`[Federal Register Volume 62, Number 227 (Tuesday, November 25, 1997)]
[Rules and Regulations]
[Pages 62810-62827]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-30602]



[[Page 62809]]

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Part III





Northeast Dairy Compact Commission





_______________________________________________________________________



7 CFR Ch. XIII



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Compact Over-Order Price Regulation and Results of Producer Referendum; 
Final Rules

  Federal Register / Vol. 62, No. 227 / Tuesday, November 25, 1997 / 
Rules and Regulations  

[[Page 62810]]



NORTHEAST DAIRY COMPACT COMMISSION

7 CFR Parts 1301, 1304, 1305, 1306 and 1307


Compact Over-Order Price Regulation

AGENCY: Northeast Dairy Compact Commission.

ACTION: Final rule.

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SUMMARY: This rule extends the present compact over-order price 
regulation (``price regulation'') for all Class I, fluid milk route 
distributions in the territorial region of the six New England states 
beyond its present expiration date of December 31, 1997. The rule 
extends the price regulation for the period January 1, 1998 through 
termination of the Compact enabling legislation.1 The 
regulation is established in the combined, Federal Milk Market Order #1 
and compact over-order, amount of $16.94 (Zone 1).
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    \1\ 7 U.S.C. 7256(3) ``Consent for the Northeast Interstate 
Dairy Compact shall terminate concurrent with the Secretary's 
implementation of the dairy pricing and Federal milk marketing order 
consolidation and reforms under section 7203 of this title.''
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    In so extending the price regulation, the Northeast Dairy Compact 
Commission (``Compact Commission'') reaffirms and again bases the 
decision on its findings that such price regulation is necessary to 
assure the viability of dairy farming in New England, that it is 
necessary to assure the region's consumers of a continued, adequate, 
local supply of fresh and wholesome milk, reasonably priced, and that 
it is otherwise in the public interest. The Compact Commission also 
establishes the price regulation based on the finding that the 
regulation has been approved by producer referendum pursuant to Article 
V, section 13 of the Northeast Interstate Dairy Compact. Notice of 
approval by referendum is published separately in this Federal 
Register.
    This rule also establishes a Task Force under Article VII. D. of 
the Compact Commission's Bylaws to determine whether it is appropriate 
to provide similar reimbursement to the region's School Lunch Programs, 
established under the National School Lunch Act of 1946 and the Child 
Nutrition Act of 1966 for any adverse financial impact. The Task Force 
is to report back on its assessment of whether it is appropriate to 
reimburse the programs and, if so, to recommend a procedure for 
reimbursement to the Compact Commission at its regularly scheduled 
meeting for February, 1998.
    Finally, the price regulation extends the administrative assessment 
of 3.2 cents per hundredweight of milk on all route dispositions of 
Class I, fluid milk in the territorial region of the six New England 
states. It is noted that the additional, start-up assessment of 
approximately 1.3 cents per hundredweight presently imposed will expire 
with final payment in December, 1997.

EFFECTIVE DATE: January 1, 1998.

ADDRESSES: Northeast Dairy Compact Commission, 43 State Street, P.O. 
Box 1058, Montpelier, VT 05601.

FOR FURTHER INFORMATION CONTACT: Daniel Smith, Executive Director, 
Northeast Dairy Compact Commission at the above address or by telephone 
at (802) 229-1941 or by facsimile at (802) 229-2028.

SUPPLEMENTARY INFORMATION:

Background

    The Compact Commission was established under authority of the 
Northeast Interstate Dairy Compact (``Compact''). The Compact was 
enacted into law by each of the six participating New England states as 
follows: Connecticut--Public Law 93-320; Maine--Public Law 89-437, as 
amended, Public Law 93-274; Massachusetts--Public Law 93-370; New 
Hampshire--Public Law 93-336; Rhode Island--Public Law 93-106; 
Vermont--Public Law 89-95, as amended, 93-57. Consistent with Article 
I, Section 10 of the United States Constitution, Congress consented to 
the Compact in Public Law 104-127 (FAIR ACT), Section 147, codified at 
7 U.S.C. 7256. Subsequently, the United States Secretary of 
Agriculture, pursuant to 7 U.S.C. 7256(1), authorized implementation of 
the Compact.
    Section 8 of the Compact empowers the Compact Commission to engage 
in a broad range of activities designed to ``promote regulatory 
uniformity, simplicity and interstate cooperation.'' For example, the 
Compact authorizes the Compact Commission to engage in a range of 
inquiries into the existing milk programs of both the participating 
states and the federal milk marketing system, to make recommendations 
to participating states, and to work to improve industry relations as a 
whole. See Compact, Art. IV, section 8.
    In addition to the powers conferred by Section 8, the Compact also 
authorizes the Compact Commission to consider adopting a compact over-
order price regulation. See Compact, Art. IV, section 9. A ``compact 
over-order price'' is defined as:

    A minimum price required to be paid to producers for Class I 
milk established by the Commission in regulations adopted pursuant 
to sections nine and ten of this compact, which is above the price 
established in federal marketing orders or by state farm price 
regulation in the regulated area. Such price may apply throughout 
the region or in any part or parts thereof as defined in the 
regulations of the commission.

See Compact, Art. II, section 2(8).
    The regulated price authorized by the Compact is actually an 
incremental amount above, or ``over-order'' the minimum price for the 
same milk established by Federal Milk Market Order #1. The price 
regulation establishes the minimum procurement price to be paid by 
fluid milk processors for milk that is ultimately utilized for fluid 
milk consumption in the New England region.2 Price 
regulation also provides for payment of a uniform ``over-order'' price, 
out of the proceeds of the price regulation, to all dairy farmers 
making up the New England milkshed regardless of the utilization of 
their milk.3 See Compact, Art. IV, section 9 (``The 
Commission is hereby empowered to establish the minimum price for milk 
to be paid by pool plants, partially regulated plants and all other 
handlers receiving milk from producers located in a regulated area.''.)
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    \2\ 7 CFR 1305.2.
    \3\ 7 CFR 1307.4.
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    Section 11 of the Compact delineates the administrative procedure 
the Compact Commission must follow in deciding whether to adopt a price 
regulation:

    Before promulgation of any regulations establishing a compact 
over-order price or commission marketing order, including any 
provision with respect to milk supply under subsection 9(f), or 
amendment thereof, as provided in Article IV, the commission shall 
conduct an informal rulemaking proceeding to provide interested 
persons with an opportunity to present data and views. Such 
rulemaking proceeding shall be governed by section four of the 
Federal Administrative Procedures Act, as amended (5 U.S.C. 553). In 
addition, the commission shall, to the extent practicable, publish 
notice of rulemaking proceedings in the official register of each 
participating state. Before the initial adoption of regulations 
establishing a compact over-order price or a commission marketing 
order and thereafter before any amendment with regard to prices or 
assessments, the commission shall hold a public hearing. The 
Commission may commence a rulemaking proceeding on its own 
initiative or may in its sole discretion act upon the petition of 
any person including individual milk producers, any organization of 
milk producers or handlers, general farm organizations, consumer or 
public interest groups, and local, state or federal officials.

    Section 12(a) of the Compact directs the Commission to make four 
findings of fact before an over-order price

[[Page 62811]]

regulation can become effective. Specifically, the Commission shall 
make findings of fact with respect to:

    (1) Whether the public interest will be served by the 
establishment of minimum milk prices to dairy farmers under Article 
IV.
    (2) What level of prices will assure that producers receive a 
price sufficient to cover their costs of production and will elicit 
an adequate supply of milk for the inhabitants of the regulated area 
and for manufacturing purposes.4
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    \4\ The Commission limited its assessment to issues relating to 
the fluid milk market, given the limitations on its authority to 
regulate the price of milk used for manufacturing purposes. See 
Compact, Section 9(a); see also 7 U.S.C. 7256(2).
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    (3) Whether the major provisions of the order, other than those 
fixing minimum milk prices, are in the public interest and are 
reasonably designed to achieve the purposes of the order.
    (4) Whether the terms of the proposed regional order or 
amendment are approved by producers as provided in section thirteen.

Compact, Art. V. Section 12.
    Pursuant to Section 11 of the Compact, the Compact Commission 
initiated a rulemaking procedure in December, 1996.5 The 
rulemaking culminated on May 30, 1997 with the issuance of a final rule 
establishing a compact over-order price regulation for the period July 
1-December 31, 1997.6
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    \5\ The Commission issued a notice of Hearing on December 13, 
1996 at 61 FR 65604 and held public hearings on December 17 and 19, 
1996. The Notice also invited the public to submit written comments 
through January 2, 1997. Following the close of this comment period, 
the Commission met on January 16, 1997 and established three working 
groups to consider the testimony and data submitted. The Commission 
issued a Notice of Additional Comment Period on March 14, 1997. 62 
FR 12252. This comment period closed on March 31, 1997; the reply 
comment period closed April 9, 1997. Based on the testimony and 
comment received, the Compact Commission issued a proposed rule on 
April 28, 1997 to adopt price regulation. 62 FR 23032. As part of 
the proposed rule, the Commission published for comment technical 
regulations to be codified at 7 CFR Section 1300, et seq. Minor 
corrections to the proposed rule were published on May 8, 1997, 62 
FR 25140, to provide clarification and to correct errors. The 
Compact Commission received additional comment in response to the 
proposed rule issued April 28, 1997.
    \6\ 62 FR 29626 (May 30, 1997).
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    On September 8, 1997, the Compact Commission issued notice of 
proposed rulemaking to consider whether to extend the price regulation 
beyond the present December 31, 1997 expiration date.7 The 
technical provisions of the price regulation established by final rule 
of May 30, 1997 and as codified at 7 CFR Chapter 1300, and the summary 
and analysis of the rule, were issued as a proposed rule in the 
September 8, 1997 notice of rulemaking, with the further proposals that 
the regulation be extended for one year and that it be amended 
generally. Pursuant to Compact, Art. IV, Section 11, the Compact 
Commission held a public hearing on September 24, 1997 on the proposed 
rule, and accepted written comment pursuant to its bylaws until October 
8, 1997.
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    \7\ 62 FR 47156 (September 8, 1997).
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    Based on the oral and written comment received, and upon the 
reasoning set forth in its previous proposed and final rules, the 
Compact Commission hereby extends the present price regulation for the 
period January 1, 1998 through termination of the Compact enabling 
legislation. As explained below, the amount of the price regulation 
remains unchanged at $16.94. As also explained below, the technical 
regulation, as codified at 7 CFR Chapter 13 [Secs. 1301.11(b), 
1304.5(a), 1305.1, 1306.1, 1306.2, 1306.3(b) through (f), 1307.1, 
1307.2, and 1307.4(f)], is amended in certain instances.
    Immediately following is a summary analysis and response to the 
comment received during the present rulemaking procedure. A more 
detailed review and response follows, organized around the finding 
analysis required by Section 12 of the Compact. This analysis also 
summarizes and incorporates the relevant reasoning developed in the 
previous rulemaking. The analysis also identifies and describes any 
amendments to the price regulation made as part of this final rule.

I. Summary Analysis of Comments Received in Response to the Proposed 
Rule and Compact Commission's Response

    Oral and written comment received in the September 24, 1997 hearing 
and additional written comments received by the Compact Commission's 
published deadline of October 8, 1997 were duly considered by the 
Compact Commission. The Compact Commission met on October 23, 1997 to 
consider and act on the comment received. Public notice of this meeting 
was published on October 16, 1997 in the Federal Register. 62 FR 53769.
    Eighty-nine separate comments were received during the hearing and 
written comment period. Of the total commenters, five expressed 
opposition to the regulation's extension and eighty-four expressed 
support for its extension.
    The five commenters expressing opposition to the regulation's 
extension include an economist for Public Voice for Food and Health 
Policy, a public interest group based in Washington, DC, and four 
representatives of Massachusetts ACORN, a low income community advocacy 
group in Dorchester, MA. These commenters expressed concern primarily 
with the regulation's impact on low income consumers in the New England 
region.
    The Compact Commission recognizes and acknowledges the concerns 
raised by these opposing commenters. As explained in greater detail in 
the subsequent analysis, one of the central reasons the Compact 
Commission adopted its initial regulation for the limited period of six 
months on May 30, 1997 was to ensure close monitoring of the 
regulation's impact on consumers, including low income consumers. See 
62 FR 29638. This careful scrutiny is derived from the finding analysis 
and inquiry into the public interest in milk price regulation which the 
Compact Commission must make under the Compact, and which is concerned 
with, among other issues, the impact of price regulation upon 
consumers, including low income consumers.
    While accentuating the need for continued, careful scrutiny, the 
commenters have not established that the price regulation is causing 
such anomalous market distortions of the retail market as to justify 
elimination of price regulation. When viewed in the context of, and 
balanced with, the comments presented in support of continuing the 
regulation, along with the reasoning derived from the prior rulemaking, 
the Compact Commission concludes the interests of consumers in a stable 
milk supply and, ultimately, stabilized prices, will continue to be 
served by extending the price regulation.
    Fifty-four of the eighty-four commenters expressing support for 
extension of the regulation were dairy farmers. Other commenters 
expressing support for extension include representatives of dairy 
farmer cooperatives, farm credit agencies, banks, dairy processors, 
dairy feed and fertilizer suppliers, Farm Bureaus, farm machinery 
dealers, New England state WIC Programs, New England state Departments 
of Agriculture, a state legislator, a large animal veterinarian, and a 
consumer.
    These commenters, farmers and others alike, expressed support for 
extending the regulation for periods of varying duration. The broad 
majority supported extension through the termination of the Compact 
Commission's authority to establish an over-order price regulation 
under the Congressional Consent to the Compact.8 The 
supporting comment also was mixed with regard to whether the amount of 
the over-order price should be kept at the same rate or increased, and, 
if increased, at what rate. Most of

[[Page 62812]]

the comment supported an increase reflecting the increase in the 
Consumer Price Index. Finally, a number of the commenters recommended 
certain amendments to the technical codified price regulation.
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    \8\ 7 U.S.C. 7256(3).
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    In view of these amendments suggested by the commenters, the 
Compact Commission notes that, in addition to allowing for close review 
of the regulation's impact on the retail market, the limited, six month 
duration of the initial price regulation was also established to ensure 
close scrutiny of the regulation's impact on the overall fluid milk 
marketplace. As with review of the impact on the retail market, this 
overall assessment is necessary to determine whether the price 
regulation has caused such market distortions as to require its 
discontinuation, or whether its extension will continue to serve the 
public interest.
    As explained in detail below, the Compact Commission concludes from 
this rulemaking process that the public interest is best served by the 
regulation's extension from January 1, 1998 through termination of the 
Compact enabling legislation. Accounting for the concerns of the 
commenters, the Compact Commission concludes the public interest, 
including those of low income consumers, will be better served by 
extending the price regulation so as to establish stable prices across 
the wholesale and retail markets in New England for the continuous 
period July 1, 1997 through termination of the Compact enabling 
legislation. The Commission concludes that close scrutiny of the 
regulation's impact must continue and, accordingly, schedules 
subsequent rulemaking with review of all relevant issues to be 
commenced, pursuant to Section 11 of the Compact, no later than July 1, 
1998.
    The comments received, with regard to the significant concerns and 
relative positions on the critical issues invoked by the finding 
analysis mandated by Section 12(a) of the Compact, are now addressed in 
detail.

II. Summary and Further Explanation of Findings Regarding Adoption of 
Over-order Price

    As noted above, Section 12(a) of the Compact directs the Commission 
to make four findings of fact before an over-order price regulation can 
become effective. The issues relating to the first three topics 
(excluding the referendum procedure) were exhaustively reviewed in the 
Compact Commission's initial proposed rule. The Compact Commission's 
findings on these topics, based on that analysis, were reaffirmed with 
further discussion in the subsequently adopted final rule on May 30, 
1997, which rule served as the proposed rule in the present rulemaking 
process. The analysis of these issues contained in the previous 
proposed and final rules is again reaffirmed, subject to the further 
discussion contained here.
    As in the previous rulemaking, the second finding required by the 
Compact (the level of prices needed to assure a sufficient price to 
producers and an adequate supply of milk) is discussed initially. The 
Compact Commission finds that a price of $16.94 per hundredweight 
continues to be needed to achieve these dual goals. The first finding 
required by the Compact (whether the public interest will be served by 
the establishment of minimum milk prices) is then discussed. The 
Compact Commission further finds that the public interest will be 
served by an over-order price regulation in the amount of $16.94 to 
extend from January 1, 1998 through termination of the Compact enabling 
legislation.
    With respect to both of these findings, the Compact Commission's 
inquiry has been guided by Section 9(e) of the Compact, which sets 
forth several factors which the Compact Commission must consider during 
the hearing process to determine whether to adopt and if so, the amount 
of, an over-order price:

    In determining the price, the commission shall consider the 
balance between production and consumption of milk and milk products 
in the regulated area, the costs of production, including, but not 
limited to the price of feed, the cost of labor including the 
reasonable value of the producer's own labor and management, 
machinery expense, and interest expense, the prevailing price for 
milk outside the regulated area, the purchasing power of the public 
and the price necessary to yield a reasonable return to the producer 
and the distributor.

    The third finding required by the Compact is then discussed; the 
Compact Commission concludes that the major provisions of this order, 
other than those establishing minimum milk prices, are in the public 
interest and reasonably designed to achieve the purposes of the order.
    The fourth required finding is whether the terms of the proposed 
order have been approved by producer referendum, pursuant to Article 
IV, section 12 of the Compact. In this final rule, the Compact 
Commission makes this finding premised upon certification of such 
approval, published separately in this Federal Register. The procedure 
for such certification is set forth infra in the section of this rule 
addressing the fourth finding.

A. What Level of Prices Will Assure That Producers Receive a Price 
Sufficient To Cover Their Costs of Production and Elicit an Adequate 
Local Supply of Milk

    As one of the four underlying findings required for the 
establishment of price regulation, the Compact Commission must 
determine:

    (2) What level of prices will assure that producers receive a 
price sufficient to cover their costs of production and will elicit 
an adequate supply of milk for the inhabitants of the regulated area 
and for manufacturing purposes.9
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    \9\ The Commission limited its assessment to issues relating to 
the fluid milk market, given the limitations on its authority to 
regulate the price of milk used for manufacturing purposes. See 
Compact, Sec. 9(a); see also 7 U.S.C. section 7256(2). At the same 
time, for purposes of this analysis, it must be recognized that the 
present supply needs for manufacturing purposes are not available 
for fluid usage.

Compact Art. V, section 12(a)(2).
    As in the prior rulemaking, the Compact Commission's deliberations 
regarding the level of price required to cover costs of production 
focused again on the variety of cost inputs identified in Section 9(e) 
of the Compact. With regard to the price needed to elicit an adequate 
local supply of milk, the Compact Commission reviewed the nature of the 
balance of production and consumption in the region, as also called for 
by Section 9(e) of the Compact.10 This required review again 
prompts assessment of the degree to which farm prices have been 
insufficient to cover costs of production over time (``price 
insufficiency''), and the degree to which such insufficiency has 
affected the balance of production and consumption in the region. 
Assessment of this issue also required consideration of the wide swings 
over time in farmer pay prices under federal regulation, which have 
caused farm financial stress and made it difficult for farmers to plan 
financially (``price instability''), and the failure of farmer pay 
prices to keep up with inflation.
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    \10\ This assessment was presented under the second, broader 
public interest analysis in the first rulemaking procedure.
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Farmer Costs of Production
    The Compact Commission's inquiry with regard to whether prices are 
sufficient to cover the cost of production was guided by Section 9(e) 
of the Compact, which directs the Commission to consider cash costs of 
production, including feed, machinery expense, labor, and interest, as 
well as the non-cash costs of value for the farmer's own labor and a 
reasonable return on the farmer's investment.
    With regard to the various specific components of cash and non-cash 
costs

[[Page 62813]]

reviewed under Section 9(e) of the Compact, the Compact Commission 
determined in the previous rulemaking that feed costs are a significant 
production cost component. The Commission found that feed costs can 
account for as much as 50 percent of a farmer's cost of production. 62 
FR 23034. Farmers indicated that feed costs had risen beyond their 
means. In 1996, in particular, feed costs increased by some 29 percent. 
62 FR 29633.11
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    \11\ In addition, a cost-of-production study conducted by 
Wackernagel and relied upon by the Commission (62 FR 23034) 
indicated that feed and crop expenses together can account for some 
39% of a farmer's cash operating expenses.
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    According to the comment received in the present rulemaking, feed 
costs continue to account for a significant portion of cost of 
production. A Vermont dairy farmer indicated that the ratio of 
purchased grain cost to the value of milk produced for his farm has 
normally been 20% but that, since January of 1997, it has averaged 32%. 
De Geus and Gillmeister, in their joint submission,12 report 
that the Economic Research Service (ERS) of the USDA indicate that 
feeds account for as much as 50% of the cash expenses for milk 
production in 1996. They also report that feed prices are down this 
year relative to 1996 but remain historically high. They rely on the 
ERS September 1997 Livestock, Dairy, and Poultry Monthly 
Report,13 as well as the recent farm experience in New 
England, to conclude that high grain and high hay prices will raise 
this year's production costs higher, but not as high as last year's 
level.
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    \12\ Reenie De Geus and William Gillmeister, Dairy Economists 
for the Vermont and Massachusetts Departments of Agriculture, 
Written comment, (``WC''), October 8, 1997.
    \13\ The Report describes the current national situation to be: 
``Forage supplies will be of mediocre quality and high priced, even 
though the silage crop looks promising in most areas. Milk-feed 
price ratios will be at levels normally associated with conservative 
concentrate feeding and below-trend growth in milk per cow.''
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    De Geus, in a separate submission,14 indicates that 
Vermont feed costs are expected to remain high because of flooding in 
northern Vermont and drought conditions in southern Vermont, parts of 
New York, and much of the rest of New England.15 A dairy 
farmer from Connecticut reported that, since last September, his grain 
costs had increased approximately 8%.16 Other commenters 
noted that the increase in grain prices they are experiencing is 
creating an imbalance between their production costs and farm price for 
milk.17
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    \14\ Reenie De Geus, WC, October 8, 1997.
    \15\ Vermont dairy farmers reiterated this point in their 
submissions. Paul Doten, Harvey T. Smith, WC, October 8, 1997.
    \16\ David Jaquier, Dairy Farmer, East Canaan, CT, Public 
Hearing (``PH'') at p.134, September 14, 1997.
    \17\ Walter Fletcher, Donna Caverly, Richard Woodger, Maine 
Dairy Farmers, WC, October 8, 1997.
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    Machinery expense as a factor in the cost of production arises 
primarily in the context of depreciation; that is, depreciation must be 
covered by replacing old and worn out equipment. See 62 FR 29633. As in 
the prior rulemaking, farmers again indicated that pay prices are too 
low to permit them to make these investments.18 Claude and 
Jeanne Bourbeau indicated that that ``[their] debt load has increased 
in the past year due to depreciation of farm equipment. Money is needed 
to replace equipment and the milk check does not provide adequate funds 
to replace this equipment.'' 19 Another farmer indicated 
that it doesn't make sense to invest in new equipment because it would 
just add to his debt load and increase his monthly 
payments.20 Both Wesley Snow of Brookfield, Vermont and 
Robert Dow of Dover, Maine indicated that the increase in equipment 
costs since they purchased their current equipment makes replacement 
impossible, given their current milk price.21
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    \18\ See 62 FR 29633. Economist Reenie De Geus noted in record 
testimony that expenditures on machinery and other depreciation 
expenses tend to rise in the good years and are delayed in the bad 
years. Reenie De Geus, WC 75.
    \19\ Claude and Jeanne Bourbeau, Dairy Farmers, Swanton, 
Vermont, WC, October 8, 1997.
    \20\ David Hinsworth, Dairy Farmer, Royalton, Vermont, WC, 
October 8, 1997.
    \21\ WC, October 8, 1997.
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    Section 9(e) also directs the Compact Commission to consider 
interest and labor costs in assessing the sufficiency of farmer pay 
prices. (Measurement of these components of costs of production, in 
particular, provide for much of the variability in the range of cost of 
production noted below.) In the previous rulemaking, the Compact 
Commission determined that both interest and non-family labor expenses 
constitute a significant proportion of costs of production: from $0.50 
to $1.18 per hundredweight for interest expenses, and $1.08 to $1.92 
per hundredweight for labor expenses. 62 FR 29633.22
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    \22\ See: Wackernagel, which analyzed Agrifax and ELFAC farms 
over a 3-year period; Maine cost-of-production studies; and Pelsue 
and ERS-USDA studies submitted by Smith.
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    Section 9(e) also directs the Compact Commission to consider 
certain non-cash costs, including a reasonable value for the farmer's 
own labor and a reasonable return on the farmer's investment. In 
considering whether pay prices provide a reasonable value for the 
farmer's labor, the Compact Commission previously determined that dairy 
farms in New England are still predominately family operated, and, that 
in light of farmer pay prices, much of this family labor is completely 
uncompensated, or significantly undercompensated. Id. The Commission 
concluded that this failure to compensate for family labor discourages 
entry into the dairy industry. See 62 FR at 23035.
    Comment received in this rulemaking again supports this 
determination. A number of commenters indicated that they were 
experiencing difficulty in hiring labor at rates they were able to 
pay.23 One dairy farmer indicated that he must pay his hired 
help more than he pays himself.24
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    \23\ Lester Bailey, Robert L. Foster, and Claude and Jeanne 
Bourbeau, Dairy Farmers, WC, October 8, 1997.
    \24\ Onan Whitcomb, Williston, Vt., WC, October 8, 1997.
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    Allaire Palmer reports that his ``family employees have not had a 
raise in four years and work for six dollars per hour. Rent is 
furnished because employees are required to be available twenty-four 
hours per day.'' 25 Two dairy farmers testified that their 
children and grandchildren were not interested in continuing the family 
tradition of farming because of the long hours and short 
profit.26 On the basis of the record, the Compact Commission 
finds that current pay prices continue to discourage family entry into 
dairy farming because they fail to offer reasonable value for the 
farmer's labor.
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    \25\ Allaire P. Palmer, Dairy Farmer, Cornish, Maine, WC, 
October 8, 1997.
    \26\ Douglas Carlson, Dairy Farmer, Canaan, CT, and Dale Lewis, 
Dairy Farmer, Haverill, NH, PH at p. 99 and p. 140, respectively, 
September 24, 1997.
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    With regard to whether pay prices provide a reasonable return on 
the farmer's investment, the Compact Commission noted several comments 
received in the previous rulemaking indicating that a reasonable return 
ranges between 4% and 5%.27 The Commission determined that, 
for an extended period of time, pay prices have been insufficient to 
provide a rate of return on equity that reaches these levels. 62 FR 
29633.
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    \27\ Robert A. Smith of the Yankee Farm Credit System suggested 
a 4% rate of return was reasonable in his testimony at the September 
24, 1997 PH and in his comments submitted in the previous rulemaking 
in April, 1997. 62 FR 23033. The Maine cost-of-production studies, 
which analyze southern New England, used a 5% return on equity. Id. 
at 23034. In addition, Michael Sciabarrasi of University of New 
Hampshire Cooperative Extension Service, suggested that 5% was a 
minimal rate of return. Id.
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    Comment received from farmers in the present rulemaking again 
highlighted the impact of these

[[Page 62814]]

expenses upon their costs of production and the failure of pay prices 
to cover them completely. A number of commenters pointed out that 
failure of pay prices to cover their costs of production left them with 
no return on their investment.28 Douglas Carlson pointed out 
in his testimony that because of the large number of recent farm 
foreclosures, auctions are not bringing a reasonable return on the 
original investment, reflecting a lower general value of farm capital 
investments.29 The Compact Commission, therefore, reaffirms 
the determination that pay prices are insufficient to provide a rate of 
return on equity that reaches a reasonable range between 4% and 5%.
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    \28\ Allaine Palmer, David Bradshaw, Rosemarie Jeleniewski, 
Harold Larrabee, and Roger Scott, Dairy Farmers, WC, October 8, 
1997.
    \29\ Douglas Carlson, PH at p. 102.
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    This survey of various cost inputs of under Section 9(e) of the 
Compact underscores the pressure farmers operate under with regard to 
the inability of pay prices to cover costs of production. With regard 
to identifying overall costs of production, as determined by the 
previous rulemaking, numerous studies provide a variety of 
estimates.30 While based on different methods for 
determining costs of production, particularly with respect to non-cash 
costs, these studies provide the basis for making the overall 
assessment of price needed to cover cost of production, as required by 
the Compact. In the previous rulemaking, based on a comprehensive 
assessment of a number of studies, the Compact Commission concluded 
that the range of the costs of production for New England is somewhere 
between $14.06 and $16.46. Id.
---------------------------------------------------------------------------

    \30\ 62 FR 29632-33.
---------------------------------------------------------------------------

    The Compact Commission received additional comment on the measure 
of overall cost of production in the present rulemaking from a number 
of commenters. Robert A. Smith of Northeast Farm Credit Associations 
again reported that, on the basis of a report prepared by Farm Credit 
Partners surveying farms in New England, New York and Pennsylvania, the 
costs of production for the region were $14.25/cwt. for 1995 and 
$15.00/cwt. for 1996. When adjusted for a 4% return on equity, these 
costs become $15.37/cwt. for 1995 and $16.02/cwt. for 
1996.31 The cost figures for New England were the same as 
for the larger region as a whole.32
---------------------------------------------------------------------------

    \31\ Robert A. Smith, Manager of Public Affairs and Regional 
Council Relations, CoBank and Northeast Farm Credit Associations, PH 
at p. 75, September 24, 1997.
    \32\ Id.
---------------------------------------------------------------------------

    Reenie De Geus, Vermont's Department of Agriculture, Food and 
Market dairy economist, reported that the average costs of production 
for Vermont farms in the Farm Credit Partners survey was $14.06/cwt. 
for 1995 and $15.32/cwt. for 1996, up 9%.33 For that six 
year period, 1991 to 1996, the average cost of production for these 
Vermont farms is $14.65/cwt. with only a 3% return on 
equity.34 A representative of a dairy processor testified 
that the cost of production is in the range of $13.50/cwt. to $14.00/
cwt.35 Comment from individual farmers indicated a range for 
their costs of production from $12.66/cwt. to $17.95/cwt.36 
for an average among them of $14.65/cwt.
---------------------------------------------------------------------------

    \33\ De Geus, WC.
    \34\ Id.
    \35\ Gary Warren, Vice-President, Fairdale Farms, Bennington, 
VT, PH at p. 124, September, 24, 1997.
    \36\ Ivar Green, Allaire Palmer, David Bradshaw, Claude and 
Jeanne Bourbeau, and Neal Rea, WC, October 8, 1997; Ed Platt, PH, 
September 24, 1997. It is to be noted that some of their estimates 
include a return on equity and while others do not.
---------------------------------------------------------------------------

    Combined with the analysis conducted during the prior rulemaking, 
the Compact Commission determines in this rule that the cost of 
production remains in the range of $14.06/cwt. to $16.46/
cwt.37 Acccordingly, the Commission concludes that an 
overall combined pay price 38 in this range is necessary 
``to assure that producers receive a price sufficient to cover their 
costs of production'' within the meaning of the finding analysis 
required by Section 12(a) of the Compact.
---------------------------------------------------------------------------

    \37\ The Commission notes that it is in process of conducting 
the comprehensive cost of production study authorized by its 
previous final rule. See 62 FR29632. One commenter (Gillmeister) 
argues for a division of the proceeds of price regulation based upon 
a presentation of varying costs of production among the New England 
states and New York. The Commission declines to adopt the approach 
of this commenter as premature, given that the Commission has just 
undertaken its study process to determine costs of production in the 
states and the region.
    \38\ This combined price reflects the federal Market Order #1 
blend price plus the Compact over-order producer price. For a more 
complete discussion of the components of the actual pay or ``mail 
box'' price paid to farmers see 62 FR 23037.
---------------------------------------------------------------------------

    In the prior rulemaking, the Compact Commission concluded that an 
over-order pay price in the range of $0.46-$1.90 was necessary to bring 
farmer pay prices up to the level necessary to cover cost of 
production. See 62 FR 29633 (Final Rule); 62 FR 23040-41 (Proposed 
Rule). Assuming Class I utilization of 50 percent, this means that 
price regulation in the amounts of $0.92-$3.80 would be necessary to 
achieve the necessary range of over-order payment.
Elicitation of an Adequate Local Supply of Milk
    The required finding with regard to pay price accounts for the 
broader assessment of the level needed to elicit an adequate supply of 
milk, in addition to the relatively discrete assessment of the level 
needed to cover cost of production. In the prior rulemaking, the 
Compact Commission determined that the Compact Sec. 9(e) scrutiny of 
the balance of production and consumption of fluid, or beverage milk, 
in the region is critical to this additional assessment. See 62 FR 
29634-35.
    The Compact Commission determined that production and consumption 
is presently in balance, but in a balance of pronounced and 
unsustainable stress that must be alleviated. 62 FR 23040. The Compact 
Commission concluded that overall milk production was in decline in the 
New England region and in the portion of New York State which has 
traditionally been a supplemental part of the New England milkshed. 62 
FR 23039-40. The Compact Commission also found that supplies of milk 
are being transported increasing distances from the region's population 
centers and associated processing plants. 62 FR 23040. While over fifty 
percent of the milk produced in the New England milkshed is presently 
utilized in a variety of manufactured dairy products, the Compact 
Commission concluded that substitution of such milk cannot be relied 
upon to provide an alternative supply for fluid utilization purposes. 
62 FR 23039. In sum, the Compact Commission concluded that the balance 
of production and consumption in the region depended on at least 
stabilizing, if not increasing, the present, local supply through price 
regulation. 62 FR 23040.
    Assessment of how to alleviate the stress on the region's supply of 
milk through price regulation requires consideration of how best to 
alleviate the stress under which producers operate. This inquiry 
naturally reverts back to the issue of the degree to which farmer pay 
prices are not sufficient to cover costs of production. In addition, as 
previously determined, the review leads the Compact Commission to 
conclude that the nature of the persistently unstable farmer pay prices 
and the degree to which farmer prices have failed to keep pace with 
inflation are also structural factors of stress.
Price Insufficiency
    As noted above, the Compact Commission's comprehensive review in 
the prior rulemaking of the various cost inputs and the variety of 
studies of

[[Page 62815]]

overall cost of production provided the basis for the Compact 
Commission to determine the amount and degree to which farmer pay 
prices were not sufficient to cover costs of production. 62 FR 29633. 
Based on its review of the studies, overall, the Compact Commission 
concluded that costs of production have exceeded the farm pay price by 
an amount in the range of $0.46-$1.90. Id.
    As also noted above, the newly received data, in combination with 
the previous analysis, leads the Compact Commission again to conclude 
that farmer pay prices are failing to cover costs of production and 
that there is a continuing need for an over-order price that results in 
farmer pay prices in the range of $0.46 to $1.90.
Failure of Farmer Pay Prices To Keep Up With Inflation
    The Compact Commission determined in the prior rulemaking that the 
failure of farmer pay prices to keep up with inflation was a 
significant factor contributing to chronic price insufficiency and farm 
financial stress. 62 FR 29633-64. For this reason, the Compact 
Commission adopted the joint proposal of Reenie De Geus and William 
Gillmeister, dairy economists for the Vermont and Massachusetts 
Departments of Agriculture, respectively, to establish an over-order 
price regulation based, in part, on an inflation 
adjustment.39
---------------------------------------------------------------------------

    \39\ Their joint submission in this rulemaking, however, argues 
against using the Consumer Price Index (CPI) as a structural 
adjustment to the Compact over-order price because the dairy 
farmer's costs of production are driven by factors other than those 
measured by the CPI, such as the cost of grain. The Commission 
concludes that the CPI is not a perfect fit for systemic cost 
increases on the farm.
---------------------------------------------------------------------------

    Comment received in the present rulemaking did not focus on the 
issue of the chronic, structural failure of prices to keep up with 
inflation to the same degree as in the prior rulemaking. This is 
perhaps a result of the fact that the price regulation adopted as part 
of the prior rulemaking was premised, in part, on a structural 
adjustment for inflation. In any event, the Commission remains mindful 
that the relationship between farmer pay prices and inflation remains a 
critical concern. Certainly, the comment received supports this 
determination.40
---------------------------------------------------------------------------

    \40\ Robert Wellington, Sr. Vice-President, AgriMark 
Cooperative, WC, October 8, 1997; Lee and Charlotte Bosworth, 
Auburn, ME; Mary Connolly, Pittsfield, ME; Alaine Palmer, Cornish, 
ME; Pery and Carol Hogden, Randolph, VT; David Hansen, North 
Brookfield, MA; Edward A. Ellis, Hebron, CT; Wesley and Brenda Snow, 
Brookfield, VT; Robert Dow, Dover, ME; Lowell J. Davenport Jr., 
Ancramdale, NY; Dairy Farmers, WC, October 8, 1997.
---------------------------------------------------------------------------

    The Compact Commission also remains mindful, however, of the 
concern expressed by several commenters in the prior rulemaking (62 FR 
29634) and a comment submitted in this rulemaking 41 that an 
inflation adjustment not be built in as a permanent, automatic 
adjustment.42 The Compact Commission's determination of the 
proper balance between adjustment for inflation and accounting for 
broader market conditions, in establishing the appropriate level of 
price regulation, is presented in the summary analysis of this section, 
below.
---------------------------------------------------------------------------

    \41\ See De Geus and Gillmeister, Id. In large part based on 
their comment, CPI is rejected for automatic adjustment to the 
Compact over-order price. See below.
    \42\ Based in part on this concern, the Commission concluded on 
May 30, 1997 that adoption of a price regulation for the limited 
duration of six months would allow for continuing evaluation of 
broader market conditions. Id.
---------------------------------------------------------------------------

Price Instability
    The Compact Commission received a wealth of testimony and comment 
in the prior rulemaking indicating that wide fluctuations in the price 
of milk are also a primary cause of farm financial stress and, in 
particular, made it difficult for farmers to plan financially. 62 FR 
29633.
    The comment received in the present rulemaking accentuates the fact 
of persistent fluctuations in the pricing structure under federal 
regulation. The price drop from the Autumn of last year to the present 
was both precipitous and dramatic. Between October, 1996 and July, 
1997, the New England Market Order #1 Blend price fell from $16.84 to 
$11.97.43 For October, 1997, the blend price is estimated to 
be $13.50 44
---------------------------------------------------------------------------

    \43\ Market Order #1 Administrator Statistics.
    \44\ Wellington, PH at p. 8.
---------------------------------------------------------------------------

    Not surprisingly, farmers again expressed their reluctance to make 
long-term investments in their farming operations, and their concern 
that when prices dropped precipitously they were unable to meet their 
most basic obligations. For example, the ability of farmers to pay 
machinery expenses is further diminished by price instability because 
farmers are unable to invest (e.g., in new machinery or in upgrading 
their facilities), given the wide fluctuations in the price of milk.
    Of most concern, Leon Berthiaume, General Manager of St. Albans 
Cooperative Creamery, testified that--

    In May through July, 66 to 100 of our members received a check 
of less than $1,000.00 for 15 days worth of milk production. We also 
during [sic] this period of time there was 20 to 50 members that 
received no check at all for those 15 days of production. We are 
continuing to experience farm auctions. In the last 2\1/2\ weeks, we 
have lost 12 members from our Cooperative, and in the next week we 
have three more members that are scheduled to be auctioned 
off.45
---------------------------------------------------------------------------

    \45\ Leon Berthiaume, PH at pp. 57-58. Robert Wellington also 
testified at the PH at p. 8 that Agri-Mark, the region's largest 
cooperative, accounting for 1630 of the approximately 3840 pool 
producers in Federal Market Order #1, indicates a loss of 73 member 
producers in July, 1997 from the previous July. It also was down 61 
members in August compared to the previous August. Agri-Mark also 
added 10 new New York members in July, 1997 as compared with the 
previous July, and 17 such new members in August, as compared with 
the previous year. According to the testimony, ``New York has been 
the only area available to obtain the additional milk needed for New 
England consumers.''

    Gary Warren, in his testimony at the public hearing, underscored 
the benefits of price stability across the market, from farmer to 
consumer.46 Robert A. Smith pointed out that volatility in 
milk prices makes it very difficult for farmers to effectively plan and 
make the type of investments necessary to position themselves for the 
future.47
---------------------------------------------------------------------------

    \46\ Warren, PH at p. 128.
    \47\ Smith, PH at p. 76.
---------------------------------------------------------------------------

    In addition to testimony of the apparent, continuing, stress on 
supply, however, the Compact Commission received testimony that 
production had nonetheless increased by 2.2 percent in 
1997.48 This indicates that, in the short term, despite the 
persistent failure over time of prices to cover cost of production and 
the structural conditions of market stress, farmers are still able to 
produce milk to cover demand. The Compact Commission concludes this is 
in part because of the presence of a range of cost of 
production,49 and in part because of the working dynamic 
between the fluid and manufactured milk markets under federal 
regulation. One commenter indicated such increased production may also 
in part be a function of the cool 1997 summer.50 In 
addition, testimony in the record indicates that increased production 
may be a factor of persistently low farm prices.51 (The 
Compact Commission also notes that, in addition to price enhancement 
under the Compact price regulation for August and September, 1997, 
according to De Geus, ``last year was an abnormally high year both for 
price and costs with the result that farmers had a positive return

[[Page 62816]]

of one cent for the first time in six years.'') 52
---------------------------------------------------------------------------

    \48\ Leon Graves, Commissioner, Vt. Dept. of Agriculture, Food 
and Markets, WC, October 8, 1997.
    \49\ John Schnittker, Public Voice for Food and Health Policy, 
PH at p. 13, September 24, 1997; Gillmeister, WC, October 8, 1997; 
De Geus and Gillmeister, WC, October 8, 1997.
    \50\ Wellington, PH at p. 114.
    \51\ Wellington, PH at p. 110; Carl Peterson, Dairy Farmer and 
President, AgriMark, PH at p. 70.
    \52\ See footnote 27; 62 FR 29633.
---------------------------------------------------------------------------

    The Compact Commission concludes, accordingly, that the required 
determination of the amount needed both to cover cost of production and 
to assure an adequate supply must account simultaneously for both the 
persistent gap between cost of production and pay prices and the level 
of supply in the market in spite of that gap. The finding analysis 
reflects an intended balancing of the basic economic requirement that 
pay prices cover cost of production to ensure sustainability with a 
recognition that supply may still be provided despite some gap between 
cost of production and pay prices.
    John Schnittker argues, without supporting evidence, that the price 
regulation would primarily help the larger and generally more 
financially healthy dairy producers and would help the smaller and 
financially stressed producers the least.53 The commenter 
made the same argument in the previous rulemaking process, also without 
supporting evidence. The Compact Commission there concluded that the 
criticism of the Compact over-order price regulation by Schnittker was 
incorrect. 62 FR 29634. The assertion assumes that the smaller producer 
is less efficient than the larger producer. On the basis of the 
detailed analysis of Professor Wackernagel,54 the Commission 
again concludes, however, that the financial viabililty of both 80 cow 
farms and 350 cow farms will be improved substantially by the Compact 
over-order price regulation.
---------------------------------------------------------------------------

    \53\ Schnittker, PH at p. 11.
    \54\ 62 FR 29634 (May 30, 1997).
---------------------------------------------------------------------------

Summary Analysis--Level of Prices Needed to Assure That Producers 
Receive a Price Sufficient To Cover Their Costs of Production and 
Elicit an Adequate Local Supply of Milk
    As noted above, the Compact Commission has determined that an over-
order price in the range of $0.46-$1.90 continues to be needed to 
assure that farmer costs of production are covered, requiring an over-
order price regulation in the range of $0.92-$3.80.55 With 
regard to the price needed to elicit an adequate supply of milk for the 
region, the Compact Commission again notes that such an amount is not 
necessarily identical with that required to cover costs of production. 
The Compact Commission further concludes that the analysis of the 
appropriate level of price regulation must also account for price 
instability and the failure of producer prices to account for 
inflation,56 as well as the regulation's duration.
---------------------------------------------------------------------------

    \55\ Assuming Class I utilization of 50 percent, the amount of 
the over-order regulation price must be twice the over-order 
producer price to account for the entire, identified, amounts.
    \56\ The Commission here reaffirms its reliance upon the study 
by Professor Wackerngel, cited at length in both the previous 
proposed and final rules, which analyzed in detail the impact of 
Compact price enhancement and price stabilization upon two different 
farm sizes--an 80 cow herd and a 350 cow herd. 62 FR 29634 (May 30, 
1997).
---------------------------------------------------------------------------

    As noted at the outset, the prior rulemaking resulted in 
establishment of an over-order price regulation of $16.94 for six 
months duration. 62 FR 29632. The Compact Commission received numerous 
comments from farmers on the appropriate level of price and duration 
for an extension of the price regulation. The majority of these 
commenters recommended that the price be adjusted by the CPI at 2.2%, 
with such adjustment to last through the termination of the 
Compact.57 Wellington and Berthiaume made a similar 
recommendation; Beach recommended an adjustment by the CPI at 2.2% for 
a period of six months.58 De Geus and Gillmeister 
recommended that it be raised by 2%.59 (In his separate 
comment, Gillmeister proposed a six months' duration; De Geus proposed 
extension through sunset.) Warren suggested that the price be raised by 
$1.00.60
---------------------------------------------------------------------------

    \57\ 7 U.S.C. 7256(3).
    \58\ Wellington, PH at p. 107; Berthiaume, PH at p. 58; Sally 
Beach, Independent Dairymen's Coop., PH at p. 82.
    \59\ De Geus and Gillmeister, WC.
    \60\ Warren, PH at p. 126.
---------------------------------------------------------------------------

    Viewing the comment in light of all the relevant factors, the 
Compact Commission finds the argument of De Geus and Gillmeister 
61 persuasive for not further adjusting the amount of the 
Compact over-order price regulation in direct proportion to the 
Consumer Price Index. The function of the initial regulation was a one-
time regulatory adjustment in response to the strikingly apparent, 
chronic, structural failure of the marketplace to account for 
inflation. Price regulation forward must be responsive to the variety 
of market forces at work, including but not limited to inflation, as 
argued by these commenters.
---------------------------------------------------------------------------

    \61\ See: note 34 supra.
---------------------------------------------------------------------------

    The Compact Commission further concludes that the present amount of 
the price regulation at $16.94 is sufficiently responsive to the 
variety of market forces referred to above. The resulting degree of 
price enhancement provided by the price regulation still ensures that 
the net pay price remains within the range, albeit at the low end, of 
that identified as necessary to provide for covering the costs of 
production.
    The Compact Commission also determines that extension of the $16.94 
price regulation for the period January 1, 1998 through termination of 
the Compact enabling legislation, so as to establish uniform regulation 
and price for a total period of at least 21 months, will provide 
critical assurance of continued price stability for producers. Finally, 
the presence of a regulation of stable, continuous, duration will still 
allow the Commission to hear and consider the need to make further 
adjustment to account for increased costs of production and inflation 
at any time, before farmer pay prices again begin to lag far behind 
inflation. The Commission will commence rulemaking, pursuant to Section 
11 of the Compact, no later than July 1, 1998 to consider whether any 
further adjustment in the Compact over-order regulation price is 
necessary and appropriate.
    In this regard, the Commission takes official notice of the fact 
that the first three months of the regulation increased farmer pay 
prices, on average, by approximately $1.30 per hundredweight, raising 
the combined, regulated minimum pay price from approximately $12.00 to 
approximately $13.30 per hundredweight. For the next two months of the 
regulation, it is projected that the regulation will increase the pay 
price by approximately $.75 and $.40, respectively, yielding combined 
pay prices of approximately $13.90--$14.10 per hundredweight. The 
regulation, accordingly, is providing both price enhancement and 
stability.
    With this background, the response of the Compact Commission to the 
comments received from farmers and cooperative representatives 
indicating the need for further price enhancement is to extend the 
current regulation at the same price. The extension of the regulation 
serves the essential function of establishing combined price 
enhancement and price stability in the market for a period of at least 
21 consecutive months. At the same time, the extension in no way 
precludes the Commission from finding that a further adjustment in 
price is warranted after making an assessment of the costs of 
production, market prices and production levels during the rulemaking 
process the Commission will commence no later than July 1, 1998.
    In sum, extension of the price regulation in the amount of $16.94 
through termination of the Compact enabling legislation is the 
appropriate ``level of price needed to assure that producers receive a 
price sufficient to

[[Page 62817]]

cover their costs of production and elicit an adequate local supply of 
milk.''

B. Whether the Public Interest Will Be Served by the Establishment of 
Minimum Milk Prices to Dairy Farmers

    In the prior rulemaking, the Compact Commission first focused 
specifically on the producer related-inquiry of Section 9(e) in making 
the finding concerning the appropriate level of price required by the 
Compact, and then referred to the conclusions there determined in 
making the broader ``public interest finding'' required by the Compact. 
62 FR 29632. This analytical approach is adopted for purposes of 
extending the rule. This analytical approach is also adopted with 
regard to the dual findings required for establishment of the proper 
level of price under the rule.
    The Compact Commission also adopts the two-part assessment of the 
broader ``public interest'' utilized in the prior rulemaking. This 
assessment is premised first on a review of those components of the 
public interest specifically identified by section 9(e), followed by 
consideration of a broader range of subjects and issues drawn from 
these specific components.
    As set forth in section A, above, focusing on the producer/milk 
supply-related finding inquiry, the Compact Commission found the amount 
of $16.94 per hundredweight to be the appropriate level of price 
regulation, extended for the period January 1, 1998 through termination 
of the Compact enabling legislation. This level of price was determined 
to be necessary to ``cover * * * costs of production and elicit * * * 
an adequate supply of milk'' within the meaning of the required finding 
analysis. The price assures in addition, thereby, that the ``balance 
between production and consumption of milk productions in the regulated 
area'' will be maintained within the meaning of Compact, section 9(e).
    With regard to the review of ``the purchasing power of the public'' 
contemplated by Compact, section 9(e), the Compact Commission has again 
determined that this inquiry is relevant to assessing the impact of 
price regulation on the consumer market, the ``critical part of the 
Compact Commission's assessment of the public interest under this 
finding section.'' 62 FR 23045. This inquiry focuses ``primary concern 
on the consumer interest because milk is a staple product.'' 
Id.62
---------------------------------------------------------------------------

    \62\ With regard to the Compact's emphasis on the ``prevailing 
price for milk outside the regulated area'' and the first ``public 
interest'' finding, the Compact Commission again determines this 
data to be relevant with regard to the retail price of milk outside 
the region. (It is also relevant to the farm price of milk outside 
the region.) Based on the comments received in the prior rulemaking, 
the Commission identified the retail prices in two separate markets 
outside the Compact region as a benchmark for tracking the impact of 
price regulation on retail prices in the region, 62 FR 23046-47 
(April 28, 1997), and to compare ``the current, relative alignment 
in prices between the New England and New York regions against the 
relative alignments once price regulation is in place.'' 62 FR 23048 
(April 28, 1997). The comprehensive study to conduct this tracking 
analysis is currently being developed by the Commission.
---------------------------------------------------------------------------

    The Compact Commission determined in the prior rulemaking that the 
continuing erosion of the region's milkshed has had a direct--and 
adverse--impact on retail prices, and hence on the purchasing power of 
the public, in part because of the increased transportation costs 
associated with an expanding milkshed. 62 FR 29635. The Compact 
Commission similarly determined that ``farm/wholesale price volatility 
had also likely had an adverse impact on retail prices over time, and 
that stabilization of the farm/wholesale price through a compact over-
order price regulation, traced through to the endpoint retail market, 
likely will manifest as a corresponding positive impact on retail 
prices.'' 63 Id. Finally, the Compact Commission determined 
that ``the foregoing analysis supports the conclusion that the 
purchasing power of the public likely will be enhanced, rather than 
diminished, as a result of the stabilizing effects of the over-order 
price regulation.'' Id.
---------------------------------------------------------------------------

    \63\ As a general manager of a processing facility testified, 
stable wholesale prices should lead to stable retail prices. Warren, 
PH at p. 130.
---------------------------------------------------------------------------

    Based on the reasoning presented in the proposed and final rules, 
the Compact Commission reaffirms these determinations.64
---------------------------------------------------------------------------

    \64\ The Commission also concluded that the actual impact on 
retail prices could only be determined by careful monitoring and 
tracking over time. 62 FR 23048 (April 28, 1997). The Commission is 
in process of establishing and implementing the study procedure 
necessary to accomplish this assessment.
---------------------------------------------------------------------------

    The detailed data and comment received with regard to the consumer 
interest focused on prevailing retail prices for Class I fluid milk in 
the region and the potential and actual impact of the price regulation 
on the retail market. Adverse comment was also received with regard to 
retail prices and concerns about the regulation's impact on low income 
consumers. Comment was also submitted with regard to extension of the 
State WIC program reimbursement provisions.
Impact on Retail Prices--Data and Analysis
    De Geus and Gillmeister submitted joint testimony with regard to 
the impact of the price regulation on the overall retail market. Data 
was submitted placing the price regulation's impact within a context of 
price movements between 1995 and the present. The relationship between 
the procurement cost for raw milk and the retail price was assessed. 
According to their testimony,

    The important point to note in the relationship between tables 1 
and 2 is that farm prices for Class I milk fell dramatically in 
January of 1997, while retail price [sic] remained elevated. Then, 
when the Compact [sic] implemented the Final Rule in July of 1997, 
the prevailing price jumped 30 cents from their already elevated 
level. In Figure 1, Vermont shows a 20 cent increase in the price of 
a gallon of milk. Then in August the prevailing price in Boston fell 
10 cents and remained unchanged in September. Expectations are that 
the prevailing price will fall more over time.

    The commenters further indicated that--

    The baseline projections for dairy product prices for 1998 shows 
a decrease in prices of 0.4%. That is to say, dairy product prices 
are expected to decline * * *. Overall, we feel that the consumer is 
doing quite well. While fluid milk prices increased in July, they 
should decrease some over the next several months as competition for 
the growing sea of consumer dollars begins to over-ride any over-
order price.

                       Table 1: Federal Market Order #1 (Zone 1) Class I Prices 1995-1997                       
                                                 [Per cwt] \65\                                                 
----------------------------------------------------------------------------------------------------------------
  Jan.     Feb.     Mar.     Apr.     May      June     July     Aug.    Sept.   Oct.    Nov.    Dec.    Average
----------------------------------------------------------------------------------------------------------------
15.10..    14.62    14.59    15.03    15.13    14.47    14.36    14.66   14.47   14.79   15.32   15.85     14.85
16.11..    16.15    15.97    15.83    15.94    16.33    17.01    17.16   17.73   18.18   18.61   17.37     16.82
14.85..    14.58    15.18    15.69    15.73    14.69    16.94    16.94   16.94   16.94   16.94   16.94     15.54
----------------------------------------------------------------------------------------------------------------
\65\ Source: Gillmeister and DeGeus, infra, (Market Order #1 Administrator Statistics).                         


[[Page 62818]]


                                     Table 2: Boston Retail Prices 1995-1997                                    
                                                [Per gallon] \66\                                               
----------------------------------------------------------------------------------------------------------------
  Jan.     Feb.     Mar.     Apr.     May      June     July     Aug.    Sept.   Oct.    Nov.    Dec.    Average
----------------------------------------------------------------------------------------------------------------
2.59...     2.49     2.49     2.59     2.49     2.49     2.49     2.49    2.49    2.49    2.49    2.59      2.52
2.59...     2.59     2.69     2.59     2.69     2.59     2.59     2.79    2.59    2.59    2.59    2.59      2.62
2.59...     2.59     2.69     2.59     2.59     2.59     2.89     2.79    2.79  ......  ......  ......      2.67
----------------------------------------------------------------------------------------------------------------
\66\ Source: Gillmeister and De Geus, infra, (International Association of Milk Control Agencies).              

    De Geus submitted additional individual testimony, indicating 
similar retail price experience in Vermont and Connecticut:

                              Retail Price                              
------------------------------------------------------------------------
                                                Vermont:   Connecticut: 
                                                $/gallon     $/gallon   
------------------------------------------------------------------------
November 1996................................      $2.49           $2.67
December.....................................       2.53            2.68
January 1997.................................       2.54            2.65
February.....................................       2.51            2.62
March........................................       2.48            2.61
April........................................       2.49            2.60
May..........................................       2.48            2.65
June.........................................       2.49            2.61
July.........................................       2.64            2.81
August.......................................       2.62            2.83
September....................................       2.62            2.78
------------------------------------------------------------------------

    As can be seen, prices in Vermont increased by 15 cents after 
initiation of the price regulation in July, then declined the following 
month, and held constant in September. In Connecticut, prices were 
observed to have increased by 20 cents after initiation of the price 
regulation in July, another 2 cents in August, and then decreased by 5 
cents for September.
    Despite the apparent initial spike in retail prices,\67\ the 
Compact Commission concludes that the regulation has not affected the 
retail market so anomalously as to require its elimination. Rather, it 
is concluded from the data and analysis presented that the retail 
market can best be understood as in the process of adjustment to the 
current price regulation. The Commission particularly notes that the 
average Class I price for 1997 will be 11 cents less than last year, 
while the retail price for the Boston market is expected to be 5 cents 
greater. Recognizing that last year's prices were unusually high, and 
that the retail market usually takes time to adjust to price 
changes,\68\ it is noted that the retail price has increased 15 cents 
since 1995, while the farm price, including that imposed by the price 
regulation has increased by only six cents.
---------------------------------------------------------------------------

    \67\ De Geus indicated that the data gathered for the 
Connecticut market, identifying a price increase of 20 cents, 
includes ``Mom and Pop'' stores while the Vermont data, identifying 
a price increase of 15 cents, does not. According to De Geus, this 
difference is attributable to the difference in data collection. WC.
    \68\ Cf. 62 FR 29629 citing Hansen, Hahn, and Weimar, 
``Determinants of the Farm-to-Retail Milk Price Spread'', 
Agriculture Information Bulletin Number 693 (March 1994). See also 
Kinnucan and Forker, ``Asymmetry in Farm-Retail Price Transmission 
for Major Dairy Products'', Amer. J. Ag. Econ., 285-292 (May, 1987).
---------------------------------------------------------------------------

    The Compact Commission also takes note that the over-order price 
obligation for July, 1997 was $3.00, while for November it will be 
substantially less, in the amount of $0.91. The impact of having a flat 
price in the market, resulting from the interplay between the 
underlying federal, Class I price and the Compact ``over-order'' price, 
accordingly, thus has yet to be fully assimilated into the pricing 
dynamic of the market.
    The data and analysis presented are not inconsistent with the 
Compact Commission's prior determination that stabilization of the 
farm/wholesale price through a compact over-order price regulation, 
traced through to the endpoint retail market, likely will manifest as a 
corresponding positive impact on retail prices.'' 62 FR 29635.\69\ 
Indeed, if the commenters cited above are correct in their assessment 
of the likely trend of retail prices in 1998, it will only require a 
slight such ``drift downward'' for retail prices to reach their 1995 
level.
---------------------------------------------------------------------------

    \69\ One commenter who is the general manager of a processing 
facility supported the Commission's analysis with his assessment 
that stable wholesale prices should lead to stable retail prices. PH 
at p 130.
---------------------------------------------------------------------------

Comment on the Impact of the Compact Over-order Price Regulation on Low 
Income Consumers
    The Compact Commission received four comments from an organization 
representing low income consumers \70\ who expressed opposition to the 
extension of the price regulation. Their comments centered on a concern 
with increased retail prices for fluid milk faced by low income parents 
and grandparents. Because they attributed recent price increases in 
their neighborhoods to the Compact Commission's decision to establish 
the price regulation, they are opposed to its extension.
---------------------------------------------------------------------------

    \70\ Joyce Campbell, Patricia Maben, and Florence Knedsen of 
Massachusetts ACORN, a low income community advocacy group, PH at 
pp. 14-25; Felicia Fields, President, Boston ACORN, WC.
---------------------------------------------------------------------------

    Another commenter expressed opposition based on his analysis that 
the regulation was benefiting farmers at the expense of consumers, 
particularly low income consumers. According to this commenter, the 
over-order price now in effect could increase consumer cost for milk in 
the Compact region by as much as $70 million over the next year.\71\
---------------------------------------------------------------------------

    \71\ John Schnittker, Public Voice for Food and Health, PH at p 
9. The Commission notes in response to this comment that, despite 
the apparent initial spike in prices, the Commission does not 
determine that the apparent impact of the price regulation is some 
form of a price increase attributable to a direct ``pass-through'', 
as apparently inferred by the commenter. As in the previous 
rulemaking the Commission declines to adopt this approach in view of 
the lack of explanation, and given that it is directly contrary to 
the developed literature on this issue which suggests a contrary 
conclusion. As the Commission determined in its proposed rule, price 
stabilization eliminates the need for retailers to retain 
significant margins in order to protect against the uncertainty in 
wholesale costs that exists when prices are volatile. See 62 FR 
23049 (citing Hahn, et al.). Because retailers will not have to 
engage in this ``risk response'' pricing strategy to ensure cost 
recovery, the Commission again disagrees with the commenter's 
conclusory remarks regarding the impact of price regulation on 
retail prices.
---------------------------------------------------------------------------

    The Compact Commission's response to these commenters flows from 
its assessment of the actual and potential impact on the retail market 
described above. As indicated, the Commission determined price 
regulation would likely have a ``positive impact'' on retail prices 
over time, though cognizant of the possibility of short-term increases 
in milk prices at the retail level, when it adopted the regulation. 
Establishment of a six month regulation ensured either expiration of 
the regulation in short order or review of the regulation soon after 
its adoption to determine whether unexpected anomalies were occurring 
so as to preclude its extension.72
---------------------------------------------------------------------------

    \72\ The WIC reimbursement provisions were established in part 
to cover such a contingency.
---------------------------------------------------------------------------

    Even accounting for these adverse comments, the Compact Commission 
determines that no such anomalies are occurring in the marketplace. 
Rather, the market is in process of responding to the imposition of a 
flat, combined

[[Page 62819]]

Class I price, and the actual impact of the regulation is yet to be 
determined. The interplay of the underlying federal Class I pricing 
regulation and the ``over-order'' mechanism, combining to establish the 
flat, combined price, have yet to work through the asymmetric pricing 
regimen of retail milk prices. Moreover, while prices may have spiked 
up in response to initial imposition of the price regulation, according 
to the received data and analysis, they declined the next month and 
``are expected to fall more over time.'' 73
---------------------------------------------------------------------------

    \73\ De Geus and Gillmeister, infra.
---------------------------------------------------------------------------

    The Compact Commission notes further that the WIC 
program,74 along with the School Lunch Program,75 
provides a buffer to assist low income consumers with increases in the 
retail cost of milk that might occur.76 In view of the 
existence of these programs, and given the current market picture 
presented by the data and analysis as a whole, the Commission 
determines that the adverse comment does not establish the need for 
elimination of the price regulation.
---------------------------------------------------------------------------

    \74\ The WIC reimbursement provisions remain in effect as part 
of this extended price regulation.
    \75\ Pub.L. 79-346 and Pub.L. 89-642; see also: 62 FR 29637 (May 
30, 1997).
    \76\ The Commission takes official notice that the Massachusetts 
WIC Program guidelines show program eligibility at 185% of the 
federal poverty level. Under the guidelines, a family of four is 
eligible at an income of $29,639 per annum or $572 monthly.
---------------------------------------------------------------------------

Reasonable Rate of Return to the Distributor
    With regard to the ``price necessary to yield a reasonable rate of 
return to the distributor,'' Compact, Section 9(e), the Compact 
Commission has previously determined that ``[t]he focus of this inquiry 
is the determination of a price that ensures a reasonable rate of 
return,'' and, more specifically, ``whether processing plants are 
currently covering costs of production,'' including the distributors' 
rate of return on capital. 62 FR 23045.
    Working from this framework, the Compact Commission sought and 
received comment on wholesale costs and prices. The data received 
persuaded the Compact Commission to conclude that processors are in 
fact covering their margins, including a return on capital of $0.06 per 
gallon.77 The Compact Commission further determined that 
``minimization of such persistent fluctuations in price can only serve 
as a benefit to stability of firm participants in the wholesale 
market.'' 62 FR 29635.
---------------------------------------------------------------------------

    \77\ The comment received and used for this analysis included a 
study by R. Aplin, E. Erba, M. Stephenson, ``An Analysis of 
Processing and Distribution Productivity and Costs in 35 Fluid Milk 
Plants,'' February 1997, R.B. 97-03, Cornell University, and an 
extract by the same authors, entitled ``Presentation at IDFA Annual 
Meeting in Dallas, Texas (October 1996). (This extract provides 
``estimated costs of marketing 2% lowfat milk through supermarkets, 
New York Metro Area, $ per gallon, 1995). In comment received on the 
proposed rule, Professor Aplin indicates that the extract was based 
on identified costs of the northeast plants that were part of the 
broader, overall study group. The Commission also relied upon a 
study by the Economic Research Service (ERS) of the United States 
Department of Agriculture, Food Cost Review/AER-729. The Commission 
found the Aplin et al. study more representative, given its 
identified inclusion of a significant percentage of northeast 
plants. Moreover, the ERS study incorporated data drawn from 
vertically integrated, or combined, processing/retailing facilities. 
The Compact region only includes one such operation.
---------------------------------------------------------------------------

    The Compact Commission hereby reaffirms the resulting determination 
that the benefits of price stabilization 78 in the wholesale 
market parallel the benefits of price stabilization at the farm level, 
namely, allowing processors to engage in long-term economic planning 
and investment, and thereby improve their economic efficiency and 
performance. Id.
---------------------------------------------------------------------------

    \78\ See: footnote 64, supra.
---------------------------------------------------------------------------

Broadened Inquiry Under Compact Section 9(e)
    As indicated in the introduction to this finding section, the 
Compact Commission determined under the prior rulemaking that the 
ultimate finding required by Section 12 of the Compact--whether ``the 
public interest will be served by the establishment of minimum milk 
prices to dairy farmers''--necessitated consideration of a broader 
range of subjects and issues than those specifically delineated by 
Section 9(e) of the Compact. Accordingly, the Compact Commission sought 
comment regarding the potential impact of price regulation on each of 
the farm, wholesale and retail sub-markets which comprise the overall 
market for fluid milk. 62 FR 23042. These inquiries were broken down 
further into the individual components of these respective sub-markets, 
including some of the components specifically listed in Section 9(e) of 
the Compact, as discussed above. This broad-ranging inquiry, focusing 
on all phases of the fluid milk market, allowed the Compact Commission 
to gather substantial data and make an informed determination that an 
over-order price regulation would be in the public interest, overall, 
and with regard to its specific impact on each of the three discrete 
sub-markets--farm, wholesale and retail. 62 FR 23048-50. For purposes 
of completeness, the Compact Commission's conclusions with regard to 
the wholesale and retail submarkets are again expressly presented, 
along with analysis of relevant comment received as part of this 
rulemaking process.79
---------------------------------------------------------------------------

    \79\ As in the prior rulemaking, the impact on the farm 
submarket is presented under the inquiry mandated by the farmer/
supply finding.
---------------------------------------------------------------------------

    Wholesale Sub-Market--The Compact Commission assessed the impact of 
price regulation on the wholesale market by considering the issue of 
rate of return to processors, as discussed above, (62 FR 23045), and by 
assessing whether price regulation would result in market distortion 
with regard to wholesale price and thereby contravene the public 
interest. 62 FR 23048. In assessing the concern with market distortion, 
the Compact Commission carefully reviewed present patterns of supply 
for the region's wholesale needs. The Compact Commission determined 
that the wholesale market presently is supplied almost totally in the 
form of raw, bulk product transported from areas of concentration of 
dairy farms in the rural part of the region to the fluid processing 
plants located in close proximity to the region's cities. 62 FR 23045. 
The Compact Commission also determined that the marginal, remainder of 
the wholesale market is supplied by finished, packaged milk transported 
from processing plants located some distance away from the region's 
cities. Id.
    With regard to the primary bulk supply component of the wholesale 
market, the Compact Commission determined that there was unlikely to be 
market distortion caused by price regulation that could adversely 
affect the wholesale price. According to the comment received in the 
previous rulemaking, present patterns of raw product supply between 
processors and independent farmers or cooperative organizations of 
farmers are relatively stable and are unlikely to be affected by a 
regulated price increase in the amount and for the duration established 
by the price regulation. 62 FR 23048.
    The Compact Commission also concluded that price regulation was 
unlikely to cause market distortion with regard to the secondary 
packaged product component of the market. The concern here is whether 
price regulation can be administered uniformly with regard to raw 
product and, as identified and addressed in the current rule, packaged 
milk supplies. If a significant portion of the packaged milk supplies 
is left unregulated, this might distort the market by creating a 
competitive advantage for such packaged products, encouraging their 
substitution as a source of wholesale supply. 62 FR 23048. Given that 
packaged milk as

[[Page 62820]]

wholesale supply is more expensive than raw product supply, such 
substitution resulting from market distortion would increase retail 
prices and be contrary to the public interest.
    The Compact Commission concluded that raw product and packaged 
product supplies could be regulated uniformly and that such uniform 
regulation will prevent market distortion, including indirect impact on 
price. (The basis for this conclusion was presented under the third 
finding analysis of the prior rulemaking. 62 FR 29637)
    The comment received in the present rulemaking initially confirms 
the Compact Commission's assessment that the price regulation would not 
adversely affect the relatively stable market patterns of the wholesale 
sub-market. As presented in the next finding analysis, the Commission 
received and has responded in detail to comment received indicating the 
need for marginal adjustment in the operation of the price regulation 
in the wholesale market. Such comment indicating the need only for 
marginal adjustment confirms that the regulation has not had such an 
anomalous impact on the marketplace so as to require its elimination. 
At the same time, the Compact Commission reaffirms the need to continue 
to monitor comprehensively the regulation's impact on this sub-market, 
as detailed in the prior rulemaking. The Commission is in process of 
implementing the tracking mechanism necessary to conduct the required 
monitoring established by the prior rulemaking.
    Retail Sub-Market--With regard to the retail market, the Compact 
Commission concluded in the prior rulemaking that price regulation was 
likely overall to have a positive impact on ``the purchasing power of 
the public'' within the meaning of Compact Section 9(e), and thereby to 
be distinctly in the public interest. See 62 FR 23048. (The 
Commission's underlying conclusion, that stabilizing the milk supply 
and removing variability in the federally regulated, farm/wholesale, 
pricing structure would likely combine to have a positive, downward 
impact on retail prices is explained in further detail at 62 FR 23048-
50.) As noted above, the Commission has reaffirmed this conclusion in 
view of the comment received with regard to retail prices.
    In the prior rulemaking, the Compact Commission also made a further 
determination of the potential, positive impact of price regulation 
with regard to the broader, consumer-based market. More specifically, 
the Commission concluded that price regulation will not have a negative 
impact on government supplemental nutrition programs such as the 
National School Lunch Program. The Commission made this further 
determination based on its assessment that the pricing patterns of such 
programs were premised on essentially the same competitive patterns of 
the broader, consumer-based market. See 62 FR 23050. Citing a General 
Accounting Office description of the program, the Commission noted in 
its proposed rule:

    The National School Lunch Act of 1946 (Pub L. 79-396) and the 
Child Nutrition Act of 1966 (Pub L. 89-642) authorize USDA to 
reimburse state and local school authorities--under grant 
agreements--for some or all of the costs of these programs. 
Reimbursements are based on either the number of meals served or the 
number of half pints served. The schools use these funds, as well as 
state and local funds and moneys collected from students, to 
purchase food, including milk, for these programs. These purchases 
are made through either sealed bid or negotiated procurements. 
USDA's regulations require that these procurements be conducted in a 
manner that provides for the maximum amount of open and free 
competition.80

    \80\ GAO Report 13-239877 at 2 (October 16, 1992), submitted by 
Jeffords as Additional Reply Comment, April 9, 1997; See also 62 FR 
23050.
    The Commission further notes that the purchasing patterns of 
other institutional buyers such as the military and hospitals, as 
described in the GAO study similarly mirror the broader, competitive 
market. The Commission concludes that these institutional buyers 
will also benefit from the impact of price regulation on the 
competitive market.
---------------------------------------------------------------------------

    The Compact Commission reaffirms this understanding of the expected 
interplay between the price regulation and the School Lunch Program. 
Given the critical concern with the potential impact on such 
supplemental food nutrition programs, and in view of the comment 
received on this issue, the Commission determines it appropriate to 
establish a Task Force pursuant to Article VII. D. of the Compact 
Commission's Bylaws to assess more closely the regulation's actual and 
potential impact on the School Lunch programs. The Task Force shall 
report back to the Commission at its regularly scheduled meeting for 
February, 1998. Based on the Committee's assessment of the impact of 
the Compact over-order price regulation, it shall make recommendations 
as to whether the region's School Lunch Programs should receive 
reimbursement for some or all of any increased costs attributable to 
the price regulation and, if so, the method for reimbursing the 
appropriate local authorities.
Price Regulation and the WIC Program
    The Compact Commission did determine in the prior rulemaking that 
pricing and reimbursement patterns for one government supplemental 
nutrition program, the WIC Program, are not configured according to the 
same pattern as the broader consumer-based retail market. 62 FR 23050; 
29637. Accordingly, the Commission exempted the WIC program from 
operation of the price regulation. Id. at 23050-53; 29637.
    Two of the State WIC Program Directors submitted comment in support 
of extending the provisions in the current rule for reimbursing State 
WIC Programs for their costs incurred as a result of the Compact over-
order price regulation.81 The current rule includes a formal 
agreement between the Compact Commission and the six State WIC Programs 
that governs the terms of the reimbursement program. The Compact 
Commission herein extends that agreement for the effective period of 
the rule.
---------------------------------------------------------------------------

    \81\ Mary Kelligrew Kassler, Director of the Massachusetts WIC 
Program, WC; Jadwiga Goclowski, Division Director/State WIC 
Director, Department of Health, State of Connecticut, WC.
---------------------------------------------------------------------------

About the WIC Program
    The Special Supplemental Nutrition Program for Women, Infants and 
Children (WIC) is a unique health and nutrition program serving women 
and children with--or at risk of developing--nutrition-related health 
problems. WIC provides access to healthcare, free nutritious food, and 
nutrition information to help keep low to moderate income pregnant 
women, infants and children under five healthy and strong. The Program 
provides a monthly ``prescription'' for nutritious foods tailored to 
supplement the individual dietary needs of each participant. Milk and 
other dairy products play a large and important role in every 
participant's food package.
    The WIC Program is a Federally funded program carried out according 
to provisions of the Federal Child Nutrition Act. The Program is funded 
through the Food and Consumer Service of the United States Department 
of Agriculture (USDA) and administered on the local level by State WIC 
Programs in the Connecticut, Maine, Massachusetts, New Hampshire, Rhode 
Island, Vermont State Departments of Public Health (the States). 
Additional state funds are also provided in Massachusetts. Participants 
are issued WIC checks or vouchers at local agencies for WIC authorized 
foods. The checks or vouchers--which do not have a predetermined 
value--are redeemed at authorized retail stores at current store prices 
in accordance with posted prices. Prepayment edits are performed on 
each check to ensure that specific food

[[Page 62821]]

purchasing, pricing and payment requirements are met.
    Because WIC is not an entitlement program and has a capped program 
appropriation, any increase in food costs results in fewer women and 
children being served. It is imperative, therefore, that WIC's funds be 
held harmless from any adverse impact due to a Regulation. While the 
Compact Commission has again concluded that price regulation should 
have a ``positive impact'' on retail markets, it has also found that 
the market is presently adjusting to the price regulation with an as-
yet indeterminable, overall, actual outcome. In order to ensure that 
WIC funds are held harmless, it is necessary to extend the 
reimbursement procedure during the effective period of the Compact 
over-order price regulation.
Continuing Assessment of Impact
    The Compact Commission, in its current rule, provides for 
continuous monitoring and analysis of Class I fluid milk retail price 
data in order to accurately assess and evaluate any regulation-related 
adverse or beneficial impact on costs to consumers and WIC, and to make 
related adjustments to assure that the public interest is served and 
consumers and the WIC Program and its participants are protected. The 
Compact Commission, under this rule, will continue to monitor and 
analyze information at both the New England Regional and individual 
State levels--including each State's WIC programs--comprising 
representative samples of market areas and retail store types, 
proportion of sales by package size, and degree to which retail price 
fluctuations differ for package sizes in relation to each other.
WIC Reimbursement System
    Given that State WIC Programs have a September 30th fiscal year 
end, the Compact Commission can not make the Program whole after the 
fact. WIC must operate in a funding ``limbo'' between October and 
January when its State Program grants are announced. Uncertainty 
regarding the potential effect of price regulation, or reimbursements 
to States made by the Compact Commission at a later date, would force 
State WIC managers to lower first quarter participation levels. The 
State WIC Programs have proposed and the Commission has agreed to a 
method by which the WIC Program will be held harmless from any impact 
related to a demonstration of a Compact Over-Order Price Regulation for 
Class 1 fluid milk. The Commission will reimburse each respective State 
WIC Program. The amount of reimbursement will be based on a formal 
agreement to be entered into by the Compact Commission and the six New 
England State WIC Program Directors, as approved by the Food and 
Consumer Service of the USDA. Under the agreement, the reimbursement 
amounts will be based on: (1) The quantities of milk purchased with WIC 
checks and (2) the amount of any Compact Over-Order Price Regulation.
    The Compact Commission has also made provision for continuing 
monitoring and analysis of retail and wholesale prices for fluid milk. 
Should there be continuing adverse impacts on consumers, in general, 
and low income consumers, in particular, the Commission will be able to 
react.
Impact on Retailers
    Finally, the Compact Commission reaffirms its prior determination 
that price regulation does not and will not likely have an adverse 
impact on the retailers, themselves. In summary: in similar manner as 
with its assessment of the wholesale market in the prior rulemaking, 
the Commission reviewed retail costs and prices to determine if 
retailers are covering costs, including return on capital, under 
present market conditions. 62 FR 23045, 23046-48. The Compact 
Commission concluded that such margins are presently being covered, and 
that price regulation will not adversely affect the ability of retail 
outlets to continue to cover their margins. Id. at 23048.82
---------------------------------------------------------------------------

    \82\ The comment received and used for the cost analysis relied 
upon the study by Aplin et al, ``An Analysis of Processing and 
Distribution Productivity and Costs in 35 Fluid Milk Plants'', 
February 1997, R.B. 97-03, Cornell University and the extract by the 
same authors, entitled ``Presentation at IDFA Annual Meeting in 
Dallas, Texas (October 1996). (This extract provides ``estimated 
costs of marketing 2% lowfat milk through supermarkets, New York 
Metro Area, $ per gallon, 1995). In comment received on the proposed 
rule, Professor Aplin indicates that the represented supermarket 
costs were representative of New England supermarkets, as well. The 
Commission notes that these studies focus on supermarket costs. 
Supermarkets represent the primary retail outlet for fluid milk in 
the marketplace. According to the Aplin study, retail cost, with 
return is $2.12 per gallon.
---------------------------------------------------------------------------

Public Interest Finding--Summary Analysis
    Based on this analysis under Compact section 9(e) and the broader 
market-wide analysis, the Compact Commission concludes that continuing 
the price regulation in the amount of $16.94 for the period January 1, 
1998 through termination of the Compact enabling legislation will 
ensure the ``public interest'' is served in the manner contemplated by 
the finding analysis under Compact section 12(a)(2). The Compact 
Commission concludes the current price regulation has begun to achieve 
its intended purposes of price stabilization and limited price 
enhancement for producers without distortion of downstream wholesale 
and retail markets. While the actual impact on the downstream markets 
cannot yet be determined comprehensively, the data and comment 
presented indicate that at worst only marginal adjustments are 
necessary and that at best the regulation may be serving its intended 
purpose of having a positive, downward pressure on retail prices. 
Extension of the regulation in substantially similar form will continue 
its function as a limited market adjustment which again accounts for 
its potential impact on all levels of the market, from farm to retail, 
including the benefits of market stability.
    As noted throughout the analysis under this and the previous 
finding section, the Compact Commission has again considered and 
accounted for the variety of potential market impacts in fashioning 
this extension of the price regulation. The Commission remains 
concerned with its potential, adverse impact on the wholesale market, 
as well as with regard to unanticipated impacts on consumer prices.
    While the Compact Commission has concluded that the regulation has 
not and is not likely to adversely affect the wholesale market and may 
well, indeed, have a positive impact on retail prices, the Commission 
will ensure comprehensive monitoring of these market functions. The 
Commission has also determined that it will commence a rulemaking 
proceeding, pursuant to section 11 of the Compact, no later than July 
1, 1998 during which it will make an assessment of, among other issues, 
the data and analysis received as a result of its tracking analysis.
    As a final safeguard against unanticipated, adverse consequences, 
the Commission has again acted to ``hold harmless'' the WIC Program by 
reestablishing the reimbursement provisions for all New England State 
WIC Programs, despite the Commission's conclusion of the remoteness of 
there occurring unanticipated, adverse consequences in the retail 
market. Finally, as a new element of this monitoring procedure adopted 
under the previous rulemaking, the Commission will establish a Task 
Force to assess the specific impact of the regulation on the region's 
School Lunch Programs and to determine whether it is appropriate to 
establish some form of reimbursement for these programs.

[[Page 62822]]

C. Whether the Major Provisions of the Order, Other Than Those Fixing 
Minimum Prices, Are Reasonably Designed To Achieve the Purposes of the 
Order

    The third provision of section 12(a) of the Compact requires that 
the Compact Commission determine whether the non-price provisions of 
the proposed rule would also be in the public interest, and, based on 
the record before it, the Commission so finds. The Commission's 
assessment focuses on two conditions: assurance that the regulation 
does not create an incentive for dairy farmers to produce additional, 
surplus supplies of milk, and second, the Commission's regulation is 
uniform and equitable and does not unduly distort traditional markets 
and marketing channels. The Compact Commission finds that both 
conditions are met by the final rule, as amended from the proposed 
rule.
    Based on their individual farm or cooperative experience with 
production over the period January through August, 1997, several 
commenters 83 indicated that the price regulation had not 
created an incentive for dairy farmers to produce additional, surplus 
supplies of milk. They indicated that production for either their farm 
or their cooperative was roughly the same in 1997 for the 8 month 
period as for the same period in 1996.84 One dairy farmer 
indicated that in his experience, it is low prices that cause the 
farmer to produce more milk in order to meet the monthly fixed 
commitments for farm expenses.85 Similarly, another 
commenter indicated that the over-order producer price would likely not 
be an incentive for increased production because the farmer will have a 
better cash flow under the regulation and can avoid the extra costs of 
increasing production with additional cows or other 
strategies.86
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    \83\ Leon Berthiaume, St. Albans Coop., PH at p. 63 and WC; 
Sally Beach, IDA, PH at p. 85; Douglas Carlson, dairy farmer, PH at 
p. 102; David Jaquier, dairy farmer, PH at p. 137; Norma O'Leary, 
Ct. Farm Bureau, WC; Carl Peterson, dairy farmer, PH at p. 70; 
Robert Wellington, AgriMark Coop., PH at p. 111 and WC.
    \84\ Berthiaume indicated in his testimony, PH at p. 59-64 that 
production for St. Albans Cooperative was the same for January 
through June, 1997 as it was for the same period in 1996. It 
increased 1% in July, 1997 and 2.3% in August, 1997, well below the 
average increase in the 20 largest dairy states which was 5% and 
4.4%, respectively.
    \85\ Peterson. PH, p. 70.
    \86\ Wellington, WC. In his written comment, he also made the 
point that farm prices regularly below the costs of production will 
not themselves generate any long-term additional supplies of milk.
---------------------------------------------------------------------------

    Two commenters 87 based their opinion that the 
regulation will not elicit increased production on an analysis of the 
interactive effect of the compact over-order price when applied in 
complement to the Basic Formula Price (BFP) of the federal Milk Market 
Order #1. Because the current compact over-order price of $16.94 
establishes a partial floor price to the producer, the supply and 
demand in the New England milkshed, the farmer receives appropriate 
economic signals about the amount of production called for by the 
market. They independently conclude that this mechanism provides a more 
stable price for the producer while allowing the natural mechanisms of 
the marketplace to influence supply and demand.
---------------------------------------------------------------------------

    \87\ Smith and Wellington. op. cit.
---------------------------------------------------------------------------

    The joint submission of Renee De Gues and William Gillmeister, both 
dairy economists for the Vermont and Massachusetts Departments of 
Agriculture, respectively, indicates that, based on reported data, 
production levels in the region have not changed dramatically since the 
Final Rule was implemented on July 1, 1997. Based on the data they 
submitted, they conclude that ``the Compact is not stimulating 
production in New York and Pennsylvania because from July through 
September, milk production in those states seems to have matched milk 
production patterns for the U.S.'', as a whole. Receipts for New York 
and New England, while up over the same period in 1996, were normal 
when compared to 1994 and 1995. In their joint submission, they report 
that receipts from New York, Vermont and Connecticut increased by 0.6%, 
0.17%, and 3.5%, respectively, from July to August, 1997. Receipts from 
Maine, Massachusetts, New Hampshire, and Rhode Island fell by 1.6%, 
2.1%, 1.4%, and 2.4%, respectively, from July to August, 1997. 
Moreover, production levels were considerably below the average 
increase in the national production.88
---------------------------------------------------------------------------

    \88\ Leon Graves, Commissioner, Vt. Dept. of Agriculture, Food 
and Markets, WC.
---------------------------------------------------------------------------

    The Compact Commission notes that the Commodity Credit Corporation 
(CCC) made no purchases of surplus milk in the region during fiscal 
year 1996 or 1997.89 The Commission established a monitoring 
plan in the May 30, 1997 Final Rule that will track regional and 
national rates of production to determine whether the regional rate of 
increased production is within 0.25% of the national rate of increased 
production. If New England production levels do increase within this 
range, then for each such month, the Commission will estimate the 
potential cost of CCC surplus purchases of surplus which might occur 
should the rate of regional increased production exceed the national 
rate. The Commission will retain a portion of the proceeds of the price 
regulation sufficient to cover such estimated costs, as necessary. See 
62 FR 23054. In this rulemaking, the Commission determines that the 
tracking procedure and the plan for paying CCC for any surplus 
purchases are still the most viable and reasonable method for dealing 
with any increased production in the region.
---------------------------------------------------------------------------

    \89\ Wellington, WC.
---------------------------------------------------------------------------

    On the basis of this record, the Compact Commission concludes that 
neither additional supplies nor surplus production has occurred to date 
nor does it expect any to occur under an extension of the Compact over-
order price regulation. The Commission will continue the tracking 
procedures established under the current regulation to monitor 
production, so as to allow appropriate action should an unanticipated 
change in production patterns occur. 62 FR 23054. Pursuant to section 
9(f) 90 of the Compact, the Commission finds that it is not 
now necessary to take any action to ensure that the over-order price 
does not create an incentive for producers to generate additional 
supplies of milk. If the monitoring procedures indicate the need for 
such action, the Commission will take the necessary and feasible 
action, as appropriate, to reimburse the Commodity Credit Corporation 
for any purchases of resulting surplus supplies.91
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    \90\ When establishing a compact over-order price, the 
commission shall take such action as necessary and feasible to 
ensure that the price does not create an incentive for producers to 
generate additional supplies of milk.'' Compact. section 9(f).
    \91\ ``Before the end of each fiscal year that a Compact price 
regulation is in effect, the Northeast Interstate Dairy Compact 
Commission shall compensate the Commodity Credit Corporation for the 
cost of any purchases of milk and milk products by the Corporation 
that result from the projected rate of increase in milk production 
for the fiscal year within the Compact region in excess of the 
projected national average rate of the increase in milk production, 
as determined by the Secretary [of Agriculture].'' 7 U.S.C. 7256(6).
---------------------------------------------------------------------------

    One commenter 92 suggested an amendment to the codified 
regulations that would establish a method for assessing pro rata all 
pooled producers for a three month period for the purpose of any 
retroactive payment to the Commodity Credit Corporation for surplus 
purchases. The Commission's response is that, should payments at the 
end of the fiscal year to the commodity Credit Corporation be necessary 
and appropriate, the entire producer pool ought to bear those costs, 
when incurred. This mechanism provides an added disincentive for over-
production

[[Page 62823]]

by the pool producers appropriate under Section 9(e) of the Compact.
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    \92\ Leon Berthiaume, WC.
---------------------------------------------------------------------------

    The inquiry on the second condition centers on the technical 
provisions, currently codified in 7 CFR parts 1300, 1301, and 1303-
1307. These provisions establish the definitions and procedures for the 
assessment of price regulation collection from processors and 
disbursements to producers. The Commission finds, generally, that these 
provisions continue to ensure uniform and equitable administration of 
the price regulation. The provisions continue to be patterned closely 
upon the underlying federal Milk Market Order #1, as they were when 
adopted on May 30, 1997. 62 FR 29637. They are designed to and have, in 
fact, worked since July 1, 1997 in complement to the Market Order with 
the direct, technical assistance of the Market Order #1 Administrator's 
office.
    In response to the Compact Commission's proposal to extend and 
amend generally the current provisions of the regulation, a number of 
comments were received at both the public hearing and in later written 
submissions. To allow later written comment on a number of technical 
administrative issues, the Compact Regulation Administrator 
93 suggested in his testimony at the September 24, 1997 
public hearing, that an additional criteria be added to 7 CFR 
1301.11(b), relating to qualifying as a producer under the regulation, 
to include having moved milk into the regulated area for more than half 
the days during December of 1997. The current rule provides that any 
dairy farmer who moved milk into New England in December of 1996 for 
over half of the days on which he or she shipped milk qualified for the 
over-order producer price. This reflects the traditional parallel 
provision of the federal Milk Market Order for qualifying for pooling 
during a specific time period of each year.94 Those who 
qualify during this specific period have demonstrated that they are 
traditionally associated the regional milkshed. The Commission finds it 
reasonable and consistent to provide a parallel one month qualifying 
period for December of 1997 added to December of 1996. It, therefore, 
amends 7 CFR 1301.11(b) to insert ``and December 1997'' after December, 
1996 in the current regulation.
---------------------------------------------------------------------------

    \93\ Carmen L. Ross, Compact Regulation Administrator, PH at pp. 
44-55.
    \94\ Under the federal Milk Market Order #1 regulatory 
provisions, producers qualify who ship milk for over half of the 
days in July through August each year.
---------------------------------------------------------------------------

    The same commenter also suggested that 7 CFR 1301.11(b) be further 
amended by adding a provision that would limit the total amount of milk 
at a pool plant eligible to qualify out of region producers to the 
total bulk receipts of fluid milk products less the total bulk 
transfers of fluid milk products (not including bulk transfers of 
skimmed milk and condensed milk).
    The principal criterion for qualifying a producer for the over-
order producer price is whether the farmer has committed to supply the 
Compact area milkshed. Out of area producer milk being shipped into a 
Compact area pool plant and then transferred out of the plant for 
distribution outside of the regulated area does not meet that criteria. 
The commenter noted that, under the current version of this section, 
milk could be shipped into a pool plant only to qualify the producer 
for the Compact over-order producer price. The Commission finds that 
the suggestion deals adequately with this problem and is consistent 
with the principal criteria for producer qualification of a 
demonstrated commitment to supply the New England milkshed. There are, 
however, additional problems associated with this suggested provision.
    Another commenter 95 advocated that the current rule not 
be amended and that the current treatment of plant diversions be left 
in place, to parallel the treatment under the federal Milk Market 
Order. He pointed out that plant diversions are part of everyday life 
in all regions of the country and that these diversions are required by 
a variety of circumstances. A third commenter 96 pointed out 
that it would be unfair to penalize the out of area producers and 
prevent their qualification because business necessity at the plant 
required that producer's milk be transferred on any particular day. He 
suggested that ``reloading'' occurs for a variety of reasons, among 
which are varying seasonal demand and supply in the milkshed, and that 
a percentage limit on bulk milk transfers for purposes of qualifying 
out of region producers could solve the problem while not distorting 
normal business practice.
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    \95\ Eugene Madill, CEO, Dairylea Coop., PH at p. 37.
    \96\ Wellington, PH at p. 109 and WC.
---------------------------------------------------------------------------

    A dairy processor from New York 97 identified a somewhat 
related concern with regard to the current rules for qualified out of 
region producers whose milk is shipped to a pool plant in the regulated 
area with sales outside the regulated area in competition with the New 
York processor. According to the commenter, the New York processing 
facility must match the over-order producer price paid by the New 
England-based pool plant to qualified New York producers in order to 
assure maintenance of raw product supply. According to the commenter, 
this payment raises the New York processor's costs compared with the 
New England processing facility's costs.
---------------------------------------------------------------------------

    \97\ Gary Dake, Vice-President, Stewart's Processing Corp., 
Saratoga Springs, NY, WC.
---------------------------------------------------------------------------

    This comment raises a similar concern to that presented with regard 
to bulk transfers, in that new milk is being pooled which is not 
traditionally associated with the pool for the regulated New England 
area. The Commission responds to this comment by amending the 
regulation to limit producer qualification in some instances with 
regard to milk utilized for sales outside the region. All out of region 
producers historically associated with the milkshed for the region, or 
those providing supply in December 1996 and 1997, will qualify on that 
basis. Newly supplying producers, however, will qualify only to the 
extent that their receiving plant has sales in the regulated region 
attributable to such new, additional, supply.
    In recognition of the problem to which Ross's suggested amendment 
is addressed, to reflect the need to accommodate reloading as a current 
business practice for balancing milk supplies to fit consumer needs and 
available plant capacity, and to correct the problem pointed out by the 
New York processor, the Compact Commission adopts two new provisions in 
Sec. 1301.11(b) which will:
    (a) restrict a handler's ability to increase its out of region 
producer supply not traditionally associated with regulated area, by 
limiting the out of region producer qualification to only 10% of the 
milk received from those producers but subsequently reloaded and 
transferred in bulk for disposition out of the region; and will:
    (b) provide for minimization or elimination of qualification of out 
of region producers whose milk is shipped to a pool plant that packages 
the milk for sale outside of the regulated area, solely for such sales.
    To reflect the decisions of the Compact Commission to include these 
new provisions, 7 CFR 1301.11 (b) is amended as indicated infra in 
``Codification in Code of Federal Regulations''.
    One commenter 98 suggested that the five month 
qualifying period be reduced to 3 months to allow more out of region 
producers to take advantage of the over-order producer price. Another

[[Page 62824]]

commenter,99 however, advocated that the qualifying period 
remain at the five months required by the current provision. The 
Compact Commission's response to these comments is that the five month 
period is a reasonable measure of a producer's initial commitment to 
supply the New England milk pool. The Commission concludes that the 
current provision with the suggested amendments adopted above ensures 
equitable and uniform treatment of out of region producers. The 
Commission, therefore, will continue the current five month requirement 
in 7 CFR 1301.11(b).
---------------------------------------------------------------------------

    \98\ Garry Warren, PH at p.126.
    \99\ Wellington, WC.
---------------------------------------------------------------------------

    A previous commenter 100 suggested another amendment to 
clarify the current regulation in 7 CFR 1304.5 dealing with the 
classification of milk. He suggested deleting the current provision at 
Sec. 1304.5(a) and adding a new subsection (a) to clarify that fluid 
milk products which had been pooled at a New England pool plant and 
shipped to a partially regulated plant will be attributed only to the 
pool plant. This suggestion ensures that milk already subject to the 
Compact over-order obligation at the pool plant will not again be 
subject to the obligation at a partially regulated plant to which it is 
later shipped.
---------------------------------------------------------------------------

    \100\ Carmen L. Ross, Id.
---------------------------------------------------------------------------

    Although no double billing has occurred under the current 
provision, this clarification will ensure that it cannot happen. There 
was no comment opposing this suggestion.
    The Compact Commission agrees that the current provision should be 
clarified to ensure uniform and equitable administration of the 
regulation. The Commission, therefore, adopts the amendment to delete 
the current language at 7 CFR 1304.5(a) and to replace it with a new 
subsection (a) as is indicated infra in ``Codification in Code of 
Federal Regulations.''
    The Commission notes that the current codified provision at 
Sec. 1305.1 establishing the Compact over-order Class I price does not 
include the dollar amount adopted by the Commission on May 30, 1997. 
Because of the need for clarity in the codified regulations, the 
Compact Commission amends that section to include reference to the new 
Compact over-order price of $16.94, as indicated infra in 
``Codification in Code of Federal Regulations.''
    The same commenter suggested that 7 CFR 1306.1 and 1306.2 be 
amended to establish a parallel exemption from regulation with that of 
the federal Milk Market Order #1 for any dairy processor who handles 
less than an average of 300 quarts per day. He points out that these 
limited amounts of milk should be excluded from the Compact pool as a 
de minimus exemption because of the relatively small amounts of the 
Compact over-order obligation and consequent producer price 
distribution. There was no further comment received on this suggestion.
    The Compact Commission finds merit in the suggestion as a way to 
simplify administration of the regulation and to reflect the practice 
under the federal Milk Market Order system. The Commission, therefore, 
amends 7 CFR 1306.1 and 1306.2 as is indicated infra. ``Codification in 
Code of Federal Regulations.''
    The same commenter pointed out that, in the notice of final 
rule,101 the Compact Commission adopted the requirement of a 
formal agreement for a reimbursement system between the Commission and 
the State WIC Program directors, to be approved by the Food and 
Consumer Service of the USDA, that will ensure reimbursement of any 
additional costs incurred by those programs because of the over-order 
price regulation, the requirement was inadvertently omitted from the 
codification. In the same final rule notice, the Commission had also 
approved the establishment of a Commission reserve account for 
reimbursement of anticipated WIC Program costs.
---------------------------------------------------------------------------

    \101\ 62 FR 29630.
---------------------------------------------------------------------------

    As explained in the prior finding analysis, the Commission has 
reestablished and extended the WIC reimbursement system.102 
The Commission, therefore, amends 7 CFR 1306.3 to add a new subsection 
(b).
---------------------------------------------------------------------------

    \102\ See: Discussion of the WIC Programs, supra.
---------------------------------------------------------------------------

    In addition, the Compact Commission notes that, although it adopted 
a mechanism for reserving funds to cover any costs to be reimbursed to 
the Commodity Credit Corporation for surplus purchases in its Proposed 
and Final Rule,103 it did not include any provision in the 
codified regulations. To address that omission, the Commission amends 7 
CFR 1306.3 further to add a new subsection (c) and to redesignate the 
remaining subsections to be (d) through (f), as indicated infra in 
``Codification in Code of Federal Regulations.''
---------------------------------------------------------------------------

    \103\ 62 FR 23054 and 29638.
---------------------------------------------------------------------------

    The same commenter also suggested changes needed to 7 CFR 1307.1 
both to accommodate new references required by the above amendments and 
to correct the language. There was no additional comment on these 
suggestions. The Commission adopts these suggestions and amends 7 CFR 
1307.1, as indicated infra in ``Codification in Code of Federal 
Regulations.''
    The same commenter suggested changes to 7 CFR 1307.2 to clarify the 
intent and to delete subsection (c) which is not needed. There were no 
additional comments on this suggestion. The Compact Commission agrees 
with the comments and amends 7 CFR 1307.2 by deleting (c) in its 
entirety and amending (b) (1) and (2), as indicated infra in 
``Codification in Code of Federal Regulations.''
    This same commenter's last suggestion for changes to the codified 
provisions of the regulation was to amend 7 CFR 1307.4 to exclude milk 
at a partially regulated plant that was diverted from a pool plant, 
where it was already pooled for purposes of the Compact over-order 
price obligation. There was no additional comment on this suggestion. 
Because this amendment will ensure that the price obligation not be 
assessed twice on the same milk, the Commission adopts the suggestion 
and amends 7 CFR 1307.4(f), as indicated infra in ``Codification in 
Code of Federal Regulations.''
    Another commenter 104 suggested an amendment to 7 CFR 
1304.4(a)(ii) to avoid the assessment of the over-order obligation on a 
cooperative for bulk milk which the cooperative ships to other pool or 
partially regulated plants. He points out that under the current 
regulation the cooperative and its membership are financially 
responsible for the assessment for which the receiving plant is billed 
by the cooperative and which will ultimately be paid by the receiving 
plant. He suggests that it is more appropriate that the second 
processing plant be financially responsible than the farmer 
cooperative.
---------------------------------------------------------------------------

    \104\ Leon J. Berthiaume, WC.
---------------------------------------------------------------------------

    The Compact Commission's response is that the over-order price 
obligation is imposed on this particular cooperative as a processor 
operating a compact pool plant. It is a traditional technique of milk 
market regulation to impose the obligation on the pool plant that 
receives the milk from the producer. It is, therefore, appropriate that 
the cooperative continue to be responsible for the obligation as the 
operator of the receiving pool plant.
    With these amendments to the current codified provisions of the 
price regulation, the Commission finds that the major provisions of the 
order, other than those fixing minimum prices, are reasonably designed 
to achieve the purposes of the order.

[[Page 62825]]

    Finally, the Compact Commission concludes that the administrative 
assessment of $0.032 per hundredweight of milk on all route 
dispositions of class I fluid milk in the territorial region of the six 
New England states should be extended in order to finance the budgeted 
costs for administration of the Compact Commission's regulations 
through the effective period of the rule. The Commission notes that the 
additional, start-up assessment of approximately $0.013 per 
hundredweight presently imposed will expire with final payment in 
December of 1997.

III. Required Findings of Fact

    Pursuant to Compact Article V, Section 12, the Compact Commission 
hereby finds:
    (1) That the public interest will be served by the continuation of 
minimum prices in the amount of $16.94 (Zone 1) to dairy farmers under 
Article IV for the period January 1, 1998 through termination of the 
Compact enabling legislation.
    (2) That a level price of $16.94 (Zone 1) will assure that 
producers receive a price sufficient to cover their costs of production 
and will elicit an adequate supply of milk for the inhabitants of the 
regulated area and for manufacturing purposes.
    (3) That the major provisions of the order, other than those fixing 
minimum milk prices, are in the public interest and are reasonably 
designed to achieve the purposes of the order.
    (4) That the terms of the proposed price regulation were approved 
by producers by referendum.105
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    \105\ Section 13 of the Compact requires that the Commission 
conduct a referendum among producers and that, at least, two-thirds 
of the voting producers approved the regulation. A separate notice 
in the Federal Register certifies the results of the referendum 
pursuant to the following Referendum Approval Certification 
Procedure:
    The Compact Commission resolves and adopts this procedure for 
certifying whether the price regulation adopted by this final rule 
has been duly approved by producer referendum in accordance with 
Compact Article V, section 12.
    ________ is hereby designated as ``Referendum Agent'' and 
authorized to administer this procedure.
    The designated Referendum Agent shall:
    1. Verify all ballots with respect to timeliness, producer 
eligibility, cooperative identification, authenticity and other 
steps taken to avoid duplication of ballots. Verification of ballots 
shall include those cast individually by block vote. Ballots 
determined by the Referendum Agent to be invalid shall be marked 
``disqualified'' with a notation of the reason for disqualification. 
Disqualified ballots shall not be considered in determining approval 
or disapproval of the regulation.
    2. Compute and certify the following:
    A. The total number of ballots cast.
    B. The total number of ballots disqualified.
    C. The total number of verified ballots cast in favor of the 
price.
    D. The total number of verified ballots cast in opposition to 
the price regulation.
    E. Whether two-thirds of all verified ballots were cast in the 
affirmative.
    3. Report to the Executive Director of the Compact Commission 
the certified computations and results of the referendum under 
Section 2.
    4. At the completion of his or her work, seal all ballots, 
including the disqualified ballots, and shall submit a final report 
to the Executive Director stating all actions taken in connection 
with the referendum. The final report shall include all ballots cast 
and all other information furnished to or compiled by the Referendum 
Agent.
    The ballots cast, the identity of any person or cooperative, or 
the manner in which any person or cooperative voted, and all 
information furnished to or compiled by the Referendum Agent shall 
be regarded as confidential.
    The Executive Director shall publish the certified results of 
the referendum in the Federal Register.
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List of Subjects in 7 CFR Parts 1300, 1301, 1303-1307

    Milk.

Codification in Code of Federal Regulations

    For reasons set forth in the preamble, the Compact Commission 
amends title 7, chapter XIII, as follows:

PART 1301--DEFINITIONS

    1. The authority citation for part 1301 continues to read as 
follows:

    Authority: 7 U.S.C. 7256

    2. In Sec. 1301.11, paragraph (b) is revised to read as follows:


Sec. 1301.11  Producer.

* * * * *
    (b) A dairy farmer who produces milk outside of the regulated area 
that is moved to a pool plant, provided that on more than half of the 
days on which the handler caused milk to be moved from the dairy 
farmer's farm during December 1996 and December 1997, all of that milk 
was physically moved to a pool plant in the regulated area. Or: to be 
considered a qualified producer, on more than half of the days on which 
the handler caused milk to be moved from the dairy farmer's farm during 
the current month and for five (5) months subsequent to July of the 
preceding calendar year, all of that milk must have moved to a pool 
plant, provided that the total amount of milk at a pool plant eligible 
to qualify producers who did not qualify in December 1996 and December 
1997 shall not exceed the total bulk receipts of fluid milk products 
less:
    (1) Producer receipts as described in paragraph (a) of this section 
and producer receipts as described in paragraph (b) of this section who 
are qualified based on December 1996 and December 1997;
    (2) 90% of the total bulk transfers of fluid milk products (not 
including bulk transfers of skimmed milk and condensed milk) disposed 
outside of the regulated area; and
    (3) 100% of packaged fluid milk products disposed outside of the 
regulated area.
* * * * *

PART 1304--CLASSIFICATION OF MILK

    1. The authority for part 1304 continues to read as follows:

    Authority: 7 U.S.C. 7256.

    2. In Sec. 1304.5, paragraph (a) is revised to read as follows:


Sec. 1304.5  Classification of producer milk at a partially regulated 
plant.

* * * * *
    (a) Subtract from the total pounds of fluid milk products in Class 
I the pounds of fluid milk products in:
    (1) Receipts of Class I fluid milk products from pool plants if 
reported and classified Class I by the pool plant;
    (2) Disposition of Class I fluid milk products outside of the 
regulated area;
    (3) Receipts of exempt fluid milk products pursuant to Section 
1301.13 (a), (b), and (c) of this Chapter.
* * * * *

PART 1305--CLASS PRICE

    1. The authority citation for part 1305 continues to read as 
follows:

    Authority: 7 U.S.C. 7256.

    2. Section 1305.1 is revised to read as follows:


Sec. 1305.1  Compact over-order class I price and compact over-order 
obligation.

    The compact over-order Class I price per hundredweight of milk 
shall be as follows:
    (a) The class I price shall be $16.94 per hundredweight.
    (b) The compact over-order obligation shall be computed as follows:
    (1) The compact Class I price ($16.94);
    (2) Deduct Federal Order #1 Zone 1, Class I price;
    (3) The remainder shall be the compact over-order obligation.

PART 1306--COMPACT OVER-ORDER PRODUCER PRICE

    1. The authority for part 1306 continues to read as follows:

    Authority: 7 U.S.C. 7256.

    2. Sections 1306.1, 1306.2, and 1306.3 are revised to read as 
follows:

[[Page 62826]]

Sec. 1306.1  Handler's value of milk for computing basic over-order 
producer price.

    For the purpose of computing the basic over-order producer price, 
the compact commission shall determine for each month the value of milk 
of each handler with respect to each of the handler's pool plants and 
of each handler described in Sec. 1301.9 (d) of the chapter with 
respect to milk that was not received at a pool plant, as directed in 
this section. Any pool plant that does not exceed a daily average of 
300 quarts of disposition in the compact regulated area in the month 
shall not be subject to the compact over-order obligation. The total 
assessment for each handler is to be calculated by multiplying the 
pounds of Class I fluid milk products as determined pursuant to 
Sec. 1304.1 (a) by the compact over-order obligation.


Sec. 1306.2  Partially regulated plant operator's value of milk for 
computing basic over-order producer price.

    For the purpose of computing the basic over-order producer price, 
the compact commission shall determine for each month the value of milk 
disposition in the regulated area by the operator of a partially 
regulated plant as directed in this section. Any partially regulated 
plant that does not exceed a daily average of 300 quarts of disposition 
in the compact regulated area in the month shall not be subject to the 
compact over-order obligation. The total assessment for each handler is 
to be calculated by multiplying the pounds of Class I fluid milk 
products as determined pursuant to Sec. 1304.1 (a) of this chapter by 
the compact over-order obligation.


Sec. 1306.3  Computation of basic over-order producer price.

    The compact commission shall compute the basic over-order producer 
price per hundredweight applicable to milk received at plants as 
follows:
    (a) Combine into one total the values computed pursuant to 
Sec. 1306.1 and Sec. 1306.2 of this chapter for all handlers from whom 
the compact commission has received at the Compact Commission's office 
prior to the 9th day after the end of the month the reports for the 
month prescribed in Sec. 1303.1 and the payments for the preceding 
month required under Sec. 1307.3 (a) of this chapter.
    (b) Subtract 3% of the total value computed pursuant to paragraph 
(a) above for the purpose of retaining a reserve for WIC pursuant to 
the Formal Agreement for reimbursement of WIC Program costs entered 
into between the Commission and the six New England State WIC Program 
Directors, as approved by the Food and Consumer Service of the United 
States Department of Agriculture (USDA);
    (c) In any month when the average percentage increase in production 
in the regulated area comes within 0.25 of the average percentage 
increase in production for the nation, subtract from the total value 
computed pursuant to paragraph (a) above, for the purpose of retaining 
a reserve, an amount estimated by the Commission in consultation with 
the USDA for anticipated costs to reimburse the Commodity Credit 
Corporation (CCC) at the end of its fiscal year for any surplus milk 
purchases. Should those funds not be needed because no surplus 
purchases were made by the CCC at the end of its fiscal year, it is to 
be disbursed as follows:
    (1) Any producer who has received payment from a handler pursuant 
to Sec. 1307.4 shall become eligible to receive a pro rata disbursement 
by submitting to the Commission documentation that the producer did not 
increase production of milk during and after the month on which the 
regional rate of production increase met or exceeded the national rate 
of production increase, as compared to the same period in the 
preceeding year. Such documentation shall be filed with the Commission 
not later than 45 days after the end of the fiscal year.
    (2) The Commission shall calculate the amount of refund to be 
provided to each eligible producer by taking into account the total 
amount of retained proceeds, the total production of milk by all 
producers eligible for refunds, and the total amount of production by 
each eligible producer.
    (d) Add an amount equal to not less than one-half of the 
unobligated balance of the producer-settlement fund at the close of 
business on the 8th day after the end of the month;
    (e) Divide the resulting amount by the sum of the following for all 
handlers included in these computations:
    (1) The total hundredweight of producer milk;
    (2) The total hundredweight for which a value is computed pursuant 
to Sec. 1306.2(a); and
    (f) Subtract not less than four (4) cents nor more than five (5) 
cents for the purpose of retaining a cash balance in the producer-
settlement fund. The result shall be the basic over-order producer 
price for the month.

PART 1307--PAYMENTS FOR MILK

    1. The authority citation for part 1307 continues to read as 
follows:

    Authority: 7 U.S.C. 7256.

    2. Sections 1307.1 and 1307.2 are revised to read as follows:


Sec. 1307.1  Producer-settlement fund.

    (a) The compact commission shall establish and maintain a separate 
fund known as the producer-settlement fund. It shall deposit into the 
fund all amounts received from handlers under Sec. 1307.3, Sec. 1307.7, 
and Sec. 1307.8 of this Chapter and the amount subtracted under 
Sec. 1306.3(f). It shall pay from the fund all amounts due handlers 
under Sec. 1307.3, Sec. 1307.7, and Sec. 1307.8 and the amount added 
under Sec. 1306.3(d) subject to their right to offset any amounts due 
from the handler under these sections and under Sec. 1308.1 of this 
chapter.
    (b) All amounts subtracted under Sec. 1306.3(f), including interest 
earned thereon, shall remain in the producer-settlement fund as an 
obligated balance until it is withdrawn for the purpose of effectuating 
Sec. 1306.3(d).
    (c) The compact commission shall place all monies subtracted under 
Sec. 1306.3(b), 1306.3(c), and 1306.3(f) in an interest-bearing bank 
account or accounts in a bank or banks duly approved as a Federal 
depository for such monies, or invest them in short-term U.S. 
Government securities.


Sec. 1307.2  Handlers' producer-settlement fund debits and credits.

    On or before the 15th day after the end of the month, the compact 
commission shall render a statement to each handler showing the amount 
of the handler's producer-settlement fund debit or credit, as 
calculated in this section.
    (a) The producer-settlement fund debit for each plant and each 
cooperative association in its capacity as a handler under Sec. 1301.9 
(d) of this chapter shall be the value computed pursuant to 
Secs. 1306.1 and 1306.2.
    (b) The producer-settlement fund credit for each plant and each 
cooperative association in its capacity as a handler under Sec. 1301.9 
(d) shall be computed as specified in this paragraph.
    (1) Multiply the quantities of producer milk that were reported by 
pool plants pursuant to Sec. 1303.1 and the quantities or route 
disposition in the marketing area by partially regulated plants for 
which a value was determined pursuant to Sec. 1306.2(a) by the basic 
over-order producer price computed under Sec. 1306.3.
    (2) For any cooperative association in its capacity as a handler 
under Sec. 1301.9 (d), multiply the quantities of all producer milk 
reported pursuant to Sec. 1303.1(c) by the basic over-order producer 
price computed under Sec. 1306.3.
    3. In Sec. 1307.4, paragraph (f) is revised to read as follows:

[[Page 62827]]

Sec. 1307.4  Payments to producers.

 * * * * *
    (f) At a partially regulated plant each handler shall make 
payments, on a pro rata basis, to all producers and dairy farmers for 
milk (excluding diverted pool producer milk) received from them during 
the month, the payment received pursuant to Sec. 1307.3 (b).
Daniel Smith,
Executive Director.
[FR Doc. 97-30602 Filed 11-24-97; 8:45 am]
BILLING CODE 1650-01-P`