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[Federal Register: June 14, 2010 (Volume 75, Number 113)]
[Proposed Rules]               
[Page 33534-33553]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr14jn10-12]                         

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Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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[[Page 33534]]

DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Part 1000

[Doc. No. AMS-DA-09-0062; AO-14-A73, et al.; DA-03-10]

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

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Proposed rule.

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

SUMMARY: This final decision maintains the current fluid milk product 
definition's compositional standard of 6.5 percent nonfat milk solids 
criterion and incorporates an equivalent 2.25 percent true milk protein 
criterion for determining if a product meets the compositional 
standard. The decision also determines how milk and milk-derived 
ingredients should be priced under all Federal milk marketing orders 
when used in products meeting the fluid milk product definition. The 
decision provides exemptions for drinkable yogurt products containing 
at least 20 percent yogurt (by weight), kefir, and products intended to 
be meal replacements from the fluid milk product definition. The orders 
as amended are subject to producer approval by referendum before they 
can be implemented.

FOR FURTHER INFORMATION CONTACT: Henry H. Schaefer, Economist, USDA/
AMS/Dairy Programs, Upper Midwest Milk Market Administrators Office, 
Suite 200, 1600 West 82nd Street, Minneapolis, Minnesota 55431-1420, 
(952) 831-5292, e-mail address: hschaefer@fmma30.com; or William 
Francis, Associate Deputy Administrator, USDA/AMS/Dairy Programs, Order 
Formulation and Enforcement, Stop 0231-Room 2971-S, 1400 Independence 
Avenue, SW., Washington, DC 20250-0231, (202) 720-6274, e-mail address: 
william.francis@ams.usda.gov.

SUPPLEMENTARY INFORMATION: This final decision maintains the current 
fluid milk product definition's compositional standard of 6.5 percent 
nonfat milk solids and incorporates an equivalent 2.25 percent true 
milk protein criterion for determining if a product meets the 
compositional standard. The decision also determines how milk and milk-
derived ingredients should be priced under all Federal milk marketing 
orders when used in products meeting the fluid milk product definition. 
The decision exempts drinkable yogurt products containing at least 20 
percent yogurt (by weight), kefir, infant formulas, dietary products 
(meal replacements) and other products that may contain milk-derived 
ingredients from the fluid milk product definition.
    This administrative action is governed by the provisions of 
Sections 556 and 557 of Title 5 of the United States Code and, 
therefore, is excluded from the requirements of Executive Order 12866. 
The proposed amendments to the rules herein have been reviewed under 
Executive Order 12988, Civil Justice Reform. They are not intended to 
have a retroactive effect. The Agricultural Marketing Agreement Act of 
1937 (Act), as amended (7 U.S.C. 604-674), provides that administrative 
proceedings must be exhausted before parties may file suit in court. 
Under Section 608c(15)(A) of the Act, any handler subject to an order 
may request modification or exemption from such order by filing with 
the Department a petition stating that the order, any provision of the 
order, or any obligation imposed in connection with the order is not in 
accordance with the law. A handler is afforded the opportunity for a 
hearing on the petition. After a hearing, the Department would rule on 
the petition. The Act provides that the district court of the United 
States in any district in which the handler is a habitant, or has its 
principal place of business, has jurisdiction in equity to review the 
USDA's ruling on the petition, provided a bill in equity is filed not 
later than 20 days after the date of the entry of the ruling.

Regulatory Flexibility Act and Paperwork Reduction Act

    In accordance with the Regulatory Flexibility Act (5 U.S.C. 601 et 
seq.), the Agricultural Marketing Service has considered the economic 
impact of this action on small entities and has certified that this 
proposed rule will not have a significant economic impact on a 
substantial number of small entities. For the purpose of the Regulatory 
Flexibility Act, a dairy farm is considered a ``small business'' if it 
has an annual gross revenue of less than $750,000, and a dairy products 
manufacturer is a ``small business'' if it has fewer than 500 
employees.
    For the purposes of determining which dairy farms are ``small 
businesses,'' the $750,000 per year criterion was used to establish a 
production guideline of 500,000 pounds per month. Although this 
guideline does not factor in additional monies that may be received by 
dairy producers, it should be an inclusive standard for most ``small'' 
dairy farmers. For purposes of determining a handler's size, if the 
plant is part of a larger company operating multiple plants that 
collectively exceed the 500-employee limit, the plant will be 
considered a large business even if the local plant has fewer than 500 
employees.
    For the month of June 2005, the month the hearing was held, 52,425 
dairy farmers were pooled on the Federal order system. Of the total, 
49,160, or 94 percent were considered small businesses. During the same 
month, 1,530 plants were regulated by or reported their milk receipts 
to their respective Market Administrator. Of the total, 847, or 55 
percent were considered small businesses.
    The fluid milk product definition sets out the criteria for 
determining if the use of producer milk and milk-derived ingredients in 
such products should be priced at the Class I price. The established 
criteria for the classification of producer milk are applied in an 
identical fashion to both large and small businesses and will not have 
any different impact on those businesses producing fluid milk products 
thus assuring that similarly situated handlers have the same minimum 
price as required by Section 608(c)5 of the Act. Therefore, the 
amendments will not have a significant economic impact on a substantial 
number of small entities. The impact of the proposed amendments on 
large and small entities would be negligible. In fact, the amendment 
proposing to change the

[[Page 33535]]

classification of kefir and drinkable yogurt is estimated to affect 
blend prices by no more than $ 0.0026 per cwt based on record evidence.
    The Agricultural Marketing Service is committed to complying with 
the E-Government Act to promote the use of the Internet and other 
information technologies to provide increased opportunities for citizen 
access to Government information and services, and for other purposes.
    A review of reporting requirements was completed under the 
Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35). It was 
determined that these amendments would have no impact on reporting, 
recordkeeping, or other compliance requirements because they would 
remain identical to the current requirements. No new forms are proposed 
and no additional reporting requirements are necessary.
    This notice does not require additional information collection that 
needs clearance by the Office of Management and Budget (OMB) beyond 
currently approved information collection. The primary sources of data 
used to complete the forms are routinely used in most business 
transactions. The forms require only a minimal amount of information 
that can be supplied without data processing equipment or a trained 
statistical staff. Thus, the information collection and reporting 
burden is relatively small. Requiring the same reports for all handlers 
does not significantly disadvantage any handler that is smaller than 
the industry average.

Prior Documents in This Proceeding

    Notice of Hearing: Issued April 6, 2005; published April 12, 2005 
(70 FR 19012).
    Recommended Decision: Issued May 12, 2006; published May 17, 2006 
(71 FR 28590).

Preliminary Statement

    Notice is hereby given of the filing with the Hearing Clerk of this 
final decision with respect to the proposed amendments to the marketing 
agreements and the orders regulating the handling of milk in the 
Northeast and other marketing areas. This notice is issued pursuant to 
the provisions of the Agricultural Marketing Agreement Act and 
applicable rules of practice and procedure governing the formulation of 
marketing agreements and marketing orders (7 CFR Part 900).
    A public hearing was held upon proposed amendments to the marketing 
agreements and the orders regulating the handling of milk in all 
Federal milk marketing areas. The hearing was held pursuant to the 
provisions of the Agricultural Marketing Agreement Act of 1937 (AMAA), 
as amended (7 U.S.C. 601-674), and the applicable rules of practice and 
procedure governing the formulation of marketing agreements and 
marketing orders (7 CFR Part 900).
    The proposed amendments set forth below are based on the record of 
a public hearing held in Pittsburgh, Pennsylvania, on June 20-23, 2005, 
pursuant to a notice of hearing issued April 6, 2005 and published 
April 12, 2005 (70 FR 19012); and a recommended decision issued May 12, 
2006 and published May 17, 2006 (71 FR 28590).
    The material issues on the record of the hearing relate to:
    1. Amending the fluid milk product definition.

Findings and Conclusions

    This final decision maintains the current fluid milk product 
definition's compositional standard of 6.5 percent nonfat milk solids 
and incorporates an equivalent 2.25 percent true milk protein criterion 
for determining whether a product meets the compositional standard. The 
decision also determines how milk and milk-derived ingredients should 
be priced under all orders when used in products meeting the fluid milk 
product definition. The decision exempts drinkable yogurt products 
containing at least 20 percent yogurt (by weight), kefir, infant 
formulas, dietary products (meal replacements) and other products that 
may contain milk-derived ingredients from the fluid milk product 
definition.
    All Federal milk orders currently state that ``fluid milk product 
means any milk products in fluid or frozen form containing less than 9 
percent butterfat that are intended to be used as beverages.'' The 
fluid milk product definition also contains a non-definitive list of 
dairy products that are named fluid milk products. In addition to the 
compositional butterfat standard fluid milk products shall not include, 
among other products, ``* * * any product that contains by weight less 
than 6.5 percent nonfat milk solids * * *'' Dairy products that do not 
fall within these limits are not considered fluid milk products and the 
milk used to produce these products is classified in Class II, Class 
III or Class IV, depending on the form or purpose for which the 
products are to be used.
    Eleven proposals were published in the hearing notice for this 
proceeding. Proposals 1, 3, 4 and 6 were abandoned at the hearing by 
their proponents in support of other noticed proposals. No further 
reference to these proposals will be made.
    A proposal published in the hearing notice as Proposal 2, offered 
by Dairy Farmers of America, Inc. (DFA), seeks to amend the fluid milk 
product definition to include any dairy ingredient, including whey, 
when calculating the milk contained in a product on a protein-
equivalent or nonfat solids equivalent basis. DFA is a dairy farmer-
member owned cooperative and at the time of the hearing had 12,800 
member farms located in 49 states whose members' milk is pooled 
throughout the Federal order system.
    H.P. Hood LLC (H.P. Hood) owns and operates milk processing and 
manufacturing plants in the Eastern and Midwest United States and is 
the proponent of a proposal published in the hearing notice as Proposal 
5 that was modified at the hearing. As modified, Proposal 5 seeks to 
amend the fluid milk product definition to include any product that, 
based upon substantial evidence as determined by the Department, 
directly competes with other fluid milk products and that the 
Department must make a written determination before any product can be 
classified as a fluid milk product.
    A proposal published in the hearing notice as Proposal 7 was 
offered by the National Milk Producers Federation (NMPF). At the time 
of the hearing NMPF consisted of 33 dairy-farmer member cooperatives 
that represented more than 75 percent of U.S. dairy farmers. Proposal 7 
seeks to amend the fluid milk product definition by removing the 
reference ``6.5 percent nonfat solids standard and whey,'' and adopting 
a 2.25 percent true milk protein criterion. During the hearing, DFA 
offered a modification to Proposal 7 by seeking to authorize the 
Department to make an interim classification determination for new 
products that result from new technology. The Department would then 
convene a hearing to address the use of the new technology in 
classification decisions and make a final classification determination 
for the new product within one year.
    Proposal 8 seeks to amend the fluid milk product definition by 
excluding yogurt-containing beverages from the fluid milk product 
definition. This proposal was offered by The Dannon Company, Inc. 
(Dannon), a wholly owned subsidiary of The Danone Group that produces 
yogurt and fresh dairy products in 40 countries, including the United 
States.
    Proposal 9 also seeks to amend the fluid milk product definition by 
excluding drinkable food products with

[[Page 33536]]

no more than 2.2 percent skim milk protein provided the product 
contains at least 20 percent yogurt (nonfat yogurt, lowfat yogurt or 
yogurt) by weight from the fluid milk product definition. Proposal 9 
was offered by General Mills, Inc. (General Mills), a food manufacturer 
that markets such products as Yoplait yogurt and yogurt-containing 
products in over 100 countries, including the United States.
    A proposal published in the hearing notice as Proposal 10 was 
offered by the Novartis Nutrition Corporation (Novartis). Novartis 
develops and manufactures a variety of products, including milk-based 
products, designed to meet specific nutritional needs. Proposal 10 
seeks to amend the fluid milk product definition by excluding formulas 
prepared for dietary use by removing the words ``(meal replacement) 
that are packaged in hermetically-sealed containers.'' The proposal 
would remove the 6.5 percent nonfat milk solids standard.
    A proposal published in the hearing notice as Proposal 11 seeks to 
amend the fluid milk product definition by excluding health care 
beverages distributed to the health care industry. Proposal 11 was 
offered by Hormel Foods, LLC (Hormel), a wholly owned subsidiary of 
Hormel Foods Corporation and manufacturer of a variety of food products 
primarily for the health care industry.
    A witness appearing on behalf of NMPF testified in support of 
Proposal 7. The witness testified that Proposal 7 would close loopholes 
in the current fluid milk product definition that have allowed products 
developed as a result of new technology to avoid classification as 
fluid milk products. The witness said that the 6.5 percent nonfat 
solids standard should be eliminated and replaced with a 2.25 percent 
protein standard that would also include whey proteins in determining 
if the product meets the protein standard. The witness stressed that 
whey proteins should be specifically defined as whey proteins that are 
a by-product of the cheese making process. The witness was of the 
opinion that adoption of Proposal 7 would not alter the classification 
of any product currently being marketed.
    The NMPF witness stressed that Federal order regulations have 
always adapted to marketing conditions and that the current fluid milk 
product definition should be amended to reflect changes in market 
conditions brought about by changes in technology. The witness 
testified that technology has evolved such that milk can now be 
separated into numerous components that can be recombined to create a 
vast number of new milk products. The witness argued that new 
technology has enabled manufacturers to manipulate milk components, 
such as removing lactose or substituting whey for other milk solids, to 
create new products that contain less than 6.5 percent nonfat milk 
solids. This enables manufacturers of the new products to avoid 
classification of the new product as a fluid milk product even though 
the form and use does not differ from what is currently considered a 
fluid milk product.
    The NMPF witness testified that Carb Countdown[supreg], a product 
manufactured by the H.P. Hood Company, contains whey and has a reduced 
lactose content that results in its composition being below the 6.5 
percent nonfat milk solids standard. According to the witness, two 
market research studies suggest that the product is similar in form and 
use to traditional fluid milk. Relying upon a market study conducted by 
IRI, a market research firm, the witness related that 98.4 percent of 
Carb Countdown[supreg] sales are purchased as a substitute for fluid 
milk while only 1 percent of its sales are represented as an expansion 
of the fluid milk market.
    The NMPF witness was of the opinion that classifying a product on 
the basis of protein is appropriate because protein is the highest 
valued skim component in the marketplace. The witness testified that a 
2.25 percent protein standard is the appropriate equivalent of the 
current 6.5 percent nonfat milk solids standard. The witness asserted 
that protein has the most value to producers, processors and consumers 
because it contributes nutrition, flavor and texture to milk. While the 
witness was of the opinion that all dairy-derived ingredients should be 
used in computing the true protein standard of a product, the witness 
did not believe whey and whey product ingredients should be priced at 
the Class I price. The witness maintained that the use of whey and whey 
products should not exclude a product from the fluid milk product 
definition because manufacturers are using whey in their new products 
to avoid a fluid milk product classification. The witness also noted 
that instead of relying upon the Food and Drug Administration (FDA) 
standard, the Department should provide its own definition of whey.
    A post-hearing brief submitted on behalf of NMPF reiterated the 
positions testified to at the hearing. The brief asserted that adoption 
of a milk protein standard would close regulatory loopholes that 
prevent products developed as a result of new technology from avoiding 
classification as a fluid milk product. According to the brief, 
adoption of a true protein standard merely changes the way milk 
proteins are accounted for and would not change the classification of 
any product. However, these changes would capture those products 
currently formulated to avoid being classified as fluid milk products.
    Comments and exceptions to the Recommended Decision filed by NMPF 
supported the proposed adoption of the 2.25 percent milk protein 
standard, the inclusion of all nonfat milk ingredients in determining a 
product's composition, and the Class I pricing of milk protein 
concentrates (MPCs) used in fluid milk products. NMPF strongly opposed 
exemption of casein and caseinates used in fluid milk products from 
Class I pricing. They view such exemptions as differential treatment 
that could cause market disorder and provide incentives for 
manufacturers to use these un-priced ingredients in their fluid milk 
products. NMPF was of the opinion that casein and caseinates are not 
substantially different than MPCs to justify a different pricing 
treatment when used in fluid milk products. However, NMPF maintained 
that only whey resulting from the production of cheese should be 
exempted from Class I pricing when used as an ingredient in fluid milk 
products.
    NMPF comments and exceptions asserted that manufacturers have 
historically relied on the quantitative composition standards contained 
in the fluid milk product definition when making decisions regarding 
new product development. NMPF expressed opposition to the proposed 
reference to ``form and intended use'' in the fluid milk product 
definition because, in NMPF's opinion, it could cause manufacturers to 
decrease their use of dairy ingredients in order to prevent a product 
from being classified and priced as a fluid milk product. NMPF urged 
abandoning the ``form and intended use'' standard and relying solely on 
the protein and nonfat solids compositional standards in making 
classification decisions.
    A witness from DFA, appearing on behalf of DFA and Dairylea 
Cooperative, Inc., (DLC), testified in support of NMPF's Proposal 7 and 
Proposal 2. DLC is a dairy farmer-member owned cooperative with 2,400 
member farms located in 7 states at the time of the hearing.
    The DFA/DLC witness was of the opinion that the purpose of the 
hearing was to refine the fluid milk product definition to reflect 
current market conditions brought about by technological innovations to 
ensure that

[[Page 33537]]

dairy farmers are equitably paid for their milk. The witness testified 
that dairy processing technology, such as ultra filtration and milk 
component fractionalization, has enabled new products to be developed 
that were not foreseen when the current classification definition was 
last considered.
    The DFA/DLC witness testified that the current fluid milk product 
definition does not recognize the value of dairy proteins in the 
development of new products and therefore does not classify and 
subsequently price these new products appropriately. The witness 
claimed that manufacturers formulate their products to contain less 
than 6.5 percent total nonfat milk solids to avoid a Class I use of 
milk classification even though these products compete directly with 
and are substitutes for fluid milk.
    The DFA/DLC witness was of the opinion that the form and use of a 
product should be the primary factor in determining product 
classification. The witness said that secondary criteria used to make 
classification determinations should include such factors as product 
composition, a specific but not exclusive list of included and excluded 
dairy products, product substitutability and enhancement of producer 
revenue. The witness argued that eliminating the current total nonfat 
milk solids standard and replacing it with an equivalent milk protein 
standard would better reflect the demand for dairy proteins in the 
marketplace.
    The DFA/DLC witness offered a modification to Proposal 7 that the 
witness said would provide the Department with latitude for classifying 
future products that are a result of new technology. The witness 
explained that the modification would allow the Department to make an 
interim classification decision for a new product and then have up to 
one year to hold a public hearing to determine the appropriate 
permanent classification.
    The DFA/DLC witness also testified in support of Proposal 2. The 
witness said that its adoption would recognize the importance of dairy 
proteins in the marketplace by including all dairy protein sources, 
including whey and whey products, in computing the product's protein 
content. However, said the witness, while whey and whey products would 
be used in classification determinations, those ingredients should not 
be priced as Class I.
    A post-hearing brief submitted on behalf of DFA/DLC reiterated 
support for adopting a protein standard. The brief reiterated the claim 
that new technology has enabled some products that contain less than 
6.5 percent nonfat milk solids to be classified at a lower use-value 
than competitors in the market. The brief maintained that adoption of a 
protein standard would more adequately identify products that should be 
classified as fluid milk products in light of new fractionation 
technology.
    A witness appearing on behalf of O-AT-KA Milk Products Cooperative, 
Inc. (O-AT-KA) testified in support of Proposals 2 and 7. O-AT-KA, at 
the time of the hearing, was a cooperative owned by the dairy farmer-
members of Upstate Farms Cooperative, Inc., Niagara Milk Cooperative, 
Inc., and Dairylea Cooperative, Inc. The witness was of the opinion 
that the development of new technology necessitates a change to the 
fluid milk product definition. However, the witness cautioned that 
changes should not capture all beverages which contain milk solids as 
fluid milk products because not all milk-containing beverages compete 
with fluid milk.
    The O-AT-KA witness asserted that Proposal 7 should not be thought 
of as a fundamental change to the current standard; rather that the 
proposed true protein standard of 2.25 percent is an equivalent to the 
current 6.5 percent nonfat milk solids standard and should be 
considered as a needed clarification brought about by technological 
advances in milk processing. According to the witness, the proposed 
2.25 percent standard recognizes protein as a highly valued ingredient 
in milk products and those products with less than 2.25 percent protein 
would remain exempt from fluid milk product classification. The witness 
also advocated the adoption of Proposal 2 that would include whey and 
whey products in the computation of the protein percentage of the 
product but would not price the whey ingredients at Class I prices.
    A post-hearing brief, submitted on behalf of O-AT-KA, reiterated 
support for Proposal 7. The brief claimed that the adoption of the 
protein standard would increase the use of dairy ingredients in 
beverages which are not ``in the competitive sphere of the traditional 
milk beverages,'' thus increasing producer revenue. The brief also 
supported DFA/DLC's modification to Proposal 7 giving the Department 
authority to make an interim classification decision if a new product 
is a result of new technology.
    Comments and exceptions to the Recommended Decision submitted on 
behalf of DFA, DLC, O-AT-KA and Upstate Farms Cooperative Inc., 
hereinafter referred to as ``DFA, et al.'', supported the 
recommendation incorporating a 2.25 percent true protein standard as a 
proposal in the Recommended Decision and that inclusion of all milk 
derived ingredients when computing the 6.5 percent nonfat solids or 
2.25 percent true protein criterion. The DFA, et al., comments also 
endorsed the comments and exceptions submitted on behalf of NMPF.
    DFA, et al., expressed opposition to exempting casein and 
caseinates from Class I pricing when used in fluid milk products. The 
comments argued that all proteins in a fluid milk product should be 
priced the same--at the Class I price. DFA, et al., also abandoned 
their position taken at the hearing to not price whey derived from 
cheese making at the Class I price when used in fluid milk products. 
DFA, et al., was of the opinion that providing exemption for 
ingredients will only serve to encourage manufacturers to use price-
exempted ingredients to formulate a finished product that would be 
compositionally identical to fluid milk.
    DFA, et al., took exception to relying on form and intended use as 
the final determinate in classifying fluid milk products. DFA, et al., 
argued that manufacturers rely on the compositional criteria contained 
in the fluid milk product definition to decide how to formulate a new 
product, assess how their new product would be classified, and 
ultimately determine their raw milk ingredient costs. Their exceptions 
asserted if form and intended use criteria supersedes compositional 
standards, manufacturers would develop fewer dairy based products 
because of the perceived uncertainty in how that product's ingredients 
could be classified and priced. DFA, et al., argued that the 2.25 
percent protein standard should be the ultimate determinate of a fluid 
milk product and, if such compositional standard becomes inadequate, a 
hearing could be held to establish updated compositional standards.
    A post-hearing brief submitted on behalf of Select Milk Producers, 
Inc. (Select) and Continental Dairy Products (Continental) expressed 
support for adoption of a protein standard as a component of the fluid 
milk product definition. According to the brief, Select and Continental 
are dairy-farmer owned cooperatives that market milk on various Federal 
orders. The brief argued that adoption of a protein standard is a 
needed change to reflect changed marketing conditions brought about by 
new manufacturing technology without fundamentally altering current 
regulations. The brief stressed that milk proteins are valuable 
ingredients in drinkable products in the market and

[[Page 33538]]

that classification and pricing determinations should be reflective of 
this.
    Comments to the Recommended Decision filed on behalf of Select and 
Continental specifically supported the proposed adoption of a 2.25 
percent true protein standard to the fluid milk product definition and 
pricing of MPCs used in fluid milk products at the Class I price. 
Select and Continental also endorsed the comments and exceptions filed 
by NMPF.
    Select and Continental's exceptions asserted that as a result of 
new milk-processing technology, there is no barrier to using casein as 
a substitute ingredient for MPCs. In this regard, Select and 
Continental took exception to exempting casein and caseinates from 
Class I pricing because it would serve to provide an incentive to 
manufacturers to use them as a substitute for MPCs to avoid Class I 
regulation. The brief said relying on form and intended use to override 
compositional standards in making classification determinations would 
add needless ambiguity and subjectivity.
    A witness appearing on behalf of H.P. Hood testified in opposition 
to any changes to the fluid milk product definition. The witness was of 
the opinion that the fluid milk product definition should not be 
amended in a manner that would classify more dairy products as fluid 
milk products unless data is provided which would conclude that such 
products compete directly with fluid milk and such amendments would 
enhance producer revenue.
    The H.P. Hood witness asserted that if Proposal 7 was adopted and 
resulted in the reclassification of some products as fluid milk 
products, the change would only affect a small number of products and 
the enhancement of producer revenue would be minimal. If ingredient 
substitution for milk occurred as a result of adopting other proposals, 
the witness said, producer revenue could actually decrease. The witness 
was of the opinion that adoption of proposals that broaden the fluid 
milk product definition would stifle product innovation and discourage 
the use of dairy-derived ingredients because of the resulting increased 
costs to the manufacturer. These results, the witness said, should not 
be encouraged by the Federal milk order program.
    A post-hearing brief submitted on behalf of H.P. Hood reiterated 
opposition to Proposal 7. The brief maintained that no disorderly 
marketing conditions exist to warrant a change to the fluid milk 
product definition and that proponents of the protein standard failed 
to meet the burden of proof required by the AMAA to make a regulatory 
change. The H.P. Hood brief reviewed many factors used by the 
Department in previous classification decisions to determine the proper 
classification of Class I products. The list included, but was not 
limited to, demand elasticities, enhancement of producer revenue, and 
product competition. The brief stated that proponents failed to provide 
adequate data addressing these factors or prove that disorderly 
marketing conditions exist to warrant a change, and urged the 
Department to terminate the proceeding.
    Comments and exceptions filed by H.P. Hood took exception to the 
Recommended Decision's proposed adoption of a 2.25 percent protein 
standard and its reliance on form and intended use as a primary factor 
in making classification determinations. H.P. Hood reiterated its 
opinion that the proponents of the protein standard did not provide 
adequate justification for its adoption. Furthermore, H.P. Hood was of 
the opinion that it is not proper to make regulatory changes as 
preventive measures to possible disorderly marketing conditions and is 
a major deviation from historical milk order policy. The exceptions 
stressed that it is only proper to react to marketing conditions once 
they occur. In their exceptions, H.P. Hood also presented a list of 
questions regarding the application of how a product's form and 
intended use would be determined by the Department. H.P. Hood claimed 
that relying on form and intended use would be extremely burdensome and 
serve to inhibit new product development.
    A witness appearing on behalf of Leprino Foods Company (Leprino) 
testified in opposition to the adoption of the 2.25 percent protein 
standard contained in Proposal 7. According to the witness, Leprino 
operates nine plants in the United States that manufacture mozzarella 
cheese and whey products. The witness was of the opinion that a protein 
standard would reclassify products such as sport and protein drinks and 
yogurt smoothie products (formulated with ingredients such as whey and 
whey products) as fluid milk products. The witness stressed that 
broadening the fluid milk product definition to account for all dairy 
derived ingredients could lessen the demand for such ingredients. The 
witness speculated that manufacturers may seek out other less costly 
non-dairy ingredient substitutes which would result in decreased 
producer revenue.
    Exceptions to the Recommended Decision filed by Leprino expressed 
opposition to the adoption of a 2.25 true protein standard in the fluid 
milk product definition. Leprino argued that this standard should not 
be adopted unless it is modified to specifically exclude beverages that 
do not resemble or compete with fluid milk. Leprino was of the opinion, 
that without such exclusion, to classify products based on form and 
intended use could cause many non-traditional products, such as sport 
and nutritional beverages, to be classified as fluid milk products. The 
end result, argued Leprino, would be a lowered demand for dairy 
ingredients that may offset any revenue gains to producers by including 
additional products as fluid milk products.
    A witness appearing on behalf of Dannon Company, Inc. (Dannon) 
testified in opposition to Proposals 2 and 7. Dannon is a wholly owned 
subsidiary of the Dannon Group that produces yogurt and fresh dairy 
products in 40 countries, including the United States. The witness was 
opposed to the adoption of a protein standard and to the inclusion of 
whey when calculating the nonfat milk solids content of a product 
because, the witness said, it was not the original intent of the fluid 
milk product definition to include these milk-derived ingredients. The 
witness believed that adoption of a protein standard would cause more 
products to be classified as fluid milk products even though they do 
not compete with fluid milk. The witness argued that protein is not a 
major component of fluid milk products and therefore using a protein 
standard would not be appropriate for making classification 
determinations. The witness speculated that if a protein standard was 
adopted, it could stifle product innovation or cause food processors to 
use non-dairy ingredients in their food products. The witness said that 
if whey proteins are included, manufacturers may look for less 
expensive non-dairy ingredients to be used as a viable substitute.
    A post-hearing brief submitted on behalf of Dannon reiterated their 
opposition to the adoption of a protein standard claiming that adequate 
justification for such a change was not given by proponents at the 
hearing and that the mere ability to test for milk proteins does not 
justify its adoption.
    A post-hearing brief submitted on behalf of the National Yogurt 
Association (NYA) expressed opposition to Proposal 7. According to the 
brief, NYA is a trade association representing manufacturers of live 
and active culture yogurt products and suppliers of the yogurt 
industry. The brief claimed that proponent testimony was inconsistent 
regarding the proposals' impact on product classification and stated 
that if

[[Page 33539]]

the 2.25 percent protein standard was adopted, at least one yogurt-
containing product would be reclassified as a fluid milk product.
    The NYA brief also asserted that proponents did not provide a clear 
picture of how Proposal 7 would be implemented. Specifically, the brief 
noted that the following were not addressed: (1) How wet and dry whey 
would be handled; (2) how whey from cheese production would be 
differentiated from whey from casein production; and (3) how products 
that meet the proposed 2.25 percent true protein standard and contain 
whey and other proteins would be classified and priced. The NYA brief 
speculated that including whey in the protein calculation would lead to 
more products being classified as fluid milk products and cause 
manufacturers to seek out less costly non-dairy ingredients. The 
potential loss to producer revenue by substitution with non-dairy 
ingredients, concluded the brief, is not supported by the record.
    A post-hearing brief submitted on behalf of the National Cheese 
Institute (NCI) expressed opposition to Proposal 7 and claimed that its 
adoption would suppress the use of dairy-derived ingredients, 
particularly whey proteins. According to the brief, NCI is a trade 
association representing processors, manufacturers, marketers, and 
distributors of cheese and related products. NCI claimed that 
proponents of Proposal 7 did not identify any specific marketplace 
disorder that would be corrected by the adoption of a protein standard 
or list any product that would be reclassified if the fluid milk 
product definition were amended. The brief reviewed previous rulemaking 
decisions where proposals were denied because proponents failed to 
demonstrate that disorderly marketing conditions were present.
    The NCI brief stressed that use of dairy-derived ingredients in a 
product should not automatically qualify a product as a competitor of 
fluid milk or that their classification in a lower-valued use 
negatively affects producer revenue. The brief further maintained that 
proponents did not adequately address why whey proteins should be 
included in determining if the product met the proposed protein 
standard for a fluid milk product and why whey should be priced at the 
Class I price. The brief concluded that whey should be excluded from 
the fluid milk product definition because its inclusion would lead to 
products being classified as fluid milk products even when they do not 
compete with fluid milk.
    A post-hearing brief submitted on behalf of Sorrento Lactalis, Inc. 
(Sorrento) objected to the adoption of a protein standard. According to 
the brief, Sorrento is a manufacturer that operates five cheese plants 
throughout the United States. The brief stated that adoption of a milk 
protein standard as part of the fluid milk product definition would 
reduce the demand for dairy ingredients, especially whey proteins, 
which in turn would result in increased costs to manufacturers and 
reduced producer revenue.
    A witness testifying on behalf of H.P. Hood was of the opinion that 
if the Department found that changing the fluid milk product definition 
was warranted, adoption of a modified Proposal 5 would be appropriate. 
The witness said that adoption of Proposal 5 would provide the 
Department with standards to determine if a dairy product with less 
than 6.5 percent nonfat milk solids competes with and displaces fluid 
milk sales, which would justify classification of the product as a 
fluid milk product. The witness also noted that if Proposal 5 was 
adopted, a new product with less than 6.5 percent nonfat milk solids 
and route distribution in a Federal milk marketing area of less than 3 
million pounds would be exempted from classification as a fluid milk 
product. This distribution criteria, the witness explained, would allow 
manufacturers to test market a new product with the assurance that it 
would not be classified as a fluid milk product until the distribution 
threshold was exceeded.
    A witness appearing on behalf of Leprino testified in support of 
Proposal 5. The witness was of the opinion that fluid milk products 
should only be those products that meet the FDA standard of identity 
for milk and cultured buttermilk and products that compete with milk 
and cultured buttermilk. The witness testified that the fluid milk 
product definition is currently too broad and as a result, has lessened 
the demand for dairy ingredients in new non-traditional dairy products 
because of the possibility of being classified as a fluid milk product. 
The witness argued that many of these new products do not compete for 
sales with fluid milk and their use of dairy-derived ingredients should 
not qualify them to be defined as a fluid milk product.
    The Leprino witness explained that advances in technology have 
allowed the creation of dairy-derived ingredients through milk 
fractionation. According to the witness, dairy manufacturers are 
avoiding investing in some product innovation because of the regulatory 
burden and increased costs that are associated with manufacturing a 
fluid milk product.
    A witness testifying on behalf of DFA/DLC was opposed to the 
adoption of Proposal 5. The witness said that Proposal 5 would place an 
undue burden on the Department in making classification determinations 
and would also extend Class II classification to more products, neither 
of which the witness supported. The post-hearing brief submitted by 
DFA/DLC reiterated their opposition.
    A witness appearing on behalf of Bravo! Foods International 
Corporation; Lifeway Foods, Inc.; PepsiCo; Starbucks Corporation; and 
Unilever United States, Inc.; testified in opposition to all proposals 
that would reduce or eliminate the 6.5 percent minimum nonfat milk 
solids standard, adopt a protein standard, or include whey in 
determining the nonfat milk solids content of a product. Hereinafter, 
these companies are referred to collectively as ``Bravo!, et al.''
    A post-hearing brief submitted on behalf of Bravo!, et al., urged 
the termination of the proceeding except for the portion addressing the 
exemption of yogurt and kefir products from the fluid milk product 
definition. Bravo!, et al., asserted that the hearing record does not 
support adoption of a protein standard. The brief stated that decisions 
to amend Federal order provisions are not made without clear evidence 
of disorderly market conditions, the potential shortage of milk for 
fluid use, or lowering of producer revenue. The brief also discussed 
letters sent to the Department by producers and manufacturers which 
urged that a hearing be postponed because more analysis and market data 
was needed to justify amending the current fluid milk product 
definition. Bravo!, et al., argued that the hearing was held 
prematurely, without allowing for adequate study and market data 
research on the proposals that are under consideration. According to 
the brief, more time was needed to accurately determine the impact of 
new milk products on the marketplace.
    The Bravo!, et al., brief summarized hearing testimony from 
previous Department rulemaking decisions in which no changes were 
recommended due to a lack of evidence to support a regulatory change. 
According to Bravo!, et al., proponents did not provide evidence of 
disorder in the marketplace nor did they substantiate their claims that 
products currently in the market would not be reclassified if a protein 
standard was adopted. On the basis of such conditions, the brief 
concluded

[[Page 33540]]

that the current fluid milk product definition is adequate.
    If the Department did not terminate the proceeding, the Bravo!, et 
al., brief recommended that the 6.5 percent nonfat milk solids 
standards remain, that the computation of nonfat milk solids not be 
made on a milk equivalency basis, and that whey and whey ingredients be 
excluded from the computation.
    Exceptions to the Recommended Decision filed by Bravo!, et al., 
opposed the proposed adoption of the 2.25 percent protein compositional 
standard and reiterated that adoption of a protein standard would have 
a negative effect on dairy product innovation as manufacturers would 
use lower priced non-dairy proteins as substitutes. Bravo!, et al., 
asserted that the Department did not give enough consideration to the 
lowering of producer revenue that could occur due to the predicted 
ingredient substitution.
    Exceptions filed by Bravo!, et al., also opposed the Department's 
use of form and intended use as one of the factors in making 
classification determinations. The comments acknowledged that the AMAA 
authorized the Federal Milk Marketing Order (FMMO) program to rely on 
form and intended use in making classification determinations. However, 
Bravo!, et al., asserted that historically the FMMO program applied the 
form and use criteria by using compositional standards. Bravo!, et al., 
claimed that by specifically including the form and intended use 
criteria in the order language the Department could ignore a product's 
composition and arbitrarily classify products as fluid milk products 
even though they did not compete with fluid milk. Bravo!, et al., 
predicted that the specific inclusion of form and intended use in the 
fluid milk product definition would hamper the development of new 
products and the use of dairy ingredients because of the uncertainty 
manufacturers could face in how the milk components of their products 
would be classified.
    A witness appearing on behalf of Fonterra USA, Inc. (Fonterra) 
testified in opposition to proposals that would include MPCs in 
determining if the product met the protein standard of the fluid milk 
product definition. Fonterra at the time of the hearing was a wholly 
owned subsidiary of Fonterra Co-operative Group Limited, a New Zealand 
based dairy cooperative owned by 12,000 New Zealand dairy farmers. 
Fonterra operates plants within the United States that produce, among 
other things, MPCs. The witness stressed that changes to the fluid milk 
product definition would increase ingredient costs, discourage 
manufacturing companies from using dairy ingredients in their products, 
and force those companies to seek other less costly substitutes such as 
soy and soy products.
    A post-hearing brief submitted on behalf of Fonterra reiterated 
their objection to changing the nonfat milk solids standard and 
predicted that adoption of a protein standard would make classification 
decisions unnecessarily complicated without providing additional 
benefits to producers. The brief asserted that the hearing record did 
not contain a sufficient economic analysis on the possible benefits 
that adopting a protein standard would have on producer revenue or its 
impact on the dairy industry.
    The Fonterra brief speculated that adoption of a milk protein 
standard would decrease the market price for milk proteins, discourage 
new product development, and encourage the substitution of producer 
milk with non-dairy ingredients. The brief noted that the annual growth 
rate of soy and soy products in nutritional products from 1999 to 2003 
was 16.5 percent, while the growth of milk proteins in nutritional 
products only increased 10.1 percent over the same time period. The 
brief predicted that if protein prices rise as a result of the adoption 
of a milk protein standard, the growth of soy proteins will likely 
increase because they could be substituted for more costly milk 
proteins.
    The Fonterra brief also stated that the hearing record does not 
reveal disorder in the market by the application of the current fluid 
milk product definition and therefore concluded that amending the fluid 
milk product definition is not justified. The Fonterra brief argued 
that proponents did not provide adequate reasoning for including whey 
proteins in determining if a product met the protein standard but not 
pricing whey proteins the same as other milk proteins. Furthermore, the 
brief stated that proponents did not propose a method for 
differentiating between whey proteins resulting from cheese production 
and whey proteins from other sources.
    Comments filed on behalf of Fonterra took exception to the 
Recommended Decision's proposed adoption of a 2.25 percent true milk 
protein compositional standard. Fonterra reiterated that proponents did 
not meet the burden of proof needed to substantiate the adoption of a 
protein standard. According to the comments, proponents did not 
indicate if adoption of the standard would remedy any indications of 
market disruption or reclassify some products as fluid milk products.
    Fonterra's comments reviewed numerous rulemaking proceedings in 
which, Fonterra concluded, the Department declined to adopt proposed 
changes to marketing orders because of a lack of evidence that a change 
would promote orderly marketing conditions. Fonterra argued that the 
Recommended Decision did not adequately consider evidence asserting 
that adoption of the milk protein standard would not increase the cost 
for dairy ingredients, encourage the substitution of lower cost non-
dairy ingredients, and ultimately lower producer revenue. Fonterra was 
of the opinion that before making a Final Decision, further analysis of 
the proposals was needed to fully evaluate the possible economic impact 
to producers and manufacturers as a result of adoption of the protein 
standard.
    Fonterra stated that the Department's recommended adoption of an 
``either/or'' use of the protein and nonfat solids standard was not 
contained in any proposal discussed at the hearing and that the 
Department did not adequately explain how the use of both a protein and 
nonfat solids standard would provide for the orderly marketing of milk 
or increase producer revenue.
    The comments filed by Fonterra also argued that the Department uses 
this rulemaking proceeding to justify a change in policy that the 
Department previously attempted to adopt without undertaking the formal 
rulemaking process. Fonterra stated that historical Departmental policy 
has been to exempt such products as casein, sodium caseinate, lactose, 
whey, and MPCs from use in the nonfat milk solids calculation of a 
product. In 2004, Fonterra said, the Department attempted to include 
MPCs and other previously exempted dairy ingredients in the nonfat 
solids calculation; however, that administrative decision was 
overturned by an Administrative Law Judge. Fonterra claimed that 
proposing to include all milk derived protein ingredients in the 
calculation of a product's nonfat solids or protein composition is an 
attempt to change historical policy without adequate analysis or 
justification.
    Fonterra also took exception to having some ingredients included in 
the calculation of a product's composition but would not be priced in a 
final product. Fonterra claimed that whey is used in nearly identical 
products as MPCs and should therefore be priced the same. Fonterra was 
of the opinion that pricing whey and MPCs differently would violate the 
United States' World Trade Organization obligations. Fonterra

[[Page 33541]]

characterized whey production as primarily domestic, but that most MPCs 
are imported. Accordingly, they concluded that excluding whey from 
Class I pricing essentially places an illegal tariff on imported MPCs.
    A witness appearing on behalf of the American Beverage Association 
(ABA) testified in opposition to all proposals seeking to amend the 
fluid milk product definition. ABA is a trade association that 
represents beverage producers, distributors, franchise companies, and 
their supporting industries. The witness was of the opinion that the 
current fluid milk product definition already properly classifies dairy 
products and that there is insufficient evidence to warrant any 
changes. The witness claimed that any change would broaden the fluid 
milk product definition to include products that contain only small 
amounts of milk. The witness argued that many new beverage products 
which contain small amounts of milk or milk ingredients do not compete 
with fluid milk but do compete with soft drinks, juices and bottled 
water. The witness asserted that amending the fluid milk product 
definition to include some dairy ingredients not currently considered 
would increase manufacturers cost of production, result in stifled 
innovation of new products and encourage the use of non-dairy 
ingredients as substitutes for milk-derived ingredients.
    A witness appearing on behalf of Ohio Farmers Union (OFU) testified 
in opposition to any change to the fluid milk product definition. OFU 
is a nonpartisan, grassroots, general farm organization representing 
more than 300,000 family farms nationwide according to their web site. 
The witness testified that the primary purpose of the order program was 
to provide consumers with a reliable supply of safe and wholesome milk. 
The witness asserted that MPCs, caseinates, whey proteins, and other 
similar milk-derived ingredients have functional and nutritional 
characteristics different than fluid milk. Accounting for those 
ingredients in the fluid milk product definition, the witness said, 
would undermine the goal of the order program. The witness stressed 
that if the fluid milk product definition were amended, consumer 
confidence in the long established perception of milk as a fresh, pure 
and wholesome beverage would be diminished and would thus threaten the 
economic viability of domestic producers.
    A witness appearing on behalf of the Milk Industry Foundation (MIF) 
testified in opposition to amending the fluid milk product definition. 
According to the witness, MIF is an organization with over 100 member 
companies that process and market approximately 85 percent of the fluid 
milk and fluid milk products consumed nationwide. The witness stated 
that simply because a beverage contains milk or other dairy-derived 
ingredients does not prove that those products compete with fluid milk 
or that such competition lowers producer revenue.
    The MIF witness asserted that previous Federal milk order 
rulemaking decisions have required data and analysis to prove that an 
amendment was warranted. According to the witness, the proponents of 
proposals for changing the fluid milk product definition did not 
provide such data and analysis. Along this theme, the witness said that 
proponents should have provided data such as the market share held by 
products that do not fall under the current fluid milk product 
definition but would be included under any proposed change, cross price 
elasticity of demand analysis of products which meet the existing fluid 
milk product definition and of products that would be classified as a 
fluid milk product if any of their proposals were adopted, and an own-
price elasticity of demand analysis for products that would be 
reclassified.
    A post-hearing brief submitted on behalf of MIF reiterated their 
opposition to any changes to the current fluid milk product definition. 
The brief urged that if the Department does amend the fluid milk 
product definition, it should exclude all whey-derived protein products 
in determining if a product meets the fluid milk product definition. 
The brief stated that MIF has continuously opposed a hearing to 
consider amending the fluid milk product definition because not enough 
evidence is available to warrant a change. The brief maintained that 
proponents did not offer adequate data at the hearing to demonstrate 
that there is disorder in the marketplace that can be remedied by 
adoption of a protein standard.
    The MIF brief expanded its testimony by citing numerous rulemaking 
decisions that denied proposals on the basis that adequate evidence was 
not presented to warrant amendments to order provisions. MIF stressed 
that the mere existence of beverages containing dairy-derived 
ingredients is not evidence of marketwide disorder.
    Exceptions filed on behalf of International Dairy Foods Association 
(IDFA) asserted that because evidence doesn't demonstrate a need for 
change, no changes to the fluid milk product definition should be made. 
IDFA is a trade organization whose members include MIF, NCI and the 
International Ice Cream Association (IICA). According to their 
exceptions, IDFA represents more than 85 percent of the milk, cultured 
products, cheese and frozen desserts produced and marketed in the 
United States. IDFA reiterated arguments expressed by MIF at the 
hearing and in MIF's post-hearing brief. Their exception claimed that 
the hearing record did not demonstrate that products containing less 
than 6.5 percent nonfat solids and more than 2.25 percent protein are 
causing disorderly marketing conditions because they are not currently 
classified as fluid milk products.
    IDFA's comments also opposed the specific inclusion of the form and 
intended use criteria in the fluid milk product definition and argued 
that the definition should continue to contain only compositional 
criteria. IDFA wrote that manufacturers' product development decisions 
are in part determined by ingredient costs. Subjective criteria such as 
form and intended use, wrote IDFA, could impede new product development 
because a manufacturer would be uncertain of ingredient costs until a 
final product had been classified. IDFA's exceptions opposed the 
inclusion of whey when computing a product's composition because of 
inconsistent justification by proponents as to why whey used to produce 
fluid milk products should not also be priced as Class I. IDFA 
exceptions stated that the proponents of the protein standard did not 
demonstrate that disorderly marketing conditions exist in the absence 
of the protein standard. IDFA exceptions concluded that the adoption of 
amendments proposed in the Recommended Decision would only serve to 
lower producer revenue.
    Comments filed on behalf of Grande Cheese opposed all the proposed 
changes to the fluid milk product definition contained in the 
Recommended Decision. Grande Cheese is a cheese manufacturer located in 
the State of Wisconsin. Grande Cheese expressed support of the opinions 
expressed in the exceptions to the Recommended Decision filed by IDFA.
    A witness appearing on behalf of the National Family Farm Coalition 
testified in opposition to all proposals that would amend the fluid 
milk product definition. The witness testified that MPCs do not meet 
FDA's Generally Recognized as Safe (GRAS) standards as legal food 
ingredients. Furthermore, the witness said, MPCs have not been 
subjected to scientific testing to determine if they are safe for human

[[Page 33542]]

consumption and should not be allowed in milk products.
    A witness appearing on behalf of Public Citizen testified in 
opposition to proposals that seek to amend the fluid milk product 
definition. According to the witness, Public Citizen is a non-profit 
consumer advocacy organization with approximately 150,000 members. The 
witness was opposed to any change in the fluid milk product definition 
that would, in the witness' opinion, encourage the use of MPCs.
    Two Pennsylvania dairy farmers testified in opposition to any 
change to the fluid milk product definition. The producers opposed all 
proposals that would allow the use of caseinates and MPCs in fluid milk 
products. They asserted that MPCs are not allowed in the production of 
standardized cheese and should also not be allowed in the production of 
fluid milk products.
    A post-hearing brief submitted on behalf of the American Dairy 
Products Institute (ADPI), an association representing manufacturers of 
dairy products, offered support for amending the fluid milk product 
definition to include milk beverages that compete directly with fluid 
milk. However, the brief cautioned against developing a fluid milk 
product definition that would include non-traditional beverages and 
smoothie type products (yogurt-containing beverages). The brief 
recommended that an economic study be conducted to determine the 
possible impacts of the proposed changes before action is taken to 
amend the fluid milk product definition.
    A post-hearing brief submitted on behalf of General Mills contended 
that the fluid milk product definition should not be amended because 
proponents did not provide sufficient evidence or data to justify a 
change. The brief maintained that the hearing record is not clear on 
how proposals would be implemented or on the impact to producers, 
manufacturers, and consumers if the protein standard was adopted. 
General Mills contended that before a change is made, the Department 
should conduct an economic analysis to evaluate how protein and dairy 
products are competing in the marketplace and how the adoption of a 
protein standard would impact the marketplace. If a protein standard 
was recommended for adoption, General Mills recommended that whey not 
be included in the protein calculation, or if whey is included, that a 
2.8 percent protein standard be adopted in order to maintain the status 
quo.
    Exceptions to the Recommended Decision filed by General Mills 
opposed the adoption of the true protein compositional standard. 
However, General Mills was of the opinion that if the Department 
continued to support the protein standard, then any whey components 
should be excluded from determining a final product's protein content. 
General Mills purported that the inclusion of whey in the protein 
calculation, even if not priced at Class I, may lead manufacturers to 
increase their use of non-dairy ingredients as substitutes.
    General Mills was also opposed to relying on form and intended use 
in classification determinations. According to their exceptions, the 
form and use criteria would cause manufacturers to be less certain of a 
product's classification which would discourage using dairy ingredients 
in new products. General Mills noted that if the Department decides to 
not alter its Recommended Decision then it should clarify in a Final 
Decision that only products that compete with or are a substitute for 
fluid milk would be classified as a fluid milk product.
    A post-hearing brief submitted on behalf of New York State Dairy 
Foods, Inc. (NYSDF) opposed amending the fluid milk product definition. 
According to their brief, NYSDF is a trade association representing 
dairy product processors, manufacturers, distributors, retailers, and 
producers in the Northeast United States. The brief argued that 
products produced with the use of new fractionation technology are a 
small portion of the milk beverage market. They were of the opinion 
that such products are still too new to determine their impact on Class 
I sales and producer revenue. The brief also asserted that the adoption 
of a protein standard as part of the fluid milk product definition 
would discourage new product development and would increase costs that 
would result in reduced sales of dairy-derived ingredients. The brief 
urged that the proceeding be terminated.
    Comments and exceptions to the Recommended Decision filed on behalf 
of Glanbia Foods (Glanbia) opposed the proposed adoption of the true 
protein compositional standard and the specific inclusion of form and 
intended use as a factor in classification determinations. Glanbia 
operates two cheese plants and two whey plants that collectively 
process nearly 4 billion pounds of milk annually. Glanbia asserted that 
adoption of a true protein standard would lead to stifled innovation of 
milk derived ingredients in new products because the manufacturing 
industry would increase its use of non-dairy ingredients as 
substitutes. Their exceptions claimed that the hearing record does not 
contain evidence that adoption of a protein standard would ultimately 
benefit producers or remedy a market disorder. Glanbia also argued that 
the Department's reliance on form and intended use in classification 
determinations would similarly discourage the use of dairy ingredients.
    A professor from Cornell University testified regarding a research 
study conducted by the Cornell Program on Dairy Markets and Policy that 
focused on the demand elasticity's of various dairy products. The 
witness did not appear in support of or in opposition to any proposal 
presented at the hearing. The witness explained that the goal of the 
study was to ascertain the extent to which product innovation and 
classification decisions influence producer revenue. The study was 
designed to evaluate four hypothetical dairy products and test the 
effect that a range of classification determinations would have on 
producer revenue. The witness explained the study and concluded that 
the impact on producer revenue of a new product being reclassified from 
Class II to Class I was likely to be small, plus-or-minus $0.01 per 
hundredweight (cwt). However, the witness added, if non-dairy 
ingredients were substituted as a result of the reclassification, the 
study predicted that producer revenue would be lowered by $0.22 per 
cwt. The witness concluded that while the financial returns from 
product reclassification could be positive, the resulting ingredient 
substitution, which could take place, would result in a significant 
negative impact on producer revenue.
    The post-hearing brief submitted by NMPF also addressed concerns 
articulated at the hearing regarding the need for a demand elasticity 
study to address the issue of product substitution before amending the 
fluid milk product definition. The brief asserted that a demand 
elasticity study would not take into account newly emerging products, 
changing consumer preferences, and product innovations that could 
change the competitive relationships between products and therefore 
would not provide any relevant data. The brief also argued that the 
economic model created by Cornell University and discussed at the 
hearing contained many incorrect assumptions and thus concluded that 
the study results were flawed.
    The DFA/DLC brief also rebutted opposition to Proposal 7 which 
called for studies of product usage or demand elasticity's before 
considering amendments to the fluid milk product definition. The brief 
asserted the previous amendments to the classification system have been 
made

[[Page 33543]]

without such economic studies and that this proceeding should be 
handled in the same manner.
    A witness appearing on behalf of Bravo! Foods International 
Corporation, Lifeway Foods, Inc. (the principal makers of kefir in the 
U.S.), PepsiCo, Starbucks Corporation and Unilever United States, Inc. 
(Bravo! et al.), proposed at the hearing that kefir, as well as yogurt-
containing beverages, be exempted from the fluid milk product 
definition.
    A witness appearing on behalf of Dannon testified in support of 
Proposal 8 that would exclude yogurt containing beverages from the 
fluid milk product definition. The witness provided a definition of 
yogurt containing beverages as any beverage containing at least 20 
percent yogurt (which is in concert with Proposal 9). The witness 
argued that yogurt containing beverages are not similar in form and use 
to fluid milk products and should be excluded from the fluid milk 
product definition. The witness testified that Dannon currently 
manufactures yogurt containing products which are classified as both 
fluid milk products and Class II products. The Dannon witness 
maintained that regardless of the classification, none of its products 
compete with fluid milk. According to the witness these products should 
all be classified as Class II. The witness emphasized that yogurt and 
yogurt-containing products use unique cultures, ingredients, and 
production technology that differentiate them from fluid milk product 
production. Furthermore, the witness said yogurt products' packaging, 
taste, mouth feel, shelf-life and marketing placement in grocery stores 
distinguishes them from fluid milk.
    The Dannon witness presented market research it had conducted. The 
witness stated, based on the research, that yogurt-containing beverages 
are consumed as a food product and not as an alternative to fluid milk. 
The witness claimed that less than one percent of potential consumers 
of a Dannon yogurt-containing product consume the product as a 
substitute for fluid milk. Additionally, the witness noted that Dannon 
advertises its yogurt-containing products as a substitute for snacks, 
not fluid milk. The witness concluded from this that yogurt-containing 
products are different than fluid milk, do not compete with fluid milk 
in the marketplace and therefore should not be classified the same as a 
fluid milk product. The witness also testified in opposition to 
Proposal 9 but only with respect to the inclusion of a protein 
threshold which Dannon does not consider justified. The witness noted 
that Dannon does support the proposed 20 percent minimum yogurt content 
standard that such products should meet as a condition for being 
exempted from the fluid milk product definition.
    A post-hearing brief submitted on behalf of Dannon reiterated its 
hearing testimony. The brief stated that fluid milk products should 
only be those products that are closely related to, or compete with, 
fluid milk for sales. That brief stressed that yogurt-containing 
beverages are dissimilar to fluid milk beverages and are used as a food 
replacement, not as a beverage substitute. The brief noted that in 
2004, more than 37 percent of Dannon's sales were from products 
developed within the last 5 years and stressed that classifying all 
milk drinks with milk-derived ingredients as fluid milk products would 
result in decreased innovation for developing additional uses for milk.
    A witness appearing on behalf of General Mills testified in support 
of Proposal 9. The witness was of the opinion that USDA should classify 
products primarily on the basis of form and use. The witness asserted 
that drinkable yogurt products, while containing milk ingredients, are 
food products and do not compete with fluid milk. The witness explained 
that drinkable yogurt products were created to meet a change in 
consumer preferences for convenience and portability. The witness 
presented market research conducted by Yoplait demonstrating that 
consumers view drinkable yogurt products as alternatives to 
traditionally packaged yogurt and other nutritional snacks, not fluid 
milk. The witness asserted that 80 percent of Yoplait drinkable yogurt 
smoothie consumers would substitute another yogurt product for the 
smoothie.
    The General Mills witness supported the current classification 
system contending that its modification raises a host of issues and 
questions. However, if USDA determined that a change to the fluid milk 
product definition is appropriate, the witness urged adoption of 
Proposal 9 to exclude drinkable yogurt products that contain at least 
20 percent yogurt by weight and no more than 2.2 percent skim milk 
protein from the fluid milk product definition. According to the 
witness, including drinkable yogurt products in the fluid milk product 
definition would increase costs to manufacturers that would stifle 
innovation and result in a shift towards using non-dairy ingredients. 
The witness said manufacturers would choose to reformulate products 
using less milk and milk proteins resulting in reduced dairy producer 
income.
    A post-hearing brief submitted on behalf of General Mills 
maintained that ample evidence regarding the fundamental differences of 
fluid milk and yogurt containing beverages was presented at the hearing 
to justify exempting yogurt containing products with more than 20 
percent yogurt from classification as a fluid milk product. Comments 
and exceptions to the Recommended Decision filed on behalf of General 
Mills reiterated this view.
    Two witnesses appearing on behalf of the National Yogurt 
Association (NYA) testified in support of proposals that would exempt 
yogurt containing products from the fluid milk product definition. NYA 
is a national trade association representing the producers of yogurt 
products and their suppliers. The witnesses testified that previous 
regulatory decisions made by USDA emphasized that products classified 
as fluid milk products should be intended to be consumed as beverages 
and compete with fluid milk. The witnesses expressed disagreement with 
a classification decision published in the early 1990's that classified 
drinkable yogurt products as fluid milk products. The witnesses were of 
the opinion that in both form and use, yogurt and drinkable yogurt 
products compete with other food products, not fluid milk, and should 
be classified as Class II products. The witnesses explained that yogurt 
products are produced and shipped nationally by a few manufacturers, 
have a shelf-life averaging 30-60 days, have a texture and taste 
distinctly different than fluid milk and are positioned in retail 
stores separate from fluid milk. The witnesses noted that yogurt-
containing beverages were developed as a substitute for spoonable 
yogurt products, not fluid milk.
    The NYA witnesses were of the opinion that the increase in producer 
revenue resulting from currently classifying drinkable yogurt products 
as fluid milk products isn't and would not overcome the decrease in 
revenue due to the loss of sales from an increase in the price of 
drinkable yogurt products.
    A post-hearing brief submitted on behalf of NYA reiterated support 
for excluding all products containing at least 20 percent yogurt 
provided that the yogurt meets the standard of identity for yogurt. 
According to the brief, the 20 percent content requirement would ensure 
that only products whose characterizing ingredient is yogurt would be 
excluded from the fluid milk product definition. The brief also 
indicated that if USDA determines not to exclude yogurt containing 
products,

[[Page 33544]]

then NYA strongly opposes any change to the current fluid milk product 
definition.
    The NYA brief argued that consumer surveys and marketplace data 
provided by Dannon and General Mills that explained how yogurt-
containing products are fundamentally different from fluid milk were 
not contradicted at the hearing. The brief also noted that while Dairy 
Farmers of America (DFA) and National Milk Producers Federation (NMPF) 
testified that consumers are buying low-carbohydrate milk instead of 
fluid milk, they did not offer similar evidence for yogurt-containing 
products.
    Comments and exceptions to the Recommended Decision filed on behalf 
of NYA supported the proposed exemption of drinkable yogurt products 
from the fluid milk product definition. The NYA comments reiterated 
arguments it made at the hearing and in its post-hearing brief, and 
asserted that the hearing record contains no evidence to support that 
drinkable yogurt products are similar to fluid milk.
    A witness appearing on behalf of Bravo!, et al., testified in 
support of amendments that would exempt yogurt containing products and 
kefir from the fluid milk product definition. The witness argued that 
both products are compositionally different than fluid milk and do not 
compete for sales with fluid milk. Furthermore, the witness noted that 
drinkable yogurt and kefir products are one of the fastest growing 
segments in the dairy industry, providing a large opportunity for the 
expanded use of dairy-derived ingredients which should not be hampered 
by the additional costs of such ingredients being priced at Class I.
    Comments and exceptions filed on behalf of Bravo!, et al. and by 
Lifeway Foods, separately expressed support for the Recommended 
Decision's proposed exemption of kefir, and drinkable yogurt products 
that contain at least 20 percent yogurt.
    A witness appearing on behalf of Leprino Foods Company (Leprino) 
testified that if USDA recommended amending the fluid milk product 
definition, then Leprino supported the adoption of Proposal 9 to 
exclude products containing at least 20 percent or more yogurt by 
weight from the fluid milk product definition. According to the 
witness, Leprino operates nine plants in the United States that 
manufacture mozzarella cheese and whey products. The witness also was 
of the opinion that yogurt containing products do not compete with 
fluid milk and should be classified as Class II products. The witness 
stressed that if these products are not excluded from the fluid milk 
product definition, then Leprino strongly opposed the adoption of a 
protein standard to be part of the fluid milk product definition.
    Comments and exceptions filed on behalf of Leprino supported the 
Recommended Decision's proposed exclusion of yogurt containing 
beverages and kefir from the fluid milk product definition.
    Comments filed by Fonterra USA, Inc. (Fonterra) supported the 
Department's recommendation that yogurt containing beverages should be 
exempted from the fluid milk product definition but took exception to 
the yogurt content in beverages containing less that 20 percent yogurt 
(i.e. Class I) not being subject to an ``upcharge'', as are other milk 
ingredients. Fonterra is a wholly owned subsidiary of Fonterra Co-
operative Group Limited, a New Zealand based dairy cooperative owned by 
12,000 New Zealand dairy farmers.
    The witness appearing on behalf of NMPF testified in opposition to 
exempting yogurt-containing beverages from the fluid milk product 
definition. The witness was of the opinion that these products are 
similar in form and use to other flavored fluid milk products and 
should be considered a substitute for fluid milk. In its post-hearing 
brief, NMPF maintained its opposition to proposals that would exclude 
drinkable yogurt products from the fluid milk product definition.
    Comments and exceptions filed by NMPF in response to the 
Recommended Decision opposed the exemption of kefir and yogurt 
containing beverages from the fluid milk product definition arguing 
that an exemption is inconsistent with the principle of form and 
intended use. NMPF reiterated arguments made at the hearing and in its 
post-hearing brief that kefir and yogurt containing beverages are 
almost identical in form to fluid milk and are used as beverages. NMPF 
purported that data presented at the hearing by yogurt manufacturers 
demonstrating that yogurt containing beverages did not compete with 
fluid milk was misleading and the exemption would be difficult to 
enforce. NMPF stated that because kefir has no standard of identity (as 
does yogurt, for example) manufacturers could name an array of products 
as kefir to avoid classification as fluid milk products. NMPF also said 
the standard of identity for yogurt was too broad and its identity 
standard is currently under review by the FDA. NMPF claimed that 
exempting yogurt containing beverages from the fluid milk product 
definition could create an enormous regulatory loophole that could be 
exploited to avoid classification of new products as fluid milk 
products.
    The witness appearing on behalf of Dairy Farmers of America and 
Dairylea Cooperative Inc. (DFA/DLC) also testified in opposition to the 
adoption of Proposals 8 and 9. The witness stated that adoption of 
these proposals would allow more products to be classified as Class II 
products even though they compete with fluid milk for sales. A post-
hearing brief filed by DFA/DLC further claimed that the growth of 
drinkable yogurt products in the marketplace has not been impeded by 
previous classification decisions and that such products should not be 
excluded from the fluid milk product definition because some hearing 
participants claimed it would harm the innovation of new dairy 
products.
    In its comments to the Recommended Decision, Select Milk Producers, 
Inc. (Select)/Continental Dairy Products (Continental) opposed the 
exemption of kefir or drinkable yogurt beverages that contained 20 
percent or more yogurt from the fluid milk product definition. 
According to their brief Select and Continental are dairy-farmer owned 
cooperatives that market milk on various Federal orders.
    The witness appearing on behalf of Leprino testified in support of 
Proposal 10. The witness testified that only products that compete with 
fluid milk should be classified as fluid milk products, therefore meal 
replacements and nutritional drinks should remain exempted from the 
fluid milk product definition. In its exceptions to the Recommended 
Decision Leprino opposed the inclusion of the term ``health care 
industry'' in the meal replacement exemption. Leprino argued that this 
qualifier could cause a product to hold two different classifications 
depending on how it is distributed.
    A post-hearing brief submitted on behalf of Novartis stated that 
the Department should exempt special dietary need and nutritional 
beverages from the fluid milk product definition. The brief explained 
that Novartis' products are not currently classified as fluid milk 
products due to their nutritional nature, the level of nonfat milk 
solids contained in their product, and because their products are only 
available through foodservice and health care channels. The brief 
stressed that Novartis' health care products were never intended to 
compete with traditional fluid milk.
    The brief predicted that Novartis' products could possibly become 
reclassified as fluid milk products if a 2.25 percent protein standard 
were adopted as a part of the definition. The

[[Page 33545]]

brief insisted that if these products are reclassified, it would result 
in higher costs for patients with special dietary and nutrition needs. 
The brief urged the Department to exempt nutritional products consumed 
for special dietary use from the fluid milk product definition if a 
protein standard was adopted as part of the fluid milk product 
definition.
    A witness appearing on behalf of Hormel testified in support of 
Proposal 11 seeking to exclude health care beverages from the fluid 
milk product definition. The witness testified that fluid milk products 
designed for the health care industry should be exempted because they 
do not compete with fluid milk for sales. The witness explained that 
Hormel's distribution is primarily to health care facilities, and they 
are targeted to a small segment of the population. The witness argued 
that if products designed for the health care industry were classified 
as fluid milk products, it would have no effect on producer revenue 
because the products have extremely limited distribution. The witness 
explained that many products Hormel manufactures are designed to help 
counter the effects of malnutrition in adults with a variety of medical 
conditions and are not marketed nor labeled as fluid milk. Instead, 
those products are considered to be foods for special dietary use, the 
witness noted, and should be exempt from the fluid milk product 
definition.
    The Bravo!, et al., witness also testified in support of the 
continued exemption from the fluid milk product definition for products 
such as infant formula, meal replacements, products packaged in 
hermetically sealed containers, snack replacements, high protein 
drinks, and products that contain alcohol or are formulated for animal 
use. The witness explained that meal replacements and similar products 
have historically been exempted from the fluid milk product definition 
and that their regulatory status should not be changed.
    Comments received from Bravo!, et al. on the Recommended Decision 
supported the continued exemption of meal replacements that are sold to 
the health care industry but offered a slight modification to clarify 
the intent of the exemption. Bravo!, et al., explained that some 
products are considered meal replacements and are sold both in retail 
markets and through health care professionals, health care 
institutions, and weight management centers. Bravo!, et al., asserted 
that a literal reading of the Recommended Decision could lead to one 
product holding two different classifications depending on how it is 
distributed. Therefore, Bravo!, et al., suggested that the meal 
replacement exemption be modified to read ``* * * (meal replacement) 
that are intended for use in the health care industry, or products 
similar in form and intended use sold to retail customers * * *''
    The NMPF witness testified in opposition to Proposal 10 arguing 
that its adoption would eliminate important factors in determining if a 
product was specially formulated for a specific dietary purpose that 
would warrant exemption from the fluid milk product definition. The 
witness was also opposed to Proposal 11 because the proposed language--
``nutrient enhanced fortified formulas''--was too broad and would not 
clearly distinguish such products from traditional fluid milk products.
    In its exceptions to the Recommended Decision, NMPF opposed any 
amendments to the exemption of meal replacements from the fluid milk 
product definition. NMPF stated that the proposed use of the ``health 
care industry'' distribution criteria was vague and open-ended for 
interpretation on which entities are a part of the ``health care 
industry.'' NMPF was of the opinion that the current packaging criteria 
contained in the proposed meal replacement exemption is an appropriate 
guideline for what products constitute meal replacements.
    The DFA/DLC witness testified in opposition to Proposals 10 and 11. 
The witness was of the opinion that amending the fluid milk product 
definition to broaden the exemption of products such as infant formulas 
and meal replacements was not justified because doing so would 
significantly lower Class I use. This position was reiterated in the 
DFA/DLC post-hearing brief and exceptions to the Recommended Decision. 
DFA, et al., argued that no evidence was presented to support the 
removal of the packaging criteria from the meal replacement exemption. 
The exceptions asserted that the use of packaging criteria has 
historically been a way to distinguish products that do not compete 
with fluid milk because the higher cost of hermetically sealed 
packaging discouraged manufacturers from using the exemption to 
circumvent Class I pricing. DFA, et al., also took exception to the 
proposed exemption of nutritional formulas that are prepared for the 
health care industry. According to the exceptions, the types of 
institutions that comprise the ``health care industry'' are not clearly 
defined in the decision. DFA, et al., asserted that the meal 
replacement exemption could cause manufacturers to sell their products 
to a health care facility for resale in the ``normal marketplace'' to 
avoid Class I pricing.
    The witness appearing on behalf of O-AT-KA testified that products 
packaged in hermetically-sealed containers or that are specialized for 
longer shelf life should remain exempt from fluid milk product 
classification because those products are used as meal replacements and 
meal supplements, not as alternatives to milk. The witness said that 
since the term ``meal replacement'' is not defined in the current 
definition, no change in the exemption of hermetically sealed 
containers should be made. The position was reiterated in their brief.
    The Dannon witness testified in opposition to the adoption of 
Proposal 10 because it would remove the 6.5 percent nonfat milk solids 
standard of the fluid milk product definition.
    Exceptions to the Recommended Decision filed by Fonterra opposed 
the removal of how a product is packaged in the infant feeding and 
dietary use exemption, and the proposed distribution to the ``health 
care industry'' as a method for exempting meal replacements. Fonterra 
argued that relying on how a product is distributed could cause the 
same product to hold two separate classifications. Fonterra offered 
that if meal replacements are to be exempt from fluid milk product 
classification, then how a product is distributed should not be a 
factor in determining whether or not it meets the fluid milk product 
definition.

Discussion and Findings

    This decision provides that the fluid milk product definition for 
all Federal orders defines fluid milk products by: (1) Continuing to 
provide a non-exhaustive list of named fluid milk products; (2) 
Maintaining a set of compositional standards; and (3) Continuing to 
provide exceptions for products that will be exempted from the 
definition. This decision maintains the current maximum butterfat limit 
of less than nine percent for a product to still be considered a fluid 
milk product. The nonfat solids compositional standards will consist of 
the current 6.5 percent nonfat milk solids content of a product and a 
true milk protein standard of 2.25 percent content of a product. The 
nonfat solids standards will be applied independently of each other. 
For example, if a product contained 6 percent nonfat solids and 2.30 
percent true milk protein and less than 9 percent butterfat the product 
would be considered a fluid milk product. These standards either 6.5 
percent or more nonfat milk solids or 2.25 percent or

[[Page 33546]]

more true milk protein, or less than nine percent butterfat, will be 
the basis for determining if a beverage containing dairy ingredients 
meets the compositional standards for being defined as a fluid milk 
product.
    The calculation of the percent true protein and the percent nonfat 
milk solids contained in a product will be performed by measuring the 
true protein and nonfat milk solids of all dairy-derived ingredients 
contained in the finished product. All non-fluid dairy-derived 
ingredients used in a fluid milk product will be classified and priced 
in the same manner as nonfat dry milk (or condensed) is currently 
classified and priced when used in a fluid milk product.
    The record supports exemption of certain drinkable products made 
from milk or products containing milk-derived ingredients from the 
fluid milk product definition. These exemptions include: Drinkable 
yogurt containing at least 20 percent yogurt by weight and kefir; 
products especially prepared for infant feeding or dietary use as meal 
replacements that are packaged in hermetically sealed containers; and 
other products that may otherwise meet the compositional standards of a 
fluid milk product but contain no fluid milk products named in the 
fluid milk product definition.
    The primary goal of Federal milk marketing orders is to establish 
and maintain orderly marketing conditions. This is achieved primarily 
through the use of classified pricing (pricing milk based on its use) 
and the marketwide pooling of the proceeds of milk used in a marketing 
area among all producers. These two tools enable Federal orders to 
establish minimum prices that handlers must pay for milk based on its 
ultimate use and return to producers a weighted average or uniform 
price for their milk.
    Through classified pricing and marketwide pooling, Federal orders 
promote and maintain orderly marketing by equitably pricing milk used 
in the same class among competing handlers within a marketing area. 
This does not mean that handlers will necessarily have equal costs 
since differences in milk tests, procurement costs, and transportation 
will impact a handler's final raw milk costs. However, it does allow 
handlers to have the same minimum regulated price for milk used in a 
particular category of products or class of products for which they 
compete for sales. The regulated minimum price is the class price for 
the respective class of use. Thus, it is reasonable and appropriate 
that milk used in identical or nearly identical products should be 
placed in the same class of use. This tends to reduce the incidence of 
disorderly marketing that may arise because of price differences 
between competing handlers.
    Federal milk orders classify producer milk as fluid milk or used to 
produce a manufactured product. Producer milk classified as Class I 
consists of those products that are intended to be used as beverages 
including, but not limited to, whole milk, skim milk, low fat milk, and 
flavored milk products such as chocolate milk. Producer milk classified 
as Class II includes milk used in the production of soft or spoonable 
manufactured products such as sour cream, ice cream, cottage cheese, 
yogurt, and milk that is used as ingredients in the manufacture of 
other food products. Producer milk classified as Class III includes 
milk used in the production of hard cheese products. The Class IV use 
of producer milk generally consists of milk used in the production of 
canned milk, dried milk products, and butter.
    Federal orders provide a definition for ``fluid milk products'' to 
identify the types of products that are intended to be consumed as 
beverages and to specify that the skim milk and butterfat in these 
types of milk products should be classified as Class I and priced 
accordingly. The current fluid milk product definition contained in all 
Federal milk orders provides a non-exhaustive list of products that are 
specifically identified as fluid milk products. The definition also 
specifies certain compositional criteria for fluid milk products--any 
product containing less than 9 percent butterfat and 6.5 percent or 
more nonfat milk solids. The definition also specifically exempts from 
the fluid milk product definition products especially prepared for 
infant feeding or dietary use (meal replacement) packaged in a 
hermetically-sealed container, any product that contains by weight less 
than 6.5 percent nonfat milk solids, and whey.
    Numerous witnesses were concerned that the definition of milk as 
defined by the Food and Drug Administration (FDA) in 21 CFR 131.110 not 
be changed. A Federal milk marketing order decision cannot change the 
definition of milk. Some witnesses were of the opinion that the 
addition of various ingredients to milk would cause the resulting 
product to not meet the Grade A standard. This decision does amend the 
definition of a fluid milk product in all milk marketing orders for the 
purpose of classifying producer milk in accordance with the form in 
which or the purpose for which it is used as required by section 
608(c)(5)(A) of the Agricultural Marketing Agreement Act. Neither this 
decision nor Federal orders in general determine if milk is Grade A or 
what ingredients are allowed in milk. Further, Federal orders do not 
establish standards of identity for milk. Such standards are 
established by other agencies, such as a state board of health or the 
FDA.
    Testimony given at the hearing and positions taken in post-hearing 
briefs extensively discussed the importance of form and intended use in 
determining whether a product should be defined as a fluid milk 
product. However, comments to the Recommended Decision almost 
universally favored the use of specific compositional standards rather 
than form and use as first consideration which was proposed in the 
Recommended Decision. These comments have merit. Therefore as provided 
in this decision, compositional criteria will be the primary basis used 
in determining whether the product is defined as a fluid milk product.
    The standards of 6.5 percent or more nonfat milk solids or 2.25 
percent or more true milk protein are intended to exclude from the 
fluid milk product definition those products which contain some milk 
solids but that are not closely identified with the dairy industry.
    The establishment of nonfat milk solids and true milk protein 
standards for classifying milk products is intended to provide the same 
classification for products having the same general form and use. 
Similar products in different classes defeat the purpose of classified 
pricing and results in unequal costs among handlers. It is not the 
intent of the Federal order program to bring products that do not 
resemble nor are marketed as dairy beverages under the fluid milk 
product definition. As stated earlier, the Act requires the Secretary 
to classify milk ``in accordance with the form in which or the purpose 
for which it is used.'' Currently, some products such as re-hydrating 
fruit flavored sport drinks, bottled teas, carbonated soft drinks, or 
bottled water may contain some milk-derived ingredients but they do not 
resemble nor are they marketed as dairy products.
    As discussed in the comments to the Recommended Decision, specific 
compositional standards will give the industry clearer standards from 
which to determine if a product is or will be defined as a fluid milk 
product, superseding reliance on form and intended use. When 
formulating new beverage products, the industry will have specific 
standards to guide product formulation. The industry will better know 
how Federal orders will determine the prices of milk ingredients.

[[Page 33547]]

    Based on record evidence, compositional standards should continue 
to be relied upon in determining if a product meets the fluid milk 
product definition. The revised definition provides that a beverage 
should contain by weight less than 9 percent butterfat and contain 6.5 
percent or more nonfat milk solids or 2.25 percent or more true milk 
protein. The 9 percent butterfat criterion that is currently used as 
the maximum butterfat content to differentiate between fluid milk 
products and fluid cream products (a Class II use of milk) is 
unchanged. The addition of a 2.25 percent true milk protein criterion 
serves to provide a sufficient basis to distinguish whether a product 
is a Class I or Class II use of milk.
    Several parties filed comments in opposition to the inclusion of 
the 2.25 percent true milk protein criterion. They argued that its 
inclusion in the definition is unnecessary and its adoption may cause 
processors to use non-dairy ingredients to avoid products from being 
classified as a fluid milk product.
    The record of this proceeding clearly supports the addition of a 
milk protein standard to the fluid milk product definition. The record 
shows that by removing some of the lactose from milk, a product may be 
produced that is in all respects (except for the removed lactose) 
identical to the form and intended use of fluid milk products. However, 
using only the 6.5 percent nonfat standard results in this product 
being classified as Class II even though its form and use closely 
resembles Class I products.
    Including all dairy derived ingredients in the computation of a 
product's nonfat solids and true protein content provides a more 
complete and comprehensive basis to determine a milk products identity 
as a fluid milk product. Record evidence reveals criticism that the 
current fluid milk product definition has not changed to reflect the 
technological advances in milk processing--especially the fractionation 
of milk. Such fractionation technology has created the ability to 
produce dairy-based beverages of almost any composition, some of which 
are marketed as and directly compete with traditional fluid milk 
products.
    Several witnesses at the hearing addressed specific composition 
criterion that should be used for determining if a product meets the 
fluid milk product definition. Proponents of the 2.25 percent true milk 
protein criterion explained that with the technology to separate the 
lactose from the protein in milk, protein also should be used in 
determining if a product should be a fluid milk product because protein 
is the highest valued nonfat milk solid and because lactose is most 
often not used in the formulation of manufactured dairy-based 
beverages. Under current administrative determination of nonfat milk 
solids, a dairy-based beverage with lactose removed has generally been 
determined not to be a fluid milk product. Further, milk, in either wet 
or dry form, that has lactose removed is generalized as ``milk protein 
concentrate (MPC)'' and MPC has not been considered a nonfat milk 
solid. Thus, with lactose removed, a product closely resembling milk in 
form and intended use may contain less than the current 6.5 percent 
nonfat milk solids even though the protein content could exceed the 
protein content of milk.
    Other testimony contended that milk protein is not a significant 
component in fluid milk products and incorporating a milk protein 
criterion is therefore not appropriate. Contrary to the view that milk 
protein is not a significant component in fluid milk products, the 
record of the proceeding reveals that in whole milk, protein is the 
third most abundant component following lactose and butterfat. In 
lowfat milk, protein is the second most abundant component.
    Even though the record and post hearing briefs contain considerable 
discussion concerning possible new product development and substitution 
of nondairy ingredients in fluid milk products, no evidence was 
presented at the hearing to indicate at what price level or to what 
degree such substitution would take place. Testimony at the hearing 
only speculated that processors may use nondairy ingredients if the 
fluid milk product definition adopted the proposed 2.25 percent true 
milk protein compositional standard. Opponents also suggested that 
evidence did not warrant any change to the fluid milk product 
definition and that there was no evidence that changing the definition 
would be beneficial to dairy farmers. Proponent witnesses argued that 
adoption of a 2.25 percent true milk protein compositional standard 
would not change the classification of products which currently do not 
meet the fluid milk product definition. Neither proponents nor 
opponents presented any data to substantiate their claims of benefit or 
harm to changing the fluid milk product definition.
    While the Class I use of milk is priced on the basis of skim milk 
and butterfat, skim milk and butterfat pricing do not distinguish the 
components or the level of components that are in the skim fraction. 
Even if there is a greater level of protein in the skim fraction, there 
is no greater value that will be assigned to the skim fraction. 
However, producers may benefit from products being determined as 
meeting the fluid milk product definition not because of the adoption 
of the protein standard but because the dairy ingredients in these 
products are priced as Class I.
    The record evidence supports that the true milk protein or nonfat 
milk solids contained in a finished product should be used to determine 
if the 2.25 percent true milk protein or the 6.5 percent nonfat solids 
compositional standard has been met. The composition of the finished 
product, including all milk-derived ingredients, will provide a clear 
comparison of the product in question to the products listed and 
defined in the fluid milk product definition. These ingredients 
include, but are not limited to, the specific products listed in the 
fluid milk definition, nonfat dry milk, milk protein concentrate, 
casein, calcium and sodium caseinate, and whey. Although liquid whey, 
which is derived from other manufacturing, may meet the compositional 
standards of a fluid milk product in its natural form, it is not a 
finished product. The intent is to specifically exclude liquid whey 
from the fluid milk product definition and account for it only when 
used as an ingredient in the production of a finished product meeting 
the fluid milk product definition. The compositional content will be 
computed by using the pounds of true protein or nonfat milk solids in 
the finished product. For all other purposes, such as pricing and 
pooling, the fluid equivalent of all milk ingredients in fluid milk 
products, including but not limited to nonfat dry milk, milk protein 
concentrate, casein, calcium and sodium caseinate, and whey, will be 
used. The addition of a true milk protein criterion will assist in 
determining those products that should be considered fluid milk 
products. The inclusion of a true milk protein compositional standard 
also will assure that products which are comparable to the products 
listed in the fluid milk product definition are properly classified as 
Class I.
    Federal milk orders have consistently been applied to provide and 
this decision reaffirms that nonfat dry milk reconstituted to make a 
fluid milk product or the volume increase caused by the use of nonfat 
dry milk in the fortification of a fluid milk product should be 
assessed the Class I value because the integrity of classified pricing 
is maintained and the reconstituted or fortified product competes with 
fluid uses of milk products. Accordingly, this decision proposes that 
other dairy-derived ingredients, such as milk protein

[[Page 33548]]

concentrate, casein, calcium and sodium caseinate, and whey, that are 
used or reconstituted to form a fluid milk product or the volume 
increase caused by the use of these products to fortify a fluid milk 
product be priced as Class I for the same reasons. Handlers will be 
charged the current month's Class I price for the additional Class I 
volume resulting from the use of these ingredients in fluid milk 
products contrasted to the receipt of these products assigned to Class 
IV. This reclassification charge (additional cost) is not a separate 
charge but is assessed through the increase in the handler's Class I 
utilization and is assessed (determined) on the volume of reconstituted 
milk or the volume increase in the modified product, above the level of 
an unmodified product. This reclassification charge assures equity 
between competing handlers on raw product cost, assures producers that 
they will receive the Class I value contribution to a marketing order's 
blend price for milk marketed as a fluid milk product, and it maintains 
the integrity of classified pricing.
    Based on the record, all milk-derived ingredients, on a fluid 
equivalent basis, contained in a fluid milk product will be included in 
the allocation process and the resulting classification and pricing of 
producer milk. Whey, as used herein is intended to include whey, dry 
whey, and whey protein concentrates. The fluid equivalent for those 
products where the relationship between the protein and nonfat milk 
solids has not been altered will be computed using nonfat solids, while 
the fluid equivalent for those products where the relationship between 
the protein and nonfat milk solids has been altered, such as MPCs, will 
be determined on a true milk protein basis.
    The methodology for computing a handler's cost under Federal milk 
orders remains unchanged. Milk-derived products such as nonfat dry 
milk, MPC, casein, calcium and sodium caseinates and whey will be used 
to determine if the quantity of the fluid milk equivalent in the 
modified fluid milk product is greater than the volume of an unmodified 
fluid milk product of the same type and butterfat content. The 
equivalent volume of the modified product, up to the level of the 
volume of an unmodified product, will be considered Class I utilization 
and will result in the inherent reclassification charge (additional 
cost) in the handler's use value from the Class IV price to the Class I 
price. Any fluid milk equivalent in excess of this equivalent volume 
will be considered a utilization of other source milk beginning with 
Class IV and be priced accordingly. The receipt of these milk-derived 
products used in a fluid milk product will be accounted for on a fluid 
equivalent basis as Class IV other source receipts.
    Comments filed in response to the Recommended Decision, by various 
parties representing producers, were in favor of including all nonfat 
dairy solids in the computation of the numerical standards as contained 
in the Recommended Decision. Their comments reiterated the position 
presented in their testimony and briefs. Comments filed by opponents of 
including all nonfat milk solids argued that the inclusion of all 
nonfat solids is unnecessary because whey and certain other nonfat 
solids have not traditionally been included in the definition of fluid 
milk. They also maintain that because no disorderly marketing has 
occurred, no change is necessary. Opponents assert that the inclusion 
of all nonfat dairy solids would capture additional products meeting 
the fluid milk definition and in turn processors would substitute 
nondairy solids to avoid classification as a fluid milk product.
    As record evidence supports and as already discussed in this 
decision, the inclusion of all milk-derived ingredients in the 
computation of the nonfat solids on true protein content is 
appropriate. The use of all milk-derived ingredients used in the 
manufacturing of the fluid milk product provides a more complete basis 
for comparing the product to the listed fluid milk products and a 
clearer indication of the appropriate determination of classification. 
In addition, considering all milk-derived ingredients places all 
current and future products on the same set of compositional standards.
    Opponents maintain that nondairy products will be substituted to 
avoid a product being determined to be a fluid milk product. However, 
opponents did not present evidence as to the relative prices necessary 
for this substitution to occur. Opponents did not quantify any of their 
claims that the recommended decision would cause product substitution 
in the manufacture of dairy based beverages. Nor did they present any 
examples of dairy ingredient substitution. Therefore, it is virtually 
impossible to determine if substitution will occur and what the impact, 
if any, may be. While there are currently several nondairy ingredient 
options available to formulate products, the advantages of using dairy 
ingredients, such as their nutrition, physical properties, and taste, 
have kept dairy ingredients as a competitive choice for use in the 
manufacture of the many new products currently available.
    Manufacturers of milk-based products that are intended to be used 
for dietary uses (meal replacements) testified that products sold for 
such dietary use in hermetically-sealed containers and the same product 
sold in other types of containers receive different regulatory 
classifications. Some products, such as those intended to be used for 
infant feeding and dietary needs (meal replacements), are currently 
considered Class II products if they are hermetically-sealed. However, 
the same products in a brick-pack or other types of packaging may be 
considered fluid milk products. The record evidence indicates that 
these products have a limited distribution and in the case of many of 
the dietary products, sales are only to health care facilities (such as 
hospitals and nursing homes). In addition, these products have a very 
long shelf life. The limited distribution and packaging of these 
products indicates that they do not directly compete with Class I 
products. Their intended use can be generalized as replacements for 
meals by infants, the infirm, and the elderly and not for use as a 
beverage. These products as used for medical and well-defined 
healthcare applications are not fluid milk competitors and are not of a 
scale, as record evidence demonstrates, that would cause a change in 
marketing conditions for fluid milk products. Accordingly, the term 
``meal replacement'' encompasses both those drinkable dairy products 
intended to replace meals and categorized products intended for the 
health care industry, and may include other products of similar 
intended form and use.
    This decision, in the narrow context of a highly specialized and 
marketed drinkable product sold to the health care industry, continues 
to find that packaging is a legitimate criterion for considering some 
meal replacement products as Class II products and others as Class I. 
When dietary products (meal replacements) are in hermetically sealed 
containers such packaging confirms that their intended use is a meal 
replacement. When not so packaged, dietary products (meal replacements) 
may or may not be used to replace the nutrition of normal meals in the 
health care industry or possibly to be used in the same manner as fluid 
milk. The dietary products packaged in other than hermetically sealed 
containers may or may not have the same form and intended use as those 
in hermetically sealed containers. It is therefore not reasonable that 
they should automatically be similarly classified.

[[Page 33549]]

Dietary products (meal replacements) should be excluded from the fluid 
milk product definition and should be considered Class II products if 
they are packaged in hermetically sealed containers or if it is 
demonstrated otherwise that the intended use is for specialized health 
care purposes or medically required meal substitution.
    Based on the record, the products in question have been produced to 
help consumers with various dietary or digestive problems achieve 
sufficient nutritional intake through a drinkable alternative to solid 
foods. These products traditionally have added vitamins, minerals, and 
proteins to achieve a nutritional equivalent to a ``typical'' meal. In 
addition, these products are packaged in hermetically sealed containers 
to maintain a long shelf life for easy handling in nursing homes and 
hospitals. These products continue to be Class II products. Similar 
meal replacement products not packaged in hermetically sealed 
containers (brick packs or gable topped containers) should be 
considered as Class II products regardless of where they are marketed 
if they can be shown to be intended for the same specialized dietary 
use as a product sold in a hermetically sealed container with the same 
limited use. However, fortified milk products not intended for dietary 
use (meal replacements) that are available for a more generalized use 
that would broadly compete with fluid milk will not be exempted from 
the fluid milk product definition.
    Numerous comments and exceptions were filed in response to the 
Recommended Decision that are in opposition to the elimination of 
packaging and the addition of ``sold to the health care industry'' as 
criteria for excluding milk based dietary use (meal replacement) 
products from the definition of a fluid milk product. Much of the 
opposition concerned the definition of ``sold to the health care 
industry'' and the application of such a criteria. Several comments 
suggested that products sold to retail stores might be classified 
differently than products sold to nursing homes or hospitals. Based on 
the evidence presented in exceptions, this decision removes the 
distribution channel reference in the fluid milk product definition to 
prevent the potential dual classification of a product.
    As noted by DFA, et al., in its exceptions to the Recommended 
Decision, USDA did not receive any proposals to change the 
classification of supplements for dietary use that contain milk-derived 
ingredients such as ready-to-drink high protein products. Beverages 
containing milk-derived ingredients, such as high protein drinks, are 
typically packaged in hermetically sealed containers and are currently 
classified as Class II products. Such beverages may include fruit 
flavored re-hydrating sports drinks, bottled teas, carbonated soft 
drinks and bottled waters which may contain milk-derived ingredients, 
usually in the form of whey proteins. Because this final decision 
provides for primary reliance on compositional standards rather than on 
intended form and use, products such as these need to be specifically 
exempted from the fluid milk product definition even if they otherwise 
meet the definition's compositional standards. Such products are 
clearly not the same as other named fluid milk products of the 
definition and are not used in a manner consistent with beverage milk. 
These products may often be used to supplement nutritional needs, but 
are not used or considered to be a meal replacement. Such products, 
packaged in hermetically sealed containers, will be exempted from the 
fluid milk product definition.
    Exceptions to the Recommended Decision assert that expanding 
exemptions of products from the fluid milk product definition would 
result in lower producer revenue. The record of this proceeding lacks 
the data to conclude that exempting certain milk-based or milk 
containing products, or reclassifying current products from one class 
to another, will harm producer revenue.
    Proposal 5 called for, in part, retaining the 6.5 percent nonfat 
solids criterion and giving the Department the flexibility to include 
other dairy-based products that fell below 6.5 percent nonfat solids as 
fluid milk products. At the hearing, the proposal was modified to 
require the Department to first make other determinations and to 
conduct studies before a classification determination is made on 
whether the product meets the fluid milk product definition.
    Specifically, the modified proposal would require the Department to 
determine if a product competes directly and substantially with Food 
and Drug Administration defined milk products and also included five 
other criteria the Department would have to satisfy before a written 
determination of fluid milk product classification could be issued. The 
modified proposal further required that more than three million pounds 
of the product be sold in a marketing area per month before the product 
would be defined as a fluid milk product even if the product met all of 
the five criteria.
    The multi-criteria features of Proposal 5, as modified, are not 
consistent with the adopted primary consideration to compositional 
standards and the requirement to classify milk on the basis of form and 
intended use as provided for in section 608(c)(5)(A) of the Act and are 
not adopted. Requiring a comparison of retail prices and advertising, 
and examination of the substitutability between the new product and 
already defined fluid milk products does not conform to the primary 
reliance on compositional standards or form and intended use in 
determining whether a product meets the fluid milk product definition. 
No significant improvements to product classification determinations 
would be achieved. Therefore Proposal 5 is denied.
    A modification to Proposal 7 made at the hearing is not adopted. 
This modification sought to require the Department to hold a hearing to 
determine the classification of a new product ``made by new 
technology.'' Such requirement is not necessary for the same reasons in 
determining that Proposal 5 and all of its modifications are not 
adopted. The need to incorporate a specific requirement to hold a 
hearing is not necessary since it is already available.
    A number of opponents of proposals seeking to change the fluid milk 
product definition argued that there must necessarily exist a current 
problem or the existence of disorderly marketing conditions before 
amendments to the provisions of Federal milk marketing orders can be 
made. Based on the evidence, this decision disagrees with such 
arguments. Actions to preserve the integrity of the regulatory system 
have historically been taken to avoid problems with the goal of 
maintaining orderly marketing conditions. Amending the orders to 
prevent disorderly marketing conditions from arising is reasonable and 
consistent with ensuring and maintaining orderly conditions and equity 
among producers and handlers. In light of the changing marketing 
conditions, it is especially reasonable and appropriate to provide 
standards that can address both immediate and future needs of a rapidly 
changing industry brought about by new technology.
    Some witnesses testified that even if a product meets the fluid 
milk product definition, the intended use of that product should be 
considered for assigning the product to the most appropriate class use. 
In this regard, if the intended use of the product is a food item that 
does not compete with traditional fluid milk in the marketplace, the 
product should be

[[Page 33550]]

exempted from the fluid milk product definition. The most notable 
products of this characteristic are drinkable yogurts that, while 
drinkable, are not intended to be used as a beverage. The record 
reveals that some products such as drinkable yogurts are marketed as a 
food item to supplement or even replace a meal and intended to be used 
as a quick and easy way to carry a snack. This differentiates their 
intended use from fluid milk products consumed as beverages. The record 
indicates that these products are not marketed side-by-side with fluid 
milk products in retail outlets. Instead, they are positioned alongside 
other Class II products such as spoonable yogurts in cups. It is 
reasonable to conclude that drinkable yogurts are yogurt in fluid form 
and not flavored drinks and are sufficiently different in intended use 
from other fluid milk products to warrant their exemption from the 
fluid milk product definition.
    A portion of Proposal 9 referred to drinkable yogurt having a 
protein standard of ``* * * no more than 2.2 percent skim milk protein 
* * *'' given that it contained a minimum amount (20 percent) of 
yogurt. As just discussed above, several witnesses testified to the 
fact, and the consumer surveys and marketplace data provided by Dannon 
and General Mills explained how yogurt containing products (e.g. 
drinkable yogurt) are fundamentally different from fluid milk. No 
protein standard is adopted for drinkable yogurt because the 20 percent 
yogurt content requirement differentiates these products and assures 
they are not in competition with fluid milk.
    Nevertheless, it is reasonable to establish a minimum level of 
yogurt that needs to be contained in the finished product to 
differentiate them from flavored beverages while at the same time 
identifying the drinkable yogurt as a yogurt product. No record 
evidence was presented by manufacturers of yogurt-containing beverages 
to demonstrate that a 20 percent minimum yogurt standard would cause 
some yogurt beverages to be classified as fluid milk products and 
others not. Therefore based on record evidence, it is reasonable to 
estimate that the current yogurt content of these products is above the 
proposed 20 percent minimum.
    Accordingly, drinkable yogurt containing at least 20 percent yogurt 
by weight should be considered a yogurt product and as such exempt from 
the fluid milk product definition. The yogurt contained in exempted 
drinkable yogurt still must meet the yogurt, low-fat yogurt, or fat-
free yogurt standard of identity as defined by the FDA (21 CFR 131.200-
131.206) and the manufacture of the yogurt mass must be an identifiable 
and quantifiable step in the formulation process of the drinkable 
yogurt.
    Opponents of excluding drinkable yogurts from the fluid milk 
product definition stressed that drinkable yogurts should not be 
excluded because they are beverages and packaged similarly to other 
fluid milk products. Opponents are of the opinion that drinkable 
yogurts are fluid milk products because they are comparable to flavored 
or cultured fluid milk products. Drinkable yogurts do have several 
characteristics similar to listed fluid milk products--they can be used 
as a beverage and are similarly packaged. There are, however, other 
characteristics that differentiate drinkable yogurts from fluid milk 
products, as the record indicates. These characteristics include, in 
most cases, a different consistency than the fluid milk products, a 
significant volume of added yogurt, the addition of fruit and not just 
flavorings, and live and active cultures supplied by the yogurt.
    The differences between listed fluid milk products and drinkable 
yogurts warrant the exclusion of drinkable yogurts containing at least 
20 percent yogurt from being defined as a fluid milk product. Drinkable 
products with less than 20 percent yogurt will be considered fluid milk 
products. The milk ingredients (including the yogurt portion) contained 
in those products with less than 20 percent yogurt will be priced at 
the Class I price. The Recommended Decision proposed the yogurt portion 
of these Class I products not be subject to a Class I ``upcharge.'' 
Fonterra's exceptions objected to the yogurt content not being priced 
as Class I as would other milk ingredients in the fluid milk product. 
Since these beverages with less than 20 percent yogurt will be 
considered a fluid milk product, it is consistent to price the milk 
ingredients in such products the same as other Class I beverages.
    Bravo!, et al., which supported excluding drinkable yogurts from 
the fluid milk product definition, proposed, as did Lifeway Foods 
separately at the hearing, to also exclude kefir. The evidence provided 
to support excluding kefir from the fluid milk product definition 
identified kefir as a cultured product similar to drinkable yogurt 
that, like yogurt, contains live and active cultures. While cultured 
beverages are one of the listed products in the fluid milk product 
definition, the record shows kefir's several similarities to drinkable 
yogurts provide a reasonable basis to conclude that the milk used in 
kefir products should be classified in the same way as milk used in 
drinkable yogurt products. NMPF argued that kefir should not be exempt 
because no standard of identity exists to identify what is and is not 
kefir. While kefir has no standard of identity, cultured milk 
requirements are described by the U.S. Food and Drug Administration 
(FDA) (21 CFR 131.112) and kefir is specifically listed as such a 
product. Therefore, as with drinkable yogurts containing at least 20 
percent yogurt by weight, kefir should be exempt from the fluid milk 
product definition.
    Producer groups were concerned about the Recommended Decision's 
effect on producer income. The exclusion of certain drinkable yogurts 
and kefir from the fluid milk product definition will have a minimal 
impact on the resulting uniform prices to producers. According to the 
record the volume of drinkable yogurt or kefir type beverages was less 
than one-half of one percent of the packaged fluid milk products 
distributed in 2004. For 2004, it is estimated that if all of the 
current drinkable yogurt and kefir beverages had been Class II, the 
impact on producers, either through the uniform price or producer price 
differential, would have been a $0.0026 per hundredweight reduction on 
the more than 103 billion pounds of producer milk pooled on Federal 
orders.
    NMPF argued that the form and use of drinkable yogurt is the same 
as the products listed in the fluid milk products definition. It could 
be asserted that drinkable yogurt is a beverage similar to some of the 
listed fluid milk products and it is made in this form with the 
intention of people drinking the product. However, the similarity ends 
there and the record evidence establishes numerous differences which 
support drinkable yogurt and kefir to not be treated as fluid milk 
products. As pointed out in the Recommended Decision and by proponents 
of both Proposals 8 and 9 in their comments, drinkable yogurt is 
marketed with yogurt and competes with yogurt products in the 
marketplace and not with fluid milk products. As indicated by a 
proponent for exempting drinkable yogurt from the fluid milk product 
definition, it is made by blending yogurt into a liquid. This is 
significantly different from flavored drinks in which flavoring is 
added to a fluid milk product. As a practical point, drinkable yogurts 
do not fulfill the same intended use as fluid milk products in the home 
or commercially. For example, they are not intended to be added to tea 
or coffee, or poured on cereals, fruits and

[[Page 33551]]

other foods, and to be consumed as a beverage.
    NMPF, in their exceptions to the Recommended Decision, pointed out 
that the FDA may change the standard of identity of yogurt and 
therefore it is inappropriate to use the current FDA standard of 
identity as a criterion in determining that drinkable yogurt which 
contains more than 20 percent yogurt is not a fluid milk product. NMPF 
exceptions also opposed the exemption of kefir from the fluid milk 
product definition for many of the same reasons for exempting drinkable 
yogurt. As NMPF correctly notes, kefir is a cultured fermented 
beverage. A cultured fermented beverage such as kefir is equally 
dissimilar to the other listed fluid milk products as these described 
drinkable yogurts.
    After careful review and consideration of the record evidence and 
the reasons as stated above, this decision concludes that drinkable 
yogurt containing at least 20 percent yogurt by weight, and kefir 
should not be defined as fluid milk products. As such, this 
determination represents the adoption of Proposal 8, the requirement 
that drinkable yogurt products contain at least 20 percent yogurt by 
weight to be excluded from the fluid milk product definition as 
included in Proposal 9, and the proposal of Bravo!, et al., as well as 
Lifeway Foods that kefir be exempt from the fluid milk product 
definition. Milk used to produce these products will be classified as a 
Class II use of milk.

Rulings on Proposed Findings and Conclusions

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

General Findings

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

Rulings on Exceptions

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

Marketing Agreement and Order

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

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

    It is hereby directed that a referenda be conducted and completed 
on or before the 30th day from the date this decision is published in 
the Federal Register, in accordance with the procedures for the conduct 
of referenda [7 CFR 900.300-311], to determine whether the issuance of 
the orders as amended and hereby proposed to be amended, regulating the 
handling of milk in the Northeast, Appalachian, Florida, Southeast, 
Upper Midwest, Central, Mideast, Pacific Northwest, Southwest and 
Arizona marketing areas is approved or favored by producers, as defined 
under the terms of the order, as amended and as hereby proposed to be 
amended, who during such representative period were engaged in the 
production of milk for sale within the aforesaid marketing areas.
    The representative period for the conduct of such referenda is 
hereby determined to be June 2009.
    The agents of the Secretary of Agriculture to conduct such 
referenda are hereby designated to be the respective market 
administrators of the aforesaid orders.

List of Subjects in 7 CFR Part 1000

    Milk marketing orders.

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

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

Findings and Determinations

    The findings and determinations hereinafter set forth supplement 
those that were made when the orders were first issued and when they 
were amended. The previous findings and determinations are hereby 
ratified and confirmed, except where they may conflict with those set 
forth herein.
    (a) Findings. A public hearing was held upon certain proposed 
amendments to the tentative marketing agreements and to the orders 
regulating the handling of milk in the Northeast and other marketing 
areas. The hearing was held pursuant to the provisions of the 
Agricultural Marketing Agreement Act of 1937, as amended (7 U.S.C. 601-
674), and the applicable rules of practice and procedure (7 CFR part 
900).

[[Page 33552]]

    Upon the basis of the evidence introduced at such hearing and the 
record thereof, it is found that:
    (1) The said orders as hereby amended, and all of the terms and 
conditions thereof, will tend to effectuate the declared policy of the 
Act;
    (2) The parity prices of milk, as determined pursuant to Section 2 
of the Act, are not reasonable in view of the price of feeds, available 
supplies of feeds, and other economic conditions which affect market 
supply and demand for milk in the aforesaid marketing areas. The 
minimum prices specified in the orders as hereby amended are such 
prices as will reflect the aforesaid factors, insure a sufficient 
quantity of pure and wholesome milk, and be in the public interest;
    (3) The said orders as hereby amended regulate the handling of milk 
in the same manner as, and are applicable only to persons in the 
respective classes of industrial or commercial activity specified in, a 
marketing agreement upon which a hearing has been held; and
    (4) All milk and milk products handled by handlers, as defined in 
the marketing agreements and the orders as hereby amended, are in the 
current of interstate commerce in milk or its products.

Order Relative to Handling

    It is therefore ordered, that on and after the effective date 
hereof, the handling of milk in the Northeast and other marketing areas 
shall be in conformity to and in compliance with the terms and 
conditions of the order, as amended, and as hereby amended, as follows:
    For the reasons set forth in the preamble, 7 CFR part 1000 is 
proposed to be amended as follows:

PART 1000--GENERAL PROVISIONS OF FEDERAL MILK MARKETING ORDERS

    1. The authority citation for 7 CFR Part 1000 continues to read as 
follows:

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

    2. In Sec.  1000.15 paragraphs (a) and (b)(1) are revised to read 
as follows:

Sec.  1000.15  Fluid milk product.

    (a) Except as provided in paragraph (b) of this section, fluid milk 
product shall mean any milk products in fluid or frozen form that are 
intended to be used as beverages containing less than 9 percent 
butterfat and 6.5 percent or more nonfat solids or 2.25 percent or more 
true milk protein. Sources of such nonfat solids/protein include but 
are not limited to: Casein, whey protein concentrate, milk protein 
concentrate, dry whey, caseinates, lactose, and any similar dairy 
derived ingredient. Such products include, but are not limited to: 
Milk, fat-free milk, lowfat milk, light milk, reduced fat milk, milk 
drinks, eggnog and cultured buttermilk, including any such beverage 
products that are flavored, cultured, modified with added or reduced 
nonfat solids, sterilized, concentrated, or reconstituted. As used in 
this part, the term concentrated milk means milk that contains not less 
than 25.5 percent, and not more than 50 percent, total milk solids.
    (b) * * *
    (1) Any product that contains less than 6.5 percent nonfat milk 
solids or contains less than 2.25 percent true milk protein; whey; 
plain or sweetened evaporated milk/skim milk; sweetened condensed milk/
skim milk; yogurt containing beverages with 20 or more percent yogurt 
by weight and kefir; products especially prepared for infant feeding or 
dietary use (meal replacement) that are packaged in hermetically sealed 
containers; and products that meet the compositional standards 
specified in paragraph (a) of this section but contain no fluid milk 
products included in paragraph (a) of this section.
* * * * *
    3. In Sec.  1000.40 paragraphs (b)(2)(iii) and (b)(2)(vi) are 
revised to read as follows:

Sec.  1000.40  Classes of utilization.

* * * * *
    (b) * * *
    (2) * * *
    (iii) Aerated cream, frozen cream, sour cream, sour half-and-half, 
sour cream mixtures containing nonmilk items; yogurt, including yogurt 
containing beverages with 20 percent or more yogurt by weight and 
kefir, and any other semi-solid product resembling a Class II product;
* * * * *
    (vi) Products especially prepared for infant feeding or dietary use 
(meal replacements) that are packaged in hermetically sealed containers 
and products that meet the compositional standards of Sec.  1000.15(a) 
but contain no fluid milk products included in Sec.  1000.15(a);
* * * * *
    4. In Sec.  1000.43 paragraph (c) is revised to read as follows:

Sec.  1000.43  General classification rules.

* * * * *
    (c) If any of the water but none of the nonfat solids contained in 
the milk from which a product is made is removed before the product is 
utilized or disposed of by the handler, the pounds of skim milk in such 
product that are to be considered under this part as used or disposed 
of by the handler shall be an amount equivalent to the nonfat milk 
solids contained in such product plus all of the water originally 
associated with such solids. If any of the nonfat solids contained in 
the milk from which a product is made are removed before the product is 
utilized or disposed of by the handler, the pounds of skim milk in such 
product that are to be considered under this part as used or disposed 
of by the handler shall be an amount equivalent to the nonfat milk 
solids contained in such product plus all of the water and nonfat 
solids originally associated with such solids determined on a protein 
equivalent basis.
* * * * *

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

Marketing Agreement Regulating the Handling of Milk in Certain 
Marketing Areas

    The parties hereto, in order to effectuate the declared policy of 
the Act, and in accordance with the rules of practice and procedure 
effective thereunder (7 CFR part 900), desire to enter into this 
marketing agreement and do hereby agree that the provisions referred to 
in paragraph I hereof, as augmented by the provisions specified in 
paragraph II hereof, shall be and are the provisions of this marketing 
agreement as if set out in full herein.
    I. The findings and determinations, order relative to handling, and 
the provisions of Sec.  ------ to ------ \1\ all inclusive, of the 
order regulating the handling of milk in the ------------ \2\ marketing 
area (7 CFR part ------ \3\); and
---------------------------------------------------------------------------

    \1\ First and last section of order.
    \2\ Name of order.
    \3\ Appropriate part number.
---------------------------------------------------------------------------

    II. The following provisions: Sec.  ------------ \4\ Record of milk 
handled and authorization to correct typographical errors.
---------------------------------------------------------------------------

    \4\ Next consecutive section number.
---------------------------------------------------------------------------

    (a) Record of milk handled. The undersigned certifies that he/she 
handled during the month of ---------- \5\, ---------- hundredweight of 
milk covered by this marketing agreement.
---------------------------------------------------------------------------

    \5\ Appropriate representative period for the order.
---------------------------------------------------------------------------

    (b) Authorization to correct typographical errors. The undersigned 
hereby authorizes the Deputy Administrator, or Acting Deputy

[[Page 33553]]

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

Signature

By (Name)--------------------------------------------------------------
(Title)----------------------------------------------------------------
(Address)--------------------------------------------------------------

    (Seal)

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

    Dated: May 21, 2010.
Rayne Pegg,
Administrator, Agricultural Marketing Service.
[FR Doc. 2010-12771 Filed 6-11-10; 8:45 am]
BILLING CODE P
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