54172 Federal Register / Vol. 71, No. 177 / Wednesday, September 13, 2006 / Proposed Rules 

DEPARTMENT OF AGRICULTURE 

Agricultural Marketing Service 

7 CFR Part 1033 

[Docket No. AO–166–A72; DA–05–01–B] 

Milk in the Mideast Marketing Area; 

Decision on Proposed Amendments to 

Marketing Agreement and to Order 

AGENCY: Agricultural Marketing Service, 

USDA. 

ACTION: Proposed rule; final decision. 

SUMMARY: This document is the final 

decision proposing to adopt 

amendments to the Mideast order 

intended to deter the de-pooling of milk. 

This final decision is subject to 

producer approval by referendum. 

FOR FURTHER INFORMATION CONTACT: 

Gino Tosi, Associate Deputy 

Administrator, Order Formulation and 

Enforcement Branch, USDA/AMS/Dairy 

Programs, STOP 0231—Room 2968, 

1400 Independence Avenue, SW., 

Washington, DC 20250–0231, (202) 690– 

1366, e-mail: gino.tosi@usda.gov. 

SUPPLEMENTARY INFORMATION: This final 

decision adopts amendments that: (1) 

Establish a limit on the volume of milk 

a handler may pool during the months 

of April through February to 115 

percent of the volume of milk pooled in 

the prior month; and (2) Establish a 

limit on the volume of milk a handler 

may pool during the month of March to 

120 percent of the volume of milk 

pooled in the prior month. The 

proposed amended order is subject to 

producer approval by referendum. 

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, as amended (7 

U.S.C. 601–674), 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 Secretary 

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, the Secretary 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 Department’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 et seq.), 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 producers, it 

should be an inclusive standard for 

most ‘‘small’’ dairy farmers. For 

purposes of determining a handler’s 

size, if the plant is part of a larger 

company operating multiple plants that 

collectively exceed the 500-employee 

limit, the plant will be considered a 

large business even if the local plant has 

fewer than 500 employees. 

During March 2005, the month during 

which the hearing occurred, there were 

9,767 dairy producers pooled on and 36 

handlers regulated by the Mideast order. 

Approximately 9,212 producers, or 94.3 

percent, were considered small 

businesses based on the above criteria. 

Of the 36 handlers regulated by the 

Mideast during March 2005, 26 

handlers, or 72.2 percent, were 

considered small businesses. 

The adopted amendments regarding 

the pooling standards serve to revise 

established criteria that determine those 

producers, producer milk, and plants 

that have a reasonable association with 

and consistently serve the fluid needs of 

the Mideast milk marketing area. 

Criteria for pooling milk are established 

on the basis of performance standards 

that are considered adequate to meet the 

Class I fluid needs of the market and, by 

doing so, to determine those producers 

who are eligible to share in the revenue 

that arises from the classified pricing of 

milk. 

Criteria for pooling are established 

without regard to the size of any dairy 

industry organization or entity. 

Therefore, the proposed amendments 

will not have a significant economic 

impact on a substantial number of small 

entities. 

The Agricultural Marketing Service is 

committed to complying with the EGovernment 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 action 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 approved forms 

are routinely used in most business 

transactions. The forms require only a 

minimal amount of information which 

can be supplied without data processing 

equipment or a trained statistical staff. 

Thus, the information collection and 

reporting burden is relatively small. 

Requiring the same reports for all 

handlers does not significantly 

disadvantage any handler that is smaller 

than the industry average. 

No other burdens are expected to fall 

on the dairy industry as a result of 

overlapping Federal rules. This 

rulemaking proceeding does not 

duplicate, overlap, or conflict with any 

existing Federal rules. 

Prior documents in this proceeding: 

Notice of Hearing: Issued February 14, 

2005; published February 17, 2005 (70 

FR 8043). 

Amended Notice of Hearing: Issued 

March 1, 2005; published March 3, 2005 

(70 FR 10337). 

Tentative Partial Decision: Issued July 

21, 2005; published July 27, 2005 (70 FR 

43335). 

Interim Final Rule: Issued September 

20, 2005; published September 26, 2005 

(70 FR 56111). 

Final Partial Decision: Issued January 

17, 2006; published January 23, 2006 

(71 FR 3435). 

Recommended Decision: Issued 

February 15, 2006; published February 

22, 2006 (71 FR 9033). 

Final Partial Rule: Issued April 17, 

2006; published April 20, 2006 (71 FR 

20335). 


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Preliminary Statement 

A public hearing was held upon 

proposed amendments to the marketing 

agreement and the order regulating the 

handling of milk in the Mideast 

marketing area. The hearing was held, 

pursuant to the provisions of the 

Agricultural Marketing Agreement Act 

of 1937 (AMAA), as amended (7 U.S.C. 

601–674), and the applicable rules of 

practice and procedure governing the 

formulation of marketing agreements 

and marketing orders (7 CFR Part 900). 

The proposed amendments set forth 

below are based on the record of a 

public hearing held at Wooster, Ohio, 

on March 7–10, 2005, pursuant to a 

notice of hearing issued February 14, 

2005, published February 17, 2005, (70 

FR 8043) and an amended notice of 

hearing issued March 1, 2005, and 

published March 3, 2005 (70 FR 10337). 

Upon the basis of the evidence 

introduced at the hearing and the record 

thereof, the Administrator, on February 

15, 2006, issued a Recommended 

Decision containing notice of the 

opportunity to file written exception 

thereto. 

The material issues, findings, 

conclusions and ruling of the 

Recommended Decision, are hereby 

approved, adopted and are set forth 

herein. The material issues on the 

record of hearing relate to: 

1. Pooling standards 

A. Establish pooling limits 

B. Producer definition 

2. Transportation Credits 

Findings and Conclusions 

This final decision specifically 

addresses proposals published in the 

hearing notice as Proposals 4, 5, 6, 7, 

and 8 which seek to establish a limit on 

the volume of milk that can be pooled 

on the order; Proposal 9 which seeks to 

establish transportations credits; and 

features of Proposal 3 intended to clarify 

the Producer definition by providing a 

definition of ‘‘temporary loss of Grade A 

approval.’’ Proposals which sought to 

change the performance standards of the 

order, Proposals 1 and 2, were 

addressed in a tentative partial decision 

published on July 27, 2005 (70 FR 

43335). The portion of Proposal 3 that 

sought to amend the number of days a 

producer needs to deliver milk to a 

distributing plant before the milk of the 

producer is eligible for diversion was 

abandoned by the proponents at the 

hearing. No further reference to that 

portion of Proposal 3 will be made. 

The following findings and 

conclusions on the material issues are 

based on evidence presented at the 

hearing and the record thereof: 

1. Pooling Standards 

A. Establishing pooling limits 

Preliminary Statement. Federal milk 

marketing orders rely on the tools of 

classified pricing and marketwide 

pooling to assure an adequate supply of 

milk for fluid (Class I) use and to 

provide for the equitable sharing of the 

revenues arising from the classified 

pricing of milk. Classified pricing 

assigns a value to milk according to how 

the milk is used. Regulated handlers 

who buy milk from dairy farmers are 

charged class prices according to how 

they use the farmer’s milk. Dairy 

farmers are then paid a weighted 

average or ‘‘blend’’ price. The blend 

price that dairy farmers are paid for 

their milk is derived through the 

marketwide pooling of all class uses of 

milk in a marketing area. Thus each 

producer receives an equal share of each 

use class of milk and is indifferent as to 

the actual class for which the milk was 

used. The Class I price is usually the 

highest class price for milk. Historically, 

the Class I use of milk provides the 

additional revenue to a marketing area’s 

total classified use value of milk. 

The series of class prices that are 

applicable for any given month are not 

announced simultaneously. The Class I 

price and the Class II skim milk price 

are announced prior to the beginning of 

the month for which they will be 

effective. Class prices for milk in all 

other uses are not determined until on 

or before the 5th day of the following 

month. The Class I price is determined 

by adding a differential value to the 

higher of either an advanced Class III or 

Class IV value. These values are 

calculated based on formulas using the 

National Agricultural Statistics Service 

(NASS) survey prices of cheese, butter, 

and nonfat dried milk powder for the 

first two weeks of the prior month. For 

example, the Class I price for August is 

announced in late July and is based on 

the higher of the Class III or IV value 

computed using NASS commodity price 

surveys for the first two weeks of July. 

The Class III and IV prices for the 

month are determined and announced 

after the end of the month based on the 

NASS survey prices for the selected 

dairy commodities during the month. 

For example, the Class III and IV prices 

for August are based on NASS survey 

commodity prices during August. A 

large increase in the NASS survey price 

for the selected dairy commodities from 

one month to the next can result in the 

Class III or IV price exceeding the Class 

I price. This occurrence is commonly 

referred to by the dairy industry as a 

‘‘class price inversion.’’ A producer 

price inversion generally refers to when 

the Class III or IV price exceeds the 

average classified use value, or blend 

price, of milk for the month. Price 

inversions have occurred with 

increasing frequency in Federal milk 

orders since the current pricing plan 

was implemented on January 1, 2000, 

despite efforts made during Federal 

Order Reform to reduce such 

occurrences. Price inversions can create 

an incentive for dairy farmers and 

manufacturing handlers who voluntarily 

participate in the marketwide pooling of 

milk to elect not to pool their milk on 

the order. Class I handlers do not have 

this option; their participation in the 

marketwide pool is mandatory. 

The producer price differential, or 

PPD, is the difference between the Class 

III price and the weighted average value 

of all Classes. In essence, the PPD is the 

dairy farmer’s share of the additional/ 

reduced revenues associated with the 

Class I, II, and IV milk pooled in the 

market. If the weighted average price of 

Class I, II, and IV milk in the pool is 

greater than the Class III price, then 

dairy farmers receive a positive PPD. 

However, a negative PPD can occur if 

the value of the Class III milk in the pool 

exceeds the value of the remaining 

classes of milk in the pool. This can 

occur as a result of the price inversions 

discussed above. 

The Mideast Federal order operates a 

marketwide pool. The Order contains 

pooling provisions which specify 

criteria that, if met, allow dairy farmers 

to share in the benefits that arise from 

classified pricing through pooling. The 

equalization of all class prices among 

handlers regulated by an order is 

accomplished through a mechanism 

known as the producer settlement fund 

(PSF). Typically, Class I handlers pay 

the difference between the blend price 

and their use-value of milk into the PSF. 

Manufacturing handlers typically 

receive a draw from the PSF, usually the 

difference between the Class II, III or IV 

price and the blend price. In this way, 

all handlers pay the class value for milk 

and all dairy farmer suppliers receive at 

least the order’s blend price. 

When manufacturing class prices of 

milk are high enough to result in a usevalue of milk for a handler that is higher 

than the blend price, handlers of 

manufacturing milk may choose to not 

pool their milk receipts. Opting to not 

pool their milk receipts allows these 

handlers to avoid the obligation of 

paying into the PSF. The choice by a 

manufacturing handler to not pool their 

milk receipts is commonly referred to in 

the dairy industry as ‘‘de-pooling.’’

When the blend price rises above the 

manufacturing class use-values of milk 

these same handlers again opt to pool 


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their milk receipts. This is often referred 

to as ‘‘re-pooling.’’ The ability of 

manufacturing handlers to de-pool and 

re-pool manufacturing milk is viewed 

by some market participants as being 

inequitable to both producers and 

handlers. 

The ‘‘De-Pooling’’ Proposals. 

Proponents are in agreement that milk 

marketing orders should contain 

provisions that will tend to limit the 

practice of de-pooling. Five proposals 

intending to limit the de-pooling of milk 

were considered in this proceeding. The 

proposals offered different degrees of 

deterrence against de-pooling by 

establishing limits on the amount of 

milk that can be re-pooled. The 

proponents of these five proposals are 

generally of the opinion that de-pooling 

erodes equity among producers and 

handlers, undermines the orderly 

marketing of milk and is detrimental to 

the Federal order system. 

Two different approaches on how to 

best limit de-pooling are represented by 

these five proposals. The first approach, 

published in the hearing notice as 

Proposals 6 and 7, addresses de-pooling 

by limiting the volume of milk a handler 

can pool in a month to a specified 

percentage of what the handler pooled 

in the prior month. The second 

approach, published in the hearing 

notice as Proposals 4, 5 and 8, addresses 

de-pooling by establishing what is 

commonly referred to as a ‘‘dairy farmer 

for other markets’’ provision. These 

proposals would require milk of a 

producer that was de-pooled to not be 

able to be re-pooled by that producer for 

a defined time period. All proponents 

agreed that none of the proposals would 

completely eliminate de-pooling but 

would likely deter the practice. 

Of the five proposals received that 

would limit de-pooling, this final 

decision adopts Proposal 7, as modified 

in post-hearing briefs, offered by Dairy 

Farmers of America and Michigan Milk 

Producers Association (DFA/MMPA). 

DFA/MMPA are Capper-Volstead 

cooperatives who pool milk on the 

Mideast market. Specifically, adoption 

of Proposal 7 will limit the volume of 

milk a handler can pool during the 

months of April through February to no 

more than 115 percent of the volume of 

milk pooled in the prior month, and 

limit the volume of milk a handler can 

pool in the month of March to 120 

percent of the volume of milk pooled in 

the month prior. Milk diverted to 

nonpool plants in excess of these limits 

will not be pooled. Milk shipped to pool 

distributing plants and allocated to 

Class I in excess of the volume allocated 

to Class I in the prior month will not be 

subject to the 115 or 120 percent 

limitation. Milk pooled on another 

Federal order during the previous 3 

consecutive months would not be 

subject to the 115 or 120 percent 

limitation. The 115 or 120 percent 

limitation may be waived at the 

discretion of the Market Administrator 

for a new handler on the order or for an 

existing handler whose milk supply 

changes due to unusual circumstances. 

As published in the hearing notice, 

Proposal 6, offered by Ohio Dairy 

Producers (ODP) and Ohio Farmers 

Union (OFU), was virtually identical to 

Proposal 7. ODP is an organization of 

independent Ohio dairy farmers and 

agriculture businesses that work to 

increase the productivity and 

profitability of dairy farmers. OFU is an 

organization whose members include 

dairy farmers pooled on the Mideast 

order. Proposal 6 would limit the 

volume of milk a handler could pool in 

a month to 115 percent of the volume 

of milk pooled in the prior month. The 

proposal does not contain a separate 

pooling standard for the month of 

March. Milk shipped to pool 

distributing plants, or milk pooled on 

another Federal order during the 

preceding 6 months, would not be 

subject to the 115 percent standard. The 

proposal would grant authority to the 

Market Administrator to increase or 

decrease the 115 percent standard. 

As published in the hearing notice, 

Proposals 4, 5 and 8 address de-pooling 

by establishing defined time periods 

during which de-pooled milk could not 

be pooled. Proposal 4, also offered by 

ODP and OFU, would require an annual 

pooling commitment by a handler to the 

market. The proposal specified that if 

the milk of a producer was not pooled 

during a month, or any of the preceding 

11 months, the equivalent of at least 10 

day’s milk production of the dairy 

farmer would need to be delivered to a 

pool distributing plant during the 

month in order for all the milk of the 

dairy farmer for that month to be 

pooled. Proposal 4 is not adopted. 

Proposal 5, offered by Continental 

Dairy Products (Continental), would 

limit the ability to pool the milk of a 

producer if such milk had not been 

pooled during the previous 12 months. 

Continental is a Capper-Volstead 

cooperative whose members milk is 

pooled on the Mideast order. Proposal 5 

is not adopted. 

Proposal 8, offered by Dean Foods 

Company (Dean), would not permit repooling for a 2 to 7 month period for 

milk that had been de-pooled. Dean is 

a handler that distributes fluid milk 

products within the Mideast marketing 

area. Under Proposal 8, if a producer’s 

milk were de-pooled in any of the 

months of February through June, or 

during any of the preceding 3 months, 

or during any of the preceding months 

of July through January, the equivalent 

of at least 10 day’s milk production 

would need to be physically received at 

a pool distributing plant in the order to 

pool all of the dairy farmer’s production 

for the month. Additionally, if the milk 

of a dairy farmer is de-pooled in any of 

the months of July through January, or 

in a preceding month, at least 10 day’s 

milk production of the dairy farmer 

would need to be delivered to a pool 

distributing plant to have all the milk of 

the dairy farmer pooled for the month. 

Proposal 8 is not adopted. 

While Proposals 4, 5 or 8 are not 

adopted, to the extent that these 

proposals offered alternative methods to 

deter the practice of de-pooling, 

adoption of Proposals 6 and 7 

essentially accomplishes this objective. 

The proponents of Proposals 4, 5, 6, 

7 and 8 are all of the opinion that 

current inadequate pooling standards 

enable manufacturing handlers to depool milk and immediately re-pool milk 

the following month and are in need of 

revision. According to the proponents, 

the Mideast blend price is lowered 

when large volumes of higher-valued 

milk used for manufacturing is depooled as well as when the large 

volumes of de-pooled milk returns to 

the pool. Furthermore, the witnesses 

argued that de-pooling handlers do not 

have to account to the Mideast pool at 

classified prices and therefore face 

different costs than their similarly 

situated pooling competitors. While all 

proponents insisted that the pooling 

standards of the order need to be 

amended to ensure producer and 

handler equity, their opinions differed 

only on how to best meet this end. 

The current Producer milk provision 

of the Mideast order considers the milk 

of a dairy farmer to be producer milk 

when it has been received at a pool 

plant of the order. A producer must 

deliver 2 day’s milk production to a 

pool plant during each of the months of 

August through November so that all the 

milk of a producer will be eligible to be 

pooled throughout the year. Once the 

standard has been met, the milk of a 

producer is eligible to be diverted to 

nonpool plants and continue to be 

priced under the terms of the order. A 

pool plant cannot divert more than 50 

percent of its total producer milk 

receipts to nonpool plants during each 

of the months of August through 

February and 60 percent during each of 

the months of March through July. Milk 

that is subject to inclusion in another 

marketwide equalization program 

operated by another government entity 


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Federal Register / Vol. 71, No. 177 / Wednesday, September 13, 2006 / Proposed Rules 54175 

is not considered producer milk. The 

order currently does not limit a 

handler’s ability to re-pool 

manufacturing uses of milk. 

A witness appearing on behalf of 

Continental testified in support of 

Proposal 5. The witness was of the 

opinion that pooling provisions should 

limit a handler’s ability to de-pool their 

milk receipts at will and with little 

consequence. The witness testified that 

Proposal 5 would prohibit a handler 

from pooling the milk of a producer that 

had been de-pooled during the previous 

11 months. The witness characterized 

Proposal 5 as an adequate deterrent to 

handlers de-pooling large volumes of 

milk for short term financial gain. The 

witness added that adoption of Proposal 

5 would provide adequate safeguards for 

new producers on the order or 

producers who may temporarily lose 

Grade A status to pool their milk 

without penalty. 

A post-hearing brief submitted on 

behalf of Continental reiterated their 

support for the adoption of Proposal 5. 

The brief stressed that de-pooling leads 

to the inequitable sharing of revenues 

amongst producers and therefore should 

be dealt with in the most stringent 

manner. Continental argued that 

adoption of any proposal that would 

allow handlers to continue to de-pool 

any percentage of their milk receipts 

supports the concept that de-pooling is 

an acceptable practice. Continental 

vigorously opposed any level of depooling and insisted that adoption of 

Proposal 5 was the only appropriate 

proposal to re-establish equity in the 

marketplace. 

A witness appearing on behalf of ODP 

testified in support of Proposals 4 and 

6. According to the witness, over 1.3 

billion pounds of milk was de-pooled 

during April and May 2004 reducing the 

value of the marketwide pool by $21.3 

million. The ODP witness insisted that 

pooling standards should ensure that 

producer milk which regularly supplies 

the needs of the fluid market does not 

receive a lower blend price when 

manufacturing handlers opt to not pool 

their milk receipts. The witness noted 

that Federal order hearings have been 

held in the Central and Upper Midwest 

markets to address de-pooling. The 

witness stressed that if the ability of 

manufacturing handlers to not pool 

their milk receipts is eliminated in the 

Central and Upper Midwest markets, it 

may add to the volume of de-pooled 

milk in the Mideast market. The witness 

was of the opinion that adoption of 

either Proposal 4 or Proposal 6 would 

best solve the inequities created from 

de-pooling. 

A witness appearing on behalf of 

Dean testified in support of Proposal 4. 

The witness asserted that the intent of 

the Federal order system is to ensure a 

sufficient supply of milk for fluid use 

and provide for uniform payments to 

producers who stand ready, willing, and 

able to serve the fluid market regardless 

of how the milk of any individual is 

utilized. The Dean witness testified that 

provisions allowing manufacturing 

handlers the option to participate or not 

participate in the pool causes inequities 

between handlers. 

The Dean witness was of the opinion 

that de-pooling causes inequities 

between handlers and undermines the 

order’s ability to provide for a stable 

milk supply to meet Class I demand. 

The inequity, the witness said, is that all 

handlers do not have the same ability to 

pool and de-pool; fluid handlers are 

required to pool their milk receipts 

while manufacturing handlers have the 

option of pooling their milk receipts. 

The witness was of the opinion that this 

difference in pooling options creates 

cost inequities between handlers since a 

fluid handler must always account to 

the pool at classified use values while 

manufacturing handlers may not. 

The Dean witness also explained how 

de-pooling leads to inequities between 

producers. The witness used a 

hypothetical example of two 

cooperatives—Cooperative A that 

delivers 50 percent of its milk receipts 

to distributing plants and Cooperative B 

who delivers 30 percent of its milk 

receipts to distributing plants. 

Cooperative A, the witness said, is 

always at a disadvantage when a price 

inversion occurs because they can only 

de-pool 50 percent of their milk receipts 

because the milk delivered to 

distributing plants must be pooled. 

However, the witness said, Cooperative 

B can de-pool 70 percent of their milk 

receipts because only 30 percent is 

delivered to distributing plants. 

Therefore, the witness concluded, 

Cooperative B is able to pay a higher 

price to its dairy farmer suppliers since 

it is able to de-pool an additional 20 

percent of its total milk receipts that 

Cooperative A cannot. 

The Dean witness stressed that 

hearings have been held in other 

Federal orders to consider proposals 

seeking to deter de-pooling and urged 

the Department to adopt provisions to 

prevent milk from opportunistically 

pooling on the Mideast order. In the 

opinion of the Dean witness, Proposal 4 

is the most appropriate solution to deter 

the de-pooling of milk because it creates 

large and long-term consequences to 

handlers who opt to de-pool. The Dean 

witness believed that should the 

Department determine that Proposal 4 is 

not appropriate, Proposal 8 would be 

the best alternative. 

A post-hearing brief submitted on 

behalf of Dean reiterated support for the 

adoption of Proposal 4 with a 

modification. Dean proposed granting 

the Market Administrator the ability to 

waive a producer’s de-pooled status if 

the producer was de-pooled after 

informing its pooling handler that it 

intended to deliver its milk to another 

handler. The brief stressed that the 

intention of Proposal 4 is not to prevent 

a producer from being pooled because of 

circumstances out of their control and 

believed their modification would 

remedy this potential situation. Dean’s 

brief reiterated that de-pooling results in 

inequities between both handlers and 

producers. The brief noted that a 

provision similar to Proposal 4 is in 

place in the Northeast order and 

asserted that it has been very effective 

in limiting de-pooling. 

Comments filed on behalf of Dean in 

response to the Recommended Decision 

supported the Department’s decision to 

deter the practice of de-pooling. 

However, Dean expressed reservations 

that adoption of Proposal 7 would be 

sufficient to adequately deter the 

practice of de-pooling in the Mideast 

marketing area. Dean also commented 

that the re-pooling standard for the 

month of February should be modified 

to 110 percent to account for additional 

days in January much like the repooling standard for the month of 

March was modified to account for the 

fewer days in February. 

A witness appearing on behalf of 

Superior Dairy (Superior) testified in 

support of Proposal 4. Superior is a pool 

distributing plant regulated by the 

Mideast order. The witness said that 

Proposal 4 should be adopted because 

the de-pooling actions of some handlers 

are reducing the blend price paid to 

producers who regularly and 

consistently service the needs of the 

Class I market. 

A witness appearing on behalf of OFU 

testified in support of Proposal 6. The 

witness said that current regulations 

allow handlers to take advantage of the 

Federal order program and not share 

income generated in the market with 

pooled producers. The witness 

supported adoption of Proposal 6 and 

stressed that adoption of the proposal 

would discourage manufacturing 

handlers from not pooling their milk 

receipts when it is to their financial 

advantage. 

A second witness appearing on behalf 

of Dean testified in support of Proposals 

4, 6, 7, and 8. The witness testified that 

Proposal 4 would encourage handlers to 


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pool their milk receipts in times of a 

price inversion since the decision to depool would result in a 12-month 

penalty. The witness said that adoption 

of Proposal 4 would also ensure that the 

de-pooled producer provided service to 

the Class I market by making substantial 

and consistent service to fluid 

distributing plants. 

The second Dean witness 

characterized Proposal 8 as a less 

desirable alternative to Proposal 4. The 

difference in the two proposals, the 

witness said, is the number of months 

a producer must meet the 10-day touch 

base standard to be re-pooled—it is 

fewer under Proposal 8 and varies 

depending on the month in which the 

milk was de-pooled. In general, 

emphasized the witness, the effects of 

both proposals would be the same 

except that if Proposal 8 were adopted, 

the cost to a de-pooling handler and the 

benefit to continuously pooled 

producers would be less. 

The second Dean witness testified 

that Proposal 7 and Proposal 6 are less 

desirable options to Proposals 4 and 8. 

According to the witness, if a 115 

percent re-pooling standard were 

adopted it would take a handler who 

opted to de-pool 90 percent of its milk 

17 months to re-pool all the handler’s 

milk receipts. If a handler opted to depool 30 percent of its milk receipts, the 

witness added, it would only take 3 

months to again pool all of its milk 

receipts. The witness emphasized that 

the larger the volume of milk a handler 

opted to de-pool, the longer the length 

of time a handler would need to 

requalify all its milk receipts and the 

more money it would cost the depooling handler. The witness concluded 

that Proposals 6 and 7 offered a different 

method for limiting de-pooling that 

would not be as effective as the method 

contained in Proposals 4 and 8. 

A dairy farmer whose milk is pooled 

on the Mideast order testified in support 

of Proposals 4, 5, and 6. The witness 

testified that in April 2004 their farm 

lost $9,000 because of the reduced PPD 

that resulted from de-pooling. The 

witness urged the Department to adopt 

either Proposal 4, 5, or 6 to remedy depooling and to do so on an emergency 

basis. 

A witness appearing on behalf of 

DFA/MMPA testified in support of 

Proposal 7. The witness said that 

Proposal 7 was designed to limit depooling by creating financial 

consequences for manufacturing 

handlers who de-pool their milk 

receipts. The witness testified that 

members of DFA/MMPA currently depool milk when it is to their advantage 

but emphasized that de-pooling causes 

market disorder and should be 

prohibited. 

The DFA/MMPA witness said that depooling is not a new occurrence; 

however, the volatility of milk prices in 

recent years has caused more frequent 

price inversions and subsequent 

opportunities to de-pool. The witness 

referenced data presented at a similar 

proceeding held in the Central order 

that during the 84 month period from 

1993 to 1999, there were 16 months 

with negative PPD’s, 6 of which were in 

excess of a negative 50 cents per cwt. 

However, the witness noted that during 

the 60 month period from January 2000 

through December 2004 the opportunity 

to de-pool had occurred 51 times. 

The DFA/MMPA witness contended 

that de-pooling causes inequities 

because similarly situated handlers face 

different costs in procuring a milk 

supply. Class I milk is required to be 

pooled, the witness said, and 

distributing plants always have to share 

the additional value of their Class I milk 

sales with all pooled producers. 

However, the witness said, a 

manufacturing handler is not required 

to account to the pool at classified 

prices and can therefore retain the 

revenue generated from not pooling 

milk when price inversions occur. The 

witness asserted that manufacturing 

handlers use the additional revenue 

generated from de-pooling to pay a 

higher price to their producers while 

fluid handlers must use money from 

their profit margins to pay a competitive 

price. In this regard, the witness said, 

Class I handlers are at a disadvantage in 

competing with manufacturing handlers 

for a producer milk supply. 

Relying on Market Administrator 

statistics, the DFA/MMPA witness 

illustrated that in April 2004 

manufacturing handlers that may have 

chosen to not pool their milk receipts 

were able to keep $3.78 more per 

hundredweight than a fluid handler on 

all their de-pooled milk and could use 

the proceeds to pay dairy farmers. The 

witness showed how a supplying 

handler that delivered one load of milk 

a day for a month to a Class I plant, 

would have received $56,700 less than 

a manufacturing handler who could opt 

to de-pool their milk receipts. Relying 

on Market Administrator statistics, the 

witness testified that 649.3 million 

pounds of milk was de-pooled in April 

2004. According to the witness, if that 

milk had been pooled the PPD paid to 

all producers would have been $1.66 

per cwt higher. 

The DFA/MMPA witness testified that 

Proposal 7 would limit the amount of 

milk a handler could pool to 115 

percent of the handler’s prior month 

pooled milk volume. The witness 

insisted that the 115 percent standard 

would create the economic incentive 

necessary to keep an adequate reserve 

supply of milk pooled on the order 

while accommodating reasonable levels 

of growth in a handler’s month-tomonth production and other seasonal 

production fluctuations. The witness 

noted that the Market Administrator 

should be given the discretion to 

disqualify de-pooled milk from pooling 

if the Market Administrator believes 

that the handler was trying to 

circumvent the pooling standards. 

The DFA/MMPA witness testified that 

emergency marketing conditions exist 

without a deterrent to de-pooling that 

warrant the omission of a recommended 

decision. The witness was of the 

opinion that the volatile dairy product 

markets that gave rise to rapid price 

increases and price inversions will 

continue and therefore, should be 

addressed in an expedited manner. 

A post-hearing brief submitted on 

behalf of DFA/MMPA reiterated their 

support of Proposal 7. The brief stressed 

that adoption of Proposal 7, while not 

completely eliminating a handler’s 

ability to de-pool, would reduce the 

total volume of de-pooled milk. DFA/ 

MMPA suggested a modification to 

Proposal 7 in their post-hearing brief to 

establish a limit on the volume of milk 

a handler could pool in March to 120 

percent of the their total volume of milk 

pooled during the prior month. DFA/ 

MMPA believed that this modification 

would better accommodate and account 

for the fewer number of days in the 

month of February. 

The DFA/MMPA brief argued that 

Proposals 4 and 5 are not appropriate 

for the Mideast order because they call 

for stringent and unnecessary changes 

in the order’s pooling provisions. The 

brief stressed that the intention of 

Proposal 7 was to improve the pooling 

standards of the order but not in a 

manner that would necessitate a change 

to a handler’s business operations. 

Comments filed on behalf of DFA/ 

MMPA; Dairylea; National Farmers 

Organization, Inc.; and Land O’Lakes, 

hereinafter referred to as DFA, et al., 

expressed their support of the proposed 

re-pooling standards. DFA, et al., 

clarified that the intent of Proposal 7 

was to constrain the practice of depooling while still encouraging 

additional milk shipments for Class I 

use. DFA, et al., proposed that the repooling standard be amended to exempt 

milk delivered to distributing plants in 

excess of the previous month’s pooled 

volume instead of the proposed 

standard that exempts milk delivered to 

distributing plants in excess of the 


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volume classified as Class I in the prior 

month. A witness appearing on behalf of 

Ohio Farm Bureau Federation testified 

in support of Proposal 7. The witness 

was of the opinion that if the current 

pooling provisions are not amended to 

deter the practice of de-pooling, prices 

received by farmers who reliably service 

the Class I market would decrease. The 

witness claimed that handlers who depool milk do not share the revenues 

generated from de-pooling with all 

pooled producers which lowers returns 

to producers who are consistently 

serving the Class I market. The witness 

added that Federal order hearings 

concerning de-pooling have been held 

in other Federal orders. The witness 

claimed that if de-pooling is not 

addressed in the Mideast order, milk 

from other Federal orders may seek to 

be pooled on the Mideast order. In this 

regard, the witness said that adoption of 

Proposal 7 is necessary to ensure that 

blend prices received by producers who 

are consistently pooled are not further 

eroded. 

A witness appearing on behalf of 

Prairie Farms Dairy (Prairie Farms) 

testified in support of Proposal 7. Prairie 

Farms is a member owned CapperVolstead cooperative that pools milk on 

the Mideast order. The witness testified 

that since Prairie Farms is required to 

pool all milk utilized at their 

distributing plants, all revenues 

generated from their Class I sales are 

shared with all pooled producers. The 

witness noted that Prairie Farms does 

de-pool its manufacturing milk when it 

is advantageous but emphasized that 

this practice is detrimental to producers 

who are consistently serving the Class I 

market. The witness urged adoption of 

Proposal 7 but also offered support for 

Proposal 6. 

Seven dairy farmers whose milk is 

pooled on the Mideast order testified in 

support of Proposal 7. The dairy farmers 

testified that the purpose of the Federal 

order system is to ensure that pooled 

producers receive an equitable share of 

the revenue generated from all classes of 

milk. The witnesses were of the opinion 

that the practice of de-pooling caused 

them to lose a substantial amount of 

potential income. These witnesses 

stressed that if manufacturing handlers 

choose to pool their milk receipts in 

months when the PPD is positive, it is 

only equitable for them to pool their 

milk receipts when the PPD is negative. 

The witnesses believed that de-pooling 

results in producers who consistently 

service the Class I needs of the market 

receiving a lower blend price than they 

otherwise would have if all milk had 

been pooled. The witnesses maintained 

that because de-pooling erodes revenues 

received by pooled producers, the 

Department should address de-pooling 

on an emergency basis. 

Another dairy farmer witness whose 

milk is pooled on the Mideast order 

testified in support of limiting depooling but did not offer support for any 

specific proposal. The witness said that 

as a result of de-pooling in the months 

of April and May 2004, their farm lost 

over $6,000. The witness was of the 

opinion that the Department should act 

on an emergency basis since the ability 

for manufacturing handlers to de-pool 

milk will continue to lower the 

proceeds received by producers that 

service the needs of the Class I market. 

A witness appearing on behalf of 

Smith Dairy Products Company testified 

in support of proposals limiting depooling. Smith operates two distributing 

plants located in the Mideast marketing 

area. The witness said that the practice 

of de-pooling manipulates the intent of 

the Federal milk order system and 

results in the lowering of the blend 

prices paid to producers that service the 

needs of the Class I market. The witness 

did not offer support for a specific 

proposal but urged the Department to 

eliminate the ability to de-pool milk on 

the Mideast order on an emergency 

basis. 

A witness appearing on behalf of 

Continental testified in opposition to 

Proposals 4, 6, 7, and 8. The witness 

opposed adoption of these proposals 

because they would allow milk 

delivered to a distributing plant to be 

immediately re-pooled and maintained 

that Proposal 5 would be a better option 

for the marketing area. 

A witness appearing on behalf of 

White Eagle Cooperative Federation 

(White Eagle) testified neither in 

support of or opposition to Proposal 7. 

White Eagle is a federation of 

cooperatives and independent 

producers that markets approximately 

150 million pounds of milk per month 

on the Mideast order. The witness 

asserted that adoption of the 115 

percent pooling standard could limit 

smaller cooperatives from increasing 

their dairy farmer membership. The 

witness testified that adoption of 

Proposal 7 would allow for an increase 

in the volume of milk pooled above 115 

percent if a producer who was pooled 

on another Federal order sought to 

become pooled on the Mideast order but 

would not make the same exception for 

a producer continually pooled on the 

Mideast order who increases 

production. The witness said that if depooling were limited on the Mideast 

order, de-pooled milk would seek to be 

pooled on other Federal orders where 

there are no de-pooling restrictions. The 

witness was of the opinion that the depooling issue should be handled on a 

national basis and with a recommended 

decision where the public could submit 

comments. These positions were 

reiterated in their post-hearing brief 

filed on behalf of White Eagle, Superior 

Dairy, United Dairy, Guggisberg Cheese, 

Brewster Dairy, and Dairy Support, Inc. 

A post-hearing reply brief submitted 

on behalf of Dean expressed opposition 

to Proposal 5. Dean argued that Proposal 

5 was too restrictive because it 

contained no provision to enable depooled milk to become immediately repooled if it was truly needed to service 

the fluid market later in the month. 

Comments filed on behalf of Foremost 

Farms USA Cooperative (Foremost) and 

Alto Dairy Cooperative (Alto), 

hereinafter, referred to as ‘‘Foremost, et 

al.’’, took exception to the 

Recommended Decision. Foremost, et 

al., are member owned Capper-Volstead 

cooperatives that market milk and 

supply distributing plants in the 

Mideast marketing area. Foremost, et al., 

took exception to the proposed 

regulations that would require a 

producer to be continuously pooled on 

another Federal order for the previous 3 

months to be exempted from the repooling standards. Their exception 

asserted that a producer should be 

allowed to have some de-pooled milk 

receipts during the previous 3 months 

and still be exempted from the repooling standards of the Mideast order. 

Comments filed on behalf of Family 

Dairies USA took exception with 

amendments proposed in the 

Recommended Decision. Family Dairies 

is a member owned Capper-Volstead 

cooperative whose milk is pooled on the 

Mideast order. Family Dairies wrote that 

the Recommended Decision did not 

address the cause of negative PPD’s—

class price inversions—and therefore 

opposed the adoption of the proposed 

amendments. 

Comments were filed on behalf of 

Associated Milk Producers, Inc.; 

Bongards’ Creameries; Ellsworth 

Cooperative Creamery; Family Dairies 

USA; First District Association; Davisco 

Foods; Valley Queen Cheese Company; 

and Wisconsin Cheese Makers 

Association, hereinafter referred to as 

the ‘‘AMPI Group.’’ The AMPI Group 

took exception to the re-pooling 

standard proposed by the Department 

and asserted that the proposed standard 

did not solve the underlying cause of 

de-pooling. The AMPI Group asserted 

that the Department arbitrarily refused 

to consider proposals that would end 

the time lag in classified price 

announcements as a remedy to depooling and did not consider alternative 


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54178 Federal Register / Vol. 71, No. 177 / Wednesday, September 13, 2006 / Proposed Rules 

proposals that would be less 

burdensome to handlers or requests to 

address the practice of de-pooling on a 

national basis. 

The AMPI Group commented that 

provisions which allow the Market 

Administrator to waive the re-pooling 

standard for handlers that experience a 

significant change in their milk supply 

due to unusual circumstances should be 

more specific as to what constitutes an 

unusual circumstance. The AMPI Group 

argued that small manufacturers may 

experience a growth in their milk 

supply that would not be considered an 

unusual circumstance and that such a 

situation should not cause a handler to 

be penalized under the re-pooling 

standard. The AMPI Group also cited 

various legal issues as reasons why the 

Department should not adopt the repooling standards. All Federal milk 

marketing orders require the pooling of 

milk received at pooled distributing 

plants—which is predominately Class I 

milk—and all pooled producers and 

handlers on an order share in the 

additional revenue arising from higher 

valued Class I sales. Manufacturing 

handlers and cooperatives of Class II, III 

and IV uses of milk who meet the 

pooling and performance standards 

make all of their milk receipts eligible 

to be pooled and usually find it 

advantageous. Manufacturing handlers 

and cooperatives who supply a portion 

of their total milk receipts to Class I 

distributing plants receive the difference 

between their use-value of milk and the 

order’s blend price. Federal milk orders, 

including the Mideast order, establish 

limits on the volume of milk eligible to 

be pooled that is not for fluid uses 

primarily through diversion limit 

standards. However, manufacturing 

handlers and cooperatives are not 

required, as are Class I handlers, to pool 

all their eligible milk receipts. 

According to the record, 

manufacturing handlers and 

cooperatives have opted to not pool 

their milk receipts when the 

manufacturing class prices of milk are 

higher than the order’s blend price—

commonly referred to as being 

‘‘inverted.’’ During such months, 

manufacturing handlers and 

cooperatives have elected to not pool all 

of their eligible milk receipts because 

doing so would require them to pay into 

the PSF of the order, the mechanism 

through which handler and producer 

prices are equalized. When prices are 

not inverted, these handlers would pool 

all of their eligible receipts and receive 

a payment or draw from the PSF. In 

receiving a draw from the PSF, such 

handlers have sufficient money to pay at 

least the order’s blend price to their 

supplying dairy farmers. 

When manufacturing handlers and 

cooperatives opt to not pool all of their 

eligible milk receipts in a month, they 

are essentially avoiding a payment to 

the PSF. This, in turn, enables them to 

avoid the marketwide sharing of the 

additional value of milk that accrues in 

the higher-valued uses of milk other 

than Class I. When the Class I price 

again becomes the highest valued use of 

milk, or when other class-price 

relationships become favorable, the 

record reveals that these same handlers 

opt to again pool their eligible milk 

receipts and draw money from the PSF. 

It is the ability of manufacturing 

handlers and cooperatives opting to not 

pool milk and thereby avoid the 

marketwide sharing of the revenue 

accruing from non-Class I milk sales 

that is viewed by proponents as giving 

rise to disorderly marketing conditions. 

According to proponents, producers and 

handlers who cannot escape being 

pooled and priced under the order are 

not assured of equitable prices. 

The record reveals that since the 

implementation of Federal milk 

marketing order reform in January 2000, 

and especially in more recent years, 

large and rapid increases in 

manufactured product prices during 

certain months have provided the 

economic incentives for manufacturing 

handlers to opt not to pool eligible milk 

on the Mideast order. For example, 

during the 3-month period of February 

to April 2004, the Class III price 

increased over 65 percent from $11.89 

cwt to $19.66 cwt. During the same time 

period, total producer milk pooled on 

the Mideast order decreased by nearly 

40 percent from 1.4 billion pounds to 

873 million pounds. When milk 

volumes of this magnitude are not 

pooled the impacts on producer blend 

prices are significant. Producers who 

incur the additional costs of 

consistently servicing the Class I needs 

of the market receive a lower return 

than would otherwise have been 

received if they did not continue to 

service the Class I market. Prices 

received by dairy farmers who supplied 

the other milk needs of the market are 

not known. However, it is reasonable to 

conclude that prices received by dairy 

farmers were not equitable or uniform. 

The record reveals that ‘‘inverted’’

prices of milk are generally the result of 

the timing of Class price 

announcements. Despite changes made 

as part of Federal milk order reform to 

shorten the time period of setting and 

announcing Class I milk prices and 

basing the Class I price on the higher of 

the Class III or Class IV price to avoid 

price inversions, large month-to-month 

price increases in Class III and Class IV 

product prices sometimes trumped the 

intent of better assuring that the Class I 

price for the month would be the 

highest-valued use of milk. In all orders, 

the Class I price (and the Class II skim 

price) is announced prior to or in 

advance of the month for which it will 

apply. The Class I price is calculated by 

using the National Agricultural 

Statistics Service (NASS) surveyed 

cheese, butter, nonfat dry milk and dry 

whey prices for the two most current 

weeks prior to the 24th day of the 

preceding month and then adding a 

differential value to the higher of either 

the advanced Class III or Class IV price. 

Historically, the advance pricing of 

Class I milk has been used in all Federal 

orders because Class I handlers cannot 

avoid regulation and since they are 

required to pool all of their Class I milk 

receipts they should know their product 

costs in advance of notifying their 

customers of price changes. However, 

milk receipts for Class III and IV uses 

are not required to be pooled; thus, 

Class III and IV product prices (and the 

Class II butterfat value) are not 

announced in advance. These prices are 

announced on or before the 5th of the 

following month. Of importance here is 

that manufacturing plant operators and 

cooperatives have the benefit of 

knowing all the classified prices of milk 

before making a decision to pool or not 

pool eligible receipts. 

The record reveals that the decision of 

manufacturing handlers or cooperatives 

to pool or not pool milk is made on a 

month-to-month basis and is generally 

independent of past pooling decisions. 

Manufacturing handlers and 

cooperatives that elected to not pool 

their milk receipts did so to avoid 

making payments to the PSF and they 

anticipated that all other manufacturing 

handlers and cooperatives would do the 

same. However, the record indicates 

that normally pooled manufacturing 

handlers and cooperatives met the 

pooling standards of the order to ensure 

that the Class I market was adequately 

supplied and that they established 

eligibility to pool their physical receipts 

including diversions to nonpool plants. 

Opponents to proposals to deter depooling are of the view that meeting the 

pooling standards of the order and 

deciding how much milk to pool are 

unrelated events. Proponents took the 

view that participation in the 

marketwide pool should be based on a 

long-term commitment to supply the 

market because in the long-term it is the 

sales of higher priced Class I milk that 

adds additional revenue to the pool. 


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Federal Register / Vol. 71, No. 177 / Wednesday, September 13, 2006 / Proposed Rules 54179 

1Official notice is taken of data and information 

published in Market Administrator Bulletins, as 

posted on individual Market Administrator Web 

sites. 

The producer price differential, or 

PPD, is the difference between the Class 

III price and the weighted average value 

of all Class I, II and IV milk pooled. In 

essence, the PPD is the residual revenue 

remaining after all butterfat, protein and 

other solids values are paid to 

producers. If the pooled value of Class 

I, II and IV milk is greater than the Class 

III value, dairy farmers receive a 

positive PPD. While the PPD is usually 

positive, a negative PPD can occur when 

class prices rise rapidly during the 6- 

week period between the time the Class 

I price is announced and the time the 

Class II butterfat and III and IV milk 

prices are announced. When 

manufacturing prices fall, this same lag 

in the announcement of class prices 

yields a positive PPD. 

As revealed by the record, when 

manufacturing plants and cooperatives 

opted to not pool milk because of 

inverted price relationships, PPD’s were 

much more negative. When this milk is 

not pooled, a larger percentage of the 

milk remaining pooled will be the 

‘‘lower’’ priced Class I milk. When 

manufacturing milk is not pooled the 

weighted average value of milk 

decreases relative to the Class II, III or 

IV value making the PPD more negative. 

For example, record evidence 

demonstrated that in April 2004, a 

month when a sizeable volume of milk 

was not pooled, the PPD was a negative 

$3.78 per cwt. If all eligible milk had 

been pooled, the PPD would have been 

$1.66 per cwt higher or a negative $2.12 

per cwt. This $1.66 per cwt represents 

the additional burden borne by those 

producers who remain pooled. 

The record reveals that when 

manufacturing handlers and 

cooperatives opt to not pool milk, 

unequal pay prices may result to 

similarly located dairy farmers. For 

example, Dean noted that when a 

cooperative delivers a high percentage 

of their milk receipts to a distributing 

plant, it lessens their ability to not pool 

milk and makes them less competitive 

in the marketplace relative to other 

producers and handlers. Other evidence 

in the record supports conclusions 

identical to Dean that when a dairy 

farmer or cooperative is able to receive 

increased returns from shipping milk to 

a manufacturing handler during times of 

price inversions, other dairy farmers or 

cooperatives who may have shipped 

more milk to a pool distributing plant 

are competitively disadvantaged. 

The record of this proceeding reveals 

that the ability of manufacturing 

handlers and cooperatives to not pool 

all of their eligible milk receipts gives 

rise to disorderly marketing conditions 

and warrants the establishment of 

additional pooling standards to 

safeguard marketwide pooling. Current 

pooling provisions do not require or 

prohibit handlers and cooperatives from 

pooling all eligible milk receipts. 

However, the record reveals that when 

handlers and cooperatives opt to not 

pool milk, inequities arise among 

producers and handlers that are 

contrary to the intent of the Federal 

milk marketing order program—

maintaining orderly marketing 

conditions. 

The record contains extensive 

testimony regarding the effects on the 

milk order program resulting from 

advance pricing and the priority the 

milk order program has placed on the 

Class I price being the highest valued 

use of milk. It remains true that the 

Class I use of milk is still the highest 

valued use of milk notwithstanding 

those occasional months when milk 

used in usually lower-valued classes 

may be higher. This has been 

demonstrated by an analysis of the 

effective Class I differential values—the 

difference in the Class I price at the base 

zone of Cuyahoga County, Ohio, and the 

higher of the Class III or Class IV price—

for the 65-month period of January 2000 

through May 2005 performed by 

USDA.1 These computations reveal that 

the effective monthly Class I differential 

averaged $1.97 per cwt. Accordingly, it 

can only be concluded that if the longerterm Class I sales continue to be the 

source of additional revenue accruing to 

the pool even when, in some months, 

the effective differential is negative. 

Price inversions occur when the 

wholesale price for manufactured 

products rises rapidly indicating a 

tightening of milk supplies to produce 

those products. It is for this reason that 

the Department chose the higher of the 

Class III or Class IV prices as the mover 

of the Class I price. Distributing plants 

must have a price high enough to attract 

milk away from manufacturing uses to 

meet Class I demands. As revealed by 

the record, this method has not been 

sufficient to provide the appropriate 

price signals to assure an adequate 

supply of milk for the Class I market. 

Accordingly, additional measures are 

needed as a means of assuring that milk 

remains pooled and thus available to the 

Class I market. Adoption of Proposal 7 

is a reasonable measure to meet the 

objectives of orderly marketing. 

This final decision does find that 

disorderly marketing conditions are 

present when producers do not receive 

uniform prices. Handlers and 

cooperatives opting to not pool milk do 

not account to the pool at the classified 

use value of those milk receipts. They 

do not share in all the additional costs 

and burdens with those producers who 

are pooled and who are incurring the 

costs of servicing the Class I needs of 

the market. This is not a desired or 

reasonable outcome especially when the 

same handlers and cooperatives will 

again pool all of their eligible receipts 

when class-price relationships change 

in a subsequent month. These inequities 

borne by the market’s producers are 

contrary to the intent of the Federal 

order program’s reliance on marketwide 

pooling—ensuring that all producers 

supplying the market are paid uniform 

prices for their milk regardless of how 

the milk of any single producer is used. 

Exceptions filed by the AMPI Group 

and Foremost, et al., asserting that the 

re-pooling standards do not address the 

cause of de-pooling—price inversions—

are unpersuasive. It is reasonable that 

the order contain pooling provisions 

intended to deter the disorderly 

conditions that arise when de-pooling 

occurs. Such provisions maintain and 

enhance orderly marketing. 

Accordingly, this final decision finds it 

reasonable to adopt provisions that limit 

the volume of milk a handler or 

cooperative may pool during the months 

of April through February to 115 

percent of the total volume pooled by 

the handler or cooperative in the prior 

month and to 120 percent of the prior 

month’s pooled volume during March. 

Adoption of this standard will not 

prevent manufacturing handlers or 

cooperatives from electing to not pool 

milk. However, it should serve to 

maintain and enhance orderly 

marketing by encouraging participation 

in the marketwide pooling of all 

classified uses of milk. 

A modification proposed by Dean in 

their exceptions to the Recommended 

Decision to lower the re-pooling 

standard in February to 110 percent is 

denied. This modification was not 

discussed at the hearing. The 115 

percent re-pooling standard should 

adequately deter excessive de-pooling. 

However, should de-pooling abuses 

continue under the new re-pooling 

standards the Department can be 

petitioned to adjust the standards. 

Despite exceptions filed by the AMPI 

Group, this decision continues to adopt 

provisions that grant authority to the 

Market Administrator to waive the repooling standard for a bloc of milk due 

to unusual circumstances. This 

discretion has been previously granted 

to the Market Administrator to amend or 

waive other pooling standards and it is 


jlentini on PROD1PC65 with PROPOSALS5
54180 Federal Register / Vol. 71, No. 177 / Wednesday, September 13, 2006 / Proposed Rules 

reasonable to make a similar 

accommodation here. Consideration was 

given on whether de-pooling should be 

considered at a national hearing with 

other, broader national issues of milk 

marketing. However, each marketing 

area has unique marketing conditions 

and characteristics that have areaspecific pooling provisions to address 

those specific conditions. Because of 

this, pooling issues are considered 

unique to each order. Historically, 

pooling issues have been addressed on 

an order by order basis and, despite 

exceptions filed by the AMPI Group, 

this final decision continues to find that 

it would be unreasonable to address 

pooling issues, including de-pooling, on 

a national basis. Other objections by the 

AMPI Group that the Department 

should take into account a 

manufacturers cost of production are 

irrelevant in regards to the pooling 

standards of the order. The record does 

not support finding that manufacturers 

de-pool milk to recoup manufacturing 

costs that they otherwise cannot. The 

record clearly establishes that 

manufacturers de-pool their milk supply 

to avoid making a payment into the 

order’s PSF. Nevertheless, 

manufacturing allowances, which are 

uniform in all Federal orders, are 

currently being addressed by the 

Department on a national basis (71 FR 

545). 

Some manufacturing handlers and 

cooperatives argued at the hearing and 

noted in exceptions to the 

Recommended Decision that their milk 

did perform in meeting the Class I needs 

during the month and this occurred 

before making their pooling decisions. 

They argue that the Class I market is 

therefore not harmed and that the 

intents and goals of the order program 

are satisfied. In response to these 

arguments, this decision finds that the 

practice of de-pooling undermines the 

intent of the Federal order program to 

assure producers uniform prices across 

all uses of milk normally associated 

with the market as a critical indicator of 

orderly marketing conditions. 

Exceptions filed by Foremost, et al., 

arguing that a producer should be 

allowed to de-pool some milk in each 

month and still be allowed to utilize the 

exception for producers or blocs of 

producers moving between orders is 

contrary to the goal of the re-pooling 

provision. If a producer were allowed to 

de-pool milk in one Federal order and 

subsequently re-pool in a second 

Federal order without limitation, the repooling standard would be severely 

undermined. As a matter of 

clarification, a producer can be depooled in one order and re-pooled in the 

Mideast order as part of the 115 percent 

re-pooling limitation, but no further 

exemption from the limitation would 

apply to this producer. 

Handlers and cooperatives who depool purposefully do so to gain a 

momentary financial benefit (by 

avoiding making payments to the PSF) 

which would otherwise be equitably 

shared among all market participants. 

While the order’s performance 

standards tend to assure that 

distributing plants are adequately 

supplied with fresh, fluid milk, the 

goals of marketwide pooling are 

undermined by the practice of depooling. Producers and handlers who 

regularly and consistently bear the costs 

of serving the Class I needs of the 

market will not equitably share in the 

additional value arising momentarily 

from non-fluid uses of milk. These same 

producers and handlers will, in turn, be 

required to share the additional revenue 

arising from higher-valued Class I sales 

in a subsequent month when class-price 

relationships change. 

The five proposals considered in this 

proceeding to deter the practice of depooling in the Mideast order have 

differences. They all seek to address 

market disorder arising from the 

practice of de-pooling. However, this 

final decision does not find adoption of 

the three ‘‘dairy farmer for other 

market’’ proposals—Proposals 4, 5 and 

8—reasonable because they would make 

it needlessly difficult for milk to be repooled and because their adoption may 

disrupt prevailing marketing channels 

or cause the inefficient movement of 

milk. Likewise, Proposal 6, which 

suggests restricting pooling in a month 

to 115 percent of the prior month’s 

volume pooled by the handler, is not 

adopted. Adoption of this proposal 

would disrupt current marketing 

conditions beyond what the record 

justifies. 

A request submitted by DFA, et al., in 

their exceptions to the Recommended 

Decision to exempt all milk delivered to 

distributing plants in excess of the 

previous month’s pooled volume 

regardless of its allocation is denied. 

Such a provision could result in the 

uneconomical movement of milk to 

circumvent the re-pooling standard. 

Therefore, this final decision adopts 

Proposal 7 to limit the pooling of milk 

by a handler during the months of April 

through February to 115 percent of the 

total milk receipts the handler pooled in 

the prior month and to 120 percent of 

the prior month’s pooled volume during 

March because it provides the most 

reasonable measure to deter the practice 

of de-pooling. 

B. Producer Definition 

A proposal published in the hearing 

notice as Proposal 3, seeking to specify 

the length of time a dairy farmer may 

lose Grade A status before losing 

producer status on the order, is not 

adopted. Proposal 3, offered by Dean, 

seeks to amend the Producer milk 

definition by explicitly stating that a 

dairy farmer may lose Grade A status for 

up to 21 calendar days per year before 

needing to requalify as a producer on 

the order. The Mideast order does not 

specify the length of time a dairy farmer 

may lose Grade A status before needing 

to requalify as a producer on the order. 

Two witnesses appearing on behalf of 

Dean testified in support of Proposal 3. 

The Dean witnesses supported adoption 

of Proposal 3 to provide for 21 days in 

a year that a producer could lose Grade 

A approval before needing to reassociate 

with the Mideast order by making a 

delivery to a Mideast pool plant. By 

providing for an exact number of days, 

the witnesses emphasized, a loss of 

Grade A status could not be used as a 

method to de-pool or to circumvent the 

pooling standards. The witnesses 

believed that the Market Administrator 

should be granted the authority to 

extend the length of time a producer 

could lose Grade A status before they 

would have to requalify if the loss of 

status was due to circumstances beyond 

the producers control. A post-hearing 

brief submitted on behalf of Dean 

reiterated their belief that this change 

was necessary to ensure that the repooling standards would not be 

circumvented. 

Comments filed on behalf of Dean 

took exception to the Department’s 

denial of Proposal 3 to define the term 

‘‘temporary’’ in the producer milk 

definition. Dean maintained that a 

producer should bear the burden of 

establishing that their temporary loss of 

Grade A approval was not designed to 

avoid the new re-pooling standards. 

The Producer definition of the 

Mideast order currently does not define 

the length of time a producer may lose 

Grade A status before needing to 

requalify for producer status on the 

order. The issue of qualifying for 

producer status is important since it 

determines which producers and which 

producer milk is entitled to share in the 

revenues arising from the marketwide 

pooling of milk on the Mideast order. 

The definition of ‘‘temporary’’ used 

by the Market Administrator has 

accommodated the Mideast market by 

giving producers a reasonable amount of 

time to regain Grade A status without 

burdening the market with excessive 

touch-base shipments or recordkeeping 


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requirements. Limiting the time period 

a producer can lose Grade A status 

would require handlers and the Market 

Administrator to track the producer’s 

loss of Grade A status throughout the 

year to determine when the 21 day limit 

is reached. 

Despite exceptions filed by Dean 

requesting an exact definition of 

‘‘temporary’’, this decision continues to 

find that the additional touch-base 

shipments that would be required for a 

dairy farmer to requalify for producer 

status on the order would cause 

uneconomic shipments of milk. 

Additionally, the increased 

recordkeeping requirements would 

burden not only the handlers but also 

the Market Administrator’s office 

without contributing to the goals and 

application of the proposed 

amendments to the pooling standards 

contained in this decision. Other 

amendments adopted in this decision 

that grant the Market Administrator 

authority to disqualify milk for pooling 

if it is found that the handler attempted 

to circumvent the re-pooling standards 

provide an adequate safeguard against 

pooling abuses. Accordingly, Proposal 3 

is not adopted. 

2. Transportation Credits 

A proposal offered by DFA, published 

in the hearing notice as Proposal 9 and 

modified at the hearing, seeking to 

establish a transportation credit 

provision is not adopted. Proposal 9 

seeks to establish a year-round 

transportation credit on shipments of 

milk from farms to distributing plants at 

a rate of $0.0031 per cwt per mile. A 

separate rate of $0.0024 per cwt per mile 

for eligible milk movements in the State 

of Michigan was offered as a 

modification by MMPA. The credit 

would not be applicable on the first 75 

miles of movement and would be 

limited to 350 miles. The Mideast order 

does not currently provide for 

transportation credits. 

A witness appearing on behalf of 

DFA/MMPA testified that the 

establishment of a transportation credit 

in the Mideast order is warranted 

because the cost of supplying the Class 

I market is not being equitably borne by 

all pooled producers. The witness 

testified that all producers benefit from 

Class I sales because the revenue 

generated is distributed through the 

marketwide pool. In particular, the 

witness said that all pooled producers 

were not equitably sharing in the costs 

of transporting supplemental supplies to 

meet Class I demand. The witness was 

of the opinion that Federal order prices 

should reimburse producers for the cost 

of transporting milk supplies to Class I 

plants when needed. The witness 

emphasized that Proposal 9 is designed 

to equitably distribute some of the cost 

of transporting those Class I milk 

supplies with all pooled producers. 

The DFA/MMPA witness explained 

that the proposed exemption of the first 

75 miles of eligible milk movement 

recognizes the producer’s responsibility 

to deliver their milk to the market. The 

75 mile exclusion was appropriate, the 

witness contended, because in the two 

northern reserve supply regions of 

Michigan and northern Ohio, the 

average distance milk travels to a 

distributing plant is 71 and 74 miles, 

respectively. The witness also said that 

a maximum applicable milk movement 

of 350 miles is a reasonable safeguard to 

prevent milk from traveling great 

distances solely to receive the 

transportation credit. The DFA/MMPA 

witness also noted that the Market 

Administrator should be given the 

discretion to adjust the transportation 

credit rate if market conditions warrant. 

The witness asserted that the market’s 

blend price would be reduced by 

approximately $0.0297 per cwt per 

month if Proposal 9 was adopted. The 

witness maintained that a small 

reduction in the blend price received by 

farmers to cover a transportation credit 

was justified because of the benefit they 

would receive from having Class I 

plants fully supplied. 

The DFA/MMPA witness contended 

that the northern region of the Mideast 

marketing area is a milk surplus region 

while the southern portion of the 

marketing area is usually a milk deficit 

region. The witness said that often 

surplus milk from the northern region of 

the marketing area must be transported 

long distances to supply the southern 

region for Class I use. Before Federal 

order reform, the witness asserted, the 

pricing structure of the Federal order 

program provided location adjustments 

that encouraged milk to move to Class 

I plants because the difference in the 

Class I differentials between the surplus 

and deficit areas provided producers 

sufficient reimbursement for the 

transportation costs incurred. However, 

the witness stressed, the Mideast order’s 

current Class I differential values 

between surplus and deficit areas do not 

provide sufficient incentive to 

encourage this north to south movement 

of milk. 

According to the DFA/MMPA 

witness, the cost to move a load of milk 

within the Mideast marketing area from 

a $1.80 Class I differential zone to a 

$2.20 Class I differential zone is $0.66 

per cwt. However, the order’s Class I 

differential’s only provided a $0.40 per 

cwt incentive to transport that milk. The 

result, said the witness, is that Class I 

handlers have to pay additional money 

to fulfill their Class I needs although all 

pooled producers benefit from the 

higher returns generated from those 

Class I sales. The witness maintained 

that Federal order prices should cover 

all transportation costs for supplemental 

milk supplies and stressed that the 

proposed transportation credit only 

seeks to recoup 66 percent of that cost. 

The DFA/MMPA witness provided 

over-order premium and cost 

information experienced by DFA when 

delivering supplemental milk supplies. 

The witness said that the average overorder premium charged for 

supplemental milk in 2004 was $1.72 

per cwt. The witness explained that 

after subtracting out various customer 

credits, transportation costs, zone 

adjustments and give up charges, the net 

return, on average, was $0.71 per cwt to 

pay producers and cover the operating 

costs of the cooperative. The witness 

discussed the marketing decisions of 

DFA for October 2004, a month when 

supplemental supplies are historically 

needed. The witness said that in 

October 2004 DFA purchased over 21 

million pounds of supplemental milk 

for delivery to distributing plants in the 

Mideast marketing area. After 

subtracting costs from the over-order 

premium, there was an average of $0.45 

per cwt to pay producers and cover 

operating costs. The witness estimated 

that if Proposal 9 had been in place 

during October 2004, DFA would have 

received an $0.08 per cwt transportation 

credit on its supplemental supplies of 

Class I milk. 

A post-hearing brief submitted on 

behalf of DFA/MMPA reiterated their 

position that transportation credits for 

the Mideast order are appropriate to 

ensure that all pooled producers will 

more equitably bear some costs in 

servicing the Class I market. The brief 

also argued that Proposal 9, as modified 

at the hearing, contained appropriate 

mileage limits to safeguard against 

handlers seeking to pool milk on the 

order solely for the purpose of receiving 

the credit. 

The DFA/MMPA brief contended that 

the Mideast marketing area lacks 

sufficient supplemental supplies within 

the marketing area to service the Class 

I needs of the market. The brief 

reiterated that DFA/MMPA members are 

currently bearing a disproportionate 

share of the cost of supplying the Class 

I market because they have to transport 

milk long distances but are not 

reimbursed for the additional 

transportation costs incurred. The brief 

reiterated that while there are reserve 

supplies of milk in northern regions of 


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the marketing area that could be 

delivered to the deficit southern regions, 

the Class I differential does not 

sufficiently reimburse the additional 

transportation cost. 

Comments filed on behalf of DFA, et 

al., took exception to the Department’s 

denial of establishing transportation 

credits in the Mideast order. DFA, et al., 

argued that record evidence 

demonstrates that the Mideast order has 

clear deficit and surplus milk supply 

regions and asserted that despite only 

submitting data for October 2004, the 

testimony given at the hearing shows 

that the supplemental milk supplies are 

needed year-round in the Mideast 

marketing area. DFA, et al., took 

exception to the assertion that 

cooperatives should be able to recoup 

their additional transportation costs in 

the marketplace. DFA, et al., concluded 

that the record is replete with data 

demonstrating that producers supplying 

distant Class I plants do not receive 

uniform prices and requested that the 

Department establish a transportation 

credit provision to remedy this 

disorderly marketing condition. 

A witness appearing on behalf of 

Foremost, et al., was of the opinion that 

a transportation credit on producer milk 

delivered to distributing plants was 

warranted because of the high cost of 

servicing Class I plants in the Mideast 

marketing area. The witness explained 

that on average, the distance from farms 

to distributing plants in the Mideast 

marketing area is longer than the 

distance between farms and 

manufacturing plants. Therefore, the 

witness was of the opinion that since 

producers pay the transportation cost 

for their milk, a producer delivering to 

a distributing plant will always receive 

a lower price for their milk because 

their transportation costs will be greater. 

The Foremost, et al., witness also 

offered a modification to Proposal 9 that 

the proposed transportation credit 

should apply to milk transfers from pool 

supply plants to pool distributing 

plants. The witness testified that from 

2002 through 2004, Foremost delivered 

approximately 20 million pounds of 

milk from their pool supply plants to 

pool distributing plants during the 

months of August through November. 

However, the witness said, under the 

provision as proposed by DFA/MMPA, 

these milk transfers would not have 

received the transportation credit. The 

witness noted that the Upper Midwest 

order provides for transportation and 

assembly credits for milk transferred 

from supply plants to distributing plants 

and that a transportation credit 

provision for the Mideast order should 

also be applicable for plant-to-plant 

milk movements. 

The Foremost, et al., witness 

explained that the Mideast Milk 

Marketing Agency (MEMMA), of which 

Foremost is a member, markets the milk 

of its members and charges Class I 

handlers an over-order premium for 

milk delivered to their plants. The 

premium charges are negotiated 

between MEMMA and the individual 

distributing plants, the witness 

explained. The witness was of the 

opinion that to remain competitive with 

other suppliers and for their customers 

to remain competitive in the market, 

MEMMA cannot increase their overorder premiums to a rate that would 

compensate the costs of moving milk as 

would a transportation credit. 

A post-hearing brief submitted on 

behalf of Foremost, et al., maintained 

their support of Proposal 9 with their 

modification to include plant-to-plant 

milk movements as eligible for a 

transportation credit. The brief 

contended including credits for plantto-plant transfers is appropriate because, 

in their opinion, all Class I milk 

shipments to distributing plants should 

be eligible for a transportation credit. 

A witness appearing on behalf of 

Michigan Milk Producers Association 

(MMPA) testified in support of 

establishing a transportation credit for 

Class I milk with a modification. The 

witness proposed that a lower rate be 

applicable for milk movements within 

the State of Michigan. 

According to the MMPA witness, 

trucks used to haul milk within the 

State of Michigan are often larger 

because of higher gross weight limits 

allowed by the State. Typically, a trailer 

that can hold up to 90,000 pounds of 

milk, results in transportation costs of 

approximately $0.0036 per loaded mile, 

the witness noted. However, in keeping 

with testimony offered by DFA/MMPA 

for partial reimbursement of 

transportation cost, the witness said, 

Michigan distributing plants receiving 

milk from Michigan farms should 

receive a lower credit rate of $0.0024 

per loaded mile. Otherwise, the witness 

said, Michigan handlers would recoup 

more than 67 percent of their actual 

transportation cost. The witness was of 

the opinion that the gain to producers 

from having all Class I needs satisfied 

outweighed the small reduction that a 

transportation credit would have on the 

blend price. 

The MMPA witness testified that the 

Producer Equalization Committee (PEC), 

which was identified as the over-order 

pricing agency in Michigan, charges an 

over-order premium for Class I and II 

milk. According to the witness, these 

premiums over the previous 2 years 

have ranged from $1.40 to $1.65 per 

cwt. The witness explained that PEC 

pools its over-order revenue and 

equitably distributes it among 

participating producers. According to 

the witness, individual producers who 

incurred higher transportation costs for 

shipping milk a long distance will 

sometimes receive a larger share of the 

over-order revenue. 

The MMPA witness testified in 

opposition to the Foremost, et al., 

modification to provide transportation 

credits on plant-to-plant milk 

movements. The witness argued that 

transportation credits should be used to 

promote efficient movements of milk 

and that shipping milk directly from 

farms to distributing plants in the 

Mideast marketing area is the most 

efficient movement. The witness was of 

the opinion that data provided by the 

Market Administrator demonstrated that 

there are adequate reserve supplies 

located within reasonable distances for 

farm-to-distributing plant deliveries. 

The witness asserted that providing a 

transportation credit on milk transfers 

between plants would encourage milk to 

be pooled from plant locations far from 

the marketing area and would 

inappropriately qualify producers—who 

would not be reliable suppliers of milk 

for the Class I needs of the Mideast 

market—to be pooled on the order. A 

post-hearing brief submitted on behalf 

of MMPA reiterated their support for 

establishing a transportation credit for 

Class I milk as they modified it during 

the hearing and opposition to including 

milk delivered from pool supply plants 

to pool distributing plants. 

A brief submitted on behalf of Dean 

expressed support for adopting a 

transportation credit provision with a 

modification. The brief said that 

providing a transportation credit to 

reimburse the cost of supplying the 

Class I market is appropriate, but 

expressed concern with exempting the 

proposed first 75 miles of milk 

movement from receiving the credit. 

Dean believed that such an exemption 

discriminates against local farmers that 

supply Class I plants. 

The Dean brief also asserted that if 

producer milk receives a transportation 

credit for supplying the Class I market, 

milk from that same farm should not be 

permitted to divert to a plant that is 

located outside the Mideast marketing 

area. The brief explained that milk 

diverted to plants outside the marketing 

area should be viewed as ‘‘dairy farmer 

for other markets’’ milk. While Dean 

acknowledged that such treatment of 

out-of-area diverted milk is a major 

change to Proposal 9, their brief 


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nevertheless proposed that for milk 

diverted to out-of-area plants from the 

same farm that milk receives a 

transportation credit, such milk should 

not count as shipments for the purpose 

of meeting the order’s touch-base 

standard. 

Seven dairy farmers whose milk is 

pooled on the Mideast order testified in 

support of establishing a transportation 

credit for Class I milk. Five of the dairy 

farmers were members of cooperatives 

and two were independent dairy 

farmers. The dairy farmers were of the 

opinion that the entire market should 

bear the costs associated with serving 

the Mideast Class I market, not solely 

the cooperatives that provide 

supplemental supplies to the order’s 

distributing plants. 

A witness appearing on behalf of OFU 

testified in opposition to adopting 

transportation credits. The witness said 

that a transportation credit would 

discourage the use of local milk to 

supply Mideast order pool plants. 

A witness appearing on behalf of 

Prairie Farms testified in opposition to 

adopting transportation credits for Class 

I milk. The witness said that the 

modified transportation credit proposals 

would provide no benefit to Prairie 

Farms members who supply distributing 

plants because most of their producers 

are located less than 75 miles from the 

plant. The witness contended that 

transportation credits in the Mideast 

order would lead to inefficient milk 

movements for the sole purpose of 

receiving a credit. 

A witness appearing on behalf of 

Smith Dairies testified in opposition to 

adopting transportation credits for Class 

I milk. The witness was of the opinion 

that providing a transportation credit 

would reduce the blend price paid to 

pooled producers who consistently 

supply distributing plants. The witness 

stressed that handlers who have supply 

agreements with distributing plants 

should account for their transportation 

costs of supplemental supplies and not 

ask the government for regulatory relief. 

The witness also asserted that the 

handler’s business model should 

account for all transportation costs of 

milk from the farm to the retail 

customer. The witness was of the 

opinion that transportation credits 

could give a competitive advantage to 

those handlers that receive the credit. 

The witness said that when Smith 

Dairies purchases supplemental 

supplies, the price negotiated for the 

supplemental supplies does cover 

transportation costs and a transportation 

credit would be additional 

reimbursement. 

A brief submitted on behalf of 

Continental expressed opposition to the 

transportation credit provision. 

Continental believed that adopting 

Proposal 9 would only benefit the 

proponents of the proposal and would 

reduce the blend price paid to close-in 

producers who supply a distributing 

plant. The brief stated that Continental’s 

major concern was that the credit would 

be paid by the handlers with no 

guarantee that the credit would be 

transferred to a non-cooperative 

producer who incurred hauling costs. 

Continental was of the opinion that 

adoption of the proposal could pressure 

non-members into joining a cooperative 

and thereby limit producer choices as to 

where they can market their milk. 

The Agricultural Marketing 

Agreement Act of 1937 (AMAA), as 

amended, provides authority for milk 

marketing orders to contain provisions 

for making payments to handlers for 

performing services that are of 

marketwide benefit. In this context, a 

marketwide service payment is a charge 

to all producers whose milk is pooled 

on the order, regardless of the use 

classification of such milk. The 

payment, in the form of a credit, is 

deducted from the total value of all milk 

pooled before computing the order’s 

blend price. The AMAA identifies 

services that may be of marketwide 

benefit to include, but are not limited to: 

(1) Providing facilities to furnish 

additional supplies of milk needed by 

handlers and to handle and dispose of 

milk supplies in excess of quantities 

needed by handlers; (2) handling on 

specific days quantities of milk that 

exceed quantities needed by handlers; 

and (3) transporting milk from one 

location to another for the purpose of 

fulfilling requirements for milk of a 

higher use classification or for providing 

a market outlet for milk of any use 

classification. 

Proposal 9, as proposed and modified 

by DFA/MMPA seeks to establish a 

transportation credit as a marketwide 

service payment for milk shipped 

directly from dairy farms to distributing 

plants. The credit would only be 

applicable to milk classified as Class I 

and would be paid at a rate of $0.0031 

per cwt per mile. The credit would not 

apply to the first 75 miles of applicable 

milk movements because this is the 

typical distance milk moves from farm 

to distributing plants in the marketing 

area. Receipt of the credit would be 

limited to not more than 350 miles 

because the Class I needs of the 

marketing area are satisfied without the 

need to reach further for a supply. In 

light of testimony that higher gross 

vehicle weight limits are provided in 

the State of Michigan, MMPA proposed 

a modification to establish a separate 

and lower transportation credit rate of 

$0.0024 per cwt per mile for intra-state 

milk movements from farms to 

distributing plants in the State of 

Michigan. Foremost, et al., sought to 

expand the adoption of transportation 

credits for milk transfers between 

supply plants and distributing plants 

because milk transferred from supply 

plants, like direct-shipped milk, also 

serves the Class I market and should 

therefore be eligible for a transportation 

credit. This modification was not 

supported by DFA or MMPA, the 

proponents of Proposal 9. 

An example of a Federal milk 

marketing order that currently provides 

for a marketwide service payment is the 

transportation and assembly credits 

employed in the Upper Midwest milk 

marketing order. The transportation and 

assembly credit provisions of the 

Chicago Regional order were carried 

into the provisions of the current Upper 

Midwest order as part of Federal order 

reform. The transportation credit feature 

of the provision provides transporting 

handlers with a credit of $0.028 per cwt 

per mile for milk transfers from pool 

supply plants to pool distributing 

plants. The credit is deducted from the 

total value of all milk pooled on the 

order. Because the transportation credit 

reduces the total dollar value of the milk 

pooled, it results in a lower blend price 

paid to all producers. 

These provisions were first 

implemented in 1987 to ensure that the 

costs of serving the Class I market of the 

Chicago Regional marketing area were 

more equitably shared among all market 

participants that benefited from the 

additional revenue generated from Class 

I sales. Because of the very liberal 

pooling standards of the Upper Midwest 

order, much of the milk is pooled 

through the diversion process by having 

delivered 1 day’s production to a pool 

plant. Since such milk is then pooled on 

a continuing basis, it is considered 

equitable that such milk bears some of 

the cost of supplying the Class I market 

on a continual basis. The credit was 

maintained in the larger consolidated 

Upper Midwest order for the same 

reasons. The transportation credit, as 

proposed and modified by proponents 

in this proceeding, differs from the 

transportation credit provision of the 

Upper Midwest order. The principal 

difference is that as proposed, the credit 

would be paid to the receiving handler 

for milk delivered direct from farms to 

distributing plants. 

The dairy-farmer cooperative 

proponents argue that in their capacity 

as producers they are bearing an 


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inequitable share of the cost of 

supplying the supplemental needs of 

the marketing area’s Class I market. In 

this regard, they assert that while all 

pooled producers are benefiting from 

Class I sales in the market, cooperative 

member producers supply a greater 

percentage of supplemental milk to 

Class I plants, and thus conclude that 

they are inequitably bearing the cost of 

providing supplemental supplies during 

certain times of the year. 

The cooperative witnesses contend 

that when independently supplied 

distributing plants need supplemental 

supplies, such supplemental supplies 

are acquired from cooperatives. 

However, the cooperatives over-order 

premiums have been determined well 

before the start of the months when 

supplemental milk supplies are needed 

without adjusting for the generally 

farther distance any given particular 

load of milk must be transported. Even 

though proponents seek transportation 

credits year-round, the evidence reveals 

that it is the additional cost burden they 

bear providing supplemental milk 

supplies in the fall months, using 

October 2004 as a representative month, 

which Proposal 9 seeks to address. The 

basis of the argument advanced by the 

proponents was that without a 

transportation credit, meaningful cost 

recovery is not otherwise obtainable 

from receiving handlers. The record 

evidence does not support concluding 

that this burden is experienced in every 

month of the year. 

The proponent cooperatives also 

asserted that the Class I differentials of 

the Mideast marketing area do not offer 

sufficient incentive to attract Class I 

milk to distributing plants in certain 

portions of the Mideast area. This 

failure, the proponent cooperatives say, 

places them as Class I suppliers at a 

competitive disadvantage relative to 

other Class I suppliers who are not 

supplying supplemental needs. The 

cooperatives proposed the 

establishment of a transportation credit 

provision as a means of offsetting a 

portion of the total additional cost of 

supplying Class I plants that the Class 

I differentials do not adequately 

compensate. 

The proponents noted that the 

structure of the Mideast market, namely 

plant consolidation, diminished milk 

supplies in certain areas and 

transportation costs have increased 

since the Class I differentials were 

implemented in 2000. Amending the 

Class I differentials to more equitably 

reimburse Class I suppliers for 

transportation costs was another option 

considered but rejected by the 

proponents. They were of the opinion 

that changing the Class I price surface 

would have been very difficult and 

concluded that providing for 

transportation credits would be a 

satisfactory alternative to pricing 

problems. Proponents estimated that the 

impact of the proposed transportation 

credit on the Mideast order blend price 

per month, if adopted, would be a 

reduction of approximately $0.0297 per 

cwt. 

Despite exceptions filed by DFA, et 

al., this final decision continues to find 

that the record of this proceeding does 

not support the adoption of a 

transportation credit provision in the 

Mideast marketing area. The proponents 

requested a year-round transportation 

credit for Class I milk deliveries but did 

not offer sufficient evidence to justify 

establishment of the credit. Evidence 

presented at the hearing for the volume 

and cost of milk deliveries was limited 

to the fall month of October 2004. 

Testimony offered in support of the 

establishment of a transportation credit 

spoke primarily of the need for partial 

cost recovery for the transportation of 

supplemental supplies in the fall 

months. Because the record contains no 

data for other months it is difficult to 

determine to what extent distant milk is 

moving to the Mideast market as 

supplemental supplies. Additionally, it 

is not possible to determine what 

portion of the distant supplies revealed 

in the October data are displacing local 

milk at distributing plants for producer 

qualification purposes only. 

The proponents did provide average 

cost and revenue data regarding 

supplemental milk supplies for 2004. 

The DFA witness testimony compared 

average milk procurement costs for 

October 2004 with average annual 

procurement costs. The two largest 

changes in procurement costs during the 

month of October, when compared to 

the annual average, were for ‘‘give-up 

charges’’ and for ‘‘supplemental hauling 

costs.’’ If the annual average 

procurement costs are adjusted to 

remove the impact of supplemental 

procurement costs calculated for August 

through November, it is estimated that 

supplemental hauling costs increased 

$0.27 and give-up charges increased 

$0.22 on average in the fall when 

compared to the average cost as 

extrapolated for the remainder of the 

year. This analysis concludes that the 

give-up charges are a major portion of 

the costs associated with the 

supplemental supply. This may indicate 

that the performance standards for the 

order are too low. It should be noted 

that the diversion limits were reduced 

and the supply plant shipping standards 

were increased on an interim emergency 

basis as a result of this proceeding. 

Due to the lack of data detailing the 

total cost of procuring supplemental 

supplies of milk and an estimate of the 

annual revenue generated by the 

transportation credit, no finding can be 

made that Proposal 9 should be 

adopted. Of particular concern is the 

possibility that the credit could be 

applicable to current and customary 

supply arrangements. This would result 

in a producer financed hauling subsidy 

on a year-round basis that is not related 

to any supplemental supplies or 

marketwide services. 

Additionally, it is unclear why 

government intervention is needed to 

essentially require producers to 

supplement the milk procurement costs 

of handlers located in milk deficit 

sections of the marketing area. Such a 

transportation credit would 

disadvantage handlers located in nondeficit regions of the marketing area that 

wish to distribute packaged milk 

products in the deficit regions. The full 

cost of transporting packaged Class I 

milk into the deficit regions would be 

borne by the distributing handler but 

the cost of transporting bulk milk into 

the deficit region for subsequent 

processing would be partially funded by 

all producers through the transportation 

credit. The proponents’ testimony 

throughout the proceeding stressed that 

they are unable to recoup their 

transportation costs from the 

marketplace. However, the evidence 

does not support these assertions. Both 

DFA and MMPA witnesses revealed that 

they are able to charge Class I handlers 

adequate over-order premiums to cover 

their transportation costs. The 

proponents asserted that these 

transportation costs should instead be 

recouped through marketwide pooling 

so that they can return a greater portion 

of the over-order premium to their 

members. The additional transportation 

cost of supplemental milk supplies is 

recovered from handlers who benefit by 

having such milk made available to 

satisfy demands. 

Cooperatives who deliver 

supplemental supplies to distributing 

plants are providing those handlers with 

the benefit of a supply to meet their 

demands. However, in return the 

cooperative receives the benefit of an 

over-order premium to cover any 

additional costs it may incur and, if 

possible, return a higher price to its 

members. The cooperative also benefits 

in that these supplemental deliveries are 

used to satisfy the cooperative’s longterm performance standards. It is not 

reasonable to lower the blend prices 

received by all dairy farmers when 


jlentini on PROD1PC65 with PROPOSALS5
Federal Register / Vol. 71, No. 177 / Wednesday, September 13, 2006 / Proposed Rules 54185 

transportation costs are adequately 

recovered from the Class I handler who 

needs the milk to meet demands. 

This final decision continues to find 

that government intervention through 

the adoption of the proposed year-round 

transportation credit provision is not 

warranted. The record of this 

proceeding does reveal that additional 

costs can be recouped in the 

marketplace without such intervention. 

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 Mideast order 

was first issued and when it was 

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 agreement 

and the order, 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 area, and the 

minimum prices specified in the 

tentative marketing agreement and the 

order, 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 agreement 

and the order, as hereby proposed to be 

amended, will regulate the handling of 

milk in the same manner as, and will be 

applicable only to persons in the 

respective classes of industrial and 

commercial activity specified in, the 

marketing agreement 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 are two documents, a Marketing 

Agreement regulating the handling of 

milk, and an Order amending the order 

regulating the handling of milk in the 

Mideast marketing area, which has been 

decided upon as the detailed and 

appropriate means of effectuating the 

foregoing conclusions. 

It is hereby ordered that this entire 

decision and the two documents 

annexed hereto be published in the 

Federal Register. 

Referendum Order To Determine 

Producer Approval; Determination of 

Representative Period; and Designation 

of Referendum Agent 

It is hereby directed that a referendum 

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 

procedures for the conduct of referenda 

[7 CFR 900.300–311], to determine 

whether the issuance of the order as 

amended and hereby proposed to be 

amended, regulating the handling of 

milk in the Mideast marketing area is 

approved or favored by producers, as 

defined under the terms of the order, as 

amended and as hereby proposed to be 

amended, who during such 

representative period were engaged in 

the production of milk for sale within 

the aforesaid marketing area. 

The representative period for the 

conduct of such referendum is hereby 

determined to be March 2006. 

The agent of the Secretary to conduct 

such referendum is hereby designated to 

be David Z. Walker, Mideast Market 

Administrator. 

List of Subjects in 7 CFR Part 1033 

Milk marketing orders. 

Dated: September 1, 2006. 

Lloyd C. Day, 

Administrator, Agricultural Marketing 

Service. 

Order Amending the Order Regulating 

the Handling of Milk in the Mideast 

Marketing Area 

This order shall not become effective 

unless and until the requirements of 

§ 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 order was first 

issued and when it was 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 

agreement and to the order regulating 

the handling of milk in the Mideast 

marketing area. 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 order 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 order as hereby amended 

regulates 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 Mideast 

marketing area shall be in conformity to 

and in compliance with the terms and 


jlentini on PROD1PC65 with PROPOSALS5
54186 Federal Register / Vol. 71, No. 177 / Wednesday, September 13, 2006 / Proposed Rules 

conditions of the order, as amended, 

and as hereby amended, as follows: 

The provisions of the order amending 

the order contained in the 

Recommended Decision issued by the 

Administrator, Agricultural Marketing 

Service, on February 15, 2006, and 

published in the Federal Register on 

February 22, 2006 (71 FR 9033), are 

adopted without change and shall be the 

terms and provisions of this order. The 

order follows. 

PART 1033—MILK IN THE MIDEAST 

MARKETING AREA 

1. The authority citation for 7 CFR 

part 1033 is amended to read as follows: 

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

2. Section 1033.13 is amended by 

adding a new paragraph (f), to read as 

follows: 

§ 1033.13 Producer milk. 

* * * * * 

(f) Producer milk of a handler shall 

not exceed the limits as established in 

§ 1033.13(f)(1) through § 1033.13(f)(3). 

(1) Producer milk for the months of 

April through February may not exceed 

115 percent of the producer milk 

receipts of the prior month. Producer 

milk for March may not exceed 120 

percent of producer receipts of the prior 

month; plus 

(2) Milk shipped to and physically 

received at pool distributing plants and 

allocated to Class I use in excess of the 

volume allocated to Class I in the prior 

month; plus 

(3) If a producer did not have any 

milk delivered to any plant as other 

than producer milk as defined under the 

order in this part or any other Federal 

milk order for the preceding three 

months; and the producer had milk 

qualified as producer milk on any other 

Federal order in the previous month, 

add the lesser of the following: 

(i) Any positive difference of the 

volume of milk qualified as producer 

milk on any other Federal order in the 

previous month, less the volume of milk 

qualified as producer milk on any other 

Federal order in the current month, or 

(ii) Any positive difference of the 

volume of milk qualified as producer 

milk under the order in this part in the 

current month, less the volume of milk 

qualified as producer milk under the 

order in this part in the previous month. 

(4) Milk received at pool plants in 

excess of these limits shall be classified 

pursuant to § 1000.44(a)(3)(v) and 

§ 1000.44(b). Milk diverted to nonpool 

plants reported in excess of this limit 

shall not be producer milk. The handler 

must designate, by producer pick-up, 

which milk shall not be producer milk. 

If the handler fails to provide this 

information the provisions of 

§ 1033.13(d)(6) shall apply. 

(5) The market administrator may 

waive these limitations: 

(i) For a new handler on the order, 

subject to the provisions of 

§ 1033.13(f)(6), or 

(ii) For an existing handler with 

significantly changed milk supply 

conditions due to unusual 

circumstances; 

(6) Milk may not be considered 

producer milk if the market 

administrator determines that handlers 

altered the reporting of such milk for the 

purpose of evading the provisions of 

this paragraph. 

Marketing Agreement Regulating the 

Handling of Milk in the Mideast Marketing 

Area 

The parties hereto, in order to effectuate 

the declared policy of the Act, and in 

accordance with the rules of practice and 

procedure effective thereunder (7 CFR part 

900), desire to enter into this marketing 

agreement and do hereby agree that the 

provisions referred to in paragraph I hereof 

as augmented by the provisions specified in 

paragraph II hereof, shall be and are the 

provisions of this marketing agreement as if 

set out in full herein. 

I. The findings and determinations, order 

relative to handling, and the provisions of 

§§ 1033.1 to 1033.86 all inclusive, of the 

order regulating the handling of milk in the 

Mideast marketing area (7 CFR Part 1033 

which is annexed hereto); and 

II. The following provisions: 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 March 

2006,llhundredweight 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. 

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) lllllllllllllll

(Title) lllllllllllllllll

(Address) llllllllllllllll

(Seal) 

Attest 

[FR Doc. 06–7495 Filed 9–6–06; 8:45 am] 

BILLING CODE 3410–02–P 


jlentini on PROD1PC65 with PROPOSALS5