Vol. 78 Thursday, 

No. 26 February 7, 2013 

Part IV 

Department of Agriculture 

Agricultural Marketing Service 

7 CFR Part 1000 

Milk in the Northeast and Other Marketing Areas; Final Decision on 

Proposed Amendments to Marketing Agreements and Orders and 

Termination of a Portion of the Proceeding; Proposed Rule 

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9248 Federal Register / Vol. 78, No. 26 / Thursday, February 7, 2013 / Proposed Rules 

DEPARTMENT OF AGRICULTURE 

Agricultural Marketing Service 

7 CFR Part 1000 

[Doc. No. AMS–DA–07–0026; AO–14–A77 et 

al.; DA–07–02] 

Milk in the Northeast and Other 

Marketing Areas; Final Decision on 

Proposed Amendments to Marketing 

Agreements and Orders and 

Termination of a Portion of the 

Proceeding 

AGENCY: Agricultural Marketing Service, 

USDA. 

ACTION: Proposed rule. 

SUMMARY: This document is the final 

decision proposing to permanently 

adopt changes to the manufacturing cost 

allowances and the butterfat yield factor 

used in Class III and Class IV productprice formulas applicable to all Federal 

milk marketing orders. These 

amendments were adopted by an 

interim final rule issued on, July 25, 

2008, that became effective on October 

1, 2008. This document also terminates 

the proceeding with regard to additional 

proposals that addressed the collection 

of manufacturing cost information, the 

use of an energy cost adjustor and 

providing for a cost add-on feature to 

Class III and Class IV product-price 

formulas. The orders amended by this 

decision require producer approval. 

Referenda will be conducted in three 

markets and dairy farmer cooperatives 

will be polled in the other seven 

markets to determine whether dairy 

farmers approve the issuance of the 

orders as amended. 

FOR FURTHER INFORMATION CONTACT: 

William Francis, Director, Order 

Formulation and Enforcement Division, 

USDA/AMS/Dairy Programs, Order 

Formulation and Enforcement, Stop 

0231—Room 2971–S, 1400 

Independence Avenue SW., 

Washington, DC 20250–0231, (202) 720– 

7183, email address: 

william.francis@ams.usda.gov. 

SUPPLEMENTARY INFORMATION: This final 

decision proposes to permanently adopt 

amendments to the manufacturing 

(make) allowances for cheese, butter, 

nonfat dry milk (NFDM) and dry whey 

contained in the Class III and Class IV 

product price formulas (Proposal 1). 

Specifically, this decision proposes to 

permanently adopt the following make 

allowances: $0.2003 per pound of 

cheese; $0.1715 per pound of butter; 

$0.1678 per pound of nonfat dry milk 

(NFDM); and $0.1991 per pound of dry 

whey. This decision also proposed to 

permanently increase the butterfat yield 

factor in the butterfat price formula from 

1.20 to 1.211 (Proposal 6). These makeallowances and butterfat yield factor 

have been in use since October 1, 2008, 

following producer approval of the 

tentative final decision (73 FR 51352). 

This decision also addresses 

proposals published in the hearing 

notice as Proposals 3, 4, 5, 6, 7, 8, 9, 10, 

11, 12, 13, 14, 15, 16 and 18 that seek 

to change various features of the Class 

III and Class IV product-price formulas. 

This document also terminates the 

proceeding with regard to Proposals 2, 

17 and 20. 

This administrative action is governed 

by the provisions of sections 556 and 

557 of Title 5 of the United States Code 

and, therefore, is excluded from the 

requirements of Executive Order 12866. 

The amendments to the rules 

proposed herein have been reviewed 

under Executive Order 12988, Civil 

Justice Reform. They are not intended to 

have a retroactive effect. The 

amendments would not preempt any 

state or local laws, regulations, or 

policies, unless they present an 

irreconcilable conflict with this rule. 

The Agricultural Marketing 

Agreement Act of 1937 (Act), as 

amended (7 U.S.C. 604–674), provides 

that administrative proceedings must be 

exhausted before parties may file suit in 

court. Under section 608c(15)(A) of the 

Act, any handler subject to an order may 

request modification or exemption from 

such order by filing with the U.S. 

Department of Agriculture (USDA) a 

petition stating that the order, any 

provision of the order, or any obligation 

imposed in connection with the order is 

not in accordance with the law. A 

handler is afforded the opportunity for 

a hearing on the petition. After a 

hearing, USDA would rule on the 

petition. The Act provides that the 

district court of the United States in any 

district in which the handler is an 

inhabitant, or has its principal place of 

business, has jurisdiction in equity to 

review the USDA’s ruling on the 

petition, provided a bill in equity is 

filed not later than 20 days after the date 

of the entry of the ruling. 

Regulatory Flexibility Act and 

Paperwork Reduction Act 

In accordance with the Regulatory 

Flexibility Act (5 U.S.C. 601–612), the 

Agricultural Marketing Service has 

considered the economic impact of this 

action on small entities and has certified 

that this proposed rule will not have a 

significant economic impact on a 

substantial number of small entities. For 

the purpose of the Regulatory Flexibility 

Act, a dairy farm is considered a small 

business if it has an annual gross 

revenue of less than $750,000, and a 

dairy products manufacturer is a small 

business if it has fewer than 500 

employees. 

For the purposes of determining 

which dairy farms are small businesses, 

the $750,000 per year criterion was used 

to establish a production guideline of 

500,000 pounds per month. Although 

this guideline does not factor in 

additional monies that may be received 

by dairy farms, it should be an inclusive 

standard for most small dairy farms. For 

purposes of determining a handler’s size 

of operation, if the plant is part of a 

larger company operating multiple 

plants that collectively exceed the 500- 

employee limit, the plant will be 

considered a large business even if the 

local plant has fewer than 500 

employees. 

For the month of February 2007, the 

month the initial public hearing was 

held, the milk of 49,712 dairy farms was 

pooled on the Federal order system. Of 

the total, 46,729 dairy farms, or 94 

percent, were considered small 

businesses. During the same month, 352 

plants were regulated by or reported 

their milk receipts to be pooled and 

priced on a Federal order. Of the total, 

186 plants, or 53 percent, were 

considered small businesses. 

This decision proposes to 

permanently amend the make 

allowances contained in the formulas 

used to compute component prices and 

the minimum class prices in all Federal 

milk orders that were implemented 

October 1, 2008, on an interim basis, 

without change. Specifically, the make 

allowance for cheese continues to be 

$0.1715 per pound (initially increased 

from $0.1682 per pound); the make 

allowance for NFDM continues to be 

$0.1678 per pound (initially increased 

from $0.1570); the make allowance for 

butter continues to be $0.1715 per 

pound (initially increased from 

$0.1202); and the make allowance for 

dry whey continues to be $0.1991 

(initially increased from $0.1956). The 

butterfat yield factor in the butterfat 

price formulas continues to be 1.211 

(initially increased from 1.20). 

The make allowances serve to 

approximate the average cost of 

producing cheese, butter, NFDM and 

dry whey for manufacturing plants 

located in Federal milk marketing areas. 

The established criteria for the make 

allowance changes are applied in an 

identical fashion to both large and small 

businesses and will not have any 

different impact on those businesses 

producing manufactured milk products. 

An economic analysis has been 

performed that discusses impacts of the 

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Federal Register / Vol. 78, No. 26 / Thursday, February 7, 2013 / Proposed Rules 9249 

1Official Notice is taken of a Final Rule (77 FR 

8717) published February 15, 2012. Effective April 

1, 2012, USDA’s AMS began collecting and 

reporting wholesale dairy product prices. This was 

previously managed by the National Agricultural 

Statistic Service (NASS). 

2Official Notice is taken of a Notice (77 FR 2282) 

published April 13, 2012. Effective April 18, 2012, 

AMS surveyed prices are used in the price 

discovery mechanism for the component values of 

raw milk. These component prices are then used to 

determine FMMO minimum classified prices. 

proposed amendments on industry 

participants including producers and 

manufacturers. It can be found on the 

AMS Web site at www.ams.usda.gov/ 

dairy. Based on that economic analysis, 

the proposed amendments will not have 

a significant economic impact on a 

substantial number of small entities. 

The Agricultural Marketing Service 

(AMS) is committed to complying with 

the E-Government Act, to promote the 

use of the Internet and other 

information technologies to provide 

increased opportunities for citizen 

access to Government information and 

services, and for other purposes. 

This decision does not require 

additional information collection that 

needs clearance by the Office of 

Management and Budget (OMB) beyond 

currently approved information 

collection. The primary sources of data 

used to complete the forms are routinely 

used in most business transactions. The 

forms require only a minimal amount of 

information that can be supplied 

without data processing equipment or a 

trained statistical staff. Thus, the 

information collection and reporting 

burden is relatively small. Requiring the 

same reports for all handlers does not 

significantly disadvantage any handler 

that is smaller than the industry 

average. 

Economic Analysis 

In order to assess the impact of the 

proposed changes in Federal order 

product price formulas, the Department 

conducted an economic analysis. This 

analysis was discussed in the tentative 

partial final decision (73 FR 35306) and 

remains unchanged. The complete 

analysis is available on the Dairy 

Programs Web site which can be 

accessed at www.ams.usda.gov/dairy. 

Prior documents in this proceeding 

Notice of Hearing: Issued February 5, 

2007; published February 9, 2007 (72 FR 

6179). 

Supplemental Notice of Hearing: 

Issued February 14, 2007; published 

February 20, 2007 (72 FR 7753). 

Notice to Reconvene Hearing: Issued 

March 15, 2007; published March 21, 

2007 (72 FR 13219). 

Notice to Reconvene Hearing: Issued 

May 2, 2007; published May 8, 2007 (72 

FR 25986). 

Tentative Partial Final Decision: 

Issued June 16, 2008; published June 20, 

2008 (73 FR 35306). 

Interim Final Rule: Issued July 25, 

2008; published July 31, 2008 (73 FR 

44617). 

Delay of Effective Date: Issued August 

28, 2008; published September 3, 2008 

(73 FR 51352). 

Preliminary Statement 

Notice is hereby given of the filing 

with the Hearing Clerk of this final 

decision and termination of proceeding 

with respect to the proposed adopted 

amendments to the tentative marketing 

agreements and the orders regulating the 

handling of milk in the Northeast and 

other marketing areas. This notice is 

issued pursuant to the provisions of the 

Act and applicable rules of practice and 

procedure governing the formulation of 

marketing agreements and marketing 

orders (7 CFR part 900). 

A public hearing was held upon 

proposed amendments to the marketing 

agreements and the orders regulating the 

handling of milk in the Northeast and 

other marketing areas. The hearing was 

held, pursuant to the provisions of the 

Act, as amended (7 U.S.C. 601–674), 

and the applicable rules of practice and 

procedure governing the formulation of 

marketing agreements and marketing 

orders (7 CFR part 900.) 

The proposed amendments set forth 

below are based on the record of the 

first session of a public hearing held in 

Strongsville, Ohio, on February 26– 

March 2, 2007, pursuant to a notice of 

hearing issued February 5, 2007, 

published February 9, 2007 (72 FR 

6179); a second session of a public 

hearing held in Indianapolis, Indiana, 

on April 9–13, 2007, pursuant to a 

reconvened hearing notice issued March 

15, 2007, published March 21, 2007 (72 

FR 13219); and a third session of a 

public hearing held in Pittsburgh, 

Pennsylvania, on July 9–11, 2007, 

pursuant to a reconvened hearing notice 

issued May 2, 2007, published May 8, 

2007 (72 FR 25986). 

The material issues on the record of 

the hearing relate to: 

A. Amending the product-price 

formulas used to compute Class III and 

Class IV prices. 

B. Terminating the proceeding with 

respect to proposals 2, 17 and 20. 

Findings and Conclusions 

A. Amending the Product-Price 

Formulas Used To Compute Class III 

and Class IV Prices 

This final decision proposes to adopt 

a proposal published in the hearing 

notice as Proposal 1 which seeks to 

amend the manufacturing allowances 

for butter, cheese, NFDM and dry whey 

using the most currently available data, 

and a portion of Proposal 6 that 

increases the butterfat yield in the 

butterfat price formula. The provisions 

contained herein were adopted on an 

interim basis and became effective 

October 1, 2008. Specifically, this 

decision finalizes the following 

manufacturing allowances: Cheese— 

$0.2003 per pound, butter—$0.1715 per 

pound, NFDM—$0.1678 per pound and 

dry whey—$0.1991 per pound. This 

decision also increases the butterfat 

yield factor in the butterfat price 

formula from 1.20 to 1.211. 

The Federal Milk Marketing Order 

(FMMO) program uses wholesale 

product-price formulas to compute 

prices handlers must account for in the 

marketwide pooling of milk used in the 

four classes of products. These formulas 

rely on the price of finished products to 

determine the minimum classified 

prices handlers pay for raw milk. In 

addition, the Class III and Class IV 

prices form the base from which Class 

I and Class II prices are determined. 

This end-product pricing system was 

implemented on January 1, 2000 

(published February 12, 1999; 64 FR 

70868). 

The product-price formulas are 

computed by using component values 

from Agricultural Marketing Service 

(AMS) surveyed prices of manufactured 

dairy products.1 The pricing system 

determines butterfat prices for milk 

used in products in each of the four 

classes from a surveyed butter price; 

protein and other solids prices for milk 

used in Class III products from surveyed 

cheese and dry whey prices; and a 

nonfat solids price for milk used in 

Class II and Class IV products from 

surveyed nonfat dry milk product 

prices.2 The skim milk portion of the 

Class I price may be derived from either 

the protein and other solids price, or 

from the nonfat dry milk price 

depending on the relationship between 

the Class III and IV price. The butterfat, 

protein, other solids and nonfat solids 

prices are all derived in a similar 

manner: Average AMS survey price 

minus a manufacturing (make) 

allowance times a yield factor. The yield 

factor is an approximation of the 

quantity of a specific product that can 

be made from a hundredweight (cwt) of 

milk. The yield factors were last 

amended on April 1, 2003 (published 

February 12, 2003; 68 FR 7063). 

The make allowance factor represents 

the cost manufacturers incur in 

processing raw milk into one pound of 

product. Federal milk order pricing 

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9250 Federal Register / Vol. 78, No. 26 / Thursday, February 7, 2013 / Proposed Rules 

formulas currently contain the following 

make allowances: Cheese—$0.2003 per 

pound, butter—$0.1715 per pound, 

NFDM—$0.1678 per pound and dry 

whey—$0.1991 per pound. These make 

allowances were adopted on July 25, 

2008, (73 FR 44617) and became 

effective on October 1, 2008, on an 

interim basis as a result of this 

proceeding. The make allowances were 

determined on the basis of California 

Department of Food and Agriculture 

(CDFA) and Cornell Program on Dairy 

Markets and Policy (CPDMP) surveys of 

product manufacturing costs. The 

current make allowances for butter and 

nonfat dry milk were determined by 

using a weighted average of the CDFA 

and CPDMP surveys over national 

production volumes. The cheese make 

allowance was determined by relying on 

the CDFA 2006 survey average cheese 

manufacturing cost and the dry whey 

make allowance was determined by 

relying on the CPDMP 2006 survey. All 

make allowances were adjusted for 

marketing costs. 

Nineteen proposals were published in 

the hearing notice for this proceeding. 

Proposals 4, 5 and 11 were withdrawn 

at the hearing by proponents in support 

of other noticed proposals. No further 

reference to these proposals will be 

made. 

A proposal published in the hearing 

notice as Proposal 1, offered by AgriMark Cooperative (Agri-Mark), seeks to 

amend the Class III and Class IV make 

allowances by using the most current 

plant cost survey data available. AgriMark is a Capper-Volstead cooperative 

with approximately 1,400 memberowners throughout New England and 

New York, and operates 4 

manufacturing plants. 

Agri-Mark was also the proponent of 

Proposal 2 that seeks to amend the Class 

III and Class IV product price formulas 

to annually update the manufacturing 

allowances using an annual 

manufacturing cost survey of cheese, 

whey powder, butter, and nonfat dry 

milk plants (located outside of 

California). The proposed amendments 

would grant authority to Market 

Administrators to administer the survey, 

select the sample plants, and collect, 

audit, and assemble cost information. 

A proposal published in the hearing 

notice as Proposal 3, offered by Dairy 

Producers of New Mexico (DPNM), 

seeks to amend the manufacturing 

allowances contained in the Class III 

and Class IV product price formulas. 

Specifically, this proposal seeks to set 

the make allowances at the following 

levels: $0.1108 per pound for butter; 

$0.1638 per pound for cheese; $0.1410 

per pound for NFDM; and $0.1500 per 

pound for dry whey. DPNM is an 

association of dairy producers located in 

New Mexico and West Texas. 

DPNM was the proponent of 

Proposals 6, 7 and 8 that seek to amend 

the yield factors and the butterfat 

recovery rate of the Class III and Class 

IV product price formulas. Proposal 6 

seeks to amend the butter price formula 

by increasing the butterfat yield factor 

from 1.20 to 1.211 and to amend the 

protein price formula by increasing the 

butterfat recovery rate from 90 percent 

to 94 percent. Proposal 7 seeks to 

eliminate the farm-to-plant shrinkage 

and butterfat shrinkage adjustments of 

all yield factors. Proposal 8 seeks to 

increase the nonfat solids yield factor 

from 0.99 to 1.02, and increase the 

protein price yield factor for cheese 

from 1.383 to 1.405 and for butterfat 

from 1.572 to 1.653. 

Proposal 9 was offered by the 

International Dairy Foods Association 

(IDFA). Proposal 9 seeks to amend the 

Class III and Class IV product-price 

formulas by adjusting the protein price 

formula to reflect the lower value and 

reduced volume of butterfat recoverable 

as whey cream. IDFA is a trade 

association with 530 members 

representing manufacturers, marketers, 

distributors, and suppliers of fluid milk 

and related products. 

Proposal 10 was submitted on behalf 

of Agri-Mark. Proposal 10 seeks to 

amend the Class III and Class IV 

product-price formulas by reducing the 

protein price to reflect the lower selling 

price of whey butter. 

Proposal 12 was offered by IDFA. 

Proposal 12 seeks to amend the Class III 

and Class IV product price formulas by 

eliminating the 3-cent cost adjustment 

for cheese manufacturing of 500-pound 

barrels contained in the protein price 

formula. 

Proposal 13 was offered by Dairy 

Farmers of America, Inc. (DFA) and the 

Northwest Dairy Association (NDA). 

Proposal 13 seeks to amend the Class III 

and Class IV product-price formulas by 

removing the barrel cheese price as a 

cost component of the protein price 

formula. DFA is a Capper-Volstead 

cooperative with 13,500 memberowners producing milk in 49 states. 

NDA is a Capper-Volstead cooperative 

with approximately 610 memberowners, and operates 6 manufacturing 

plants and 4 distributing plants in the 

western United States. 

Proposal 14 was advanced by AgriMark. Proposal 14 seeks to amend the 

Class III and Class IV product price 

formulas by using a combination of the 

weekly NASS and Chicago Mercantile 

Exchange (CME) cheese price series to 

determine the cheese price contained in 

the Class III and Class IV product-price 

formulas. 

Proposal 15 was offered by DPNM. 

This proposal seeks to replace the NASS 

commodity price surveys with CME 

commodity prices in each of the price 

formulas except for the other solids 

formula. The dry whey price in the 

other solids formulas would continue to 

be derived from the NASS dry whey 

price survey. 

Proposal 16 was offered by National 

All-Jersey, Inc. (NAJ). Proposal 16 seeks 

to amend the Class III and Class IV 

product-price formulas by eliminating 

the other solids price and adding the 

equivalent value of dry whey to the 

protein price formula. NAJ is a breed 

organization with more than 1,000 

members. 

Proposal 17 was offered by the 

National Milk Producers Federation 

(NMPF). The proposal seeks to amend 

the Class III and Class IV product-price 

formulas to incorporate a monthly 

energy cost adjustment based on 

monthly changes in the manufacturing 

price indices for industrial natural gas 

and industrial electricity as published 

by the Bureau of Labor Statistics. NMPF 

is an association consisting of 33 dairyfarmer cooperative members 

representing nearly three-quarters of 

U.S. dairy farmers. 

Proposal 18 was offered by the Maine 

Dairy Industry Association (MDIA). 

Proposal 18 seeks to amend the Class III 

and Class IV product-price formulas by 

incorporating a factor to account for any 

monthly spread between component 

price calculations for milk and a 

competitive pay price for equivalent 

Grade A milk. MDIA is an association 

that represents all of Maine’s 350 dairy 

farmers. 

A proposal published in a 

supplemental hearing notice as Proposal 

20 was submitted on behalf of Dairylea 

Cooperative, Inc. (Dairylea). Proposal 20 

seeks to amend the Class III and Class 

IV price formulas by establishing costof-production add-ons that 

manufacturers could include in the 

selling price of their products but would 

not be included in the determination of 

the NASS survey prices. Dairylea is a 

Capper-Volstead cooperative with 2,400 

member-owners located in seven 

northeastern states. 

To provide order to the hearing 

testimony, post-hearing briefs and 

comments and exceptions to the 

tentative final decision, the summary of 

testimony is organized as follows: 

1. Make Allowances: Proposals 1, 2 and 3 

2. Product Yields and Butterfat Recovery 

Percentage: Proposals 6, 7 and 8 

3. Value of Butterfat in Whey: Proposals 9 

and 10 

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4. Barrel Cheese Price: Proposals 12 and 13 

5. Product Price Series: Proposals 14, 15 and 

18 

6. Other Solids Price: Proposal 16 

7. Energy Cost Adjuster; Proposal 17 

8. Cost-of-Production Add-on; Proposal 20 

1. Make Allowances 

A witness from Cornell University 

(Cornell witness) testified regarding the 

2006 manufacturing cost survey (2006 

survey) conducted by the Cornell 

Program on Dairy Markets and Policy 

(CPDMP), to assess the manufacturing 

costs of plants producing cheddar 

cheese, dry whey, butter and NFDM. 

The witness did not testify in support of 

or in opposition to any proposal 

presented at the hearing. The witness 

explained that an earlier study, the 

CPDMP 2005 manufacturing cost survey 

(2005 survey), was contracted in part by 

USDA and was presented at a 2006 

rulemaking hearing (71 FR 52502), and 

was a factor considered by USDA in 

developing the make allowances that 

became effective March 1, 2007, (71 FR 

78333). The witness said that some 

manufacturing plants that participated 

in the 2005 survey requested a new 

survey to reflect more current cost 

information. 

The Cornell witness said that the 

plants that participated in the 2005 

survey were asked to participate in the 

2006 survey. The witness stated that 21 

plants agreed to participate and of those 

plants, 19 were deemed to have 

acceptable data to be included in the 

2006 survey. Plants submitted data 

corresponding to their most recent fiscal 

year; most of the data observations 

occurred in calendar year 2006, the 

witness said. The data was not audited 

by the witness. The witness explained 

that if a plant produced multiple 

products they were asked to allocate 

manufacturing costs for each product. 

However, if they failed to do so the 

witness allocated costs on a per pound 

of solids basis in the finished product. 

The average manufacturing costs 

detailed in the study were on a per 

pound of finished product basis and 

were not adjusted for moisture content, 

the witness said. 

The Cornell witness said that 11 

cheese plants participated in the 2006 

survey compared with 16 cheese plants 

in the 2005 survey. Eight of those plants 

(one classified as a large plant and the 

other seven as small plants) also 

participated in the 2005 survey; the 

three remaining plants that participated 

in the 2006 survey were asked to 

participate in 2005 but submitted data 

too late for inclusion. The witness 

testified that five small cheese plants 

that were included in the 2005 survey 

opted not to participate in the 2006 

survey. Of the 11 plants, the witness 

classified 7 as small plants and the 

remaining 4 as large volume plants. The 

witness testified that the weighted 

average manufacturing cost of the 2006 

cheese plant sample was $0.1584 per 

pound, a decrease of $0.0054 per pound 

from 2005. The witness said that 

comparing the costs for the 8 plants that 

participated in both surveys revealed a 

weighted average cost increase of $0.017 

per pound between the 2005 and 2006 

surveys. The total pounds covered by 

the 2006 survey increased from 

approximately 60 million pounds in 

2005 to nearly 119 million pounds in 

2006. The Cornell witness asserted that 

the 2005 survey over-sampled small 

plants while the 2006 survey oversampled large plants. The witness noted 

that the average packaging cost for 

cheese in the 2006 survey was only for 

40-pound block production. If a plant 

produced barrel cheese the witness 

assigned it an average 40-pound block 

packaging cost before computing the 

average manufacturing costs for the 

entire sample. 

The Cornell witness said that 7 whey 

plants participated in the 2006 survey 

and their weighted average cost was 

$0.1976 per pound—an increase of 

$0.0035 per pound from the 2005 

survey. According to the witness, the 7 

participating whey plants were 

associated with cheese plants that were 

also included in the 2006 survey. The 

witness noted that 12 whey plants 

participated in the 2005 survey. 

The Cornell witness said that 4 butter 

plants participated in the 2006 survey; 

3 of the plants also participated in the 

2005 survey. The weighted average cost 

of the 4 plants was $0.1846 per pound, 

an increase of $0.0738 per pound over 

the 2005 survey. The survey accounted 

for 57.6 million pounds of butter. The 

witness testified that significant cost 

allocation problems and data quality 

problems with the 2005 butter data were 

major reasons for the large increase in 

the weighted average cost from 2005 to 

2006. The witness testified that the 2005 

survey butter data was not accurate, but 

asserted that the allocation problems 

were corrected in the 2006 survey. 

While maintaining that the 2006 survey 

data was reliable, the witness said that 

a larger sample size would have been 

preferred. The witness also noted that 

the manufacturing costs submitted by 

one of the butter plants in the 2006 

survey did include the cost of 

transporting cream from its drying plant 

to its butter plant. 

The Cornell witness said that the 2006 

survey for NFDM consisted of 7 of the 

8 NFDM plants that participated in the 

2005 survey. According to the witness, 

the weighted average cost of the 7 plants 

was $0.1662 per pound, an increase of 

$0.0239 per pound from 2005. The 

witness explained that the weighted 

average cost increase is partially 

explained by increases in real costs 

(labor, packaging, etc.), but also partly 

because of a change in the methodology 

of indirectly allocating costs between 

butter and NFDM. According to the 

witness, there were flaws in the method 

used to indirectly allocate costs for 

NFDM in the 2005 study that resulted 

in understating the cost of processing 

NFDM. The witness claimed that an 

attempt was made in the 2006 survey to 

correct this understated processing cost. 

The witness did not explain the 

reported flawed methodology in the 

2005 survey or the methodological 

changes for the 2006 survey. According 

to the witness, the 2006 survey 

accounted for 70.1 million pounds of 

NFDM, an increase of 15 million 

pounds. 

A witness appearing on behalf of 

Agri-Mark testified in support of 

Proposals 1 and 2. The witness 

explained that Proposal 1 seeks to 

update the make allowances adopted on 

an interim final basis (71 FR 78333), 

effective March 1, 2007, using 2005 

CDFA data. The witness asserted that 

this update would increase the butter, 

NFDM and cheese make allowances by 

$0.0014, $0.0092 and $0.0029 per 

pound, respectively. The witness was of 

the opinion that the dry whey make 

allowance should incorporate the 2005 

CDFA data which reflects an average 

cost of $0.2851 per pound. 

The witness reiterated Agri-Mark’s 

position expressed in comments to a 

previous tentative final decision (71 FR 

67467) that proposed adoption of the 

make allowances that were adopted in 

2006. The witness concluded that using 

this weighting methodology (including a 

$0.0015 per pound marketing cost 

factor) the resulting make allowances 

should be: $0.1780 per pound for 

cheese, $0.1351 per pound for butter, 

$0.1510 for NFDM and $0.2090 per 

pound for dry whey. 

The Agri-Mark witness conceded that 

increasing the make allowances would 

assist high-cost plants in covering their 

costs while creating a financial windfall 

for low-cost plants. In turn, the witness 

said, the low cost plants could use the 

additional revenue to sell products at a 

lower cost, pay producers a higher 

price, or increase their financial returns. 

The witness said that any financial 

gains low-cost plants in the 

southwestern region earn from a high 

make allowance would not harm highcost plants in the Northeast because it 

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is too costly to transport milk from the 

southwestern U.S. to the northeast 

region. The witness believed that 

competitive issues resulting from high 

make allowances would only arise if a 

low-cost plant was located next door to 

a high-cost plant that competes for the 

same milk supply. 

The Agri-Mark witness advanced 

Proposal 2 seeking to establish an 

annual manufacturing cost survey, 

administered by USDA that would 

automatically update make allowances 

without requiring a rulemaking 

proceeding. On brief, Agri-Mark 

withdrew the automatic updating 

portion of this proposal. The witness 

explained that manufacturing input 

prices fluctuate in the short-run and an 

annual survey would ensure more 

timely recognition of these fluctuations 

in make allowances. The witness said 

that the CPDMP survey should provide 

the basic methodology needed to 

conduct the survey and that any 

changes to the methodology should be 

done through the formal rulemaking 

process. The witness asserted that the 

survey should be administered by 

Market Administrator audit personnel 

and the plant sample, preferably larger 

than the CPDMP sample, should be 

selected by random sampling. The 

witness also supported auditing 

surveyed plants and asserted that this 

function should be funded by payments 

from the Market Administrator’s 

administrative assessment funds. The 

witness said that if the survey was 

audited, the use of CDFA cost data 

would no longer be necessary in 

determining make allowances. The 

witness also supported addressing the 

proposed manufacturing cost survey in 

a recommended decision to allow for 

public comments. 

The Agri-Mark witness was of the 

opinion that based on the CPDMP 2006 

survey the make allowances should be 

set at the higher of: (1) A level that 

would allow a minimum of 80 percent 

of the producer milk used by Class III 

and Class IV plants to cover their costs; 

or (2) A level that would allow a 

minimum of 25 percent of the producer 

milk volume used by Class III and Class 

IV plants in any specific Federal order 

annually pooling at least 4 billion 

pounds of milk to cover their costs. The 

Agri-Mark witness opposed Proposal 3. 

A witness appearing on behalf of 

Land O’Lakes (LOL) testified in support 

of Proposals 1 and 2. According to the 

witness, LOL is a Capper-Volstead 

cooperative with over 3,000 members 

that owns 4 manufacturing plants in the 

United States. The witness supported 

updating the current make allowances 

with CDFA manufacturing cost data as 

advanced in Proposal 1. The witness 

advocated that the audited CDFA whey 

manufacturing cost data be included in 

the whey make allowance computation. 

The witness asserted that the make 

allowances should be recalculated by 

weighting the CDFA and CPDMP data 

by the survey sample volumes, not 

national product volumes which the 

witness argued was not statistically 

valid. The witness concluded that the 

new make allowances (using LOL’s 

proposed weighting) should be as 

follows: $0.1780 for cheese; $0.2090 for 

dry whey; $0.1560 for NFDM; and 

$0.1351 for butter. 

The LOL witness supported the 

annual cost survey offered in Proposal 

2, with technical modifications. The 

witness stated that the authority for 

collecting plant cost data should be 

granted to the AMS Administrator, that 

the plant sample be limited to plants 

located outside of California that receive 

pooled (producer) milk, and that the 

survey results be combined with the 

CDFA data to determine appropriate 

Federal order make allowance levels. 

The witness opposed the portion of 

Proposal 2 that would set make 

allowances at a level that would cover 

the cost of manufacturing for the highest 

cost Federal order marketing area. The 

witness said that classified prices are 

determined on a national, not a regional 

basis, and therefore relying on regional 

costs is inappropriate. The witness was 

of the opinion that USDA should clearly 

identify the target product volume and 

percentage of plants that should be 

covered by new make allowances that 

result from this proceeding. 

The LOL witness opposed Proposal 3 

seeking to exclude CDFA manufacturing 

cost data when computing new make 

allowances. The witness argued that 

since 2000 the Department has 

continuously considered CDFA 

manufacturing cost data when 

determining new make allowance levels 

and asserted that there is no justification 

to modify that policy. The witness 

elaborated that classified prices are 

determined using a national survey that 

includes California plants and therefore 

including California plant costs when 

determining make allowance levels is 

appropriate. 

A witness testifying on behalf of 

Michigan Milk Producers Association 

(MMPA) testified in support of 

Proposals 1 and 2, and in opposition to 

Proposal 3. According to the witness, 

MMPA is a Capper-Volstead cooperative 

with approximately 2,400 members that 

markets 3.5 billion pounds of milk 

annually and operates 2 manufacturing 

plants. The witness offered support for 

Proposal 1 to update the make 

allowances based on the most currently 

available data. The MMPA witness 

stressed support for Proposal 2’s annual 

survey of manufacturing costs that 

would be administered by AMS through 

its Market Administrators. 

A witness appearing on behalf of NDA 

testified regarding the CPDMP 2005 

survey that was used to determine 2006 

make allowance levels. The witness said 

that NDA participated in the study and 

that costs for its NFDM plants were 

incorrectly allocated. The witness 

estimated that NDA’s NFDM production 

represented approximately 54 percent of 

the total volume contained in the 

CPDMP 2005 survey for NFDM. In the 

survey, cream costs were allocated on a 

butterfat solids basis rather than as a 

percent of total solids, the witness said. 

However, according to the witness 

NDA’s NFDM plants separate the cream 

that is stored in silos to be sold or 

transported to its butter manufacturing 

plant resulting in an over-allocation of 

costs to cream in the CPDMP 2005 

survey. According to the witness, this 

misallocation inaccurately lowered 

NDA’s NFDM manufacturing costs by 

$0.036 per pound. The witness asserted 

that after correcting for this error, the 

CPDMP 2005 survey for NFDM 

weighted average cost should have been 

$0.019 per pound higher. The witness 

urged USDA to issue an emergency 

decision addressing make allowances 

because of the errors contained in the 

CPDMP 2005 survey. 

A post-hearing brief was filed on 

behalf of Agri-Mark, Foremost Farms 

USA, LOL, MMPA, NDA and Associated 

Milk Producers, Inc. (Agri-Mark et al.). 

The members of Agri-Mark et al. are all 

Capper-Volstead cooperatives who 

market their members’ milk in the 

Federal order system and operate 

manufacturing plants. 

The Agri-Mark et al. brief emphasized 

support for product-price formulas 

because, in their opinion, no truly 

independent competitive price series 

exists to determine milk prices. The 

brief summarized the evolution of the 

Federal order pricing system and 

asserted that USDA’s past policy has 

been to set make allowances at levels 

that cover the processing costs for most 

Federal order plants. The brief 

expressed the opinion that USDA 

deviated from this policy when 

determining current make allowance 

levels. 

The Agri-Mark et al. brief supported 

adoption of Proposal 1 and argued that 

make allowances should be updated 

using the 2005 CDFA and the CPDMP 

2006 surveys. Agri-Mark et al. was of 

the opinion that USDA should continue 

to use the same national product 

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volume weighting methodology that 

determined the current make 

allowances, incorporate CDFA whey 

cost data, use the CPDMP 2005 survey 

cheese plant population average cost 

instead of the sample average cost and 

continue to include a marketing cost 

factor of $0.0015 per pound in each 

make allowance. 

In their post-hearing brief, Agri-Mark 

et al. proposed that the cheese make 

allowance be set at $0.2154 per pound. 

Agri-Mark et al. wrote that the CPDMP 

2005 survey cheese plant population 

average of $0.2028 per pound was most 

representative of average size plants and 

is therefore the best available 

information to determine an appropriate 

cheese make allowance. Agri-Mark et al. 

endorsed the methodology explained in 

the IDFA brief that derived a cheese 

make allowance of $0.2154 per pound. 

The Agri-Mark et al. brief proposed a 

dry whey make allowance of $0.2080 

per pound by combining the 2005 CDFA 

and 2006 CPDMP surveys. Using this 

same methodology, the brief proposed a 

butter make allowance of $0.1725 per 

pound and the NFDM make allowance 

of $0.1782 per pound (though 

stipulating that the CDFA medium-sized 

plant cost should be used for NFDM.) 

The brief summarized the Cornell 

witness’ testimony regarding the errors 

with the 2005 butter and NFDM survey 

methodology and concluded that the 

current make allowances that were 

determined with this data are 

unrepresentative of actual costs. AgriMark et al. requested that Proposal 1 be 

adopted on an emergency basis to 

rectify the current unrepresentative 

make allowances. 

In their brief, Agri-Mark et al. 

expressed support for the portion of 

Proposal 2 that would authorize USDA 

to develop and conduct periodic 

manufacturing cost surveys of plants 

located outside of California. The brief 

explained that this data could then be 

relied upon in future rulemaking 

proceedings to amend the product price 

formulas. 

Comments and exceptions to the 

tentative partial final decision 

submitted on behalf of Agri-Mark et al. 

expressed support for the proposed 

make allowances. According to AgriMark et al. the proposed make 

allowances reasonably reflect the record 

evidence of 2006 surveyed plant cost 

data. However, they argued that the 

make allowances should incorporate a 

one-time adjustment for energy costs 

because energy costs have significantly 

increased from 2006 through June 2008. 

Based on energy cost data from the 

Bureau of Labor Statistics, Agri-Mark et 

al. proposed that the following 

adjustment should be added to the make 

allowances: $0.0036 for cheese, $0.0029 

for butter, $0.0114 for NFDM and 

$0.0105 for dry whey. 

In its exceptions, Agri-Mark et al. also 

stated that USDA had shifted policy 

from adopting make allowances that 

allow most manufacturing plants 

receiving pooled milk to recover their 

manufacturing costs to make allowances 

that allow the manufacturing plants 

receiving most of the pooled milk to 

cover their manufacturing costs. Such a 

policy shift, from covering ‘‘most 

plants’’ to covering ‘‘most milk’’ noted 

Agri-Mark et al. should be explained in 

the final decision. Agri-Mark et al. also 

requested that in the final decision 

USDA reaffirm the exclusion of 

balancing costs as a make allowance 

factor. 

A witness testified on behalf of 

DPNM, Select Milk Producers, Inc., and 

Continental Dairy Producers, Inc. 

(DPNM et al.). The witness said that 

Select and Continental are CapperVolstead cooperatives whose members 

are located in New Mexico, Texas, 

Kansas, Ohio, Michigan and Indiana. 

According to the witness, the DPNM et 

al. testimony was endorsed by Lone Star 

Milk Producers and Zia Milk Producers, 

Inc., who are also Capper-Volstead 

cooperatives. 

The DPNM et al. witness testified in 

support of Proposal 3. The witness was 

of the opinion that CDFA cost data 

should not be used to determine new 

make allowance levels because the data 

are only representative of California 

manufacturing plants which the witness 

asserted have higher manufacturing 

costs than the rest of the country. The 

witness testified that CDFA data had 

been utilized in the past when make 

allowances were determined using 

Rural Business Cooperative Service 

(RBCS) cost data because the audited 

CDFA data broadened the available data 

and was used to verify the information 

contained in the RBCS study. However, 

the witness insisted that the CPDMP 

cost surveys are far more representative 

of the population of manufacturing 

plants and should now be relied upon 

as the sole determinant of make 

allowances. 

The DPNM et al. witness testified that 

make allowances should be set at the 

following levels: $0.1108 per pound for 

butter; $0.1638 per pound for cheese; 

$0.1410 per pound for NFDM; and 

$0.1500 per pound for dry whey. The 

witness stated that, except for dry whey, 

the proposed make allowances are 

identical to the weighted average costs 

contained in the CPDMP 2005 survey. 

The witness proposed that the dry whey 

make allowance be determined by 

adding $0.0090 per pound to the NFDM 

make allowance to account for the 

additional energy needed to produce 

dry whey. The witness estimated that if 

the make allowances proposed by 

DPNM et al. were adopted, blend prices 

would increase by $0.22 per cwt. 

A second witness, a dairy accountant 

and dairy farmer appearing on behalf of 

DPNM et al. testified regarding dairy 

farm operating costs, accounting and 

business analysis of large modern dairy 

farm operations. According to the 

witness, the firm provides accounting 

and other business services to dairy 

producer operations in 27 states whose 

production volume represents about 10 

percent of the milk produced in the 

United States. The witness testified that 

based on data collected during the 

1990’s, large dairy farms in six Western 

states had an average annual net profit 

per cwt of $1.31. The witness testified 

that based on 10 years’ worth of client 

data, dairy farms in the west and eastern 

states must earn a net income of $1.50 

and $2.00 per cwt, respectively, for a 

dairy farmer to collect a salary and retire 

debt. The witness predicted that, for 

2007, producer client gross income 

would average $15.51 per cwt. At an 

average cost of production of $15.17, the 

witness went on to predict that their 

clients would face a net profit of $0.34 

per cwt. The witness said that this 

amount is far from the $1.50 per cwt net 

profit needed for their clients to reduce 

debt or cover living expenses. 

The second DPNM et al. witness 

stated that low milk prices in 2005 

reduced dairy farm client income to an 

average of $206 per cow. The witness 

noted that during the 1990’s, average 

production cost per cwt in western 

states was $11.87 but this has risen to 

$13.50 for 2004–2005. The witness 

testified that rising input costs 

combined with lower milk prices in 

2004–2005 made large-scale, highly 

efficient dairy farming unprofitable, 

even in low-cost operating areas such as 

western Texas and New Mexico. The 

witness provided additional testimony 

to show that increasing make 

allowances depressed dairy farmer 

income during a period of increasing 

costs and reduced opportunities for 

profitability. The witness supported this 

testimony with 2006 client data 

showing that a farm milking 1,800 cows 

would have lost $284,000. The witness 

provided detailed client data showing 

that the major higher-cost milk 

production factors during 2005 and 

2006 were increased energy and feed 

costs. 

A third witness, a dairy farmer, 

appearing on behalf of DPNM et al. 

testified in support of Proposal 3. The 

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witness operates a farm in New Mexico 

that milks approximately 3,800 cows 

and testified that they have been 

receiving $1.50 cwt below the 

Southwest order’s blend price because 

of hauling costs. The witness said that 

over the last few years any increase in 

producer milk prices have been 

consumed by rapidly increasing 

production costs. The witness 

supported all proposals submitted by 

DPNM and articulated opposition to 

adoption of Proposals 1 and 2. 

The DPNM et al. post-hearing brief 

explained that its opposition to all other 

proposals included in the hearing to 

adjust the make allowances was based 

on three principles: (1) The data used to 

determine the appropriate level of 

manufacturing allowances for 

establishing Federal order prices should 

be drawn from plants operating within 

the Federal order system; (2) 

adjustments to Federal order pricing 

regulations should always be subject to 

formal rulemaking; and (3) make 

allowances should be set at a level 

deemed appropriate by USDA, after 

taking into consideration all statutorily 

required factors and current milk 

marketing conditions, rather than 

prescribed geographic or volumetric 

factors. The brief explained why the 

CPDMP 2005 survey is the best data 

available and met their criteria for use 

in establishing Federal order make 

allowances and why the 2006 survey is 

flawed and should not be relied upon in 

determining make allowances. 

Exceptions filed by DPNM et al. in 

response to the tentative partial final 

decision argued that in proposing new 

make allowances the Department failed 

to consider producer costs of feed and 

fuel in each marketing area as mandated 

by the Food, Conservation and Energy 

Act of 2008 (2008 Farm Bill). DPNM et 

al. took exception with the Department’s 

national Economic Analysis of the 

proposed changes. It argued that Federal 

orders do not encompass the entire 

national market and therefore regional 

economic analyses should also be 

conducted. 

DPNM et al. also took exception with 

the use of 2006 CDFA manufacturing 

cost data (released October 3, 2007) to 

compute the make allowances without 

input from interested parties about the 

applicability of the new data. It 

specifically took exception with the use 

of the weighted average cheese 

manufacturing cost and argued that the 

record did not indicate if the number of 

high-cost versus low-cost plants in the 

California survey is similar to the plant 

make-up of the rest of the country. 

DPNM et al. also stated in their 

comments that the Department has 

denied dairy farmers due process and 

provided a list of examples. They also 

took exception to the notion advanced 

in the tentative partial final decision 

that milk production costs are reflected 

in the supply and demand conditions 

for dairy products. Instead, DPNM et al. 

argued that the cost of producing milk 

is reflected in the supply and demand 

conditions of the various inputs, such as 

feed, labor and fuel. DPNM et al. stated 

that contrary to the Department’s 

findings, the increase in the number of 

manufacturing plants from 2005 to 2007 

indicates that make allowances were not 

too low, and that only CPDMP 2005 data 

(released in 2006) should be used to 

determine new make allowance levels. 

A witness appearing on behalf of 

IDFA testified in support of Proposal 1 

and the annual manufacturing cost 

survey advanced in Proposal 2. 

However, the witness did not support 

adoption of the portion of Proposal 2 

that would result in the automatic 

update of make allowances. The witness 

requested emergency adoption of 

Proposal 1 and this request was 

reiterated in IDFA’s post-hearing brief. 

The IDFA witness testified that the 

product-price formulas determine the 

minimum prices manufacturers must 

pay for their raw milk and that those 

whose costs exceed the fixed make 

allowances in the price formulas are 

unable to recoup their higher costs. The 

witness asserted that any increase in the 

manufacturer’s end product prices 

would only result in an increase in the 

minimum raw milk price they must pay. 

According to the witness, manufacturers 

also face financial problems if any of the 

product-price formula factors are 

incorrect. The witness illustrated by 

example the impacts of both inaccurate 

product prices and inaccurate make 

allowances on manufacturers. 

The IDFA witness testified that before 

January 1, 2000, the Federal order 

system utilized a market-based pricing 

system which automatically reflected 

current market conditions. However, 

under the end product pricing system, 

market factors (e.g. yields, butterfat 

retention) are set at a point in time and 

can only be changed through the formal 

rulemaking process, the witness said. 

The IDFA witness espoused that 

setting make allowances too high or 

yield factors too low may result in low 

milk prices but that should not be of 

concern to USDA. In this regard, the 

witness was of the opinion that the 

Federal order system should only 

determine minimum prices and allow 

market responses through over-order 

premiums to remedy any regulated 

prices that are too low. However, the 

witness conceded that if a plant can 

manufacture products at costs lower 

than those reflected by the make 

allowance levels then the difference 

could be used to make plant 

investments, secure a larger milk supply 

to the detriment of higher-cost plants or 

return higher margins to plant owners. 

The IDFA witness testified in support 

of updating the current make 

allowances with the most current cost 

data available (Proposal 1). The witness 

was of the opinion that the CDFA dry 

whey cost data should be a factor in 

determining a new dry whey make 

allowance for Federal orders. The 

witness asserted that the CDFA average 

dry whey plant size more closely 

resembled the NASS average dry whey 

plant size than did the CPDMP survey. 

Furthermore, the witness asserted that 

the CDFA dry whey data was skewed 

toward low-cost plants, not high-cost 

plants as asserted by USDA. The 

witness maintained that using the CDFA 

data in determining the dry whey make 

allowance would not cause the make 

allowance to be set too high. The 

witness concluded that both the CDFA 

and CPDMP dry whey weighted average 

costs should be used to determine the 

dry whey make allowance. This position 

was reiterated in the IDFA post-hearing 

brief. 

Also in its post-hearing brief, IDFA 

stated that any decision made by USDA 

on the Class III and Class IV pricing 

formulas should not directly consider 

hearing testimony regarding dairy 

farmer cost-of-production. The brief 

asserted that it is already captured 

indirectly through the supply and 

demand for manufactured dairy 

products and therefore should not be 

given additional consideration in this 

proceeding. 

The IDFA witness testified that USDA 

needs to correct for CPDMP’s stratified 

cheese plant sampling which in IDFA’s 

opinion over-represents low-cost cheese 

plants. The witness highlighted the 

testimony of the Cornell witness which 

compared the 8 cheese plants that 

participated in both surveys revealing 

an average manufacturing cost increase 

of 1.7 cents per pound. IDFA was of the 

opinion that since the same cheese plant 

sample was not used in the two CPDMP 

surveys, the most appropriate method 

for determining a new cheese make 

allowance would be to use the weighted 

average cost from the 2005 survey 

($0.2028) plus 1.7 cents for a total of 

$0.2198 per pound. In its brief, IDFA 

concluded that the new make 

allowances should be set no lower than 

the following: $0.2154 per pound for 

cheese; $0.1725 per pound for butter; 

$0.1782 for NFDM; and $0.2080 for dry 

whey. 

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The IDFA witness supported adopting 

an annual manufacturing cost survey as 

contained in Proposal 2 but opposed 

any automatic updating of make 

allowances. The witness said that an 

annual survey would provide industry 

participants information regarding 

trends in plant costs and such 

information could be used in future 

hearings to adjust make allowances. 

However, the witness did not support 

automatically updating make 

allowances outside of the hearing 

process because it would prohibit 

industry input regarding how the data 

should be utilized. IDFA reiterated these 

views in its post-hearing brief. 

The IDFA witness testified in 

opposition to Proposal 3. The witness 

argued that audited CDFA data should 

continue to be included when 

determining new make allowance 

levels. The witness asserted that the 

elimination of the CDFA data would 

result in lower make allowances that, in 

their opinion, are already too low. In its 

post-hearing brief, IDFA asserted that 

the proponents of Proposal 3 had 

presented no evidence that 

manufacturing costs have decreased to 

levels similar to the manufacturing costs 

reflected in make allowances that were 

effective prior to February 1, 2007. 

Comments and exceptions filed by 

IDFA expressed support for the 

proposed make allowances contained in 

the tentative partial final decision. IDFA 

also indicated support for comments 

filed by Agri-Mark et al. requesting that 

the make allowances be adjusted to 

reflect increased energy costs through 

June 2008. IDFA also continued to 

support adoption of a manufacturing 

cost survey (Proposal 2) as a means to 

provide accurate and timely 

manufacturing cost data for use at future 

rulemaking proceedings, and expressed 

continued support for the denial of 

Proposal 3. 

A witness appearing on behalf of 

Lactalis American Group, Inc. (Lactalis) 

testified in support of Proposal 1 and in 

opposition to Proposal 3. According to 

the witness, Lactalis operates six cheese 

plants in the United States. The witness 

expressed support for IDFA’s positions. 

The witness said that the Class III and 

Class IV product-price formulas should 

be amended to give more flexibility to 

market participants in establishing 

market prices. The witness was of the 

opinion that increasing make 

allowances by adopting Proposal 1 

would give processors the flexibility to 

make short-term adjustments in 

response to changing market conditions. 

The witness argued that the increasing 

milk supply, not make allowances 

which are too high, is the cause of low 

milk prices received by dairy farmers. 

Therefore, the witness opposed any 

proposals that would result in lower 

make allowances. 

A witness appearing on behalf of 

Leprino testified in opposition to 

Proposal 3 stating that there is no basis 

to set make allowances below current 

levels. According to the witness, 

Leprino operates nine manufacturing 

plants throughout the United States that 

produce Italian style cheeses. The posthearing brief filed by Leprino expressed 

support for the make allowances 

proposed in IDFA’s post-hearing brief. 

Leprino was of the opinion that make 

allowances should be set no lower than 

the following: $0.2154 for cheese; 

$0.2080 for dry whey; $0.1725 for 

butter; and $0.1782 for NFDM. 

A witness appearing on behalf of 

Saputo Cheese USA (Saputo), a dairy 

product manufacturer, testified in 

support of IDFA’s positions. The 

witness testified that Saputo opposed 

any proposal which would add 

complexity to the Federal milk order 

system. The witness supported updating 

the current make allowances to reflect 

the most current available data as 

sought in Proposal 1 and that updated 

make allowances for dry whey should 

use CDFA data. 

A post-hearing brief filed on behalf of 

Twin County Dairy (Twin County), an 

Iowa-based cheese manufacturer, 

expressed support for the proposals 

offered by IDFA and Agri-Mark that seek 

to increase make allowances. However, 

the brief asserted that the proposals do 

not go far enough to ensure that 

medium-sized plants, such as the one 

operated by Twin County, remain 

profitable. The brief argued that the 

proposed make allowances are heavily 

weighted toward large, low-cost plants 

and their adoption, especially the dry 

whey make allowance, would cause 

financial hardship for many cheese 

manufacturing plants that are similar in 

size to Twin County. Twin County 

insisted that even though product-price 

formulas are applied identically to large 

and small plants, USDA should conduct 

a regulatory impact analysis because in 

Twin County’s opinion, product-price 

formulas have a disproportionate impact 

on small businesses compared with 

larger entities that may benefit from 

advantages of economies of scale. 

A witness appearing on behalf of HP 

Hood LLC (HP Hood) testified in 

opposition to Proposals 1, 2 and 3. 

According to the witness, HP Hood is a 

manufacturer of Class I and Class II 

dairy products that are distributed 

nationally. The witness opposed 

Proposals 1, 2 and 3 because their 

adoption would change the Class III and 

Class IV milk pricing formulas that in 

turn are used to determine the Class I 

and Class II prices that HP Hood pays 

for its raw milk supply. The witness 

opposed adoption of any proposal that 

would result in the automatic or 

periodic updating of the Class III and 

Class IV pricing formulas arguing that 

such updates should be made through 

the formal rulemaking process. 

A witness appearing on behalf of NAJ 

offered an amendment to Proposal 2. 

The witness said the amendment would 

expand the manufacturing cost survey 

to include gathering manufacturing cost 

data for whey protein concentrates 

(WPC’s) and lactose. This inclusion was 

reiterated in NAJ’s post-hearing brief. 

A Michigan dairy farmer testified 

regarding the profitability of dairy 

farmers and in opposition to adopting 

any proposals that would increase make 

allowances. The witness was opposed to 

increasing make allowances until the 

price formulas are amended to recognize 

a farmer’s cost of production. The 

witness stated that on-farm fuel costs 

were $35,000 in 2004 and had risen to 

$70,000 in 2006. The witness asserted 

that there are many Michigan dairy 

farmers considering leaving the dairy 

industry because of increased costs and 

low milk prices. The witness also 

expressed the opinion that NASS NFDM 

prices were misreported or underreported during the prior 12 months. 

A post-hearing brief submitted on 

behalf of O–AT–KA Milk Products 

Cooperative, Inc., (O–AT–KA) expressed 

support for Proposals 1 and 2, and 

opposition to Proposal 3. According to 

the brief, O–AT–KA is a CapperVolstead cooperative located in New 

York and its plant manufactures 600 

million pounds of milk annually into 

butter and NFDM. The brief stressed 

that changes to the make allowances 

and other factors of the product price 

formulas need to accurately represent 

the current manufacturing market. O– 

AT–KA expressed support for Proposal 

1 and was of the opinion that the 

CPDMP 2006 survey should be 

considered a minimum when setting 

make allowances. According to the 

brief, O–AT–KA’s plant manufacturing 

costs are higher than the CPDMP 2006 

survey weighted average NFDM cost. O– 

AT–KA also wrote that they compete 

directly with California plants and 

requested that USDA keep the Class IV 

and California Class 4a prices aligned if 

it recommends any changes to the 

product price formulas. O–AT–KA 

noted support for Proposal 2, but not the 

portion that calls for automatically 

updating make allowances. The O–AT– 

KA brief opposed adoption of Proposal 

3 because it would inhibit their ability 

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9256 Federal Register / Vol. 78, No. 26 / Thursday, February 7, 2013 / Proposed Rules 

to provide balancing services to the 

market and a fair return to its memberowners. 

A joint post-hearing brief filed on 

behalf of Dairylea and DFA (Dairylea et 

al.), opposed adoption of Proposals 1 

and 2. The brief expressed the opinion 

that the current make allowances should 

be used with the addition of the energy 

adjustor advanced in Proposal 17 and 

cost add-ons described in Proposal 20. 

The Dairylea et al. brief supported the 

NAJ modification of Proposal 2 to 

expand the NASS product price survey 

to include information on whey protein 

concentrates. 

Separate comments filed on behalf of 

Grande Cheese Company (Grande), 

Glanbia Foods, Inc. (Glanbia) and Kraft 

Foods (Kraft) expressed support for the 

proposed make allowances contained in 

the tentative partial final decision. 

Grande is a cheese manufacturer located 

in Wisconsin processing over 1.5 billion 

pounds of milk annually. Glanbia is a 

cheese manufacturer with plants located 

in Idaho and New Mexico. Kraft 

operates numerous manufacturing 

plants located throughout the country. 

Grande, Glanbia and Kraft all endorsed 

the comments and exceptions filed by 

IDFA. 

Grande’s comments also took 

exception to the exclusive use of CDFA 

data in determining the cheese make 

allowance and the sole use of CPDMP 

data to determine the dry whey make 

allowance. Glanbia and Kraft urged 

USDA to include CDFA dry whey cost 

data in the make allowance computation 

because CDFA has the only audited 

whey cost data available. Grande, 

Glaniba and Kraft also noted support for 

adopting a manufacturing cost survey 

(Proposal 2). 

Comments filed by Leprino Foods in 

response to the tentative final partial 

decision expressed support for the 

proposed make allowances. Leprino also 

supported adoption of a one-time energy 

cost adjustment as proposed by AgriMark et al. 

Comments filed in response to the 

tentative partial final decision 

submitted on behalf of the Wisconsin 

Cheese Makers Association (WCMA) 

offered support for the make allowances 

in the tentative partial final decision 

and urged USDA to adopt the annual 

manufacturing cost survey advanced in 

Proposal 2. WCMA is an organization 

representing 75 proprietary 

organizations and cooperatives that 

manufacture or process dairy products. 

WCMA argued that because small- and 

medium-sized plants typically do not 

have whey drying capacity, they are 

forced to pay more for the whey in their 

producer milk than what can be 

recouped in the market. WCMA stated 

that this is mostly because a plant’s 

inability to dry whey for sale in the 

market forces them to sell a lowervalued whey product such as wet whey. 

According to WCMA, a higher whey 

make allowance keeps small- and 

medium-sized cheese plants from losing 

revenue in times of high dry whey 

prices. WCMA was of the opinion that 

USDA should include CDFA dry whey 

cost data in the make allowance 

computation as it would provide a 

higher make allowance than currently 

proposed. 

An Indiana dairy farmer took 

exception with the increased make 

allowances contained in the tentative 

partial final decision. The dairy farmer 

stated that producer paychecks should 

not be reduced to cover the cost of 

manufacturing milk into finished 

products. 

Comments filed in response to the 

tentative partial final decision 

submitted on behalf of the National 

Family Farm Coalition (NFFC) and the 

Ohio Farmers Union (OFU) opposed the 

increased make allowances. NFFC and 

OFU contend that the tentative partial 

final decision did not take into account 

farmers’ costs of production. The two 

groups argued that make allowances 

should not be increased during a time 

when milk production costs also have 

increased. 

Exceptions to the tentative partial 

final decision filed by St. Albans 

Cooperative Creamery, Inc., (St. Albans) 

requested USDA to consider dairy 

farmer production costs before 

permanently adjusting make 

allowances. St. Albans is a dairy farmermember Capper-Volstead cooperative 

that operates a milk manufacturing 

plant. St. Albans was of the opinion that 

the 2008 Farm Bill requires a dairy 

farmer cost analysis before any final 

adjustments to make allowances. 

2. Product Yields and Butterfat 

Recovery Percentage 

A witness appearing on behalf of 

DPNM et al. testified in support of 

Proposals 6, 7 and 8. The witness 

testified that before January 1, 2000, the 

Federal milk order price discovery 

mechanism took into account dairy 

farmers’ cost of production when 

determining minimum regulated prices. 

If farmers’ cost of production increased, 

the witness said that manufacturers 

were able to pay farmers higher prices 

because on-farm production costs could 

be passed on to their customers. 

However, under the current pricing 

system, the witness argued, minimum 

prices to dairy farmers are based on the 

average prices of dairy products sold 

nationally during the month. As a 

result, the witness asserted, dairy 

farmers have experienced financial 

hardship because they are unable to 

pass on their higher costs to the 

marketplace. 

The DPNM et al. witness was of the 

opinion that Proposals 6, 7 and 8 should 

be considered jointly as coordinated 

adjustments to the various yield factors 

to ensure that dairy farmers receive a 

fair minimum price. In its post-hearing 

brief, DPNM et al. added that Proposals 

3 and 15 should also be considered in 

conjunction with Proposals 6, 7 and 8 

because together they address all parts 

of the current product price formulas. 

The DPNM et al. witness testified in 

support of Proposal 6 seeking to 

increase the butterfat yield factor from 

1.20 to 1.211. The witness said that this 

change would correct for a 

mathematical error in calculating farmto-plant shrinkage. The witness 

explained that in the 2002 final decision 

that established the current farm-toplant shrinkage factor, shrinkage 

allocated to butterfat loss should have 

been calculated on a per cwt of milk 

basis, not on a per pound of butterfat 

basis. DPNM et al. noted on brief that no 

witnesses at the hearing disagreed with 

this assertion. 

The DPNM et al. witness also offered 

a modification to Proposal 6 seeking to 

amend the butterfat credit in the protein 

price. The witness explained that when 

USDA adjusted the butterfat yield factor 

in the protein price formula to 1.572 in 

2002 to account for farm-to-plant 

shrinkage, the butterfat credit portion of 

the protein formula was not adjusted to 

an equivalent of 89.4 percent. The 

witness estimated that increasing the 

butterfat yield factor from 1.20 to 1.211 

and decreasing the butterfat credit 

portion of the protein formula from 90 

to 89.4 percent would, on average, have 

increased blend prices by $0.07 per cwt. 

The DPNM et al. witness testified in 

support of Proposal 7 seeking to 

eliminate the farm-to-plant shrinkage 

factor. The witness was of the opinion 

that accounting for farm-to-plant 

shrinkage allows producers and 

processors to mask inefficiencies. 

According to the DPNM et al. witness 

their farm-to-plant shrinkage is well 

below the 0.25 percent assumed in the 

pricing formulas. The witness attributed 

lower farm-to-plant shrinkage to large 

producers who ship tanker loads of 

milk. The witness insisted that 

shrinkage is not a result of milk solids 

being unrecoverable from the milk 

tanker and hoses but rather the result of 

imprecise measuring at the farm. 

The DPNM et al. witness testified that 

the yield factors in the product pricing 

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formulas should be amended to reflect 

current technology. The witness 

proposed that the protein price formula 

be changed to reflect a 94 percent 

butterfat recovery in cheese 

manufacturing, that the casein 

percentage in milk be increased to 83.25 

percent, and that the butterfat-to-protein 

ratio in cheese be changed to 1.214 to 

reflect average producer tests. 

According to the witness, the adoption 

of a 94 percent butterfat recovery rate 

also implies that the butterfat yield 

factor in the protein price should be 

increased from 1.587 to 1.653 as 

proposed in Proposal 8. 

The DPNM et al. witness estimated 

that increasing the butterfat recovery 

rate from 90 to 94 percent would result 

in a $0.105 increase in producer blend 

prices. The witness said that the 

currently assumed 90 percent butterfat 

recovery rate is based on technology 

that is more than 20 years old while 

new technology enables manufacturers 

to achieve a much higher recovery rate. 

Using CDFA plant cost survey data for 

2002 through 2005, the witness used a 

mass balance analysis to estimate the 

flow of milk components through a 

cheddar cheese plant and the allocation 

of milk components to products and byproducts. Through this analysis the 

witness derived a 94 percent butterfat 

recovery rate for plants participating in 

the CDFA cost survey. The witness 

estimated the butterfat recovery rate for 

cheese plants that participated in the 

2004 RBCS cost study to be 95.25 

percent for all cheeses. 

The DPNM et al. witness testified in 

support of Proposal 8. The witness 

argued that the percentage recovery 

factor for casein in milk should be 

increased from 82.2 to 83.25, to reflect 

average producer tests, which would 

result in a 2.3-cent per cwt increase in 

producer blend prices. However, in 

their post-hearing brief, DPNM et al. 

stipulated that a casein recovery factor 

of 83.10 percent was appropriate. DPNM 

et al. explained in their brief that 

changing the casein recovery factor 

would raise the protein yield factor from 

1.383 to 1.405; and increasing the 

butterfat recovery rate to 94 percent 

would change protein price formulas by 

increasing the protein to butterfat ratio 

from 1.17 to 1.214 and increasing the 

butterfat yield from 1.587 to 1.653. 

These changes would update the protein 

price formula to reflect current industry 

recovery standards and return revenue 

to producers who, according to the 

DPNM brief et al. have received lower 

pay prices. 

The DPNM et al. witness estimated 

that increasing the butterfat-to-protein 

ratio from 1.17 to 1.24 would result in 

a 3.7-cent increase in producer blend 

prices. The witness said that the current 

butterfat-to-protein ratio of 1.17 

represents standardized milk tests at 3.5 

percent butterfat and 2.9915 percent 

true protein. However, according to the 

witness the 2004 average producer milk 

test for milk contained in the 2004 

RBCS study was 3.69 percent butterfat 

and 3.04 percent true protein which 

more accurately represents a butterfatto-protein ratio of 1.214. 

The DPNM et al. witness concluded 

that the current butterfat to protein ratio 

of standardized milk undervalues more 

than one half of the producer milk 

marketed on Federal orders. The 

witness also stated that since plants 

purchase milk at test, not at the 

standardized values, it is more 

appropriate to use weighted average 

milk tests in the pricing formulas. In 

brief, DPNM asserted that standardized 

milk tests are lower than average 

producer tests and result in yield factors 

in the protein price formula that are 

artificially low which in turn 

understates what the protein price paid 

to producers should be. 

The DPNM et al. witness concluded 

that if the DPNM et al. proposals to 

change the butterfat recovery 

percentage, butterfat-to-protein ratio, 

and true protein in casein percentage 

are adopted, producer blend prices 

would increase by $0.20 per cwt. 

The DPNM et al. witness also testified 

that the NFDM yield factor should be 

increased from .99 pounds of NFDM per 

pound of solids nonfat (SNF) to 1.02 

pounds of NFDM per pound of SNF. 

The witness stressed that according to 

current FDA standards of identity, one 

pound of SNF can produce as much as 

1.05 pounds of NFDM. The witness 

elaborated that NFDM is often sold with 

approximately 5 percent moisture, 

whereas SNF is assumed to contain 0 

percent moisture. Therefore, concluded 

the witness, the current formula is 

incorrect in assuming that one pound of 

SNF actually produces less than one 

pound of NFDM. The witness referred to 

various studies conducted by CDFA and 

CPDMP that demonstrated a combined 

NFDM and buttermilk powder yield in 

excess of 1.025 pounds per pound of 

SNF. The witness was of the opinion 

that after taking into account the lower 

market value of buttermilk powder, a 

NFDM yield of 1.02 is appropriate. The 

witness estimated that this proposed 

change would increase producer blend 

prices by 4 cents. 

The witness concluded that if all the 

DPNM et al. yield changes were 

adopted, blend prices would increase by 

$0.42 per cwt and on average, producers 

would receive $9,787 in additional 

income per year. The witness was of the 

opinion that any adjustment in yield 

factors should also be accompanied by 

an adjustment in make allowances 

because the two are inherently linked. 

Exceptions to the tentative partial 

final decision filed on behalf of DPNM 

et al. opposed the denial of the butterfat 

recovery rate portion of Proposal 6, and 

Proposals 7 and 8. DPNM et al. 

reiterated their testimony presented at 

the hearing that the butterfat recovery in 

cheese is in excess of 90 percent. DPNM 

et al. also argued that the USDA did not 

properly evaluate the CDFA yield data 

for cheese and the relevance of the 

factors in determining butterfat 

retention in cheese making. They 

offered a calculation using the butterfat 

tests, solids nonfat tests, cheese yield 

and cheese moisture content for 

California plants which purported to 

show that those plants had a butterfat 

retention rate in the range of 94 percent. 

They also commented that similar 

results were obtainable from the RBCS 

data. 

DPNM et al. noted in their comments 

to the tentative partial final decision 

that the farm-to-plant shrinkage 

allowances should be removed from the 

product-price formulas as advanced in 

Proposal 7. DPNM et al. explained that 

in the western part of the country, 

where the producers it represents 

operate, milk is delivered from the farmto-plant in full tanker loads and 

therefore shrinkage is not a problem. 

Accordingly, they argued that DPNM et 

al. producers should not be penalized 

through lower component prices for 

being more efficient than producers who 

ship smaller loads and therefore 

experience farm-to-plant shrink. 

Exceptions by DPNM et al. also 

requested the Department to reconsider 

adoption of Proposal 8. They argued 

that yields contained in the productprice formulas should be based on 

average producer tests, not on milk 

standardized to 2.9915 percent protein 

and 3.5 percent butterfat. They 

expressed the view that since cheese 

prices, butterfat prices and make 

allowances are based on weighted 

averages, yields should also be based on 

the weighted average component tests of 

producer milk. The exception also 

reiterated their position that the casein 

retention rate of 82.2 percent is 

incorrect and that the factor should be 

83.25 percent. 

A witness appearing on behalf of 

Leprino testified in opposition to 

Proposals 6, 7 and 8. The witness 

opposed the portion of Proposal 6 

seeking to increase the butterfat 

recovery rate in cheese manufacturing 

from 90 to 94 percent. In the witness’ 

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opinion, the proponents for increasing 

the butterfat recovery rate provided no 

evidence to support this increase aside 

from hypothetical examples. The 

witness also opposed the amendment to 

Proposal 6 to decrease the butterfat 

credit in the protein formula below the 

90 percent butterfat recovery rate that is 

assumed in the cheese yield formula. 

The witness explained that this would 

cause cheese manufacturers to pay for 

more butterfat than is actually contained 

in the raw milk. The witness agreed that 

there is an error regarding how butterfat 

shrink is applied in the butterfat 

formula. However, the Leprino witness 

did not support increasing the butterfat 

yield factor to 1.211 because of milk 

component losses that occur in 

cheesemaking that are not recognized in 

the formula. 

The Leprino witness testified in 

opposition to elimination of the farm-toplant shrinkage factor advanced by 

Proposal 7. The witness said that the 

loss of milk when shipping from the 

farm to the plant is well documented 

and adjusting the Class III price to 

reflect this loss is appropriate. The 

witness said that Leprino experiences 

farm-to-plant milk losses of 

approximately 0.25 percent. The 

witness disagreed with the rationale 

offered by the proponent that increasing 

farm sizes and single producers 

shipping whole tanker loads of milk has 

remedied farm-to-plant shrinkage. The 

Leprino witness testified that deliveries 

to the Leprino plant in Waverly, New 

York, often have the milk of 15 to 18 

producers per tanker. The witness 

argued that milk losses from farm-toplant remain a reality that should 

continue to be acknowledged in the 

Class III price formula. 

The Leprino witness testified in 

opposition to increasing the cheese 

protein yield factor from 1.383 to 1.405 

(Proposal 8.) The witness said that the 

proponent’s assumption of 83.25 

percent casein in true protein content 

that would lead to a cheese protein 

yield factor of 1.405 was not based on 

actual laboratory casein tests. Leprino’s 

post-hearing brief reiterated its 

opposition to Proposals 6, 7 and 8. 

A witness appearing on behalf of 

IDFA testified in opposition to 

proposals seeking to increase yield 

factors (Proposals 6, 7 and 8). The 

witness was of the opinion that the 

yield factors should actually be 

decreased to reflect in-plant shrinkage 

and the sale of lower-valued products 

such as whey cream and buttermilk. In 

its post-hearing brief, IDFA espoused 

that proponents of increasing yield 

factors made erroneous assumptions. 

The brief stated that hearing evidence 

documents that farm-to-plant losses are 

a marketplace reality and should 

continue to be recognized in the product 

price formulas. The brief also argued 

that hearing evidence does not support 

proponent’s claim that a 94 percent 

butterfat recovery rate is achievable by 

most cheese manufacturing plants. 

Lastly, the brief insisted that the 83.25 

percent casein in true protein assumed 

by the proponents is not based on any 

actual milk tests. 

Comments and exceptions filed by 

IDFA to the tentative partial decision 

expressed continued support for the 

denial of Proposal’s 6, 7 and 8. 

A food technologist witness appearing 

on behalf of IDFA testified regarding the 

cheese manufacturing process and 

specifically about cheese production at 

Alto Dairy Cooperative (Alto Dairy) 

during 1985—2003. The witness 

discussed the evolution of cheese 

processing technology and testified that 

the greatest loss of milkfat during the 

cheese making process occurs during 

the cutting of the coagulum. The 

witness estimated that in moving from 

the use of traditional open vats to newer 

horizontal enclosed vats, the loss of 

milkfat during the cutting of the 

coagulum was reduced from 9.6 percent 

to 6 percent. However, the witness said, 

this does not account for losses during 

other stages of the cheesemaking 

process. The witness was of the opinion 

that the industry average butterfat 

recovery rate in cheddar cheese is 

approximately 90 percent. 

A witness appearing on behalf of Kraft 

testified in support of the positions and 

proposals advocated by IDFA. The Kraft 

witness opposed eliminating the farmto-plant shrinkage factor in the Class III 

price formula (Proposals 7 and 8.) The 

witness said that Kraft manufacturing 

plants experience farm-to-plant milk 

shrinkage and that this factor should 

continue to be acknowledged in the 

price formulas so that the butterfat 

recovery percentages and yields are not 

arbitrarily inflated. 

A witness appearing on behalf of 

Davisco Foods (Davisco) testified as 

being unable to use whey cream in 

standardized full-fat cheddar 

production. The witness explained 

Davisco sells whey cream to a butter 

manufacturer at a price lower than that 

reflected in the Class III pricing formula. 

According to the witness, Davisco owns 

and operates manufacturing plants in 

Idaho, Minnesota and South Dakota. 

A witness appearing on behalf of HP 

Hood opposed adoption of increasing 

yield factors. According to the witness, 

the proposed yield factors are not 

reflective of industry data provided in 

record testimony. Furthermore, the 

witness said, the shrinkage factor 

should remain in the pricing formulas 

and claimed that HP Hood experiences 

an average total shrinkage (farm-to-plant 

and in-plant loss) of 1.5 percent. 

A witness appearing on behalf of LOL 

testified in opposition to Proposal 6. 

The witness asserted that when 

determining the current farm-to-plant 

shrinkage factor USDA did not clearly 

state if the butterfat loss was based on 

product pounds or cwt of milk. The 

witness said that an increase in the 

butterfat yield would increase the raw 

milk costs for manufacturers who 

already contend with a make allowance 

that does not cover their cost of 

processing. The witness opposed 

increasing the butterfat recovery 

percentage to 94 percent and revealed 

that the LOL cheese plant in Kiel, 

Wisconsin, recently experienced an 

average annual cheese yield of 10.21 

pounds per cwt. According to the 

witness, assuming a 90 percent butterfat 

recovery rate and applying the plant’s 

average milk tests, the Van Slyke 

formula estimates a cheese yield of 

10.16 pounds. The witness indicated 

that the theoretical Van Slyke result and 

observed plant yield validates the 

continued use of the 90 percent butterfat 

recovery rate in the Class III price 

formula. 

The LOL witness also testified in 

opposition to Proposals 7 and 8 seeking 

to amend the yield factors by 

eliminating farm-to-plant and butterfat 

shrinkage factors. The witness said 

proponents’ claim that minimal 

comingled milk in the Florida, 

Southwest, Arizona and Pacific 

Northwest orders fails to recognize that 

comingled milk in the Northeast and 

Upper Midwest is commonplace given 

that the milk of 10 or more producers 

is commonly comingled on a single 

load. According to the witness, this 

makes farm-to-plant shrinkage between 

farm and plant weights inevitable. The 

witness indicated that in 2006, the LOL 

butter and NFDM plant in Carlisle, 

Pennsylvania, experienced an average 

difference of 0.343 percent between 

farm and plant weights and a 0.511 

percent butterfat shrinkage. The witness 

insisted that the LOL shrinkage 

percentages validate the continued 

incorporation of farm-to-plant and 

butterfat shrinkage factors in the pricing 

formulas. 

A witness appearing on behalf of 

MMPA testified in opposition to 

Proposal 7 seeking to eliminate the 

farm-to-plant shrinkage factor. The 

witness elaborated that even though 

MMPA pays its farmers based on farm 

weights and tests, some milk solids are 

lost during transportation of milk from 

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the farm to the plant. According to the 

witness, MMPA plants experience 

approximately a 0.3 percent loss of milk 

from farm-to-plant. Without the farm-toplant shrinkage factor in the product 

price formulas, the witness said that 

MMPA would have to pay farmers for 

milk that is lost in transport and cannot 

be manufactured into a saleable 

product. 

The MMPA witness also opposed 

Proposals 6 and 8 that seek to amend 

the Class IV NFDM and butter yield 

factors. The witness provided evidence 

that MMPA experiences butter and 

NFDM plant yields that are slightly 

lower than those used by the Class IV 

formula. The MMPA witness claimed 

that their yields typically generate a 

milk value of $11.11 per cwt, while the 

assumed yields in the product price 

formulas generate a milk value of $11.06 

per cwt. The witness asserted that this 

$0.05 per cwt advantage is eliminated 

because of the off-grade products it 

produces and sells at discounted prices. 

The witness concluded that the current 

Class IV yield factors are appropriate 

and that the current calculation is 

superior to the complicated alternatives 

in Proposals 6, 7 and 8. 

A witness appearing on behalf of 

Foremost testified regarding cheese 

production at Foremost’s manufacturing 

plants. The witness entered a 

declaration for the record describing the 

types of cheese produced by Foremost 

and the specific butterfat retention rate 

achieved at its cheese manufacturing 

plant in Marshfield, Wisconsin. Using a 

mass balance analysis, the witness 

stated that in 2006 the Marshfield plant 

had an average butterfat retention rate of 

90.25 percent. The witness said that 

Foremost considered investing in more 

modern cheese vats that would yield a 

higher butterfat retention rate but chose 

not to do so because it would take at 

least 13 years to recoup any return on 

such a large investment. 

The Agri-Mark et al. post-hearing brief 

expressed opposition to the adoption of 

Proposals 6, 7 and 8. The brief argued 

that the proponent’s methodology in 

computing product yields was flawed 

because it ignored that milk solids and/ 

or cream are sometimes added to farm 

milk during processing resulting in 

increased vat yields. Therefore, AgriMark et al. concluded that the product 

yields advanced in Proposals 6 through 

8 are not representative of the volume 

of products that can be produced from 

a hundredweight of milk. Agri-Mark et 

al. also took exception to proponent’s 

statements that dairy farmers are paying 

for the costs of new plant equipment 

designed to increase yields through 

increased make allowances and reduced 

producer income. Agri-Mark et al. 

argued that enhanced yields increase 

production thus lower manufacturing 

costs per pound of product from which 

make allowances are derived. Agri-Mark 

et al. also opposed the elimination of a 

farm-to-plant shrinkage factor used in 

the product price formulas. 

The Agri-Mark et al. brief stated that 

increasing the butterfat recovery rate 

from 90 percent to 94 percent is not 

justified. Agri-Mark et al. insisted that 

the proponent’s claim that cheese plants 

recycle their whey cream into the 

cheese vat and are then able to achieve 

a 94 percent butterfat recovery was 

contradicted by many witnesses at the 

hearing. Agri-Mark et al. also wrote that 

the record lacks sufficient evidence to 

justify increasing the NFDM yield factor 

from .99 to 1.02. The brief supported 

USDA’s reasoning for relying on the 

current NFDM yield factor and said that 

the farm-to-plant shrinkage factor is still 

valid. 

In comments and exceptions to the 

tentative partial final decision, AgriMark et al. expressed support for 

amending the butterfat yield factor, and 

to the denial of the portion of Proposal 

6 seeking to increase the butterfat 

recovery rate and the entirety of 

Proposals 7 and 8. 

The post-hearing brief filed on behalf 

of Dairylea et al. agreed with proponents 

of Proposal 6 that an arithmetic error in 

calculating the shrinkage factor in the 

butterfat yield had been made by USDA. 

Therefore, the brief advocated that the 

butterfat yield factor in the butterfat 

price formula be increased to 1.211. The 

brief also discussed the butterfat 

recovery percentage in the protein price 

formula and supported increasing the 

butterfat retention factor in cheese 

manufacturing but did not specify a 

factor. The brief explained that 

currently the formula assumes that 90 

percent of the butterfat in the cheese vat 

ends up in the finished product. The 

brief emphasized the importance of 

recognizing that the butterfat retention 

factor is based on butterfat going into 

the vat, not butterfat coming from the 

farm. The brief asserted that a 90 

percent recovery rate of butterfat going 

into the cheese vat is equivalent to 89.4 

percent of the butterfat coming from 

farms going into the finished product 

after accounting for farm-to-plant 

shrinkage. The brief detailed that the 

cheese manufacturers who testified to 

achieving a butterfat recovery 

percentage of 90.25 percent on the basis 

of farm tests actually experienced a 

butterfat recovery of 90.9 percent of fat 

that entered the cheese vat. The brief 

concluded that this evidence, combined 

with additional testimony regarding 

available technology, makes higher 

butterfat recovery possible and should 

be reflected in the protein price formula. 

The Dairylea et al. brief opposed the 

elimination of the farm-to-plant 

shrinkage factor as advanced in 

Proposal 7. The brief asserted that while 

some production areas are dominated by 

large farms, a large portion of the 

country is dominated by small farms 

where farm-to-plant shrinkage is 

prevalent. However, the brief noted that 

farm-to-plant shrinkage is reflected in 

the product-price formulas because 

yield data provided by manufacturers is 

commonly based on farm weights and 

tests. 

The post-hearing brief submitted on 

behalf of O–AT–KA stated that the 

hearing record does not justify adoption 

of Proposals 6, 7 and 8, and that the 

proposed changes to yield factors would 

increase its raw milk costs and inhibit 

its ability to provide balancing services 

to the market. O–AT–KA was of the 

opinion that Proposal 6 should only be 

adopted if USDA simultaneously 

amends the product-price formulas to 

account for in-plant losses and off-grade 

products that are sold at a discount. 

Comments to the tentative partial 

final decision filed separately by 

Grande, Glanbia, Kraft, Leprino and 

WCMA expressed continued support for 

the denial of Proposals 7 and 8. 

3. Value of Butterfat in Whey 

A witness appearing on behalf of 

IDFA testified in support of Proposal 9 

seeking to adjust the protein price 

formula to reflect the lower value and 

volume of butterfat recoverable from 

whey cream and was of the opinion that 

Proposal 9 was superior to Proposal 10. 

The witness asserted that the current 

Class III price formula values the 

butterfat not captured in the cheese at 

the Grade AA butter price even though 

it is sold as whey butter which has a 

lower value in the marketplace. In its 

brief, IDFA supported the testimony of 

the Leprino witness regarding saleable 

volume and the value whey cream has 

in the marketplace. The brief also 

highlighted testimony that some 

processors do not return whey cream 

back into their cheese vats. The brief 

concluded that the butterfat adjustment 

contained in the protein price formula 

should be reduced by $0.016 to account 

for the lower value and saleable volume 

of whey cream. 

Comments filed by IDFA in response 

to the tentative partial final decision 

took exception with the denial of 

Proposal 9. IDFA argued that record 

evidence demonstrates that whey cream 

has a lower value in the marketplace 

than butterfat used to produce Grade 

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9260 Federal Register / Vol. 78, No. 26 / Thursday, February 7, 2013 / Proposed Rules 

AA butter. According to IDFA, 

opponents of Proposal 9 speculated as 

to how much whey cream is re-used in 

cheese manufacturing but did not 

provide any specific examples where 

the whey cream is valued at or above 

the value of butterfat in Grade AA 

butter. IDFA referenced hearing 

testimony from numerous cheese 

manufacturers who testified that they 

did not use whey cream in the cheese 

manufacturing process. 

The witness appearing on behalf of 

Agri-Mark supported adoption of 

adjusting the Class III protein price 

component to account for the lower 

value of whey butter (Proposal 10). The 

witness estimated that 0.42 pounds of 

whey butter is made from a 

hundredweight of milk and is sold at a 

price below the Grade AA butter price. 

According to the witness, Agri-Mark 

sells its whey butter for $0.074 per 

pound less than its Grade AA butter. 

The witness was unaware of any public 

data or published reports on market 

prices for whey butter and was of the 

opinion that there are very few 

manufacturers making whey butter in 

the United States. 

The post-hearing brief filed on behalf 

of Agri-Mark et al. contended that the 

product price formulas should recognize 

the lower value and saleable volume of 

whey cream and urged the adoption of 

Proposal 9. The brief summarized 

record evidence regarding plant whey 

cream prices and volumes and insisted 

that lower whey cream values are a 

market reality that should be reflected 

in the product-price formulas. AgriMark et al. reiterated this view in 

comments and exceptions filed in 

response to the tentative partial final 

decision. Agri-Mark et al. stated that 

despite a lack of widely available whey 

cream price data, USDA should still 

make an adjustment to the price 

formulas to recognize its lower market 

value. 

A witness appearing on behalf of 

Leprino testified in support of Proposal 

9. The Leprino witness reviewed the 

derivation of the current cheese yield 

per pound of fat in the Class III productprice formula using a Van Slyke formula 

with an assumed butterfat recovery rate 

of 90 percent and a moisture content of 

38 percent. The witness asserted that 

the Class III formula implies that 0.035 

pounds of butterfat per cwt of milk is 

recoverable as whey cream but is valued 

in the Class III pricing formula as if it 

was used to produce 0.042 pounds of 

Grade AA butter. However, the witness 

asserted that all whey cream is used to 

produce Grade B butter which has a 

lower value than Grade AA butter. 

Based on testimony from Agri-Mark, 

LOL and NDA, the witness estimated 

that under the Class III price formula, 

cheese manufacturers in the Northeast 

and Pacific Northwest are being charged 

12.5 and 20.4 cents, respectively, per 

pound of butterfat in the whey cream 

more than what these products can be 

sold for in the marketplace. The witness 

was unaware of any publicly available 

data on national whey cream production 

volumes and prices. 

The Leprino witness testified that the 

Class III formula also overestimates the 

volume of butterfat recoverable as whey 

cream. With an assumed 90 percent 

butterfat recovery rate, the witness said 

that the formulas infer the remaining 10 

percent of butterfat is captured as whey 

cream. However, the witness explained 

that only 7.8 percent of the butterfat is 

actually recoverable because some 

butterfat is incorporated into dry whey 

or the skim portion of the salt whey that 

must be disposed. 

The Leprino witness testified that 

Proposal 9 would amend the Class III 

formula to better account for 

overvaluing the theoretical volumes and 

market values of whey cream. The 

witness explained that the butterfat 

credit in the protein portion of the Class 

III formula should be increased from 90 

to 92.20 percent to acknowledge and 

correct for the 7.8 percent of butterfat 

that is recoverable as whey cream. In 

addition, the witness maintained that 

the butterfat portion of the Class III 

formula should be reduced by $0.016 to 

account for the lower price 

manufacturers receive for Grade B 

butter. The witness estimated that these 

changes would have lowered the Class 

III price by $0.169 per cwt over the last 

five years. The witness revealed that 

Leprino uses all of its whey cream in its 

cheese production and therefore is able 

to recoup the cheese value for all its 

milk components. 

A post-hearing brief filed on behalf of 

Leprino stressed that the butterfat 

portion of the Class III formula should 

actually be reduced by $0.021 because 

hearing testimony from other witnesses 

revealed that 2007 whey prices in the 

Pacific Northwest were significantly 

lower than those in 2005 and 2006. The 

brief highlighted testimony that the 

2005–2006 Pacific Northwest average 

whey cream sale price was 94.4 percent 

of the average Grade AA butter price 

while the 2005–2007 average whey 

price fell to 89.4 percent of the Grade 

AA butter price. 

Comments to the tentative partial 

final decision filed by Leprino took 

exception to the denial of Proposal 9. 

Leprino reiterated arguments made 

during the hearing that the market value 

and volume of whey cream recoverable 

in the cheesemaking process is 

overvalued in the product-price 

formulas, and that the decision ignored 

record evidence demonstrating these 

market realities. Leprino wrote that 

opponents of Proposal 9 did not offer 

any evidence of other higher-valued 

uses for whey cream, but they did 

acknowledge that whey cream for use in 

Grade B butter has a lower market value. 

Leprino also argued that even if there 

are higher-valued end uses for whey 

cream, that the ultimate use of whey 

cream is irrelevant. According to 

Leprino, if whey cream is sold at a 

discount to regular cream, then that 

should be reflected in the price 

formulas. 

A witness appearing on behalf of Kraft 

supported adoption of Proposal 9. The 

witness indicated that on average, Kraft 

receives $0.10 per pound less for whey 

butter than for Grade AA butter. 

Comments to the tentative partial 

final decision filed by Kraft took 

exception to the denial of Proposal 9. 

Kraft argued that Proposal 9 should be 

adopted because the record 

demonstrates that whey cream has a 

lower market value than cream used to 

produce Grade AA butter. 

A witness appearing on behalf of 

Saputo testified that the Class III pricing 

formula wrongly presumes that all 

cheese manufacturers have dry whey 

processing capabilities and can obtain a 

high value for dry whey in the 

marketplace. In reality, the witness said, 

manufacturers sell whey as whey 

protein concentrates, whey protein 

isolates or in liquid form that have 

widely disparate market values. 

According to the witness, assumptions 

regarding the production of dry whey 

may financially harm cheese 

manufacturers and could result in the 

accelerated consolidation of milk 

manufacturing. For these reasons, the 

witness supported the adoption of 

Proposal 9. 

A witness appearing on behalf of 

Great Lakes Cheese (GLC) testified in 

support of adoption of Proposal 9. 

According to the witness, GLC is a 

cheese manufacturer whose plant in 

Adams, New York, annually processes 

410 million pounds of milk into 

American style cheeses and byproducts. The witness said that because 

milk components are lost in many stages 

of the cheesemaking process, the 

Federal order system should not have 

class prices that require manufacturers 

to pay for milk components that they are 

unable to use and sell. The witness 

illustrated by example the in-plant milk 

losses incurred from sanitizing 

equipment and the removal of sludge 

from the whey separator. In the 

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example, the witness estimated that in 

2006, GLC lost $23,770 worth of whey 

solids in the desludging process. 

The GLC witness said that GLC’s 

Adams facility produces one million 

pounds of whey cream annually and 

usually sells it for the Grade AA butter 

market price. In 2006, the witness 

stated, GLC received $1.2425 per pound 

of whey cream fat and the average CME 

AA butter price was $1.2405. However, 

the witness explained, because the 

average Class III butterfat price was 

$1.3185 per pound (a $0.076 price 

difference), it had to pay a higher price 

for the butterfat in raw milk than it 

could recover in the market. 

A witness appearing on behalf of NDA 

testified that Federal orders should 

establish fair minimum prices for 

producer milk while ensuring that the 

product-price formulas reflect the true 

value of dairy products in the market. 

The witness stated that NDA receives 

significantly less for its whey cream 

sales than it does for sweet cream sales 

and that Proposal 9 or Proposal 10 

should be adopted to reflect this reality 

in the product-price formulas. The 

witness estimated that, on average, from 

2005 through 2007, on a butterfat basis, 

NDA sold its whey cream for 36 percent 

less than it sold its sweet cream and 

$0.0244 per pound less than the Class 

III butterfat price. Therefore, the witness 

said, NDA supports IDFA’s proposal to 

adjust the protein price to reflect the 

lower value of whey cream. 

The NDA witness also explained that 

its average selling price for 

manufactured products is less than its 

reported prices to NASS because some 

of its production does not meet NASS 

specifications. The witness testified that 

products not meeting NASS 

specifications are either products made 

to meet specific customer orders or offgrade production such as cheese fines. 

The witness said that in fiscal year 

2007, 3.98 percent of NDA’s cheese 

production did not meet NASS 

specifications either by design or error. 

The volume was sold for a weighted 

average price of $0.0218 per pound less 

than its NASS reported cheddar— 

lowering NDA’s total average cheese 

price for the year by $0.009 per pound, 

the witness said. The witness described 

similar scenarios for NDA’s whey, 

NFDM and buttermilk production. 

The NDA witness revealed that in 

fiscal year 2007, NDA’s Sunnyside, 

Washington, plant, which uses modern 

horizontal cheese vats, experienced a 

cheese yield of 10.22 pounds of cheese 

per cwt of milk with an average 

moisture content of 38 percent and a 

butterfat recovery rate of 92 percent. 

The witness noted that NDA’s yield 

reflects the use of whey cream added to 

the cheese vats. 

A witness for Twin County testified in 

support of adopting Proposal 9. The 

witness asserted that the Class III price 

formula and current make allowances 

for cheese and dry whey overvalue milk 

components, particularly other solids, 

leading to reduced plant profitability. 

As a result, explained the witness, 

manufacturers are required to account to 

the marketwide pool for some 

components at the Class III price of milk 

even though they receive less than the 

Class III price for them in the 

marketplace. 

The witness explained that Twin 

County produces cheddar cheese that 

meets particular customer specifications 

which do not allow for returning whey 

cream into its cheese-making process. 

Consequently, the witness said that 

Twin County invested in a whey 

processing facility to process its skim 

whey into whey protein concentrates 

(WPC), ultra filtered milk and permeate. 

According to the witness, Twin County 

sells all of its whey cream in the 

marketplace for approximately the 

Grade AA butter price times a multiplier 

of 1.12. The witness said that Twin 

County does fortify its cheese vats with 

additional milk solids when it is 

economically feasible and its average 

cheese yield (including fortification) is 

seasonal and ranges from nine to ten 

pounds of cheese per 100 pounds of 

milk. The witness said that while Twin 

County is required to account to the 

marketwide pool for all milk 

components at the Class III price, it sells 

the whey produced at a reduced price 

in the market resulting in a net loss to 

the company for those components. 

Additionally, while the current make 

allowances (effective March 2007) did 

improve the profitability of Twin 

County, the witness insisted that the 

whey make allowance is still inadequate 

in covering the whey manufacturing 

costs of the plant. 

The Twin County witness conceded 

that the premiums it pays for milk could 

be adjusted downward to offset revenue 

losses. However, the witness indicated, 

renegotiating premiums with suppliers 

may have the unintended consequence 

of impeding or damaging long-standing 

relationships with suppliers and disrupt 

their ability to procure milk as needed. 

The witness appearing on behalf of 

HP Hood also supported adoption of 

Proposal 9 or 10. 

The post-hearing brief submitted on 

behalf of Dairylea et al. opposed the 

adoption of Proposals 9 or 10. The brief 

did not dispute that whey cream has a 

lower value in the marketplace, but 

noted that there are also higher valued 

uses for butterfat that are not recognized 

in the butterfat price. The brief 

concluded that it would be 

inappropriate to amend the butterfat 

value to recognize lower-valued whey 

cream without also recognizing highervalued butterfat uses. 

The post-hearing brief submitted on 

behalf of DPNM et al. opposed adoption 

of Proposals 9 or 10. The brief stressed 

that there is no publicly announced 

information regarding prices and 

volumes for whey cream or whey butter. 

The brief argued that record evidence 

demonstrates that a significant portion 

of whey cream is returned to the cheese 

vat and not sold as whey cream in the 

market. Exceptions to the tentative 

partial final decision filed by DPMN et 

al. expressed their continuing 

opposition to Proposal 9. 

The post-hearing brief submitted on 

behalf of NAJ also expressed opposition 

to the adoption of Proposals 9 or 10. The 

brief said that if the value of whey 

butter is as low as the proponents claim, 

then a separate whey butterfat price 

should be established in lieu of 

lowering the protein price. 

Separate comments to the tentative 

partial final decision submitted on 

behalf of Grande and Glanbia each took 

exception to the denial of Proposal 9. 

Grande and Glanbia both argued that 

record evidence indicates that whey 

cream has a lower market value than 

cream processed into Grade AA butter. 

Glanbia further insisted that while 

opponents to Proposal 9 claimed that 

other higher-value uses for whey cream 

exist, they provided no examples. 

Grande and Glanbia comments 

concluded that Proposal 9 should be 

adopted so cheese manufacturers will 

not be required to pay more for whey 

cream than can be recouped in the 

market. 

Comments filed by WCMA also took 

exception with the denial of Proposal 9 

in the tentative partial final decision. 

WCMA argued that whey cream is overvalued in the current product-price 

formulas because it is made into lower 

valued Grade B butter. WCMA was of 

the opinion that NASS should collect 

data on end uses and values of whey 

cream. 

4. Barrel-Block Cheese Price 

The witness appearing on behalf of 

IDFA testified in support of eliminating 

the current 3-cent barrel-block price 

adjustment (Proposal 12). The witness 

maintained that there is no cost 

difference between block and barrel 

production, therefore the 3-cent 

adjustment should be eliminated. 

Furthermore, the witness said, the 

CPDMP data used to determine the 

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current make allowances takes into 

account the manufacturing cost 

difference between barrels and blocks. 

Maintaining the 3-cent adjustment 

would, the witness said, result in 

double counting of any purported cost 

difference. In its post-hearing brief, 

IDFA reiterated the need to eliminate 

the 3-cent barrel-block price adjustment. 

Comments filed by IDFA in response 

to the tentative partial final decision 

opposed the denial of Proposal 12. IDFA 

argued that because cost data contained 

in the record demonstrates no difference 

in packaging costs between block and 

barrel cheese production, elimination of 

the 3-cent barrel-block spread is 

warranted. 

A witness appearing on behalf of 

Davisco testified in support of Proposal 

12. The witness offered evidence on 

Davisco’s manufacturing costs for 40- 

pound block and 500-pound barrel 

cheese production at its LeSueur, 

Minnesota, plant. The witness 

explained that the LeSueur plant has 

separate block and barrel production 

lines that enable Davisco to easily 

isolate and compare packaging and 

capital costs. After discussing the 

differences in packaging and equipment 

needed to produce block cheese and 

barrel cheese, the witness testified that 

Davisco spends $0.0012 per pound more 

to produce block cheese. According to 

the witness, its de minimis cost 

differences in producing block and 

barrel cheese warrant eliminating the 3- 

cent adjustment. 

The witnesses appearing on behalf of 

Kraft, NDA and Saputo expressed 

support for adoption of Proposal 12. The 

Kraft witness testified that the 3-cent 

adjustment historically represented the 

additional cost of producing blocks 

instead of barrels. However, the Kraft 

witness asserted, the gross return 

between blocks and barrels (adjusted to 

38 percent moisture) is approximately 

$0.0075 per pound. Therefore, 

concluded the Kraft witness, it is no 

longer necessary to add 3-cents to the 

barrel cheese price because that cost 

difference is being recouped in the 

marketplace. 

Separate comments filed by Grande 

and Kraft in response to the tentative 

partial final decision opposed the denial 

of Proposal 12. Grande and Kraft argued 

that record evidence demonstrates that 

there is no processing cost difference 

between block and barrel cheese. Kraft 

elaborated that the cost data contained 

in this hearing record is the first actual 

cost data contained in any hearing 

record that addressed the 3-cent barrel 

adjustment. Therefore, Grande and Kraft 

urged USDA to adopt Proposal 12 in the 

final decision. 

While no testimony was received 

from proponents DFA and NDA 

regarding Proposal 13, a witness 

appearing on behalf of Kraft testified in 

opposition to eliminating the barrel 

cheese price from the Class III price 

formula (Proposal 13). The witness 

asserted that since 2000, the NASS 

cheese price survey represented 

approximately 57 percent barrels and 43 

percent blocks. Therefore, the witness 

was of the opinion that it would be 

inappropriate to eliminate the barrel 

price from the Class III price formula 

because it would not reflect the actual 

prices of such a large part of the 

national cheese market. 

The witness appearing on behalf of 

Leprino supported eliminating the 3- 

cent block-barrel adjustment. The 

witness asserted that the adjustment 

was originally added to the barrel 

cheese price because it was considered 

the standard cost difference between 

producing block and barrel cheese. The 

witness testified that the 3-cent 

adjustment was no longer necessary 

because the CPDMP cheese 

manufacturing cost survey used to 

derive the current make allowances 

already accounts for the cost difference. 

The witness explained that keeping the 

3-cent adjustment would be double 

counting cost differences that may exist. 

According to the witness, the 3-cent 

adjustment was never based on actual 

cost data; rather it was a generally 

accepted valuation of the average 

production cost difference between 

producing 40 pound blocks and 500 

pound barrel cheese at a 39 percent 

moisture standard. However, the 

witness noted that after January 2001 

the barrel cheese price was adjusted to 

a 38 percent moisture standard. The 

witness asserted that this moisture 

standard change, on average, increased 

the barrel cheese price 2.2 cents per 

pound during the last 5 years. The 

witness estimated that eliminating the 

3-cent barrel-block adjustment would 

reduce the Class III price by $0.1624 per 

cwt. 

The Leprino witness also opposed 

adoption of Proposal 13 because it 

would reduce the amount of data used 

to compute the classified milk prices. 

The witness said that the barrel cheese 

price should continue as a factor in 

computing the Class III price because of 

the additional cheese volume for which 

it accounts. 

Comments to the tentative partial 

final decision submitted by Leprino 

opposed the denial of Proposal 12. 

Leprino disagreed with the reasoning 

advanced in the tentative partial final 

decision that differences in selling 

prices have no causal relationship to 

differences in manufacturing costs. 

Leprino argued that the 3-cent cost addon was originally incorporated into the 

product-price formulas because 

historically the selling price difference 

between blocks and barrels was 3-cents. 

This difference in selling prices, 

Leprino asserted, has always been 

attributed to manufacturing cost 

differences. Regardless, Leprino added 

that the Davisco plant cost data 

contained in the record proves that the 

difference in packaging costs between 

blocks and barrels is negligible; 

therefore Proposal 12 should be 

adopted. Leprino’s comments were 

endorsed by Glanbia. 

The post-hearing brief submitted on 

behalf of Agri-Mark et al. maintained 

that the 3-cent barrel adjustment should 

be eliminated and supported the views 

of the IDFA witness and its post-hearing 

brief urging the adoption of Proposal 12. 

Agri-Mark et al. reiterated this view in 

its comments and exceptions on the 

tentative partial final decision. AgriMark et al. argued that proponents of 

the elimination of the 3-cent add-on had 

provided enough record evidence to 

meet their administrative burden. AgriMark et al. summarized the regulatory 

history of the 3-cent barrel adjustment. 

They argued that record evidence by the 

Davisco witness demonstrated that the 

packaging cost difference between block 

and barrel cheese is negligible, and 

maintained that opponents of its 

elimination offered no rebuttal 

evidence. 

The post-hearing brief submitted on 

behalf of Dairylea et al. opposed 

eliminating the 3-cent per pound barrelblock cheese adjustment as advanced in 

Proposal 12. The brief expressed the 

opinion that cost data from one cheese 

plant offered by Davisco Foods is not 

adequate to support adopting the 

proposed change. According to the brief, 

cost data presented by Davisco Foods 

only compared packaging and capital 

costs for producing barrel and block 

cheese. The brief argued that despite 

Davisco’s belief that total manufacturing 

costs before packaging were the same, 

there may be differences in other 

processing costs because block and 

barrels are produced at different 

moisture contents. The brief asserted 

that if Davisco Foods cost data is 

adjusted to reflect average moisture 

content for blocks (37.75 percent) and 

barrels (34 percent), the cost of capital 

and packaging for blocks would be 10 

percent higher than for barrels. 

The Dairylea et al. brief also 

addressed the proponents’ assertion that 

incorporating CPDMP data into the 

determination of new make allowances 

provides the necessary recognition of 

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the cost difference between block and 

barrel production. The brief argued that 

CDFA data only includes cost data from 

block production and its continued use 

would mean that new make allowances 

would be too heavily weighted towards 

block production. The brief also 

asserted that evidence showing the 

market price relationship between 

blocks and barrels does not provide a 

basis to conclude that similar cost 

changes have occurred in the 

manufacturing costs of block and barrel 

cheese. 

In its brief, DPNM et al. opposed the 

reduction or elimination of the 3-cent 

barrel price adjustment (Proposal 12) 

unless Proposal 15 was adopted. The 

brief explained that Proposal 15 (using 

the CME to determine product prices) is 

intended to use only the CME block 

cheese price, not an average of the 500- 

pound barrel and 40-pound block 

prices. If Proposal 15 is adopted as 

intended, DPNM et al. wrote, the 3-cent 

barrel adjustment would no longer be 

necessary. 

Comments filed by DPNM et al. in 

response to the tentative partial final 

decision supported the continued use of 

the 3-cent barrel price adjustment if 

USDA continues to use both block and 

barrel survey prices in the Class III price 

formulas. 

5. Product Price Series 

A witness appearing on behalf of 

Agri-Mark testified in support of 

Proposal 14. The witness said that the 

proposed price series would use a 

combination of the NASS and CME 

cheese prices in the Class III productprice formula. The witness said that 

Proposal 14 seeks to incorporate current 

CME data to reduce the monthly 

differences between prices that most 

manufacturers sell their cheese and the 

cheese price from which the 

manufacturers cost of raw milk is 

determined. The witness said that 

cheese manufacturers use the CME 

cheese price to set their base cheese 

price which is then reflected in the 

NASS cheese price announced two 

weeks later. The witness explained by 

example that the two week lag between 

CME and NASS price releases was a 

problem in 2004 when cheese prices 

were rapidly changing from week-toweek causing the two price series to 

vary by more than 10 cents per pound 

during seven months of the year. 

According to an analysis conducted by 

the witness from January 2000 until 

February 2007, 98 percent of the 

variation in the NASS block cheese 

price and 87 percent of the variation of 

the NASS barrel cheese price could be 

explained by the CME price. 

The Agri-Mark witness provided an 

example to illustrate how Proposal 14 

could be administered. The witness 

explained that the cheese price in the 

Class III formula for April 2007 would 

be calculated as follows: (1) Compute 

the average CME cheese price for the 

four weeks in April; (2) add the average 

NASS cheese price for the last two 

weeks of March and the first two weeks 

of April; and (3) subtract the average 

CME cheese price for the four weeks of 

March. The Agri-Mark witness 

explained that the cheese price used to 

determine the advanced Class I price 

should be as follows: (1) Compute the 

average CME cheese price for the second 

and third weeks of March; (2) add the 

average NASS cheese price for the first 

and second weeks of March; and (3) 

subtract the average CME cheese price 

for the last two weeks of February. The 

witness was of the opinion that these 

new formulas would enable USDA to 

use current CME prices while in the 

long-run the NASS price series would 

continue as the primary determinant of 

cheese prices. The witness was of the 

opinion that the resulting ‘‘hybrid 

price’’ would reduce large monthly 

price variations like those experienced 

in 2004. The witness said that AgriMark does not support the sole use of 

CME prices in the price formulas 

because of low trading volume and the 

possibility of price manipulation. 

The Agri-Mark witness indicated that 

adopting this hybrid price would not 

significantly change the average USDA 

cheese prices or FMMO producer blend 

prices. The witness estimated that the 

average Class III prices would have been 

approximately $0.005 per pound less 

and the Northeast order producer blend 

prices would have averaged $0.003 per 

cwt less using this hybrid price during 

2003–2006. The witness did not see a 

need to compute a hybrid price for 

butter because the lag between the CME 

and NASS price reporting is not a 

problem. 

In their post-hearing brief, Agri-Mark 

et al. reiterated their support for 

adoption of Proposal 14 and opposition 

to adopting Proposals 15 and 18, both of 

which are discussed subsequently. 

In their comments and exception to 

the tentative partial final decision, AgriMark et al. expressed support for 

USDA’s decision to deny Proposals 14, 

15 and 18. 

A witness appearing on behalf of 

DPNM et al. testified in support of using 

CME product prices in the FMMO price 

formulas as advanced in Proposal 15. 

The witness was of the opinion that the 

CME is a superior price discovery 

mechanism. The witness asserted that 

the time lag associated with the NASS 

price survey has, at times, created huge 

differences between the advanced Class 

I and Class II prices and the monthly 

prices that are incorporated into the 

Class III and Class IV formulas. The 

witness opined that the time lag 

associated with using the NASS price 

survey sends incorrect price signals to 

producers and that it creates a 

disincentive for manufacturers to seek 

higher product prices in the market as 

it results in increased raw milk costs. 

The DPNM et al. witness testified that 

NASS product prices track closely with 

CME prices for cheese and butter. 

However, the witness said, the NASS 

NFDM price does not reflect the current 

cash market. The witness stated that the 

NFDM market is unique because there 

are only a few sellers and they tend to 

use the previous week’s NASS NFDM 

price to sell their products. The witness 

stated that there has been a growing 

price disparity between the NASS 

NFDM price and the NFDM price 

reported by Dairy Market News. 

According to the witness, during the 

first quarter of 2007, the monthly NASS 

NFDM prices averaged $0.12 per pound 

less than what was reported as the 

average Western Mostly NFDM price by 

Dairy Market News. The witness 

calculated that this resulted in Class II 

and Class IV prices that were $1.03 per 

cwt lower. The witness asserted that the 

price discrepancy could be a reporting 

error, noting that NASS does not have 

the authority to audit its surveyed price 

data. 

The DPNM et al. witness testified that 

CME product prices could become the 

preferred price discovery mechanism 

because they originate in a public 

market that, since 1997, has expanded 

trading times and the number of dairy 

products traded. The witness stressed 

that CME product prices are more 

reflective of the current market for 

cheese, butter and dry whey because 

many manufacturers refer to the current 

CME product price when making their 

sales. The witness added that the 

involvement of the Commodity Futures 

Trading Commission (CFTC) provides 

for regulatory oversight. However, the 

witness testified that NFDM is not 

actively traded on the CME because 

packaging specifications require that 

NFDM traded on the CME be in 

government-specified bags. The witness 

was of the opinion that if the packaging 

requirement was changed, then the CME 

would become a viable market for 

NFDM. 

The brief submitted by DPNM et al. 

expressed support for adoption of 

Proposal 15 and reiterated the position 

that NASS product price surveys should 

be replaced by CME product prices in 

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each of the price formulas except for the 

other solids formula. According to the 

brief, since the other solids formula uses 

the NASS dry whey price and the CME 

does not have a cash traded dry whey 

price, continued use of the NASS dry 

whey price is appropriate. The brief 

indicated that the use of CME prices 

would alleviate timing and circularity 

issues associated with relying on NASS 

survey prices. The brief noted that this 

position is supported in a June 2007 

General Accountability Office (GAO) 

study. 

The DPNM et al. brief expressed 

support for using a competitive pay 

price series to establish classified 

Federal order milk prices. However, the 

brief expressed the opinion that 

Proposal 18 needs to be more fully 

developed. It further requested that 

USDA investigate the use of a 

competitive pay price and convene a 

hearing to consider it as an alternative 

to NASS survey price information. 

DPNM et al. exceptions to the 

tentative partial final decision stated 

their opposition to the denial of 

Proposal 15. They reiterated arguments 

made in their hearing testimony that the 

NASS survey is vulnerable to 

manipulation. Consequently, DPNM et 

al. advocated use of the CME prices in 

the product-price formulas to provide 

for transparent market signals. 

A witness appearing on behalf of the 

Maine Dairy Industry Association 

(MDIA) testified in support of Proposal 

18. According to the witness, MDIA is 

an association that represents all of 

Maine’s 350 dairy farmers. The witness 

said that Proposal 18 seeks to establish 

an average competitive pay price for 

milk by incorporating a factor into the 

other solids portion of the Class III price 

formula to account for any monthly 

spread between the component prices 

for milk and a competitive pay price for 

equivalent Grade A milk. The witness 

was of the opinion that a competitive 

pay price is a superior method to 

product-price formulas in determining 

the value of milk used to set regulated 

minimum prices. The witness 

contended that butter, NFDM, cheese 

and dry whey each have a separate 

market that responds to unique supply 

and demand factors. The witness 

explained that in a competitive pay 

price system, buyers pay for raw milk 

according to the supply and demand 

conditions of the particular market in 

which they operate. 

The MDIA witness stated that USDA 

has previously considered competitive 

pay price mechanisms for pricing Class 

III milk. The witness explained that a 

1994–1996 simulated analysis 

conducted by USDA revealed several 

difficulties with competitive pay prices, 

such as: (1) The inability to eliminate 

the influence of regulated minimum 

prices; (2) inadequate vigorous 

competition among buyers of milk; and 

(3) the problems associated with using 

a competitive pricing scheme based on 

the competitive situation for milk in 

Minnesota and Wisconsin. The witness 

explained that these limitations formed 

the basis for Proposal 18. 

The MDIA witness explained how 

Proposal 18’s competitive pay price 

would be administered. The witness 

said that geographic areas where an 

adequate level of competition for milk 

exists should be determined by 

computing a Herfindahl index for each 

county. The witness said this index is 

a measurement of market 

competitiveness wherein a low 

Herfindahl index indicates more 

competition for milk. For example, 

competition for milk in a county with a 

value of 0.3450 is greater than in a 

county with a value of 0.3500. The 

witness proposed that competitive price 

zones be determined by aggregating 

clusters of ten or more contiguous 

counties with values below 0.33. The 

witness said that an ideal situation 

would be if at least a third of the 

manufacturing milk in Federal order 

marketing areas were competitive price 

zones. The witness explained that 

handlers purchasing milk within these 

zones would be exempt from paying 

minimum classified prices, but would 

still be required to pay current 

differentials for Class I and Class II milk. 

According to the witness, these 

differentials would be pooled and 

producers within the competitive price 

zones would receive a 12-month rolling 

average producer price differential 

(PPD). Handlers would still pay 

regulated classified prices for milk 

produced outside of these zones, the 

witness said. 

According to the MDIA witness, 

market administrators would collect 

actual payment data from handlers for 

milk purchased within the competitive 

price zones for the preceding month and 

estimated payments for the current 

month. The market administrators 

would then compute a weighted average 

price and deduct from that price the 12- 

month rolling average PPD for the 

month. This residual would be the value 

of manufacturing milk in the 

competitive price zone. A national 

average competitive manufacturing milk 

price would then be computed by 

aggregating the average price and 

volume data from all reporting 

competitive price zones. This result 

would become the new minimum Class 

III price for milk purchases outside of 

the competitive price zones. 

The MDIA witness said that the 

computation of protein and fat prices 

would be unchanged under its 

competitive price proposal. However, 

the other solids price would be the 

residual value of the Class III price once 

the values of butterfat and protein were 

deducted. The witness explained that 

indirect compensation to farmers, such 

as hauling charges, would not be 

included in the computation of a 

weighted average price. However, the 

witness also noted that Class III milk 

prices could potentially be decreased if 

manufacturers choose to exploit a 

‘‘loophole’’ and shift more monies into 

hauling subsidies. 

The MDIA witness asserted that, over 

the long run, producers located inside 

competitive price zones would receive 

the same revenue for their milk as 

producers located outside of 

competitive price zones. The witness 

did not know if Proposal 18’s pricing 

method would generate higher or lower 

prices to all producers than the prices 

generated by the current end-product 

pricing system. 

The MDIA witness was of the opinion 

that the largest group of counties in 

competitive price zones would be in the 

Upper Midwest (UMW) marketing area 

because of the large number of cheese 

plants competing for a milk supply. The 

witness predicted that this would most 

likely lead to a weighted average 

competitive pay price that is heavily 

influenced by prices paid by UMW 

plants that historically have been higher 

than Federal order minimum prices. 

The witness conceded that a 

competitive pay price heavily weighted 

to conditions in the UMW would not 

reflect national supply and demand 

conditions. 

A Maine dairy farmer appearing on 

behalf of the MDIA testified in support 

of Proposal 18. The witness testified 

that Maine is not an area regulated by 

the Federal milk marketing order 

program, but that producer prices in 

Maine are heavily influenced by those 

established under the Northeast order. 

The witness stated that, in the face of 

Federal minimum prices that are too 

low and driven by unpredictable price 

swings for dairy products, Maine dairy 

farmers have had to turn to alternative 

sources of income including state 

subsidies and increased equity 

financing to keep their farms operating. 

After adjusting USDA cost of production 

information for Vermont to account for 

lower labor and feed costs, the MDIA 

witness estimated the cost of production 

for a Maine dairy farmer in 2004, 2005 

and 2006, to be $19 per cwt, $20 per cwt 

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and $24 per cwt, respectively. The 

witness compared this price to the 

Northeast Federal order mailbox prices 

of $16.29 per cwt, $15.39 per cwt and 

$13.22 per cwt in 2004, 2005 and 2006, 

respectively. Using the Vermont cost 

data and the Northeast Federal order 

price data, the witness estimated that for 

a medium-sized Maine dairy farm with 

150 cows, average net income fell by 

$70,000 in 2004, $140,000 in 2005, and 

$320,000 in 2006. The witness asserted 

that this increasing difference between 

revenue and costs illustrates why the 

Federal order pricing system needs to be 

amended to more fully reflect dairy 

farmer cost-of-production. 

The MDIA witness also testified 

regarding two programs operated by the 

State of Maine. One program boosts 

revenue to Maine dairy farmers by 

distributing an over-order price 

payment determined by the Maine Milk 

Commission, and a second program 

provides for a subsidy payment from the 

State’s general fund. However, the 

witness said that during recent months 

these payments have not been enough to 

make up for the difference between 

declining milk prices and increasing 

production costs. The witness was of 

the opinion that, in the long-run, these 

State programs cannot be relied upon to 

provide a stable marketplace for dairy 

farmers. 

A post-hearing brief filed on behalf of 

MDIA reiterated the position that endproduct pricing does not result in high 

enough prices for the dairy farmers of 

the northeastern region of the United 

States. MDIA stated that Proposal 18 is 

‘‘a good starting point’’ from which to 

develop a competitive price scheme that 

would replace the current scheme 

which derives prices from the values of 

manufactured dairy products. The brief 

acknowledged that MDIA’s proposal is 

complex and lacks much of the detail 

needed for its adoption. However, MDIA 

reiterated its position that the adoption 

of a competitive pay price system would 

improve the valuation of producer milk 

and the subsequent determination of 

minimum classified prices. 

The MDIA brief argued that price 

discovery based on competitive 

conditions for milk is superior to milk 

prices derived from the market prices of 

manufactured dairy products. The brief 

insisted that prices derived using sound 

economic principles and accurate 

market data are crucial to accurate price 

determination. The brief stressed that 

ending a competitive pay price series for 

milk has harmed dairy farmers, 

especially in the northeastern, 

midwestern and southeastern regions of 

the country. The brief attributed 

observed price volatility in milk prices 

to the use of end-product price 

formulas. The brief asserted that the 

product-price formulas and the logic 

underlying component pricing do not 

meet the articulated policy of the 

AMAA. The brief argued that the 

AMAA’s paramount objectives are the 

stabilization and enhancement of 

producer income. 

Exceptions to the tentative partial 

final decision filed by MDIA opposed 

the denial of MDIA’s motion to reopen 

the hearing. The witness appearing on 

behalf of Dairylea supported using the 

CME cheese and butter prices as 

substitutes for the NASS surveyed 

prices as advanced in Proposal 15. The 

witness said that the industry already 

uses the CME to set base selling prices. 

The witness asserted that using NASS 

surveys to set minimum prices has 

resulted in disorderly market conditions 

because the time lag of NASS product 

price reporting results in short-term 

manufacturing losses. According to the 

witness, using the CME prices for butter 

and cheese to set minimum classified 

milk prices would eliminate the time lag 

issue and price circularity issues. 

A post-hearing brief submitted on 

behalf of Dairylea et al. opposed 

adoption of Proposal 18 based on the 

conclusion that the record evidence is 

insufficient to support its adoption. 

Their post-hearing brief specifically 

expressed support for the portion of 

Proposal 15 proposing the use of CME 

prices for cheese and butter in the 

product price formulas. This was not 

supported by DFA. While Dairylea’s 

brief expressed the opinion that using 

CME prices would address the issue of 

price circularity inherent in the NASS 

price survey, they did not support the 

use of CME prices for dry whey and 

NFDM. 

In a separate post-hearing brief, DFA 

specifically expressed support for 

adoption of the hybrid price series 

advanced in Proposal 14. DFA 

emphasized that the hybrid price series 

would transmit more timely market 

signals to processors and producers by 

aligning the purchase price of milk with 

the market prices of milk products. 

The witness appearing on behalf of 

IDFA testified in opposition to adoption 

of Proposal 14. The witness was of the 

opinion that using the proposed hybrid 

price would result in unnecessarily 

complex price formulas that would 

provide no tangible benefit to the 

industry. The witness acknowledged the 

problems associated with the time-lag of 

the NASS price series, but stated that 

there are alternative ways to address the 

lag adding complexity to the price 

formulas. Similar arguments were 

offered in IDFA’s post-hearing brief. 

The IDFA witness also testified in 

opposition to adoption of Proposal 15. 

The witness stated that the NASS 

product price survey provides the 

largest possible sample of wholesale 

prices and should continue to be relied 

upon in the product price formulas. The 

witness said that USDA’s reasoning for 

relying on the NASS price survey in the 

Federal order reform decision is still 

relevant. The witness was of the opinion 

that many of the complaints associated 

with the NASS price series could be 

remedied if price reporting to NASS 

were electronic, mandatory and audited. 

IDFA insisted in its post-hearing brief 

that using the CME to determine 

product prices could result in product 

prices unrepresentative of actual market 

sale prices and could encourage product 

trading on the CME solely to manipulate 

the minimum classified milk prices 

established under Federal orders. 

The IDFA witness also testified in 

opposition to adopting a competitive 

pay price series as advanced in Proposal 

18. The witness indicated that currently 

no reliable unregulated milk supply of 

adequate size exists to become the basis 

for a competitive pay price series. 

The witness appearing on behalf of 

Kraft opposed adoption of Proposal 15 

and supported the continued use of the 

NASS price survey to determine 

classified prices. The witness explained 

that the NASS price survey is national 

in scope and represents a significantly 

larger proportion of national cheese 

production than does the CME. The 

witness was of the opinion that if CME 

prices are used to determine classified 

prices, the growing volume of cheese 

production and sales in the western 

states would not be adequately 

represented. Therefore, the witness 

concluded, NASS survey prices best 

reflect the settled sales prices at the 

plants. The witness acknowledged the 

time lag between CME prices and the 

NASS survey prices and insisted that a 

better solution to the time lag problem 

would be to require timelier reporting of 

prices to NASS rather than abandon the 

NASS price survey. 

The witness appearing on behalf of 

Saputo opposed the adoption of 

Proposals 14 or 15 and indicated 

support for the continued use of the 

NASS price survey. The witness was of 

the opinion that timelier reporting of 

prices to NASS would counter asserted 

problems associated with the lag 

between the CME and NASS survey 

prices. The Saputo witness opposed 

using the CME to set minimum prices 

because, in the witness’ opinion, the 

CME is too thin a market to provide 

accurate market signals. 

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The witness appearing on behalf of 

Leprino testified in opposition to 

Proposal 15 because of the low volume 

of cheese that is traded on the CME as 

compared to the volume of cheese 

production that is represented in the 

NASS survey. The witness also testified 

that Leprino is not concerned with the 

time lag between the CME prices and 

the NASS price survey. The witness was 

of the opinion that the time lag is 

predictable and manageable for 

manufacturers. 

The witness appearing on behalf of 

LOL testified in opposition to Proposal 

15. The witness was of the opinion that 

the more appropriate solution to the 

problem of increased manufacturing 

costs is a more timely method of 

updating make allowances and not the 

use of the CME to derive classified 

prices. The witness argued that the 

NASS price survey is more 

representative of the national cheese 

market while the CME continues to 

remain a thinly traded market. 

The witness appearing on behalf of 

HP Hood opposed adoption of Proposal 

18 because of the lack of analysis 

available to determine its utility. 

A post-hearing brief filed on behalf of 

O–AT–KA stated that Proposal 18 may 

warrant further consideration but it 

should not be adopted in this 

proceeding. 

Comments to the tentative final 

partial decision filed separately by 

IDFA, Grande, Glanbia, Kraft, Leprino 

and WCMA expressed support for the 

denial of Proposals 14, 15 and 18. 

6. Other Solids Price 

A witness appearing on behalf of NAJ 

testified in support of adopting Proposal 

16. The witness was of the opinion that 

the value of dry whey should be derived 

primarily from its protein content, 

rather than its other solids content as it 

is currently computed. The witness 

acknowledged that from August 2006 to 

February 2007 the NASS dry whey price 

more than doubled from 29.65 cents per 

pound to 60.05 cents per pound and the 

lactose price reported in Dairy Market 

News increased from 33.89 cents per 

pound to 59.34 cents per pound. The 

witness was of the opinion that the 

recent increase in lactose prices is 

reflective of a shortage in lactose 

processing capacity and not a lack of 

available lactose. The witness believed 

that the higher dry whey and lactose 

prices prior to the fall of 2006 justify 

valuing dry whey on a protein rather 

than on an other solids basis. According 

to the NAJ witness, if Proposal 16 had 

been in place from April 2003 to 

September 2006, the Class III price 

would have been one-cent per cwt 

higher and only marginally higher since 

September 2006. 

The NAJ witness testified that from 

2003 to 2006 dry whey production only 

increased 1.5 percent, while the 

increased production of whey protein 

concentrates (WPCs) ranged from 6.6 

percent to 45.5 percent depending on 

the percent protein in the WPC. The 

witness concluded that purchasers of 

whey solids prefer WPC products that 

are high in protein. It is this preference 

that led the witness to conclude that dry 

whey should be priced on a protein 

basis. 

Using Dairy Market News’ monthly 

prices since January 2000, the witness 

discussed the costs of buying a pound 

of protein (protein parity) and a pound 

of lactose (lactose parity) in dry whey or 

WPC–34 (34 percent protein). The 

witness concluded that, in all months, 

the average price per pound of protein 

in dry whey or WPC–34 exceeded the 

average price per pound of lactose. The 

witness also asserted that the cost per 

pound of lactose in WPC–34 is higher 

than if lactose were purchased 

separately. According to the witness, 

this price relationship reveals that 

buyers of dry whey and WPCs are 

purchasing these products for their 

protein content rather than for their 

lactose content. The witness also 

emphasized that the value of protein in 

dry whey and WPC–34 more closely 

reflect each use than does lactose value 

contained in the two products. 

The NAJ witness also offered a 

modification to Proposal 16 such that 

the NASS price surveys would be 

expanded to include collection and 

reporting of market prices for various 

WPC’s and lactose. The witness said 

this would build a dataset for use in 

future rulemakings to consider the 

appropriate valuation of whey solids. 

A post-hearing brief filed on behalf of 

NAJ reiterated positions given in 

testimony. According to the brief, the 

current other solids price formula does 

not reasonably connect the market value 

of whey solids which NAJ maintains is 

based on its protein content and how 

producers are paid for whey. 

NAJ stated its opposition to the denial 

of Proposal 16 in its exceptions to the 

tentative partial final decision. NAJ 

argued that counter to what USDA 

found as a flaw in Proposal 16, one of 

its strengths is its revenue neutrality. 

NAJ was of the opinion that adoption of 

Proposal 16 would give producers a 

financial incentive to increase their milk 

protein content. NAJ reiterated 

arguments that Proposal 16 would allow 

manufacturers to account to the pool for 

protein, the component in whey that is 

most valued, while also simplifying the 

product-price formulas. NAJ was also of 

the opinion that USDA’s decision to 

only make changes in the product-price 

formulas to the make allowances and 

the butterfat yield factor indicates its 

unwillingness to amend other factors in 

the formulas. 

The witness appearing on behalf of 

IDFA opposed adoption of Proposal 16 

because it was too complex and would 

inappropriately value whey based on its 

protein content when it is comprised 

mainly of other solids. The witness said 

that USDA’s preliminary economic 

analysis demonstrates that adoption of 

Proposal 16 could increase the cost of 

high protein milk while lowering the 

cost of low protein milk. However, 

milk’s other solids content (primarily 

whey) does not change in relationship 

to the protein content, the witness said. 

The witness also stated it would be 

inappropriate to price dry whey on its 

protein content since protein does not 

affect whey yields. 

The witness appearing on behalf of 

Leprino testified in opposition to 

Proposal 16 because its adoption would 

result in distorted milk component 

values. The witness insisted that since 

dry whey yields are primarily driven by 

the lactose content of milk and the other 

solids composition, it would be 

inappropriate to price whey on its 

protein content. 

The post-hearing brief filed on behalf 

of Agri-Mark et al. opposed adoption of 

Proposal 16 arguing that the price of 

other solids would then be determined 

on its protein component which has no 

impact on yield. The brief claimed that 

since there is no standardized protein 

content for whey, adoption of Proposal 

16 could result in significant overvaluing of the protein in whey. 

However, the brief supported NAJ’s call 

for USDA to collect manufacturing cost 

and price data for WPCs and lactose on 

the basis that it would provide data on 

how to appropriately value whey solids 

for use in future proceedings. 

The post-hearing brief filed on behalf 

of Dairylea et al. opposed adoption of 

Proposal 16 because it would not add 

value or efficiency to the product price 

formulas. 

The post-hearing brief filed on behalf 

of DPNM et al. opposed the adoption of 

Proposal 16. However, the brief did 

express support for NAJ’s call for USDA 

collection of prices, manufacturing costs 

and volumes for whey protein 

concentrates and whey protein isolates. 

Comments filed separately by AgriMark et al.; DPNM et al.; IDFA; Grande; 

Glanbia; Kraft and Leprino in response 

to the tentative partial final decision 

expressed support for the denial of 

Proposal 16. 

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A witness from Pennsylvania State 

University offered testimony on the use 

of an econometric model framework to 

analyze changes to the Federal milk 

marketing orders from all the proposals 

under consideration and provided the 

results at the hearing. The testimony 

was not given on behalf of the 

Pennsylvania State University. The 

witness testified neither in support of, 

nor in opposition to, any proposals. The 

witness explained that the model is a 

short-run, supply-side model that does 

not take into account changes in milk 

demand. The witness said that the 

model was used to analyze scenarios as 

outlined in the USDA preliminary 

economic analysis that was based on the 

USDA Baseline Projections to 2015. The 

witness concluded that the USDA 

preliminary economic analysis did not 

accurately reflect changes in the milk 

supply because it did not adequately 

account for the increase in feed prices 

and the resulting effect on producer 

decisions. 

A witness testifying on behalf of the 

Ohio Farmers Union (OFU), National 

Farmers Union (NFU) and the National 

Family Farm Coalition (NFFC) called for 

the hearing to be terminated because 

dairy farmers continuously face low 

milk prices and high input costs, and 

that these concerns were not being 

addressed in this proceeding. The 

witness was of the opinion that the 

FMMO system was no longer 

accomplishing its mission of returning 

market power to dairy farmers. 

7. Energy Cost Adjuster 

A witness from NMPF testified that 

energy costs are the most volatile 

manufacturing input cost in dairy 

manufacturing. The witness asserted 

that increases in energy costs have 

countered many of the measures 

manufacturers have taken to increase 

productivity and efficiency. 

The NMPF witness testified that the 

current make allowance levels reliance 

on a fixed energy cost derived from 

information that existed at a single point 

in time is no longer appropriate. The 

witness said USDA should instead 

adopt a monthly energy price adjuster to 

capture the change in energy prices that 

may occur from month to month. The 

witness explained that the base energy 

cost should be derived from surveyed 

energy costs in the manufacturing cost 

surveys used to determine the make 

allowances. If two or more surveys were 

used to determine make allowances, 

then the energy costs of each survey 

should be weighted accordingly, the 

witness said. According to the witness, 

an energy price adjustor would then be 

added (or subtracted) to the base energy 

cost value. 

The NMPF witness explained that the 

energy price adjustor should be 

computed using the Bureau of Labor 

Statistics Producer Price Indexes for 

Industrial Electricity and Industrial 

Natural Gas (PPI). The witness said that 

the time period selected for the energy 

price adjustor should correspond with 

the same time period of the 

manufacturing cost survey data. The 

witness suggested the use of the 

monthly PPI series for several energy 

products and proposed 2005 as the base 

period from which percentage changes 

would be calculated. The witness 

stressed that if an energy price adjuster 

is not adopted, then the make 

allowances that are determined as a 

result of the current proceeding may 

become obsolete prior to 

implementation. 

The NMPF witness said that the 

adoption of a monthly energy price 

adjustor would help maintain equity 

between producers and manufacturers 

given that processors would not be 

unduly harmed when energy prices rise 

while producers would not be harmed 

when energy prices fall. The witness 

was of the opinion that it was not 

necessary to establish monthly indexes 

for other cost factors contained in the 

make allowances. 

The NMPF witness asserted that if an 

annual manufacturing survey as offered 

in Proposal 2 is adopted, then an energy 

cost factor should be used in making 

monthly adjustments to make 

allowances. The witness was of the 

opinion that even if make allowances 

were updated on an annual basis, 

manufacturing cost data as old as 24 

months would be incorporated. 

According to the witness, energy prices 

vary so much over short time periods 

that make allowances are essentially 

using a fixed energy cost factor which 

results in make allowances that are 

neither timely nor accurate. 

A post-hearing brief filed on behalf of 

NMPF reiterated their testimony in 

support of the adoption of Proposal 17. 

NMPF’s brief offered various methods 

USDA could use to determine an 

appropriate base energy cost factor and 

corresponding monthly energy price 

adjustor. 

The NMPF brief also addressed other 

hearing participants’ objections that an 

energy price adjustor would inhibit a 

plant’s ability to use the futures markets 

to hedge risk. The brief said that while 

energy futures can be used to reduce 

energy price volatility, a plant is more 

likely to lock in a high energy price if 

that plant predicts energy costs will rise 

above levels covered by current make 

allowances. The brief also argued that 

the use of energy futures may not be 

applicable for balancing plants facing 

unpredictable energy costs due to large 

seasonal fluctuations in product output. 

A witness appearing on behalf of 

MMPA testified in support of Proposal 

17. The witness said that the large 

fluctuations in gas and energy prices in 

recent years demonstrate the need for an 

energy price adjustor in the 

determination of make allowances. The 

witness also stated that adoption of the 

adjustor would ensure that 

manufacturers could recover increased 

energy costs while also preventing 

financial windfalls should energy prices 

decrease. Agri-Mark, Dairylea and O– 

AT–KA also offered support for 

Proposal 17 in their post-hearing briefs. 

The witness appearing on behalf of 

IDFA testified in opposition to the 

adoption of Proposal 17 and was of the 

opinion that adoption of the proposal 

would complicate manufacturers’ ability 

to manage risk. IDFA reiterated these 

arguments in its post-hearing brief. 

Kraft, Lactalis, HP Hood and Leprino 

supported IDFA’s position opposing the 

adoption of Proposal 17. 

With the exception of DPNM et al., 

Proposal 17 was supported by all 

producer organizations that market the 

milk of dairy farmers who participated 

in this proceeding, including those who 

manufacture NFDM and dry whey. The 

record reflects that manufacturers of 

NFDM and dry whey, in particular, 

intensively use either natural gas or 

electricity in their drying processes. 

Accordingly, proponents favored the 

ability of an energy cost adjustor to 

reflect actual natural gas or electricity 

prices in minimum prices paid for 

producer milk. Supporters also testified 

that this feature would account for 

monthly energy price changes without 

permanently decreasing the value of 

producer milk until subsequent 

rulemaking changes to make allowance 

levels can be made. 

Opposition to Proposal 17 was 

universal among IDFA, along with its 

member companies Saputo, Kraft, H.P. 

Hood and Leprino, who testified at the 

hearing. The central themes of their 

opposition were that a monthly energy 

adjuster would undermine the value of 

existing risk management tools, and 

increase the complexity of product price 

formulas. DPNM et al. also opposed 

adoption of Proposal 17 because, they 

assert, it would add complexity to the 

pricing system. 

8. Cost-of-Production Add-on 

A witness appearing on behalf of 

Dairylea testified that manufacturing 

plants would negotiate a price for the 

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applicable product with wholesale 

customers that included a factor 

reflecting manufacturing costs not 

reflected in the pricing formula make 

allowances. The witness said that these 

surcharges, or ‘‘add-ons,’’ would not be 

included in the NASS price survey and 

therefore would not affect Class III and 

Class IV prices. According to the 

witness, the negotiated add-ons would 

be capped at a maximum amount to be 

determined through a separate formal 

rulemaking. 

The Dairylea witness explained that 

when a dairy manufacturer attempts to 

pass on its higher manufacturing costs 

by charging higher prices to its 

customers, the price increase is 

captured in the NASS price survey 

which, in turn, increases a 

manufacturer’s raw milk costs through 

higher Class III and Class IV prices. The 

witness described this as a ‘‘price 

circularity’’ problem. The witness was 

of the opinion that Proposal 20 provided 

a method whereby dairy processors 

could pass on higher manufacturing 

costs not reflected in the product-price 

formulas to customers without those 

higher prices being reflected in the 

NASS price survey. According to the 

witness, classified prices would not be 

affected by a change in manufacturing 

costs. 

The Dairylea witness acknowledged 

that manufacturers have experienced 

higher processing costs than those that 

are represented by the current make 

allowances. However, according to the 

witness, higher make allowances cause 

dairy farmers to receive lower prices for 

their milk even though they also face 

higher production costs. The witness 

said that because dairy farmers are 

unable to pass on their higher costs of 

production, as a matter of fairness and 

equity, processors should seek needed 

manufacturing cost recovery through the 

price they charge their customers, rather 

than through the price they pay dairy 

farmers for raw milk. 

The Dairylea witness emphasized that 

while the manufacturing cost add-ons 

would not be included in the NASS 

price survey, any amount a 

manufacturer charged in excess of the 

cost add-ons would be required to be 

reported to NASS. The witness testified 

that the maximum manufacturing cost 

add-on should only be changed through 

formal rulemaking and that the value of 

a cost add-on should never be negative. 

The witness was of the opinion that the 

National Fluid Milk Processors 

Promotion Program (MilkPEP) check-off 

assessment administered by AMS and 

the in-state over-order premium 

program administered by the 

Pennsylvania Milk Marketing Board are 

examples of successful programs 

providing for surcharges. 

The Dairylea witness viewed adoption 

of an energy price adjustor to modify 

make allowances as detailed in Proposal 

17 to be a complement to Proposal 20. 

The witness explained that any change 

in the energy price adjustor should be 

subtracted from the value of the 

manufacturing cost add-on. For 

example, the witness explained that for 

a given month, if the manufacturing cost 

add-on for cheese was determined to be 

$0.0029 per pound and the energy price 

adjustor was $0.0023 per pound, then 

the maximum cheese manufacturing 

cost add-on for that month would be 

$0.0006 per pound. In months when the 

energy price adjustment was greater 

than the maximum cost add-on, then the 

cost add-on for that month would be 

zero, the witness said. 

A joint post-hearing brief filed on 

behalf of Dairylea and Dairy Farmers of 

America (Dairylea et al.) reiterated that 

adoption of the cost add-on would 

address the price circularity problem 

inherent to the NASS price survey. The 

brief argued that the Federal order 

system needs to evolve such that 

manufacturing cost increases can be 

fully passed on to consumers without 

lowering the value of producer milk 

used to make Class III and Class IV 

products. 

The Dairylea et al. brief emphasized 

that opposition to the adoption of 

Proposal 20 was based on the invalid 

assumptions that: (1) Manufacturing 

plants would not be able to negotiate 

cost add-ons, and (2) manufacturing 

plants regulated by Federal orders 

would become disadvantaged. The brief 

noted that a NFDM processor has been 

successful in negotiating an energy cost 

surcharge with its customers, despite 

competition from non-pool NFDM 

plants located in the United States and 

abroad. The brief also countered 

opposition arguments suggesting that a 

buyer would simply purchase finished 

products on a spot basis from the 

Chicago Mercantile Exchange (CME) to 

avoid paying a manufacturing cost addon. The brief asserted that 

manufacturing plants, regardless of pool 

status, would not give up the 

opportunity to maximize profit by 

charging a cost add-on. 

The witness appearing on behalf of 

HP Hood testified as being receptive to 

the manufacturing cost add-on feature of 

Proposal 20 without offering any further 

details or justification. 

The witness appearing on behalf of 

IDFA testified in opposition to the 

adoption of Proposal 20. The witness 

disagreed with the assertion that all 

manufacturers would be able to 

negotiate cost add-ons with their 

customers. The witness insisted that 

manufacturers unsuccessful in 

negotiating the cost add-on would only 

be able to recoup manufacturing costs 

equal to the product-price formula’s 

make allowances. The witness argued 

that the examples of successfully 

administered surcharges—the Milk PEP 

check-off assessment and the 

Pennsylvania Milk Marketing Board 

over-order premiums—are misleading 

because they involve regulated charges 

that processors are required to pay. The 

witness was of the opinion that 

Federally regulated manufacturers 

would be harmed by the adoption of 

manufacturing cost add-ons because 

customers would simply seek a lowercost product from other manufacturers 

whose milk is not priced by an order or 

would make spot purchases of product 

from the CME. 

In characterizing that all cheeses have 

a price relationship in the market, the 

IDFA witness strongly disagreed that a 

commodity cheddar cheese 

manufacturer could include a cost addon in its sales price. According to the 

witness, cost add-ons change the price 

relationship of commodity cheddar to 

other cheese varieties in the 

marketplace and as a result, 

cheesemakers buying pooled milk 

would be at a competitive disadvantage 

to those buying non-pooled milk. IDFA 

reiterated their opposition to the 

adoption of Proposal 20 in their posthearing brief. 

The witness appearing on behalf of 

Lactalis found merit with the intent of 

Proposal 20 but thought its method too 

complex and impractical, and therefore 

opposed its adoption. According to the 

witness, Lactalis operates six cheese 

plants in the United States. The witness 

was of the opinion that Federally 

regulated manufacturers would not be 

able to consistently and successfully 

negotiate a higher sales price with their 

customers to compensate for higher 

manufacturing costs. 

In their post-hearing brief, Agri-Mark 

et al. opposed adoption of Proposal 20 

on the grounds that it assumes plants 

can successfully negotiate 

manufacturing cost add-ons to recoup 

increased manufacturing costs. The brief 

expressed the opinion that a 

manufacturing cost add-on scheme 

would only be successful if all plants, 

including unregulated plants, 

simultaneously increased prices and 

clearly labeled the cost add-on on all 

invoices so that the add-on would not 

be included in the NASS price survey. 

The brief asserted that unregulated 

manufacturing plants have no incentive 

to report a manufacturing cost add-on 

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Federal Register / Vol. 78, No. 26 / Thursday, February 7, 2013 / Proposed Rules 9269 

3Official Notices are taken of amendments to 

make allowances and all related documentation by 

the State of California in the Determinations, 

Findings, Conclusions and Order of the Secretary of 

Food and Agriculture, November 20, 2007, by the 

Office of the California Secretary of Agriculture. 

See: http://www.cdfa.ca.gov/dairy/ 

dairy_hearings_matrix.html, and http:// 

www.cdfa.a.gov/dairy_hearings.html. and Summary 

of Weighted Average Manufacturing Costs, Butter, 

Nonfat Dry Milk, Cheddar Cheese, and Dry Whey 

Powder, Released September 18, 2007; See http:// 

www.cdfa.ca.gov/dairy/pdf/ 

manufcostexhibit2006.pdf. 

4 Ibid 

5Official notice is taken of 67 FR 67906 

November 7, 2002, and 68 FR 7063, February 12, 

2003, final decision and final rule respectively, and 

66 FR 54064, 65 FR 76832. 

6Official notice is taken of 71 FR 67467, 

November 22, 2006, 71 FR, 78333, December 29, 

2006, as well as hearing testimony, exhibits, and 

post hearing briefs for the hearing and hearing 

continuations originally noticed in 71 FR 545, 

January 5, 2006, and related materials concerning 

make allowances and dairy product manufacturing 

costs, and published for the convenience of the 

public on the USDA, AMS Dairy Programs Web site 

at www.ams.usda.gov/dairy. 

because NASS prices do not impact 

their raw milk costs in the same way as 

plants regulated by Federal orders. The 

brief also stressed that if plants were 

unsuccessful in negotiating a 

manufacturing cost add-on, they would 

likely be unable to obtain cost relief 

elsewhere. 

In their post-hearing brief, DPNM et 

al. opposed the adoption of a 

manufacturing cost add-on in an 

attempt to eliminate the circularity 

problem inherent to the NASS survey 

(now administered by AMS). DPNM et 

al. was of the opinion that USDA 

resources should instead be 

concentrated on developing a 

competitive pay price to replace the 

product-price formulas. 

A post-hearing brief filed on behalf of 

O-AT-KA stated that while Proposal 20 

may warrant further consideration, it 

should not be adopted in this 

proceeding. 

Discussion and Findings 

1. Amending the Product Price 

Formulas 

This proceeding offered a wide array 

of proposals aimed at changing FMMO 

end-product pricing formulas used to 

establish classified prices in all orders. 

The original 19 proposals noticed range 

from those that seek to abandon the 

current product-price formulas used to 

compute minimum Class III and Class 

IV prices to those that seek a variety of 

changes to the product-price formulas 

including manufacturing cost factors 

(make allowances), yield factors, 

technical factors and the authority to 

separate a portion of manufactured 

product sales prices from what 

otherwise is used to establish 

subsequent raw milk prices. The 

diversity of proposals considered 

indicates a lack of consensus within the 

dairy industry concerning how the 

Federal order program should set 

minimum milk prices in general and 

more specifically, how the many 

features of the product-price formulas 

should be altered. 

Witnesses representing Agri-Mark, 

NMPF, Leprino, Twin County and IDFA 

provided evidence that energy, 

transportation, labor and packaging 

costs for manufacturing processors have 

increased since the adoption of the 

March 2007 make allowances. As 

pointed out by IDFA, make allowances 

account for manufacturing costs in the 

Class III and Class IV price formulas but 

do not change as those costs change, 

therefore, increasing make allowances is 

the only reasonable way that those 

increased costs can be recovered. 

The ability of a manufacturer to offset 

cost increases is limited by the level of 

make allowances in the Class III and 

Class IV price formulas. Manufacturing 

processors are charged the FMMO 

minimum price for producer milk used 

to produce Class III and Class IV 

products. However, plant manufacturing 

cost increases may not be recovered 

because Class III and Class IV productprice formulas use make allowances that 

are fixed regardless of market conditions 

and change only by regulatory action. 

Simply put, when manufacturing cost 

increases result in higher costs than 

those provided for in the formula make 

allowance factors, the value of milk 

used to make those products may be 

over-valued. 

Product-price formulas are relied 

upon to establish the minimum class 

prices of raw producer milk used to 

make Class III and Class IV products, 

which in turn establish Class I and Class 

II prices. The product-price formulas 

use market prices collected by AMS for 

cheddar cheese, Grade AA butter and 

dry whey to set a minimum price for 

Class III milk, and NFDM and Grade AA 

butter to set a minimum price for Class 

IV milk. No competitive pay price series 

currently exists that can be relied upon 

to establish a price for raw milk 

nationally. While some proponents look 

to the CME, the futures prices of the 

CME use the FMMO minimum class 

prices as the starting points for Class III 

and Class IV milk futures contracts. 

In the absence of a competitive pay 

price series, product-price formulas 

based on cheese, dry whey, NFDM and 

butter serve as the only practical basis 

that the value of raw producer milk 

used in their production can be derived. 

A raw milk value is, in part, derived 

from sales price data collected by AMS 

from manufacturers who produce and 

market these commodity products. The 

information is aggregated weekly and 

reported in the AMS Dairy Product 

Sales Repot. The Class III and Class IV 

product-price formulas use, among 

other factors, the wholesale market 

prices of the manufactured products 

from which make allowance factors are 

subtracted. The remaining value, when 

converted to a milk equivalent basis, is 

the value of raw milk. Accordingly, the 

accuracy of deriving the minimum value 

of raw milk is dependent on the 

accuracy of the commodity sale prices 

reported and, in large part, the accuracy 

of the manufacturing cost factors, or 

make allowance factors, that are used in 

the pricing formulas. 

The Agri-Mark proposal, Proposal 1, 

seeks to change make allowances used 

in the Class III and Class IV product 

formulas by relying on manufacturing 

cost data contained in the record of this 

proceeding and combining such data for 

plants outside of California with the 

most current manufacturing cost data 

published by the CDFA.3 The two sets 

of manufacturing costs for cheese, 

NFDM, dry whey and butter would be 

combined on a weighted average basis 

in a manner consistent with the 

development of the current make 

allowances used in determining Class III 

and Class IV prices. Other proponents 

seek to use the most recently available 

publications of the CDFA.4 This method 

was used in earlier rulemakings to 

develop the make allowances used in 

the product-price formulas.5 6

Opponents of increasing make 

allowances argue a number of points— 

that they are already set at too high a 

level, that dairy farmer production costs 

also have increased significantly due to 

higher energy and feed costs, that 

processors should look beyond asking 

dairy farmers to receive less for their 

milk by charging more for manufactured 

products, and that make allowance 

increases should be made only when all 

dairy farmer production costs are 

captured in their milk pay price. These 

are not valid arguments for opposing 

how make allowances should be 

determined or what levels make 

allowances need to be in the Class III 

and Class IV product-price formulas. 

The record evidence demonstrates that 

make allowance levels are not reflective 

of the costs manufacturers incur in 

processing raw milk into the finished 

products of cheese, butter, NFDM and 

dry whey. 

Additionally, the Class III and Class 

IV product-price formulas establish 

derived classified prices for producer 

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9270 Federal Register / Vol. 78, No. 26 / Thursday, February 7, 2013 / Proposed Rules 

7 Ibid. Official notice is taken of 72 FR 36341, July 

3, 2007. 

milk that are used nationally in all 

Federal milk orders. When dairy farmer 

production costs exceed the value that 

products are sold in the marketplace, no 

source of revenue from the marketplace 

is available to cover those costs. 

In the aggregate, the costs of 

producing milk are reflected in the 

supply and demand conditions for the 

dairy products. When the supply of 

milk is insufficient to meet the demand 

for Class III and Class IV products, the 

prices for these products increase as do 

regulated minimum milk prices paid to 

dairy farmers because the milk is more 

valuable and the greater value is 

captured in the pricing formulas. Dairy 

farmers face no regulatory minimums in 

their costs and face no regulated 

minimum payment obligation in the 

way that regulated handlers must pay 

dairy farmers for milk. 

It is reasonable to conclude that the 

make allowances used in the Class III 

and Class IV product-price formulas 

should be updated to reflect changes in 

the costs manufacturers incur in 

producing cheese, butter, dry whey and 

NFDM. It is necessary to reflect changes 

in manufacturing costs so that with the 

prevailing market prices for 

manufactured products, minimum 

Federal order classified prices can be 

set. In the record of this proceeding, the 

evidence demonstrates that the 

manufacturing costs of producing 

cheese, dry whey, NFDM and butter 

have increased since the 

implementation of the make allowances 

that were adopted on an interim basis, 

effective March 1, 2007.7

The record reveals an absence of 

industry consensus concerning the 

method that make allowances should be 

changed which in turn determines the 

level of the make allowances used in the 

Class III and Class IV product-price 

formulas. The differing proposed make 

allowance levels offered during this 

proceeding represent the changes in 

opinions concerning which 

manufacturing costs, which 

manufacturing cost survey(s) and which 

other factors should be considered. For 

example, some proponents seeking 

higher make allowances argued that 

only CPDMP survey data and/or RBCS 

survey data volumes should be relied 

upon as they are most reflective of costs 

borne by plants that pay Federal order 

prices. 

Proposal 3, proposed by DPNM, was 

offered in opposition to increasing make 

allowances annually through a USDA 

administered manufacturing cost 

survey, as contained in Proposal 2 

offered by Agri-Mark. DPNM argued that 

because the CPDMP 2005 survey 

represents manufacturing costs of plants 

not located in California, it should be 

relied upon exclusively in determining 

new make allowances. This argument is 

rejected. Proponents of increasing make 

allowances have clearly demonstrated 

that costs of producing Class III and 

Class IV products have increased. 

Continuing with the method previously 

relied upon—relying on manufacturing 

cost data from CPDMP’s cost survey and 

CDFA in combination—has provided 

effective and useable make allowances 

in the pricing formulas. 

At issue in this proceeding, in part, is 

whether make allowance levels should 

be increased and what method should 

be relied upon to determine those 

levels. On its face, the DPNM proposal 

to rely only on the CPDMP 2005 survey 

data in determining make allowances 

may seem reasonable as the survey 

excludes California plants. However, the 

argument does not consider other 

important factors that affect the 

marketing conditions for milk and dairy 

products represented by California’s 

dairy sector and its impact on the 

supply and demand for milk and dairy 

products nationally. Cheese, butter, dry 

whey and NFDM compete in a national 

marketplace and as such, the prices 

established under the Class III and Class 

IV product-price formulas need to be 

reflective of marketing conditions that 

directly affect the determination of the 

minimum value of raw milk. 

Accordingly, Proposal 3 is not adopted. 

Others participants supported the use 

of CDFA data. However, CDFA data 

represents a cost survey of only 

California processing plants. Federal 

order Class III and Class IV prices must 

be derived, as much as possible, from 

national estimates of manufacturing cost 

information. AMS survey prices, used to 

establish minimum Federal order prices, 

include California processing plants. 

Accordingly, it is reasonable to 

conclude that appropriately combining 

CDFA cost data with cost survey data of 

manufacturing plants not located in 

California will produce a measure of 

national manufacturing costs. This 

combination removes as much bias as 

possible in manufacturing costs 

measurements that may otherwise result 

from the exclusive use of one set of cost 

survey data over another. 

While many hearing participants 

support the general method of 

determining make allowances proposed 

to be adopted in this decision, the 

record nevertheless reveals a lack of 

industry consensus in determining the 

specific factors to be used in the Class 

III and Class IV product-price formulas. 

This is illustrated by the information 

presented in Table 1 below. The seven 

sets of suggested make allowances 

represent proposals from four different 

groups at various points during this 

proceeding. The Agri-Mark, LOL and 

DPNM proposals were advanced by 

producer groups with different milk 

marketing and processing interests. 

Regulated processors, including some 

producer groups who are also regulated 

in their capacity as processors, are 

represented in this regard by the 

proposals advanced by IDFA and 

Leprino. 

TABLE 1—PROPOSED MAKE ALLOWANCES

Proponents Cheese 

$/lb 

Butter 

$/lb 

NFDM 

$/lb 

Dry whey 

$/lb 

Agri-Mark et. al. (Brief Pg 20–24) .................................................................... 0.2154 0.1725 0.1782 0.2080 

IDFA (Brief pg 11) ........................................................................................... 0.2154 0.1725 0.1782 0.2080 

IDFA (Brief pg 12) ........................................................................................... 0.2198 0.1846 0.1662 0.1976 

Leprino (Brief pg 2) .......................................................................................... 0.2154 0.1725 0.1782 0.2080 

DPNM Proposal ............................................................................................... 0.1638 0.1108 0.1410 0.1500 

DPNM Brief (pg 1) ........................................................................................... 0.1638 0.1150 0.1410 0.1590 

DPNM Brief (pg 20) ......................................................................................... 0.1638 0.1108 0.1410 0.1498 

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Federal Register / Vol. 78, No. 26 / Thursday, February 7, 2013 / Proposed Rules 9271 

The range of proposed make 

allowances presented in Table 1 varies 

more than 30 percent between the 

highest and lowest proposed make 

allowance levels for cheese and dry 

whey and about 25 percent for NFDM. 

Similarly, the range from highest to 

lowest proposed make allowances for 

butter varies by more than 60 percent. 

This final decision continues to find 

that it is appropriate to rely on the 

CPDMP 2006 survey of manufacturing 

costs in establishing the methodology of 

how make allowances should be 

determined. Its use is consistent with 

the methodology relied upon in 

determining the previous make 

allowance levels (effective March 1, 

2007) in the Class III and Class IV 

product-price formulas that utilized the 

CPDMP 2005 survey. The CPDMP 2006 

survey results provide a new estimation 

of manufacturing costs for plants not 

located in California. The CPDMP 2006 

survey results, when used in 

conjunction with the most current 

survey results from CDFA, improve the 

estimation of manufacturing costs on a 

national basis and is consistent with the 

methodology relied upon in 

determining the previously set make 

allowances. 

The CPDMP 2006 survey is essentially 

a new cost survey. The manufacturing 

cost data presented in the survey is 

similar to CPDMP’s earlier cost survey 

in that they both rely on cost 

information provided from 

manufacturing plants not located in 

California. The surveys also are similar 

in that they collect manufacturing cost 

data for cheese, butter, NFDM and dry 

whey. However, there are differences 

with the most important one being the 

use of different samples of plants. 

In the CPDMP 2005 survey, 16 cheese 

plants provided cost data that were 

incorporated to represent the weighted 

average costs to manufacture cheese. 

The 2006 survey represents data from 11 

cheese plants, 8 of which were among 

the 16 plants that participated in the 

2005 survey. For butter, 4 plants 

provided cost data in both the 2006 

survey and the 2005 survey, but the 

surveys represent different collections 

of sampled plants with different 

production volumes. In addition, the 

butter manufacturing cost data in the 

2006 survey differs from the earlier 

survey because it employed a different 

method for allocating costs between 

butter and NFDM production in plants 

that jointly manufacture these products. 

For NFDM, the plants sampled and 

reported in the 2006 survey included 7 

of the 8 plants sampled as part of the 

2005 survey. 

The purpose of this proceeding, in 

part, is to determine if make allowances 

should be updated. Central to this 

question is determining the proper 

methodology for determining new make 

allowances given the available public 

data. Proponents of Proposal 1 argued 

that both CDFA and CPDMP data were 

used to determine the 2006 make 

allowances and that they should 

continue to be used because their 

combination better reflects conditions in 

the national marketplace. This decision 

continues to find that incorporating 

CDFA data into the make allowance 

computations is justified to best reflect 

the national market where dairy 

commodity products are sold. AMS 

prices used in the product-price 

formulas incorporate sales from across 

the country, including California. 

Despite comments filed by DPNM et al. 

this decision finds that it is appropriate 

to rely on cost data from California 

(CDFA survey) and the rest of the 

country (CPDMP survey). It is also 

appropriate, contrary to comments from 

DPNM et al. to assess the economic 

impact of the changes on the national 

market. Consequently, the record 

supports use of the 2006 CDFA data to 

determine make allowances. 

DPNM et al. also commented that the 

Department failed to consider producer 

feed and fuel costs as mandated by the 

Food, Conservation and Energy Act of 

2008 (2008 Farm Bill, (Pub. L. 110– 

246)). At the hearing, official notice was 

taken of USDA data pertaining to 

various producer costs. This 

information is part of the hearing record 

and as such, was considered by the 

Department in determining whether 

make allowances should be amended. 

Comments regarding the tentative 

final decision from Agri-Mark et al. 

request that make allowances be 

updated to reflect energy costs through 

June 2008. Their comments cite the 

Bureau of Labor Statistics Producer 

Price Indexes for Industrial Natural Gas 

and Industrial Electric Power that 

demonstrate an increase in these energy 

prices through June 2008. Agri-Mark et 

al. assert that energy prices would 

remain high through 2009. Updating 

energy costs would result in make 

allowances that may give an 

inappropriate weight to one cost factor 

in an array of cost factors that are 

considered in determining make 

allowances. This would lock in an 

artificially high make allowance based 

solely on the costs of electricity and 

natural gas. Accordingly, the request by 

Agri-Mark’s et al. is denied. The 

determination of the adopted make 

allowances for cheese, butter, NFDM 

and dry whey are discussed below. The 

make allowances proposed to be 

permanently adopted represent national 

manufacturing cost averages for cheese, 

butter, NFDM and dry whey. As found 

and determined in previous 

rulemakings on this issue, an estimation 

of manufacturing costs for national 

application requires that national 

production volumes of these 

commodities be considered in 

determining the level of make 

allowances to be relied upon and used 

in the Class III and Class IV productprice formulas. This is critical because 

Class III and Class IV prices are the 

same in all Federal milk marketing 

orders. 

Butter Make Allowance 

The butter manufacturing cost data 

presented in the CPDMP 2006 survey 

reports weighted average costs based on 

a sample of four plants. These data are 

combined with the average cost data 

from the most recent CDFA survey and 

averaged over the 2006 national 

production volume as published by 

NASS. The combination of the weighted 

average costs from the CPDMP and 

CDFA surveys over the national 

production volume plus a marketing 

cost adjustment of $0.0015 yields a 

make allowance $0.1715 per pound for 

butter. 

NFDM Make Allowance 

The NFDM manufacturing cost data 

presented in the CPDMP 2006 survey 

reports weighted average costs based on 

a sample of 7 non-California plants. 

These data are combined with the 

weighted average costs reported by 

CDFA and averaged over the 2006 

national NFDM production volume as 

reported by NASS. The combination of 

the weighted average costs from the 

CPDMP and CDFA surveys by the 

national production volume plus a 

marketing cost adjustment of $0.0015 

yields a make allowance $0.1678 per 

pound of NFDM. 

Cheese Make Allowance 

The cheese manufacturing cost data 

presented in the CPDMP 2006 survey 

reports an average cost of producing a 

pound of cheese of $0.1584 per pound. 

This is significantly below the cost of 

producing a pound of cheese reported 

by the CPDMP 2005 survey. The cost 

difference was explained by the 

inclusion of fewer small plants in the 

2006 survey. In addition, cheese 

manufacturing costs of a larger plant 

were included in the 2006 survey that 

did not participate in the 2005 survey. 

This led to 2006 survey results that are 

heavily weighted towards larger volume 

plants. 

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9272 Federal Register / Vol. 78, No. 26 / Thursday, February 7, 2013 / Proposed Rules 

8Official notice is taken of 67 FR 67906, 

published November 7, 2002, and 68 FR 7063, 

effective April 1, 2003. 

The record reveals that eight cheese 

plants participated in both the 2005 and 

2006 surveys and that their costs 

increased an average of $0.017 per 

pound of cheese between the two survey 

years. The Cornell researcher who 

administered both surveys conceded 

that this was the strongest conclusion 

which can be drawn from the cheese 

manufacturing data of the two surveys. 

Supporters of relying on the $0.017 

factor to compute a new make 

allowance purport that this number can 

simply be added to the 2005 CPDMP 

plant average population cost of 

$0.2028. This decision finds that 

combining those two figures to compute 

a new cheese make allowance is 

procedurally incorrect. While a cost 

increase of $0.017 is significant and may 

be factually correct, it cannot be a factor 

in determining a new make allowance 

unless the original 2005 average 

manufacturing cost of the eight plants is 

included in the record. Therefore, use of 

the $0.017 cost increase in determining 

a new cheese make allowance is denied. 

While the $0.017 cannot be used to 

determine a new cheese make 

allowance, the cost comparison between 

the same samples of plants does reveal 

that average manufacturing costs have 

increased. However, comparing the 

weighted average cheese costs of the 

two CPDMP surveys indicates that 

processing costs have actually declined 

$0.0054 per pound. This decision finds 

that the inconsistencies between the two 

CPDMP surveys call into question 

whether either survey is representative 

of cheese manufacturing costs. 

Accordingly, for the purpose of 

determining a make allowance for 

cheese, the CPDMP 2006 survey results 

for cheese are rejected. 

This decision finds that the CDFA 

2006 survey of average cheese 

manufacturing costs is the best available 

information representing the 

manufacturing cost of producing a 

pound of cheddar cheese. Accordingly, 

the make allowance proposed to be 

permanently adopted for cheddar 

cheese is $0.2003 per pound including 

a $0.0015 per pound marketing cost 

adjustment. 

Dry Whey Make Allowance 

Estimating the cost of manufacturing 

dry whey presents a problem similar to 

that for cheese. Despite exceptions to 

the tentative partial final decision from 

Kraft, Glanbia and WCMA that CDFA 

whey data should be factored into 

determining a dry whey make 

allowance, this decision continues to 

reject relying on CDFA data in 

determining the dry whey make 

allowance. The CDFA 2006 

manufacturing cost survey reveals that 

CDFA was not satisfied with the 

precision in estimating the average cost 

per pound for whey products. 

Accordingly, it is unreasonable to rely 

on information that may not be 

reflective of market conditions. 

Adopting an artificially high make 

allowance for dry whey would result in 

the unwarranted decrease of producer 

revenue. Accordingly, CDFA dry why 

manufacturing cost data is not relied 

upon in determining the dry whey make 

allowance in the product-price 

formulas. 

This decision continues to rely on the 

CPDMP 2006 survey of the average 

manufacturing cost to produce a pound 

of dry whey. Relying solely on the 

CPDMP 2006 survey is identical to the 

approach used in determining the make 

allowance for dry whey used in the 

Class III price formula effective March 1, 

2007. The 2006 survey value of $0.1976 

plus a marketing cost adjustment of 

$0.0015 yields a dry whey make 

allowance of $0.1991 per pound. 

An issue was raised by Twin County 

in its brief concerning an alleged 

differential impact on small and large 

businesses if make allowances or Class 

III and IV price formulas are amended. 

However, the purpose of the Class III 

and IV price formulas and make 

allowances is to set individual 

minimum class prices for the Federal 

milk order program on a national basis. 

Butterfat Yield Factor 

A proposal, published in the hearing 

notice as Proposal 6, was included in a 

package of proposals advanced by 

DPNM seeking to amend the productprice formulas to more accurately 

capture the use of modern 

manufacturing technology and its 

impact on milk value. A portion of 

Proposal 6 seeks to amend the butterfat 

yield factor in the butterfat price 

formula from 1.20 to 1.211 to account 

for what DPNM and other participants 

in this proceeding characterized as a 

misapplication of farm-to-plant 

shrinkage when the Class III and Class 

IV product-price formulas were adopted 

in November 7, 2002 (67 FR 67906), and 

became effective on April 1, 2003 (68 FR 

7063).8

Specifically, DPNM explained that the 

butterfat recovery factor of 1.20 used in 

the butterfat pricing formula was the 

result of the incorrect application of the 

butterfat shrinkage factor of 0.015 

percent on a per pound of butterfat basis 

rather than on a per cwt basis. As 

explained by DPNM, the shrinkage 

factor was, however, properly applied to 

the butterfat adjustment portion of the 

protein price formula. Correction of this 

mathematical error removes this 

inconsistency between the butterfat 

pricing formula and the protein price 

formula. 

This decision agrees with DPNM and 

others who support correction of this 

error. In the 2002 final decision 

adopting the butterfat yield of 1.20, 

USDA correctly explained that when 

accounting for the farm-to-plant loss of 

milk, there is a 0.25 percent butterfat 

loss per pound of butterfat, plus an 

additional loss of 0.015 pounds per cwt 

of milk. However, when mathematically 

accounting for the loss in the price 

formulas, the additional 0.015 pound of 

loss was applied on a per pound of 

butterfat basis. This decision corrects 

that error and proposes to permanently 

adopt a butterfat yield of 1.211. 

Opponents of amending this factor do 

not dispute that the 1.20 butterfat yield 

factor used in the pricing formulas was 

in error. Rather, opposition rests on the 

premise that manufacturing processors 

are already paying too much for raw 

milk and they attribute this to the inplant shrinkage of butterfat that cannot 

be processed into a finished product. 

Furthermore, adopting the 1.211 factor 

would result, all other factors 

unchanged, in a higher minimum price 

for raw milk. This decision rejects such 

arguments. The arguments are based on 

an unwanted outcome and not on the 

basis of the proper application of this 

factor. The other features of Proposal 6 

are not proposed to be adopted and 

those features are discussed later in this 

decision. 

Other proposals considered in this 

proceeding address the three major 

elements of the product-price 

formulas—end-product prices used in 

the formulas, manufactured product 

yield factors and other intra-formula 

cost factors. A proposal (Proposal 18) 

advanced to establish an alternative 

approach to determining prices of raw 

milk by attempting to develop a 

competitive pay price also is 

considered. 

Product Yields and Butterfat Recovery 

Percentage 

A package of proposals, advanced by 

DPNM, seek to amend the product-price 

formulas to capture the use of more 

modern manufacturing technology and 

its impact on milk value (Proposals 6, 7, 

and 8). As already discussed, a part of 

Proposal 6 seeking to amend the 

butterfat yield factor in the butterfat 

price formula from 1.20 to 1.211 is 

proposed to be permanently adopted. 

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9Official notice is taken of 67 FR 67928, 

published November 7, 2002. 

However, Proposal 6 also seeks to 

increase the butterfat recovery 

percentage in the protein price formula 

from 90 percent to 94 percent. The 

argument for increasing this factor is 

that new cheese manufacturing 

technology has increased the amount of 

butterfat that manufacturers can 

potentially recover when making 

cheese. A 94 percent recovery rate also 

will increase the blend price paid to 

producers by $0.07 per cwt. 

Opponents to increasing the butterfat 

recovery rate, including LOL, NDA, 

Sorrento, Leprino, MMPA, and H. P. 

Hood presented evidence countering the 

DPNM claim that a butterfat recovery in 

excess of 90 percent is achievable 

industry-wide. Many manufacturer 

witnesses testified that their butterfat 

recovery percentage in cheese is, on 

average, 90 percent. 

While the record contains evidence of 

what butterfat recovery rate in cheese 

production is possible through the use 

of more modern manufacturing methods 

and technology, the preponderance of 

evidence reflects that many cheese 

manufacturers generally achieve 

butterfat recovery near 90 percent. 

DPNM et al. failed to make a compelling 

argument for an increase in the butterfat 

recovery rate in their exceptions to the 

tentative partial final decision. While 

they did offer several references to 

articles published by dairy scientists 

providing examples of cheese yields 

with higher butterfat retention rates, 

they did not provide examples of 

manufacturing facilities currently 

experiencing those higher rates. 

Furthermore, the use of advertisements 

claiming that a specific cheese vat will 

result in higher butterfat retention rates 

does not merit the conclusion that those 

rates are, on average, achieved. It is 

important that the product-price 

formulas reflect current plant 

conditions, not plant conditions that 

may be possible but not reflective of 

general industry wide conditions. 

Accordingly, this final decision 

continues to reject adoption of this 

feature of Proposal 6. 

Proponents also commented that 

plants whose butterfat recovery rate is 

greater than 90 percent are not paying 

for all of the protein used to make 

cheese. This final decision rejects that 

assertion. All of the protein contained in 

producer milk, regardless of if its end 

use in cheese or in the whey stream, is 

priced at the protein price. The protein 

price is not reduced to reflect a lower 

value for the protein in the whey 

stream. 

A second proposal of the DPNM 

package of proposals, Proposal 7, seeks 

to eliminate the farm-to-plant shrink 

adjustment factors in the Class III and 

Class IV product-price formulas. The 

argument by proponents is that modern 

measurement and milk-handling 

techniques, and the trend of 

transporting full loads of milk from 

single producers negate the need to 

retain the shrinkage adjustment factors. 

Opponents argue that in many 

marketing areas, milk shipments are 

commonly assembled from multiple 

farms and some farm-to-plant shrinkage 

is inevitable. 

Record evidence supports concluding 

that farm-to-plant shrinkage remains a 

reality for manufacturers. Numerous 

witnesses testified regarding actual 

average farm-to-plant shrinkage 

experienced at their plants: LOL (0.343 

percent); MMPA (0.3 percent); Leprino 

(0.25 percent); and HP Hood (1.5 

percent including in-plant losses). 

While DPNM argued at the hearing and 

in its exceptions that its members’ farmto-plant shrinkage is well below the 0.25 

percent contained in the Class III and 

Class IV product-price formulas, no 

evidence was offered for examination as 

an alternative other than its elimination. 

Furthermore, while proponents assert 

that shipping full tanker loads of milk 

is common in the southwest where they 

operate, record evidence does not 

demonstrate this reality in the rest of the 

country. 

This final decision continues to find 

that the Class III and Class IV productprice formulas should recognize the loss 

of milk that occurs when milk is moved 

from the farm to a receiving plant. 

Record evidence demonstrates that 

farm-to-plant shrinkage occurs, for 

example, from imprecise stick readings 

and sampling at the farm or from 

product remaining on tanker walls after 

emptying the load at the plant. In most 

cases, producers are paid based on farm 

weights and tests, in which case the 

handler pays for product that is not 

ultimately received. It is therefore 

reasonable when determining 

component prices charged to handlers 

to make an adjustment for the lost 

product. The 0.25 percent shrinkage 

factor contained in the formulas is a 

reasonable factor that represents the loss 

of producer milk when shipped from 

farm-to-plant. Accordingly, Proposal 7 

is not proposed to be adopted. 

A third proposal of the DPNM 

package of proposals, Proposal 8, seeks 

to increase the nonfat solids (NFS) yield 

factor in the Class IV product price 

formula and the yield factors for protein 

and butterfat in the protein price 

formula components of the Class III 

product-price formula. Proponents 

computed the proposed conversion 

factors to be used in the protein price 

formula by assuming: a) that the 

percentage of casein in true protein is 

actually 83.25 percent (resulting in a 

cheese yield per pound of protein of 

1.405); b) the butterfat recovery rate in 

cheese is 94 percent (resulting in a 

cheese yield per pound of butterfat of 

1.653); and c) that average producer 

tests should be used in the price 

formulas (resulting in a fat to protein 

ratio of 1.214). The conversion factor for 

computing the nonfat solids should be 

1.02 based on actual nonfat dry milk 

yield per pound of nonfat solids. 

Opponents counter that the 

methodology used to derive the 

proposed yield factors are flawed and 

that no actual studies were offered to 

support their conclusion that product 

yields are higher than those currently 

provided in the formulas. This final 

decision continues to find no record 

evidence to support amending the yield 

factors as proposed in Proposal 8. 

Despite comments to the tentative 

partial final decision by DPNM et al., 

record evidence does not support 

making changes to the yield factors in 

the protein price formula. Proponents 

continue to argue that based on 

producer tests, the actual percentage of 

casein in true protein is 83.25 percent. 

The formulas currently assume that the 

percentage of casein in true protein is 

82.2 percent. This factor, adopted in 

2002 (67 FR 67928),9 was based on 

evidence provided at that proceeding by 

a university researcher whose studies 

demonstrated a casein in true protein 

range of 82.2 percent to 82.4 percent. 

The record of this proceeding does not 

contain data from any studies that 

would indicate that the casein in true 

protein percentage has increased. 

Accordingly, this decision does not 

propose increasing the percentage of 

casein in true protein to 83.25. 

In their exceptions DPNM et al. 

reiterated its arguments that a butterfat 

recovery rate of 94 percent should be 

adopted. Its adoption would result in an 

increase in the cheese yield per pound 

of butterfat to 1.653. This final decision 

has already discussed why a 94 percent 

butterfat recovery rate is not proposed to 

be adopted. Consequently, the butterfat 

yield factor in the protein formulas is 

not amended. 

Proposal 8 also seeks to increase the 

fat-to-protein ratio in the protein 

formula to 1.214. Proponents claim that 

the increased ratio reflects the use of 

average producer milk tests of 3.04 

percent true protein and 3.69 percent 

butterfat. The current ratio of 1.17 was 

computed using standardized milk tests 

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10Official notice is taken of ‘‘California Milk 

Pricing Formulas’’, December 2007, Dairy 

Marketing Services Branch, California Department 

of Agriculture: http://www.cdfa.ca.gov/dairy/pdf/ 

steps_for_calc_minprices.pdf. 

11Official notice is taken of 68 FR 7063, February 

12, 2003. 

of 2.9915 percent true protein and 3.5 

percent butterfat. Record evidence does 

not support using average producer tests 

in determining yield factors. Proponents 

claim that other yield factors were 

determined using average producer 

tests. This statement is incorrect. Other 

yield factors in the product price 

formulas take into account the amount 

of the component in the product; there 

is no consideration of average producer 

tests. For example, the yield factor in 

the butterfat price formula is 1.211. This 

value was derived from the percentage 

of butterfat in butter, and was later 

adjusted for farm-to-plant shrinkage. 

Weighted average producer tests have 

no bearing on this yield number. This 

final decision continues to find that 

increasing the fat-to-protein ratio to 

account for weighted average producer 

tests is not justified. 

The last portion of Proposal 8 seeks to 

increase the nonfat solids yield factor 

from .99 to 1.02. DPNM et al. claims that 

it is impossible for 1 pound of solids 

nonfat to yield less than one pound of 

nonfat dry milk. In their exceptions, 

DPNM et al. claims that the California 

milk pricing formulas actually use a 

yield factor of 1.02. According to a 

December 2007 California Milk Pricing 

Formulas publication release by CDFA, 

California price formulas utilize a 

nonfat solids yield factor of 1.10 The .99 

yield factor currently contained in the 

nonfat solids price formula was adopted 

on April 1, 2003 (68 FR 7063).11 This 

factor was reduced from 1.02 to account 

for farm-to-plant shrinkage. USDA 

continues to find it appropriate to 

acknowledge farm-to-plant shrinkage in 

the product price formulas. Therefore, 

the nonfat solids yield factor is 

unchanged. 

Value of Butterfat in Whey 

Two proposals advanced by IDFA and 

Agri-Mark, Proposals 9 and 10 

respectively, seek to change the protein 

price formula feature of the Class III 

product-price formula by reducing the 

protein price to reflect the lower market 

value of whey cream. Proposal 9 also 

seeks to further lower the protein price 

to reflect the reduced recoverable 

volume of whey cream in the cheese 

making process. (During the proceeding 

Agri-Mark withdrew its support of 

Proposal 10 in support of IDFA’s 

Proposal 9.) The argument for seeking 

these changes is that that the volume of 

milkfat contained in whey cream is 

currently valued at the Grade AA butter 

price but can only be sold as whey 

butter (Grade B butter) or for other uses 

with values below the Grade AA butter 

price. Record evidence does indicate 

that Grade B is often marketed to 

commercial food service establishments 

such as bakeries and is marketed at a 

discount to the Grade AA butter price. 

Some hearing participants (NAJ) suspect 

that the volumes of whey cream 

produced and the extent of a secondary 

market for whey butter are relatively 

small. Record evidence contains very 

limited data regarding plant sales of 

whey cream or Grade B butter. More 

importantly, there is no known 

publically available data for U.S. market 

prices and volumes of whey cream or 

Grade B butter produced or sold. 

Opponents (Dairylea et al.) to IDFA’s 

proposal acknowledge that while whey 

cream does have a lower value than that 

reflected in the Grade AA butter price, 

other higher-value uses for whey cream 

exist that also are not recognized. 

Opponents argue that it would be 

inappropriate to amend the butterfat 

value to reflect a selected measure of 

whey cream value while not considering 

whey cream value in other (possibly 

higher-value) uses. 

After considering the comments and 

exceptions to the tentative partial final 

decision for reducing the protein price 

to reflect the lower market value of 

whey cream, this decision continues to 

reject this proposal. Whey cream may 

have a lower market value, but without 

publicly available market data that 

provides whey cream volumes and 

prices, no reasonable and objective 

means is available to determine if or 

how whey cream is distorting the 

protein price formula feature contained 

in the Class III product-price formula. 

Supporters of Proposal 9 did not offer 

market information that could be relied 

upon as a basis for changing the protein 

price. While there is record evidence 

from some manufacturers as to their 

individual saleable volumes and values 

of whey cream, that limited data does 

not provide for a reasonably complete 

assessment of the national market for 

whey cream and its various competing 

uses. The lack of verifiable data 

concerning whey cream and/or its 

applicability to any additional costs or 

value loss experienced by cheese 

manufacturers across the industry is 

unknown. Accordingly, Proposals 9 and 

10 are not proposed to be adopted. 

Barrel-Block Cheese Price Spread 

Proposal 12 offered by IDFA and 

supported by Leprino, DFA, NDA, AgriMark, and others, seeks to eliminate the 

3-cent addition to the barrel price in the 

protein price formula. The argument for 

elimination from the protein price 

formula is that the average price 

difference between block and barrel 

cheese was 3-cents when first 

incorporated into the formula but now 

there is virtually no difference in the 

packaging costs of blocks and barrels. 

Proponents also argue that even if there 

were a cost difference, that difference 

would have been captured in the 

CPDMP 2006 survey of manufacturing 

costs. Other proponents add to the 

argument that after the NASS barrel 

cheese price was adjusted from 39 

percent to 38 percent moisture content 

in January 2001, the price difference 

between barrels and blocks has averaged 

$0.008 per pound. 

The record contains only one cheese 

manufacturer’s (Davisco) specific 

packaging cost data for a single plant 

located in Minnesota that produces 

cheese in both blocks and barrels. That 

plant’s average packaging cost for block 

cheese was $0.0012 per pound more 

than for barrels. Another cheese 

manufacturer (Twin County) producing 

cheese exclusively in barrels in Iowa 

was unable to indicate whether it was 

advantageous to their business to 

support or oppose any change in the 3- 

cent adjustment advanced in Proposal 

12. 

This final decision does not support 

adoption of Proposal 12. The argument 

that any packaging cost differences that 

exist between barrel and block cheese is 

captured in the CPDMP 2006 survey is 

inadequately supported. The record 

reveals that all packaging costs reported 

in the CPDMP 2006 survey were for 40- 

pound block cheese production. If a 

surveyed plant produced barrel cheese, 

an average packaging cost for 40-pound 

blocks was assigned to the plant. 

Additionally, proponents assert that 

since the price difference between 

blocks and barrels is almost zero, it can 

be concluded that that any packaging 

cost difference must also be nearly zero. 

This decision does not find a causal 

relationship between selling prices and 

manufacturing costs. Even though the 

price spread between blocks and barrels 

has narrowed over time and recently 

averaged near zero, the cost difference 

between block and barrel packaging 

cannot be assumed to also be zero. 

Blocks and barrels have different supply 

and demand functions. Comparing 

average prices over a period of time 

does not therefore automatically reflect 

cost differences. Since barrel cheese 

prices exceed block cheese prices at 

certain times, due to different supply 

and demand curves, average prices will 

not in and of themselves indicate cost 

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differences. While the record contains 

packaging cost information for a single 

plant that suggests similar packaging 

costs of barrel and block cheese, such 

evidence is insufficient to conclude that 

this is representative across Federal 

order manufacturing plants or should be 

the basis for adopting the proposal. 

Accordingly, Proposal 12 is denied. 

The proposal by DFA and NDA, 

Proposal 13, seeks to eliminate the 

cheese barrel price from the protein 

price formula feature of the Class III 

product-price formula but no testimony 

was given in support of this proposal. In 

addition to NDA proponent support 

during the hearing and DFA opposition 

to the adoption of the proposal in their 

post-hearing brief, significant 

opposition from others was given. 

Opponents argue that because barrel 

cheese represents roughly half of the 

NASS price survey cheese volume (now 

captured in the AMS survey), removing 

the barrel price from the protein price 

formula would greatly reduce the total 

AMS survey volume thereby making the 

price survey less representative of the 

cheddar cheese market. 

This final decision continues to find 

that retaining the cheese barrel price in 

the protein price formula is necessary to 

ensure that the protein price is 

representative of the national cheese 

market. The Class III product-price 

formula needs to be reasonably 

representative of the market for cheese 

that determines the value of milk. 

Record evidence reveals that barrel 

production in the AMS survey is often 

in excess of 50 percent of the total 

cheese volume surveyed. Eliminating 

the barrel price from the protein price 

formula would significantly and 

needlessly reduce the volume of cheese 

used in the Class III product price 

formula which could lead to protein 

prices that are not as representative of 

the national cheese market. 

Accordingly, Proposal 13 is not 

proposed to be adopted. 

Product Price Series 

Proposal 14, advanced by Agri-Mark, 

seeks to change the price data used in 

the Class III and protein price formula 

by combining the NASS price survey 

data for cheddar cheese (now the AMS 

price survey data for cheddar cheese) 

with the weekly average CME cheese 

prices as a method that results in a 

superior benchmark price for cheese. 

The argument rests on the assertion that 

the 2-week timing difference, or lag, 

between the CME price and the AMS 

price survey for cheese fails to capture 

changes in market prices in the current 

value of cheese and the near-actual 

Class III value. The proponent also 

argues that adoption of this new price 

series would reduce price volatility and 

provide more up-to-date market 

information than that provided by the 

AMS price survey. In other words, more 

current market information would be 

transmitted through minimum Class III 

prices and provide more accurate 

pricing signals to processors and 

producers. 

Opponents to adoption of Agri-Mark’s 

Proposal 14, including IDFA and its 

members, collectively argue that 

combining the CME price with the AMS 

price would reduce the usefulness of 

currently available risk management 

tools. These tools include the use of 

futures contracts and the use of forward 

contracts. Opponents also note that (1) 

the CME is a spot market representing 

only about 4.1 percent of all cheddar 

cheese traded and is not representative 

of cheese being more commonly 

produced and marketed on a longerterm contract basis, (2) it adds a degree 

of complexity to a pricing-formula 

which is already too complex without 

any discernible benefit and (3) its 

adoption would tend to bias price 

reporting to the market conditions of the 

Chicago area. All comments to the 

tentative partial final decision regarding 

Proposal 14 supported USDA’s denial of 

the proposal. 

It is reasonable to expect that adding 

a degree of complexity may tend to 

reduce transparency and lessen the 

understanding of the Class III and Class 

IV product-price formulas. Other than 

assertions by the proponent, the record 

lacks evidence that combining CME 

prices with AMS survey prices would 

improve price discovery or market 

information or would offer superior 

transmission of economic signals 

through the minimum Class III price. 

In addition, rulemaking action on 

mandatory product price reporting 

overtakes the need to consider adoption 

of a new price series that combines CME 

prices with AMS survey prices. 

Improved mandatory price reporting 

that provides for the auditing of prices 

reported to AMS makes the accuracy, 

but not the timing, of price data less of 

an issue than envisioned throughout 

this proceeding. Accordingly, Proposal 

14 is not proposed to be adopted. 

A proposal advanced by DPNM, 

Proposal 15, seeking to replace the AMS 

price series for cheese with the CME 

price has similarities to that of Proposal 

14. It seeks to eliminate the 2-week lag 

between CME prices and AMS price 

reporting. DPNM has argued throughout 

this rulemaking proceeding that the use 

of CME prices in the price formula for 

cheese would provide producers, 

marketers and manufacturers of cheddar 

cheese with more timely and 

transparent prices as the CME 

represents actual current cheese prices. 

In opposition to the adoption of 

Proposal 15, the opponents, including 

IDFA, NDA, Agri-Mark and DFA, as in 

their opposition to the adoption of 

Proposal 14, argue that (1) The CME is 

too thin a market to be relied upon for 

use in the Class III product-price 

formula, (2) the CME represents only 

about 4.1 percent of all cheddar cheese 

traded, (3) its exclusive use would tend 

to bias and limit the price reporting for 

cheese to the market conditions of the 

Chicago market, and (4) being a spot 

market for cheese, the CME ignores 

other sales agreements and marketing 

arrangements that account for more than 

95 percent of the cheese marketed and 

largely captured in the AMS price 

survey. 

This final decision continues to find 

that cheese prices used in product-price 

formulas should reflect broad markets 

and not rely exclusively on a smaller 

subset of cheese prices and spot 

marketing conditions as represented by 

the CME. The record also makes clear 

that more industry confidence is placed 

in AMS price surveys than in spot 

market prices for cheese. Accordingly, 

Proposal 15 is not adopted. 

Other Solids Price 

Proposal 16, advanced by NAJ, seeks 

to eliminate the other solids price and 

expand the protein price formulas to 

include the value of dry whey because, 

according to NAJ, the value of whey lies 

in its protein content. The proponent 

asserts that the other solids price 

formula does not connect the market 

value of whey solids to how producers 

are paid for whey. Therefore, the 

proponent advocates that the value of 

dry whey in the price formulas be 

determined on the basis of its protein 

content which will make the other 

solids price formula no longer 

necessary. 

IDFA and other opponents argue that 

it would be inappropriate to value dry 

whey on a component (protein) that has 

no measurable effect on the product 

yield. Except for comments filed by the 

proponent, comments filed by both 

producer and manufacturer groups in 

response to the tentative partial final 

decision expressed opposition to the 

adoption of Proposal 16. 

This decision continues to find that 

Proposal 16 would add no additional 

value arising from protein to the 

marketwide pool. It would simply shift 

the money attributed to other nonfat 

solids into the protein price formula and 

add a level of complexity to the product 

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9276 Federal Register / Vol. 78, No. 26 / Thursday, February 7, 2013 / Proposed Rules 

price formulas that would yield no 

measurable benefit. 

Record evidence regarding Proposal 

16 does not support eliminating the 

other nonfat solids prices and shifting 

the value of dry whey into the protein 

price formula. Other solids in milk are 

composed primarily of lactose, whey 

protein, ash and other non-protein 

solids. Numerous component markets, 

such as lactose and dry whey, were 

evaluated during Federal order reform 

to determine an appropriate market to 

base the other solids price. It was 

determined that because no reliable 

lactose market existed, the dry whey 

market was the next best alternative. At 

this time, there is still no reliable market 

for lactose on which the other solids 

price could be based. Therefore, this 

final decision finds that dry whey, 

despite the opinion of NAJ, remains the 

most relevant market on which to base 

the other solids price. Accordingly, 

Proposal 16 is not adopted. 

Competitive Price Series 

Proposal 18, advanced by the Maine 

Dairy Industry Association (MDIA), 

seeks to determine Class III and Class IV 

prices with a competitive pay price 

series rather than the current productprice formulas. The proposal seeks a 

return to a competitive pay price used 

by the FMMO program prior to 2000. 

The proponent argues that adoption of 

the proposed competitive pay price 

series would eliminate the need for 

establishing make allowances that, 

when increased, reduce prices received 

by dairy farmers. 

A competitive pay price series 

previously existed for nearly 40 years 

and provided the foundation for all 

classified prices set in the system of 

milk marketing orders. A competitive 

pay price series would negate the need 

to directly consider manufacturing costs 

and other factors such as product yields 

and their relationship in deriving the 

value of raw milk. 

However, there are many details that 

need resolution before the FMMO 

program could return to using a 

competitive pay price series. For 

example, the proposed method is based 

on geographic areas (zones) wherein 

strong competition for raw milk 

prevails. A competitive pay price would 

be derived by averaging prices from all 

the competitive price zones. As 

conceded by the proponent, these areas 

would most likely be surrounded by 

Federal milk marketing areas where 

minimum classified prices prevail. Milk 

prices within the competitive price 

zones would therefore be influenced by 

milk priced under adjoining Federal 

orders. Other considerations, including 

an accounting of various forms of inkind payments to producers, also need 

to be addressed. Ignoring consideration 

of such payments would allow plants to 

increase (decrease) their hauling charges 

as a way of reducing (increasing) the 

actual pay price to dairy farmers. 

Therefore, this final decision finds 

that Proposal 18 cannot be implemented 

as proposed and is herein denied 

B. Termination of a Portion of the 

Proceeding 

Proposal 2, offered by Agri-Mark, 

proposed to amend the Class III and 

Class IV product formulas to annually 

update the manufacturing allowances 

using an annual manufacturing cost 

survey of cheese, whey powder, butter 

and non-fat dry milk plants. The 

proposal would give authority for 

selecting the sample and conducting the 

survey to the market administrators. The 

manufacturing cost data would then be 

used to update manufacturing 

allowances to prescribed levels. On 

brief, Agri-Mark withdrew the 

automatic-updating portion of the 

proposal. 

The record of hearing reflects a 

mixture of support and opposition to 

this proposal. This wide variance in 

industry response clearly demonstrates 

a lack of unity and policy direction. 

Opposition to Proposal 2 tended to stem 

primarily from the implementation of an 

automatic adjuster to manufacturing 

allowances, which was subsequently 

withdrawn by Agri-Mark. However, 

amongst supporters there was a clear 

lack of consensus as to how and by 

whom the survey should be 

implemented, what regions should 

comprise the survey sample, and 

specifics as to how the survey data were 

to be used. The only clear assertion 

made by the record was that some 

participants supported establishing a 

manufacturing cost survey. 

Proposal 17, advanced by NMPF, 

would have amended the Class III and 

Class IV product price formulas to 

incorporate a monthly energy cost 

adjustment based on monthly changes 

in the producer price indices for 

industrial natural gas and electricity as 

published by the Bureau of Labor 

Statistics. Proponents argued that the 

implementation of an energy price 

adjuster would update make allowances 

in response to fluctuating energy prices. 

As mentioned earlier, this proposal was 

broadly supported by producer 

organizations, many of which 

manufacture NFDM and dry whey. 

These two products, in particular, 

require the use of energy-consuming 

driers in their production processes. 

Opponents to Proposal 17 were 

overwhelmingly manufacturers of dairy 

products. They argued that the 

inclusion of an energy cost adjuster in 

the make allowance would complicate 

the milk pricing system and reduce the 

effectiveness of certain risk management 

tools. 

Proposal 20, advanced by Dairylea, 

would amend the Class III and Class IV 

product price formulas by establishing 

cost-of-production add-ons that 

manufacturers could include in the 

selling price of their products, but 

which would not be included as part of 

the NASS (now AMS) dairy product 

price survey. Proponents noted that 

increases in wholesale prices on dairy 

products are captured by product price 

surveys and subsequently drive up the 

costs of raw milk, through higher Class 

III and Class IV prices. The proposed 

mechanism, they argued, would break 

the existing price circularity, allowing 

processors to increase wholesale prices 

without affecting input costs. 

Opponents, many of whom are dairy 

processors, argued that it would be 

difficult to negotiate cost add-ons with 

wholesalers. Those handlers unable to 

successfully negotiate a higher cost addon would be limited to the cost 

allowance included in the 

manufacturing allowance. Similarly, 

handlers operating outside of the 

Federal order system could potentially 

gain market share over regulated 

competitors. Additionally, opponents 

noted, the implementation of a cost addon would further complicate the 

existing price discovery mechanism 

used by the Federal order system. 

In the time following the 

implementation of the interim final rule 

(73 FR 44617), the Department received 

a request, which has been made part of 

the Official Record, from the Greater 

Northeast Milk Marketing Agency 

(GNEMMA) to finalize those proposals 

from this proceeding implemented on 

an interim basis and terminate the 

remainder (Proposals 2, 17 and 20). 

GNEMMA is a marketing agency in 

common comprised of: Agri-Mark, Inc.; 

Dairy Farmers of America, Inc.; Dariylea 

Cooperative, Inc.; Dairy Marketing 

Services, LLC; Land O’Lakes, Inc.; 

Maryland and Virginia Milk Producers 

Cooperative Association, Inc.; St. 

Albans Cooperative Creamery, Inc.; and 

Upstate Niagara Cooperative, Inc. 

GNEMMA members market in excess of 

64 percent of all milk in the Northeast 

milk marketing area. The petitioners 

argue that certain market conditions 

have changed in the time since the 

hearing and certain data reflected in the 

record of hearing in regards to Proposals 

2, 17 and 20 are no longer valid. 

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12California Department of Food and Agriculture: 

Summary of Weighted Average Manufacturing 

Costs, Butter, Nonfat Dry Milk, Cheddar Cheese, 

and Dry Whey Powder, Released September 18, 

2007. 

13California Department of Food and Agriculture: 

Final Results for Class 4a and 4b Pricing Formula 

Hearing of October 10, 2007, released November 20, 

2007. 

Other proposals proposed to be 

permanently adopted by this decision 

have already been implemented on an 

interim basis. This decision continues to 

support their adoption, and in essence 

the status quo. 

While evidence regarding Proposals 2, 

17 and 20 was collected during the 

hearing, the Department has never 

issued a decision on their merits. The 

hearing was initially held in 2007. The 

hearing record reflects marketing 

conditions at that time. Marketing 

conditions since the 2007 hearing have 

changed. Accordingly, given these 

circumstances, it is reasonable to 

terminate the proceeding in regards to 

Proposals 2, 17 and 20 in their entirety. 

In view of the foregoing, it is hereby 

determined that the proceeding with 

respect to Proposals 2, 17 and 20 should 

be and are hereby terminated. 

Rulings on Motions 

A motion for official notice of a 

publication 12 and a final decision 13 by 

the CDFA was submitted by Agri-Mark 

et al. joined by Twin County Dairy, Inc., 

(Twin County) and supported by IDFA. 

This decision takes official notice of 

these publications. 

In their comments to the tentative 

partial final decision, Agri-Mark et al. 

and Twin County also filed a motion for 

official notice of specific energy price 

statistics and projections of the U.S. 

Department of Labor and the U.S. 

Department of Energy. This motion was 

supported by IDFA. The motion 

advocated use of this data for a one-time 

energy cost adjustment to the 

manufacturing allowances adopted in 

the final decision. Previous publications 

of these statistics were officially noticed 

during the hearing. This final decision 

takes official notice of these 

publications through March 2009. 

A motion and supplemental 

information in support of the motion 

seeking a continuance of the hearing for 

the limited purpose of offering 

additional data and analysis in 

advancing Proposal 18 were submitted 

by MDIA. A counter motion opposed to 

MDIA’s motion was made by IDFA. 

Offering new data and analysis by 

continuing or re-opening the hearing for 

the limited purpose of reconsidering 

Proposal 18 would put all other hearing 

participants advancing or opposing 

proposals during the proceeding at a 

disadvantage. This proceeding lasted for 

3 weeks over a 6 month period from 

February 2007 through July 2007. It also 

was preceded by an information session 

in December 2006. The tentative final 

decision found that sufficient time was 

made available to all known parties to 

develop and present noticed proposals 

and the motion was denied. 

Exceptions to the tentative partial 

final decision filed by MDIA requested 

that USDA reconsider their original 

motion for a continuance of the hearing. 

MDIA argued that because a decision 

has yet to be issued on three other 

noticed proposals, the hearing—in 

regard to those proposals—remains 

open. Therefore, concluded MDIA, 

USDA has the latitude to grant MDIA’s 

motion for a continuance on Proposal 

18. MDIA also stated that in denying its 

first motion, USDA did not give proper 

weight to the support for the basic 

concept of Proposal 18 (a competitive 

pay price series) expressed in numerous 

post-hearing briefs that were submitted 

by various hearing participants. 

MDIA also took exception with the 

tentative partial final decision’s 

characterization that the MDIA’s 

witness conceded problems with the 

proposed competitive pay price series. 

MDIA wrote that Proposal 18 was 

designed to be a beginning framework 

for a functioning competitive pay price 

series that would be superior to endproduct pricing formulas. MDIA argued 

that it intended to use the hearing 

process as a method for determining 

concerns with the proposal and then 

recommend to the Department a 

procedure for further development of 

the proposal. 

MDIA’s motion for a continuance 

continues to be denied. Though a 

continuation might allow for further 

development of Proposal 18 with USDA 

and industry participants, there is a 

necessity to proceed with finalizing the 

rulemaking on the Class III and Class IV 

price formulas. While MDIA’s motion is 

denied, this does not prevent future 

consideration of a competitive pay price 

system. 

Rulings on Proposed Findings and 

Conclusions 

Briefs and proposed findings and 

conclusions were filed on behalf of 

certain interested parties. These briefs, 

proposed findings and conclusions, and 

the evidence in the record were 

considered in making the findings and 

conclusions set forth above. To the 

extent that the suggested findings and 

conclusions filed by interested parties 

are inconsistent with the findings and 

conclusions set forth herein, the 

requests to make such findings or reach 

such conclusions are denied for the 

reasons previously stated in this 

decision. 

General Findings 

The findings and determinations 

hereinafter set forth supplement those 

that were made when the Northeast and 

other marketing orders were first issued 

and when they were amended. The 

previous findings and determinations 

are hereby ratified and confirmed, 

except where they may conflict with 

those set forth herein. 

(a) The tentative marketing 

agreements and the orders, as hereby 

proposed to be amended, and all of the 

terms and conditions thereof, will tend 

to effectuate the declared policy of the 

Act; 

(b) The parity prices of milk as 

determined pursuant to section 2 of the 

Act are not reasonable in view of the 

price of feeds, available supplies of 

feeds, and other economic conditions 

which affect market supply and demand 

for milk in the marketing areas, and the 

minimum prices specified in the 

tentative marketing agreements and the 

orders, as hereby proposed to be 

amended, are such prices as will reflect 

the aforesaid factors, insure a sufficient 

quantity of pure and wholesome milk, 

and be in the public interest; and 

(c) The tentative marketing 

agreements and the orders, as hereby 

proposed to be amended, will regulate 

the handling of milk in the same 

manner as, and will be applicable only 

to persons in the respective classes of 

industrial and commercial activity 

specified in, marketing agreements upon 

which a hearing has been held. 

Rulings on Exceptions 

In arriving at the findings and 

conclusions, and the regulatory 

provisions of this decision, each of the 

exceptions received was carefully and 

fully considered in conjunction with the 

record evidence. To the extent that the 

findings and conclusions and the 

regulatory provisions of this decision 

are at variance with any of the 

exceptions, such exceptions are hereby 

overruled for the reasons previously 

stated in this decision. 

Marketing Agreement and Order 

Annexed hereto and made a part 

hereof is one document: A Marketing 

Agreement regulating the handling of 

milk. The order amending the order 

regulating the handling of milk in the 

Northeast and other marketing areas was 

approved by producers and published 

in the Federal Register on July 31, 2008 

(73 FR 44617), as an Interim Final Rule. 

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9278 Federal Register / Vol. 78, No. 26 / Thursday, February 7, 2013 / Proposed Rules 

Both of these documents have been 

decided upon as the detailed and 

appropriate means of effectuating the 

foregoing conclusions. 

It is hereby ordered that this entire 

final decision and the Marketing 

Agreement annexed hereto be published 

in the Federal Register. 

Referendum Order To Determine 

Producer Approval; Determination of 

Representative Period; and Designation 

of Referendum Agent 

It is hereby directed that referenda be 

conducted and completed on or before 

the 30th day from the date this decision 

is published in the Federal Register, in 

accordance with the procedure for the 

conduct of referenda (7 CFR 900.300– 

311), to determine whether the issuance 

of the orders as amended and as hereby 

proposed to be amended, regulating the 

handling of milk in the Upper Midwest, 

Mideast, and Northeast marketing areas 

is approved or favored by producers, as 

defined under the terms of the orders (as 

amended and as hereby proposed to be 

amended), who during such 

representative period were engaged in 

the production of milk for sale within 

the aforesaid marketing areas. 

The representative period for the 

conduct of such referenda is hereby 

determined to be May 2012. 

The agents of the Secretary to conduct 

such referenda are hereby designated to 

be the respective market administrators 

of the aforesaid orders. 

Determination of Producer Approval 

and Representative Period for All Other 

Orders 

May 2012 is hereby determined to be 

the representative period for the 

purpose of ascertaining whether the 

issuance of the orders, as amended and 

hereby proposed to be amended, 

regulating the handling of milk in the 

Appalachian, Florida, Southeast, 

Central, Pacific Northwest, Arizona, and 

Southwest areas is approved or favored 

by producers, as defined under the 

terms of each of these orders as 

amended and as hereby proposed to be 

amended, who during such 

representative period were engaged in 

the production of milk for sale within 

the aforesaid marketing areas. 

List of Subjects in 7 CFR Part 1000 

Milk marketing orders. 

Order Amending the Orders Regulating 

the Handling of Milk in the Northeast 

and Other Marketing Areas 

This order shall not become effective 

until the requirements of 7 CFR section 

900.14 of the rules of practice and 

procedure governing proceedings to 

formulate marketing agreements and 

marketing orders have been met. 

Findings and Determinations 

The findings and determinations 

hereinafter set forth supplement those 

that were made when the orders were 

first issued and when they were 

amended. The previous findings and 

determinations are hereby ratified and 

confirmed, except where they may 

conflict with those set forth herein. 

(a) Findings. A public hearing was 

held upon certain proposed 

amendments to the tentative marketing 

agreements and to the orders regulating 

the handling of milk in the Northeast 

and other marketing areas. The hearing 

was held pursuant to the provisions of 

the Agricultural Marketing Agreement 

Act of 1937, as amended (7 U.S.C. 601– 

674), and the applicable rules of 

practice and procedure (7 CFR part 900). 

Upon the basis of the evidence 

introduced at such hearing and the 

record thereof, it is found that: 

(1) The said orders as hereby 

amended, and all of the terms and 

conditions thereof, will tend to 

effectuate the declared policy of the Act; 

(2) The parity prices of milk, as 

determined pursuant to section 2 of the 

Act, are not reasonable in view of the 

price of feeds, available supplies of 

feeds, and other economic conditions 

which affect market supply and demand 

for milk in the aforesaid marketing area. 

The minimum prices specified in the 

order as hereby amended are such 

prices as will reflect the aforesaid 

factors, insure a sufficient quantity of 

pure and wholesome milk, and be in the 

public interest; and 

(3) The said orders as hereby 

amended regulate the handling of milk 

in the same manner as, and is applicable 

only to persons in the respective classes 

of industrial or commercial activity 

specified in, a marketing agreement 

upon which a hearing has been held. 

Order Relative to Handling 

It is therefore ordered, that on and 

after the effective date hereof, the 

handling of milk in the Northeast and 

other marketing areas shall be in 

conformity to and in compliance with 

the terms and conditions of the order, as 

amended, and as hereby amended, as 

follows: 

The provisions of the order amending 

the order contained in the interim 

amendment of the order issued by the 

Administrator, Agricultural Marketing 

Service, on July 25, 2008, and published 

in the Federal Register on July 31, 2008 

(73 FR 44617), are adopted without 

change and shall be and are the terms 

and provisions of this order. 

[Note: The following will not appear 

in the Code of Federal Regulations.] 

Marketing Agreement Regulating the 

Handling of Milk in Certain Marketing 

Areas 

The parties hereto, in order to 

effectuate the declared policy of the Act, 

and in accordance with the rules of 

practice and procedure effective 

thereunder (7 CFR part 900), desire to 

enter into this marketing agreement and 

do hereby agree that the provisions 

referred to in paragraph I hereof, as 

augmented by the provisions specified 

in paragraph II hereof, shall be and are 

the provisions of this marketing 

agreement as if set out in full herein. 

I. The findings and determinations, 

order relative to handling, and the 

provisions of § llll to llll all 

inclusive, of the order regulating the 

handling of milk in the llllll 

marketing area (7 CFR part llll); 

and 

II. The following provisions: 

§ llllll Record of milk handled 

and authorization to correct 

typographical errors. 

(a) Record of milk handled. The 

undersigned certifies that he/she 

handled during the month of 

llllll, llllll 

hundredweight of milk covered by this 

marketing agreement. 

(b) Authorization to correct 

typographical errors. The undersigned 

hereby authorizes the Deputy 

Administrator, or Acting Deputy 

Administrator, Dairy Programs, 

Agricultural Marketing Service, to 

correct any typographical errors which 

may have been made in this marketing 

agreement. 

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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) lllllllllllll

(Title) lllllllllllllll

(Address) lllllllllllll

(Seal) 

Attest lllllllllllllll

Dated: February 1, 2013. 

David R. Shipman, 

Administrator, Agricultural Marketing 

Service. 

[FR Doc. 2013–02623 Filed 2–6–13; 8:45 am] 

BILLING CODE 3410–02–P 

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