  Producer-handler.

* * * * *
    (a) Operates a dairy farm and a distributing plant from which there 
is route disposition in the marketing area, and from which total route 
disposition and packaged sales of fluid milk products to other plants 
during the month does not exceed 3 million pounds;
* * * * *

PART 1033--MILK IN THE MIDEAST MARKETING AREA

    8. Amend Sec.  1033.10 by revising paragraph (a) to read as 
follows:


Sec.  1033.10  Producer-handler.

* * * * *
    (a) Operates a dairy farm and a distributing plant from which there 
is route disposition in the marketing area, and from which total route 
disposition and packaged sales of fluid milk products to other plants 
during the month does not exceed 3 million pounds;
* * * * *

PART 1124--MILK IN THE PACIFIC NORTHWEST MARKETING AREA

    9. Revise Sec.  1124.10 introductory text to read as follows:


Sec.  1124.10  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

[[Page 10154]]

all of the requirements of this section have been met.
* * * * *

PART 1126--MILK IN THE SOUTHWEST MARKETING AREA

    10. Amend Sec.  1126.10 by revising paragraph (a) to read as 
follows:


Sec.  1126.10  Producer-handler.

* * * * *
    Producer-handler means a person who: (a) Operates a dairy farm and 
a distributing plant from which there is route disposition in the 
marketing area, and from which total route disposition and packaged 
sales of fluid milk products to other plants during the month does not 
exceed 3 million pounds;
* * * * *

PART 1131--MILK IN THE ARIZONA MARKETING AREA

    11. Revise Sec.  1131.10 introductory text to read as follows:


Sec.  1131.10  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.
* * * * *

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

Marketing Agreement Regulating the Handling of Milk in Certain 
Marketing Areas

    The parties hereto, in order to effectuate the declared policy of 
the Act, and in accordance with the rules of practice and procedure 
effective thereunder (7 CFR part 900), desire to enter into this 
marketing agreement and do hereby agree that the provisions referred to 
in paragraph I hereof, as augmented by the provisions specified in 
paragraph II hereof, shall be and are the provisions of this marketing 
agreement as if set out in full herein.
    I. The findings and determinations, order relative to handling, and 
the provisions of Sec.  ------ to ------\10\ all inclusive, of the 
order regulating the handling of milk in the ------------\11\ marketing 
area (7 CFR part --------\12\); and
---------------------------------------------------------------------------

    \10\ First and last section of order.
    \11\ Name of order.
    \12\ Appropriate part number.
---------------------------------------------------------------------------

    II. The following provisions: Sec.  ------------\13\ Record of milk 
handled and authorization to correct typographical errors.
---------------------------------------------------------------------------

    \13\ Next consecutive section number.
---------------------------------------------------------------------------

    (a) Record of milk handled. The undersigned certifies that he/she 
handled during the month of ------------\14\, ------------ 
hundredweight of milk covered by this marketing agreement.
---------------------------------------------------------------------------

    \14\ 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: February 18, 2010.
Edward Avalos,
Under Secretary, Marketing and Regulatory Programs.
[FR Doc. 2010-4046 Filed 2-26-10; 4:15 pm]
BILLING CODE P


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