[Federal Register Volume 77, Number 40 (Wednesday, February 29, 2012)]
[Proposed Rules]
[Pages 12216-12226]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-4827]


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DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Part 1033

[Docket No. AO-11-0333; AMS-DA-11-0067; DA-11-04]


Milk in the Mideast Marketing Area; Recommended Decision and 
Opportunity To File Written Exceptions on Proposed Amendments to 
Tentative Marketing Agreement and Order

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Proposed rule; recommended decision.

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SUMMARY: This decision recommends adoption of a proposal to amend the 
Pool Plant provisions of the Mideast Federal milk marketing order to 
reflect that distributing plants physically located within the 
marketing area with a Class I utilization of at least 30 percent, and 
with combined route disposition and transfers of at least 50 percent 
distributed into Federal milk marketing areas, would be regulated as a 
Pool Distributing Plant under the terms of the order.

DATES: Comments must be submitted on or before April 30, 2012.

ADDRESSES: All comments received will be posted without change, 
including any personal information provided. Comments (four copies) 
must be filed with the Hearing Clerk, United States Department of 
Agriculture, STOP 9200-Room 1031, 1400 Independence Avenue SW., 
Washington, DC 20250-1031. Comments may be submitted for public viewing 
using the electronic process available at the Federal eRulemaking 
portal: http://www.regulations.gov. Reference should be made to the 
title of the action and docket number.

FOR FURTHER INFORMATION CONTACT: Erin C. Taylor, Order Formulation and 
Enforcement Division, USDA/AMS/Dairy Programs, STOP 0231-Room 2963, 
1400 Independence Avenue SW., Washington, DC 20250-0231, (202) 720-
7183, email address: <a href="/cdn-cgi/l/email-protection#3257405b5c1c46534b5e5d4072535f411c474156531c555d44"><span class="__cf_email__" data-cfemail="8aeff8e3e4a4feebf3e6e5f8caebe7f9a4fff9eeeba4ede5fc">[email protected]</span></a>.

SUPPLEMENTARY INFORMATION: This decision recommends adoption of 
amendments that will more adequately define the plants, and the 
producer milk associated with those plants, that serve the fluid needs 
of the Mideast market and therefore which producers should share in the 
additional revenue arising from fluid milk sales.
    This administrative action is governed by the provisions of 
sections 556 and 557 of Title 5 of the United States Code and, 
therefore, is excluded from the requirements of Executive Order 12866.
    The amendments to the rules proposed herein have been reviewed 
under Executive Order 12988, Civil Justice Reform. They are not 
intended to have a retroactive effect. If adopted, the proposed 
amendments would not preempt any state or local laws, regulations, or 
policies, unless they present an irreconcilable conflict with this 
rule.
    The Agricultural Marketing Agreement Act of 1937, as amended (7 
U.S.C. 601-674) (the Act), 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 USDA a 
petition stating that the order, any provision of the order, or any 
obligation

[[Page 12217]]

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 U.S. Department of Agriculture (USDA or 
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 an inhabitant, or has its principal place of business, has 
jurisdiction in equity to review USDA's ruling on the petition, 
provided a bill in equity is filed not later than 20 days after the 
date of the entry of the ruling.

Regulatory Flexibility Act and Paperwork Reduction Act

    In accordance with the Regulatory Flexibility Act (5 U.S.C. 601-
612), the Agricultural Marketing Service (AMS) 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 farms. For purposes of 
determining a handler's size, if the plant is part of a larger company 
operating multiple plants that collectively exceed the 500-employee 
limit, the plant will be considered a large business even if the local 
plant has fewer than 500 employees.
    During October 2011, the time of the hearing, there were 6,651 
dairy farms pooled on the Mideast order. Of these, approximately 6,169 
dairy farms (or 92.8 percent) were considered small businesses.
    During October 2011, there were 51 handler operations associated 
with the Mideast order (25 fully regulated handlers, 8 partially 
regulated handlers, 2 producer-handlers and 16 exempt handlers). Of 
these, approximately 38 handlers (or 74.5 percent) were considered 
small businesses.
    The Pool Plant provisions of the Mideast order define which plants 
have an association with serving the fluid milk market demand of the 
Mideast marketing area, and therefore determine the producers and the 
producer milk that can participate in the marketwide pool and share in 
the Class I market revenues. The proposed amendments could fully 
regulate handlers that currently fall under partial regulation. As a 
result, these handlers would be required to account to the Mideast 
order marketwide pool. Consequently, all producers whose milk is pooled 
and priced under the terms of the Mideast order would benefit from the 
additional revenue contributed to the marketwide pool by the newly-
regulated distributing plant. The Department anticipates that while 
these additional monies would be shared with all producers serving the 
market, the proposed amendments would not have a significant economic 
impact on a substantial number of small entities.
    AMS is committed to complying with the E-Government Act, to promote 
the use of the Internet and other information technologies to provide 
increased opportunities for citizen access to Government information 
and services, and for other purposes.
    A review of reporting requirements was completed under the 
Paperwork Reduction Act of 1995 (44 U.S.C. chapter 35). It was 
determined that the proposed amendment would have no impact on 
reporting, recordkeeping, or other compliance requirements because it 
would remain identical to the current requirements. No new forms are 
proposed and no additional reporting requirements would be necessary.
    This recommended decision does not require additional information 
collection that requires clearance by the Office of Management and 
Budget (OMB) beyond currently approved information collection. The 
primary sources of data used to complete the approved forms are 
routinely used in most business transactions. The forms require only a 
minimal amount of information which can be supplied without data 
processing equipment or a trained statistical staff. Thus, the 
information collection and reporting burden is relatively small. 
Requiring the same reports for all handlers does not significantly 
disadvantage any handler that is smaller than the industry average.
    Interested parties are invited to submit comments on the probable 
regulatory and informational impact of this proposed rule on small 
entities.

Prior Documents in This Proceeding

    Notice of Hearing: Issued September 2, 2011; published September 8, 
2011 (76 FR 55608).

Preliminary Statement

    Notice is hereby given of the filing with the Hearing Clerk of this 
recommended decision with respect to proposed amendments to the 
tentative marketing agreement and the order regulating the handling of 
milk in the Mideast marketing area. This notice is issued pursuant to 
the provisions of the Agricultural Marketing Agreement Act and the 
applicable rules of practice and procedure governing the formulation of 
marketing agreements and marketing orders (7 CFR part 900).
    Interested parties may file written exceptions to this decision 
with the Hearing Clerk, U.S. Department of Agriculture, STOP 9200-Room 
1031, 1400 Independence Avenue SW., Washington, DC 20250-9200, by April 
30, 2012. Four copies of the exceptions should be filed. All written 
submissions made pursuant to this notice will be made available for 
public inspection at the Office of the Hearing Clerk during regular 
business hours (7 CFR 1.27(b)). The hearing notice specifically invited 
interested persons to present evidence concerning the probable 
regulatory and informational impact of the proposals on small 
businesses. Some evidence was received that specifically addressed 
these issues and some of the evidence encompassed entities of various 
sizes.
    A public hearing was held upon proposed amendments to the marketing 
agreement and the order regulating the handling of milk in the Mideast 
marketing area. The hearing was held pursuant to the provisions of the 
Agricultural Marketing Agreement Act of 1937 (AMAA), as amended (7 
U.S.C. 601-674), and the applicable rules of practice and procedure 
governing the formulation of marketing agreements and marketing orders 
(7 CFR part 900).
    The proposed amendments set forth below are based on the record of 
a public hearing held in Cincinnati, Ohio pursuant to a notice of 
hearing issued September 2, 2011. At the hearing, evidence was also 
gathered to determine whether market conditions exist to warrant 
consideration of the proposal on an emergency basis.
    The material issues on the record of hearing relate to:

1. Amendment of the Pool Plant Definition

Findings and Conclusions

    This decision recommends adoption of a proposal, published in the 
Notice of Hearing as Proposal 1, with two modifications: one proposed 
at the hearing and one conforming change made by AMS. Proposal 1, as 
published, would amend the Pool Plant provisions

[[Page 12218]]

of the Mideast order so that any plant physically located within the 
marketing area would be fully regulated by the Mideast order if 50 
percent of the plant's total combined route disposition and transfers 
falls within Federal milk marketing area boundaries and not more than 
25 percent of the plant's route disposition is within any single 
Federal marketing area. This decision recommends striking the 25 
percent in-area route disposition qualifier from the initial proposal, 
as proposed by Superior Dairy, Inc. (Superior Dairy) during the 
hearing. As such, any distributing plant physically located in the 
Mideast milk marketing area with combined total route distribution and 
transfers of 50 percent or more into Federal milk marketing areas would 
be regulated by the terms of the Mideast order. (As discussed below, a 
plant meeting this new standard could still become pooled by another 
order if it has total route distribution of at least 50 percent into 
one Federal marketing area for 3 consecutive months (as provided for in 
Sec.  1033.7(h)(3)).) Additionally, the regulatory text recommended in 
this decision has been modified by AMS to add clarifying text to ensure 
consistency with current order provisions.
    The Pool Plant provisions of the Mideast order define how plants 
demonstrate an adequate association with the fluid market, and 
therefore the milk associated with those plants that is pooled and 
priced under the terms of the order. The Pool Distributing Plant 
standard of the Mideast order first requires a plant to meet a minimum 
Class I utilization, which is the percentage of fluid milk physically 
received at the plant that is distributed or transferred as Class I 
(fluid) products. The Class I utilization standard for the Mideast 
Federal Milk Marketing Order (FMMO) is 30 percent. The plant must also 
show a reasonable association with the order's Class I market; that 
association is determined by the percentage of the plant's total Class 
I route disposition that is distributed or transferred within the 
marketing area, or ``in-area'' route disposition. In the Mideast order, 
25 percent of the plant's Class I route disposition must be to outlets 
within the Mideast marketing area. If a plant meets both the 30 percent 
Class I utilization and the 25 percent ``in-area'' route disposition 
standard the plant will be a fully regulated distributing plant. Once 
fully regulated, a distributing plant must account to the marketwide 
pool at classified use values and pay its producers at least the 
order's minimum blend price.
    A witness appeared on behalf of the proponents of Proposal 1, Dairy 
Farmers of America, Inc., Continental Dairy Products, Inc., Dairylea 
Cooperative Inc., Erie Cooperative Association, Foremost Farms USA 
Cooperative, Inc., Michigan Milk Producers Association, Inc., National 
Farmers Organization, Inc., Prairie Farms Dairy, Inc., and White Eagle 
Cooperative Association (collectively referred to as DFA et al.), in 
support of modifying the Pool Plant provisions of the Mideast milk 
marketing order. The witness stated that DFA et al. are all member-
owned Capper Volstead cooperatives that collectively market the 
majority of the milk in the Mideast milk marketing area.
    The DFA et al. witness estimated that more than 85 percent of the 
nearly 6,974 producers whose milk is pooled on the Mideast order are 
small businesses. The witness was of the opinion that the disorderly 
marketing conditions resulting from what they consider to be inadequate 
Pool Plant provisions are harming these small businesses and that 
failing to address these issues would be detrimental to their dairy 
farmer members.
    The DFA et al. witness testified that the intent of FMMOs are to 
create and preserve orderly marketing conditions by, among other 
things, maintaining classified pricing and a marketwide pooling system 
in which all handlers pay uniform minimum classified prices based on 
their milk utilization and producers receive a minimum uniform blend 
price. The witness testified that when marketwide pooling and 
classified pricing are jeopardized, FMMOs should be amended to maintain 
order in the market.
    The DFA et al. witness explained why they proposed a change to the 
Pool Plant provisions of the Mideast order. The witness testified that 
a large fluid milk bottling plant owned by Superior Dairy, located in 
Canton, Ohio, which had previously been fully regulated by either the 
Mideast or Northeast Federal milk orders, was able to become partially 
regulated under the current provisions of both orders. The witness 
testified that Superior Dairy's Canton plant was able to avoid full 
regulation by transferring packaged product ultimately bound for 
distribution in the Northeast marketing area through a smaller sister 
plant located in Wauseon, Ohio, thereby reducing the route disposition 
from its Canton plant below the 25 percent in-area route disposition 
requirement.
    The DFA et al. witness was of the opinion that the Pool Plant 
provisions of the Mideast order allow Superior Dairy to avoid full 
regulation and consequently cause disorder in the market in two primary 
ways: (1) Producers who incur the additional costs of servicing the 
order's Class I market are not guaranteed a uniform blend price, and 
(2) similarly situated handlers are not assured the same raw milk 
costs. The witness reviewed the producer payment options available to 
partially regulated plants and explained how the ability of plants like 
Superior Dairy's plant to avoid full regulation causes disorder. The 
witness elaborated that one of the producer payment options, commonly 
known as the ``Wichita Option,'' for partially regulated plants 
requires plants to pay its producer suppliers, in aggregate, minimum 
Federal order classified values. The witness noted that while a 
Partially Regulated Distributing Plant (PRDP) has to pay aggregated 
classified values to it producers, it is not required to pay its 
producers uniformly on an individual basis. The witness said that if a 
plant demonstrates to the Market Administrator that this aggregate 
value requirement is met, then no additional payment into the order's 
producer settlement fund (PSF) is necessary. The witness testified that 
when partially regulated plants opt to pay their producer suppliers the 
minimum Federal order classified values, in aggregate, the plant can 
include over-order premiums in that calculation, whereas a fully 
regulated handler cannot. In orders such as the Mideast order, where 
significant over-order premiums are necessary to obtain a milk supply, 
the witness noted, this cost savings could be significant for a plant. 
The witness said that this savings could be used by the plant to 
increase market share for fluid milk sales, or procure additional milk 
supplies to gain a competitive advantage with similarly situated, fully 
regulated pool handlers who are required to pay classified milk use 
values to the PSF (not including over-order premiums) and minimum blend 
prices to dairy farmers.
    The DFA et al. witness attempted to estimate the amount of money 
that Superior Dairy was able to retain from January of 2010 to July of 
2011 by avoiding full regulation on the Mideast order. The witness was 
of the opinion that Superior Dairy was able to retain approximately 
$0.93 per hundredweight (cwt) on average, the potential ``advantage'' 
over fully regulated handlers, equal to a cumulative monthly total 
savings averaging just under $289,000 (based on an assumed monthly 
plant volume of 30 million pounds). The witness added that a similarly 
situated fully regulated handler would have paid this money into the 
order's

[[Page 12219]]

PSF to be shared with all producers servicing the market. However, 
Superior Dairy's partially regulated status allowed it to retain the 
money and, as a result, minimum blend prices to all the Mideast order's 
pool producers were reduced.
    The DFA et al. witness asserted that, over the years, Federal 
orders have been amended to reduce the disorder resulting from plants 
being regulated in areas different from the area in which they procure 
milk. The witness referred to a 1988 decision, ``Milk in the Ohio 
Valley and Louisville-Lexington-Evansville Marketing Areas'' (53 FR 
14804), that amended Pool Distributing Plant standards to correct a 
disorderly marketing condition which caused similarly situated plants 
within the same competitive area to have different raw milk costs. In 
this case, a plant that was located in the Louisville-Lexington-
Evansville marketing area, but had most of its route disposition in 
another marketing area, was regulated by the Louisville-Lexington-
Evansville marketing order. This change was premised on the idea that a 
plant should be regulated in the marketing area in which there is a 
reasonable assurance that it will have available an adequate supply of 
producer milk, which therefore promotes uniformity of prices to 
producers within the procurement area of the plant. The witness stated 
that the market disorder created by Superior Dairy's partially 
regulated status is similar to the issues addressed in the referenced 
1988 Decision, and again urged the Department to recommend the adoption 
of Proposal 1 as an appropriate solution.
    The DFA et al. witness concluded by requesting that the Department 
consider this proposal on an emergency basis. The witness said that DFA 
et al. supplies milk to both Superior Dairy and other fully regulated 
plants. According to the witness, the difference in regulatory status 
between its buyers causes disorderly marketing conditions that directly 
impact its members. Additionally, Superior Dairy's competitive 
advantage due to its partially regulated status lowers the value of the 
order's marketwide pool, thereby reducing the minimum blend price to 
all the order's producers each month that Superior Dairy is not fully 
regulated.
    A second witness appeared on behalf of DFA et al. in support of 
Proposal 1. The witness reiterated the testimony of an earlier witness 
concerning the disorderly marketing conditions resulting from the 
Superior Dairy Canton plant becoming partially regulated. The witness 
said that the Department had taken steps in the past to restore order 
within the markets when there was evidence of plants engaging in 
uneconomic milk shipments and other business practices solely to avoid 
becoming fully regulated. The witness referenced regulatory changes 
made as a part of Federal order reform that closed loopholes that could 
be used to avoid regulation. Specifically, the witness highlighted 
amendments that prevented plants from using diverted milk volumes as 
part of the calculation used to determine eligibility for pooling.\1\ 
The witness implied that the Department addressed this loophole to help 
maintain an orderly market.
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    \1\ 64 FR 16025.
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    A witness representing Dairy Farmers of America (DFA) appeared in 
support of Proposal 1. The witness purported to have first-hand 
knowledge of the Wauseon, Ohio, plant before it was purchased by 
Superior Dairy. The witness testified that the plant had been closed by 
two prior owners who found the facility to be inefficient and 
economically nonviable. The witness claimed that the facility was the 
smallest in the region and that no other plants of similar size and/or 
logistical constraints existed in the area. The witness described in 
detail what they perceived to be logistical complications resulting 
from the limited size of the Wauseon plant. These complications, the 
witness asserted, were evidence that the plant was being used by 
Superior Dairy to facilitate the uneconomic movement of milk in an 
attempt to avoid regulation. The witness acknowledged that they had not 
entered into the Wauseon plant since Superior Dairy's acquisition of 
the facility and had no knowledge of Superior Dairy's internal business 
processes.
    A witness appeared on behalf of Michigan Milk Producers 
Association, Inc. (MMPA) in support of Proposal 1. MMPA is a member-
owned Capper Volstead cooperative which pools the majority of its 
producer milk on the Mideast order. The witness stated that MMPA was a 
supporter of Federal orders in that they provide equality for producers 
and an orderly market for handlers.
    The MMPA witness stated that the change in regulatory status of 
Superior Dairy's Canton plant was a concern that raised questions of 
competitive equity between similarly situated handlers. The witness 
also referenced an earlier witness' testimony that included an analysis 
revealing a possible competitive advantage that a partially regulated 
plant could capture in addition to examining the degree of inequity 
that could exist amongst similarly situated plants.
    The MMPA witness was of the opinion that Superior Dairy's purchase 
of a smaller distributing plant approximately 200 miles away in 
Wauseon, Ohio, was a business decision made to avoid full regulation 
under Federal orders by transferring packaged product from the larger 
Canton plant northwest to the smaller Wauseon plant and later 
transporting this product back east to its final destination. The 
witness stated that this uneconomic movement of product was an attempt 
to avoid full regulation of the larger distributing plant.
    A witness from the Southern Marketing Agency (SMA) spoke in support 
of Proposal 1. SMA is a Capper-Volstead marketing agency comprised of 
seven cooperative members operating in the southern United States. The 
witness explained that Superior Dairy was unique from other handlers 
due to its broad distribution footprint which spanned the Northeast, 
Appalachian, Florida, Southeast, Central, and Mideast milk marketing 
areas. The witness opined that few other handlers of conventional fluid 
milk products had such expansive route disposition. The witness 
asserted that Superior Dairy was in direct competition with other 
Mideast fully regulated handlers for farm milk supplies.
    The SMA witness testified that recent shifts in the manner of 
Federal order regulation of Superior Dairy has created market disorder. 
The witness testified that when a large bottling plant is able to 
escape full regulation by the order from which its raw milk supply is 
procured and utilized at the plant, dairy farmers and cooperative 
associations face difficulties in raw milk procurement planning. The 
witness explained how seasonal changes in demand for Class I milk 
products create the need for each plant to maintain a reserve supply to 
ensure that their Class I needs are always met. The witness said that 
cooperatives routinely schedule milk deliveries into certain plants to 
ensure that reserve requirements are met and producers remain qualified 
to participate in the order's marketwide pool. The witness described 
how the pooling of necessary reserve milk supplies is complicated when 
a large plant such as Superior Dairy changes its regulatory status, or 
regulated by a Federal order distant from its milk procurement areas. 
The witness further explained that because pooling requirements vary 
between orders, a situation can arise where a plant switches the order 
it is regulated on, but producers who normally supply and are

[[Page 12220]]

pooled by the plant are not automatically qualified to be pooled on the 
new order. The witness explained how this misallocation of reserve 
supplies to handlers could unintentionally leave producers who 
regularly bear the cost of supplying the Class I market excluded from 
the order's marketwide pool.
    The SMA witness testified that the pooling of a plant in an order 
distant from the plant's physical location creates market disorder. The 
witness explained how the Department uses ``lock-in'' type provisions 
to address the wide route disposition patterns of extended shelf life 
(ESL) products. The witness testified that Federal orders regulate 
plants that manufacture ESL products in the order that the plant is 
located, regardless of where the majority of milk is sold. The witness 
testified that the pooling of ESL manufacturers in this manner prevents 
market disorder that would result from the plant switching regulation 
between orders. The witness opined that similar regulation of plants 
similar to Superior Dairy would prevent disorderly marketing 
conditions.
    The SMA witness asserted that Superior Dairy has a clear advantage 
over its fully regulated competitors since it is able to avoid payments 
into any PSF under partial regulation. The witness testified that the 
uneconomic movement of milk from Superior's Canton facility west to its 
Wauseon facility for subsequent distribution in the Northeast order was 
designed to limit the route disposition of Superior's Canton plant into 
any marketing area, thereby avoiding full regulation. The witness 
testified that this practice should be prohibited to prevent the 
potential for further disorderly marketing conditions.
    A witness testifying on behalf of Superior Dairy, Inc. spoke in 
opposition to Proposal 1. According to the witness, Superior Dairy is a 
handler of Class I fluid milk products processing about 40 million 
pounds of milk per month at its two facilities. The witness argued that 
the change in regulatory status of Superior Dairy between the Northeast 
and Mideast FMMOs and between partial and full regulation does not 
disrupt marketing conditions in sufficient measure to warrant 
regulatory change.
    The Superior Dairy witness said the majority of milk processed by 
the company is supplied by DFA. The witness testified that DFA charged 
PRDPs such as Superior Dairy classified prices plus an over-order 
premium based on the plant's raw milk utilization, as per industry 
practice. The witness noted that the company had an 82 percent Class I 
utilization and approximately 90 percent of its route distribution was 
in Federal milk marketing areas. The witness testified that Superior 
Dairy was regulated by the Mideast order until March 2010, the 
Northeast order from April 2010 to February 2011, and partially 
regulated on both orders since March 2011.
    The Superior Dairy witness testified that the company was able to 
increase sales in recent years by implementing new packaging 
technology. The witness testified that the new packaging technology 
allowed the company to gain large clients whose distribution networks 
were substantially larger than that of traditional buyers. The witness 
noted that the result of that growth was increased sales into, and 
subsequent regulation by, the Northeast milk marketing order in April 
2010. The witness explained that Class I sales to outlets within the 
boundaries of the Northeast marketing area increased to 28 percent of 
total Class I volume sold, which decreased the percentage of its Class 
I sales within then Mideast marketing area to around 20 percent. The 
witness testified that regulation on the Northeast marketing order 
required that Superior Dairy pay into the Northeast PSF, rather than 
the Mideast PSF, which in turn required a larger monthly pool 
obligation to the plant. The witness elaborated that the change in 
regulation from the Mideast order to the Northeast order harmed 
Superior Dairy's producers since the Northeast blend price, when 
adjusted to their location in Canton, Ohio, was $0.13 per cwt lower 
than the Mideast blend price. The witness said that this required 
Superior Dairy to increase the over order premiums paid to its Mideast 
raw milk suppliers to remain competitive while also paying into the 
Northeast PSF, thus increasing its total raw milk procurement costs. 
The witness noted that Superior Dairy preferred to be regulated by the 
Mideast order, rather than the Northeast, but was unable to expand 
their route distribution sufficiently in the Mideast marketing area to 
remain regulated by that order.
    The Superior Dairy witness explained how the Canton plant came to 
be partially regulated as opposed to being fully regulated on the 
Northeast or Mideast order. The witness testified that the company 
purchased a small plant in Wauseon, Ohio in early 2011. The witness 
affirmed that the addition of this facility allowed Superior Dairy to 
decrease route distribution from its Canton plant to below 25 percent 
in both the Northeast and the Mideast marketing areas, allowing it to 
become partially regulated on both orders. The witness also added that 
the new facility was of interest to the company in that it allowed them 
to expand its procurement area for raw milk into Western Ohio and 
Southern Michigan without adding administrative personnel.
    The Superior Dairy witness testified that one of the Federal order 
provisions available to handlers with limited route disposition into 
Federal order areas, sometimes referred to as the ``Wichita Option,'' 
requires handlers to pay dairy farmers, in aggregate, the Federal order 
minimum classified values. The witness argued that the partial 
regulation of Superior Dairy does not provide any competitive sales 
advantage over its fully regulated competitors. However, the witness 
said that Federal order provisions for PRDP do not promote equity 
amongst dairy farmers since the price received by dairy farmers for raw 
milk sold to a partially regulated plant can differ from the price of 
milk sold to a fully regulated plant. The witness testified that if a 
handler is partially regulated under the ``Wichita Option,'' they 
essentially operate as an individual handler pool. The witness 
explained how producers who ship milk to a PRDP with a higher than 
market average Class I utilization can receive a higher price than 
producers who ship milk to a fully regulated plant and are in turn paid 
the order's minimum blend price. The witness testified that Superior 
Dairy's producer suppliers are, in fact, paid an ``in-plant'' blend 
price that is higher than the Mideast blend price. The witness further 
added that producers are in fact not harmed when a partially regulated 
plant is supplied by a cooperative (as is the case with Superior 
Dairy), as the cooperative (and its producer-members) then receive the 
higher in-plant blend price. The witness also said that these blend 
price differences have not caused market disorder since other Mideast 
fully regulated distributing plants have continued to receive an 
adequate supply of milk.
    The Superior Dairy witness explained how adoption of Proposal 1 
would harm its own independent producer suppliers. The witness 
testified that Superior Dairy purchases raw milk from approximately 120 
independent producers, most of which are small businesses. Those 
producers, noted Superior Dairy's witness, receive an in-plant blend 
price for their raw milk greater than the Mideast order blend price. 
The witness asserted that the price the independent producers receive 
for their raw milk would decrease should the Superior Canton facility 
be

[[Page 12221]]

fully regulated because the Superior Canton plant would be required to 
account to the PSF for its Class I sales and that additional revenue 
would then be shared with all producers servicing the market, not just 
Superior Dairy's independent producer suppliers.
    The Superior Dairy witness testified that Proposal 1 should not be 
adopted and its Canton, Ohio, plant should remain partially regulated. 
However, the witness said, should the Department decide to fully 
regulate either the Canton or Wauseon plant, it would prefer that both 
plants be regulated on the Mideast order. The witness noted that 
provisions exist in certain orders allowing plants producing ESL 
products to be locked into regulation on an order by virtue of 
geographic location rather than route distribution. The witness stated 
that since the route disposition patterns of Superior Dairy are similar 
to plants producing ESL products, it is reasonable to regulate Superior 
Dairy based on geographical location, not route disposition.
    Accordingly, the Superior Dairy witness offered two separate 
modifications to Proposal 1 that the witness believed would lock 
Superior Dairy's Canton plant into regulation on the Mideast order. The 
witness suggested that Proposal 1 be modified by removing the 25 
percent in-area route disposition qualifier so that plants physically 
located in the Mideast order with route disposition and transfers of at 
least 50 percent into Federal marketing areas would be regulated on the 
Mideast order. Alternatively, the witness suggested modifying Proposal 
1 so that plants located in the Mideast order that have route 
disposition and transfers of at least 50 percent into any Federal 
market orders and sales into at least four separate marketing areas 
would be regulated on the Mideast order.
    The Superior Dairy witness disputed multiple times the data 
assembled and analyzed by the DFA et al. witness. The Superior Dairy 
witness explained that the data used by DFA et al. in its analysis did 
not, among other things, address over-order premiums paid by Superior 
Dairy to their producer suppliers.
    The witness from Superior Dairy was of the opinion that there was 
no need for the Department to consider this measure under emergency 
rulemaking procedures.
    A post-hearing brief was submitted on behalf of DFA et al. 
reiterating their testimony that inadequate Pool Plant provisions in 
the Mideast order are causing disorderly marketing conditions and that 
a large fluid milk bottling plant should not be able to avoid full 
regulation by transferring fluid milk products between plants. The 
brief claimed that when using the analysis introduced in their 
testimony, the cost advantage to a hypothetical PRDP of similar size to 
Superior Dairy (a monthly plant volume of 40 million pounds) averaged 
$373,000 per month from January 2010 to July 2011. The brief reiterated 
that because Superior Dairy can include over-order premiums in its 
theoretical pool obligation calculation, this can amount to a large 
cost advantage to the plant. The brief explained that by Superior Dairy 
avoiding payments into the PSF, producer price differentials, on 
average, were reduced by approximately $0.028 per cwt in the Mideast 
order or $0.018 per cwt in the Northeast order, depending on how the 
plant was regulated. The brief also reinforced the SMA witness' 
testimony regarding the disorder created in the pooling of reserve 
supplies by a plant changing regulatory status from one order to 
another. The brief also emphasized the importance of market-wide 
pooling and uniform producer and handler values and stated that these 
fundamentals are undermined if major participants in the market can 
avoid regulation.
    In brief, DFA et al. wrote that they were in support of the first 
alternate proposal offered at the hearing by Superior Dairy. The brief 
stated that the alternate proposal would resolve the market disorder 
that was the catalyst for the hearing request and that DFA et al. 
considers this the best option for producers supplying the fluid milk 
needs of the Superior Dairy Canton facility and Mideast marketing area 
as a whole. The brief stated that while typically a plant is regulated 
according to its route distribution, there have been exceptions made in 
order to regulate plants based on their procurement area. In these 
instances, DFA et al. wrote, milk procurement area and producer price 
equity became the integral, more important factor because of the need 
to stabilize the milk supply for plants with route distribution in 
multiple marketing areas. As a whole, DFA et al. viewed the first 
alternate proposal as the best amendment to resolve the issue and, if 
the Department did not recommend Superior Dairy's alternative proposal, 
suggested that Proposal 1 as originally noticed be adopted.
    A post-hearing brief was filed on behalf of Land O'Lakes, Inc., 
Agri-Mark, Inc., Maryland and Virginia Milk Producers Cooperative 
Association, Inc., and St. Alban's Cooperative Creamery, Inc., 
(Northeastern Cooperatives), in support of Proposal 1. The Northeastern 
Cooperatives are member-owned Capper Volstead cooperatives that pool 
their producer's milk on numerous FMMOs. The brief reiterated the 
testimony of witnesses in support of Proposal 1 as originally noticed 
and reviewed current order provisions that distinguish where a plant is 
regulated based off of the plant's route disposition instead of the 
geographical location of the plant. The brief reasserted the testimony 
of a Superior Dairy witness who said that 28 percent of its route 
distribution was in the Northeast marketing area in comparison to 20 
percent in the Mideast marketing area.
    The Northeastern Cooperatives brief opposed the alternate proposals 
offered by Superior Dairy at the hearing. The brief stated that 
alternate proposals should have been offered when the initial request 
for additional proposals was made so they could be included in the 
Notice of Hearing. The brief emphasized the Northeastern Cooperatives' 
opinion that the alternate proposals would lock-in Superior Dairy to 
regulation by the Mideast order, even if its route distribution was 25 
percent or more into another Federal marketing area. The brief stressed 
that implementation of a supposed lock-in provision would be of 
economic benefit to Superior Dairy, not producers.
    The Northeastern Cooperatives brief also stressed that the 
alternative Superior Dairy proposal would not require a plant to meet 
the 25 percent in-area route disposition standard, even though the 
plant would become regulated by the Mideast order. The brief emphasized 
that it is important to always consider route disposition as a factor 
when determining the FMMO in which a plant should be regulated.
    SMA filed a post hearing brief reiterating that disorderly 
marketing conditions are occurring as a result of inadequate Pool Plant 
provisions. SMA, in brief, offered their support to the modifications 
of Proposal 1 advanced by Superior Dairy during the hearing as a method 
for alleviating the disorderly marketing conditions. The brief noted 
that the disorder results from the disruption of uniform pricing, the 
switching of the regulatory status of plants from one order to another, 
the improper pooling assignment of reserve supplies, and the uneconomic 
movements of milk. SMA, in testimony and in written brief, urged the 
Department to consider the matter under emergency procedures, asserting 
that confidence in the Federal milk marketing order pricing system 
could otherwise be compromised.
    A post-hearing brief submitted on behalf of Superior Dairy 
reiterated many

[[Page 12222]]

of the points made at the hearing and recommended adoption of the first 
modification it had offered at the hearing. Superior Dairy asserted 
that their modified proposal would lock-in the Superior Dairy Canton 
plant as a Mideast pool plant by virtue of its geographic location 
notwithstanding its failure to meet the 25 percent in-area route 
distribution qualification. The brief stated that the purpose of the 
amendment was to regulate Superior Dairy as a pool plant under the 
terms of the Mideast order regardless of whether or not it also 
qualified as a pool plant in any other order. The brief summarized that 
the modified proposal sets as qualification standards (1) distribution 
and transfers of 50 percent or greater of a plant's fluid milk products 
into Federal milk marketing areas, and (2) plant location within the 
Mideast marketing area. Superior Dairy wrote that adoption of modified 
Proposal 1 would ensure the marketwide pooling of revenue for all 
producers and give Superior Dairy regulatory stability.
    In brief, Superior Dairy acknowledged that shifts in plant 
regulation create disruption and challenges in producer pooling and 
milk supply coordination. The brief also acknowledged that partially 
regulated plants such as Superior Dairy enjoyed certain advantages over 
fully regulated plants as they had price advantages in the procurement 
of raw milk. The brief explained that because distributing plants have 
a high Class I utilization, producers supplying the PRDP will always 
receive a higher price than those serving fully regulated distributing 
plants, who in turn receive the order's minimum blend price. 
Consequently, the brief noted, producers serving the PRDP do not 
equitably share in the burden of balancing the market's milk supplies.
    Superior Dairy's brief continued to refute the information provided 
by the DFA et al. witness regarding pricing assumptions and Superior 
Dairy's purported raw milk cost advantage. Superior Dairy stated that a 
price advantage did exist to them from being partially regulated; 
however, the calculation of that advantage as provided by DFA et al. 
was overstated.

Discussion and Findings

    At issue in this proceeding is the consideration of proposed 
amendments to the Mideast FMMO Pool Plant provisions to more adequately 
define the plants that should be fully regulated by the terms of the 
Mideast order. This decision recommends that the Pool Plant provisions 
be amended to reflect that distributing plants located within the 
marketing area with a Class I utilization of at least 30 percent and 
with combined route disposition and transfers of at least 50 percent 
into Federal milk marketing areas would be regulated as a pool 
distributing plant under the terms of the Mideast marketing order (not 
withstanding other order provisions as discussed below).
    The Pool Plant provisions of the Mideast order \2\ define how 
plants demonstrate an adequate association with the fluid market, and 
subsequently how the milk associated with those plants is pooled and 
priced under the terms of the order. There are several types of plants 
defined in the Pool Plant provisions. This decision recommends a change 
to the definition of a Pool Distributing Plant (a plant that processes 
milk for fluid uses).
---------------------------------------------------------------------------

    \2\ 7 CFR 1033.7.
---------------------------------------------------------------------------

    The Pool Distributing Plant standard \3\ of the Mideast order first 
requires a plant to demonstrate an adequate association with the fluid 
market by meeting a minimum Class I utilization. This is determined by 
the percentage of fluid milk physically received at the plant that is 
distributed or transferred as Class I (fluid) products. The Class I 
utilization standard for the Mideast FMMO is 30 percent. The plant must 
also show a reasonable association with the order's Class I market; 
that association is determined by the percentage of the plant's total 
Class I route disposition that is distributed or transferred within the 
marketing area, or ``in-area'' route disposition. In the Mideast order, 
a plant is fully regulated if at least 25 percent of its Class I route 
disposition and transfers are within the Mideast marketing area. If a 
plant meets both the 30 percent Class I utilization standard and the 25 
percent in-area route distribution standard (termed the ``30/25 percent 
standard''), the plant is fully regulated as a distributing plant under 
the terms of the Mideast order. Once fully regulated, a pool 
distributing plant must account to the marketwide pool at classified 
use values and is required to pay its producers at least the order's 
minimum blend price. This process ensures that similarly situated 
handlers have the same minimum raw milk costs and that the dairy 
farmers supplying the market share in the revenue generated from all 
fluid milk sales within the marketing area.
---------------------------------------------------------------------------

    \3\ 7 CFR 1033.7(a).
---------------------------------------------------------------------------

    FMMOs rely on the tools of classified pricing and marketwide 
pooling to assure an adequate supply of milk to meet the market's fluid 
needs and to provide for the equitable sharing of the revenues arising 
from the classified pricing of milk. Classified pricing assigns a value 
to milk according to how the milk is used; Class I (fluid) generally 
being the highest, followed by Class II (soft products), Class III 
(cheese), and Class IV (butter and nonfat dry milk). Regulated handlers 
who buy milk from dairy farmers account to the order's marketwide pool 
at classified prices according to how they use the milk. Dairy farmers 
are then paid a weighted average or ``blend'' price. The blend price is 
derived through the marketwide pooling of all class uses of milk in a 
marketing area, thus each producer receives an equal share of each use 
class of milk and is indifferent as to what class their milk is used. 
Since it is primarily the higher-valued Class I use of milk that adds 
additional revenue to the marketwide pool, it is reasonable to expect 
that the producers who consistently bear the costs of supplying the 
market's fluid needs should be the ones to share in the returns arising 
from higher-valued Class I sales.
    FMMOs have unique provisions for handlers that have route 
distribution into a marketing area but do not meet the standards for 
full regulation under the terms of the order. A handler that does not 
meet the minimum standard for full regulation under a specific FMMO 
(30/25 percent in the Mideast FMMO) but has route disposition within 
that marketing area and therefore competes with other fully regulated 
handlers for their Class I sales is known as a Partially Regulated 
Distributing Plant (PRDP). USDA has determined that some minimum 
regulation of PRDPs is necessary to maintain orderly marketing 
conditions and ensure that the order's classified pricing and 
marketwide pooling provisions are not undermined.
    There are three regulatory schemes, which may require a PRDP to 
account for route disposition into a marketing area: (1) A PRDP may pay 
into an order's PSF the difference between the Class I price and the 
market's blend price on its route disposition within the marketing 
area; (2) The PRDP pool obligation is calculated as if the plant were 
fully regulated and this obligation is compared to what the PRDP 
actually paid its milk suppliers in aggregate. If the obligation is 
greater than what it actually paid, the PRDP must pay the difference to 
the order's PSF. If the pool obligation is less than what the PRDP 
actually paid to its milk suppliers, then no additional payment to the 
order's PSF is necessary. This is often referred to as the ``Wichita 
Option''; or (3) If a PRDP is subject to a State order with classified 
pricing and marketwide

[[Page 12223]]

pooling, then it must pay into the order's PSF the difference between 
what it was required to pay into the State order and the applicable 
Class I price at the PRDP's location. An administrative assessment is 
collected by the Market Administrator regardless of which payment 
scheme the PRDP falls under and whether or not a payment into the PSF 
is required.
    The proponents of Proposal 1 requested this rulemaking proceeding 
based on their opinion that the current Pool Plant provisions of the 
Mideast FMMO have allowed a plant with significant route distribution 
throughout the Mideast and other Federal marketing areas to become a 
PRDP, which in turn has resulted in disorderly marketing conditions. 
The proponents described, in their hearing testimony and post-hearing 
brief, a situation where Superior Dairy, which had previously been 
fully regulated by either the Northeast or Mideast orders, was able to 
circumvent full regulation by either order.
    The proponents provided great detail as to how a loophole in the 
Pool Plant provisions has allowed a large plant with significant fluid 
milk sales into Federally regulated areas to avoid full regulation on 
any Federal order and outlined the market disorder this has created: 
(1) Similarly situated handlers who compete for fluid milk sales within 
the marketing area are no longer assured that they pay the same minimum 
prices for raw milk; and (2) Producers who service the order's Class I 
market are no longer sharing in all the proceeds from the order's Class 
I sales. The proponents argued that if this loophole is not closed, 
other handlers with more than one distributing plant could set up 
similar distribution patterns between their plants to also avoid full 
regulation.
    Along the same line, the SMA witness described a third disorderly 
marketing condition, the improper pooling of reserve milk supplies. 
This witness described a situation where reserve supplies associated 
with a plant can lose association with the order's marketwide pool as a 
result of a plant being able to change regulation between orders with 
different pooling standards.
    The Superior Dairy witness testified at the hearing that newly-
patented filling and packaging technologies used at their bottling 
facilities have given them a competitive advantage in the marketplace 
and as a result, the ability to expand their distribution into numerous 
Federal marketing areas. According to the Superior Dairy witness, after 
expanding their route disposition into the Northeast marketing area in 
April 2010, they became a fully regulated handler in the Northeast 
order. Superior claims that they quickly found regulation on the 
Northeast order to be financially difficult to sustain because the 
Northeast order blend price payable to producers at the Canton location 
was lower than the Mideast order blend price at the same location by an 
average of $0.13 per cwt. The Superior Dairy witness testified that in 
early 2011 it purchased a small distributing plant in Wauseon, Ohio 
which allowed it to adjust its distribution patterns between the two 
plants so that the Canton plant was no longer regulated by any Federal 
order.
    At the hearing, Superior Dairy offered two alternate modifications 
to Proposal 1. In their post-hearing brief, Superior Dairy supported 
adoption of their first modification which would fully regulate any 
distributing plant physically located within the geographic boundary of 
the Mideast marketing area if its total fluid route disposition into 
all Federal orders was greater than 50 percent. This modification would 
eliminate the stipulation, contained in Proposal 1 as originally 
noticed, that a plant's sales within any individual marketing area had 
to be less than 25 percent of its total route distribution.
    The pooling standards of a FMMO are represented in the Pool Plant, 
Producer, and the Producer Milk provisions. Performance based pooling 
standards provide the only viable method to identify the milk of those 
producers who service the Class I needs of the market and therefore 
determine those eligible to share in the marketwide pool. If a pooling 
provision does not reasonably accomplish this end, the proceeds that 
accrue to the PSF from the market's fluid milk sales are not equitably 
shared with the appropriate producers. The result is the unwarranted 
lowering of returns to those producers who actually incur the costs of 
servicing and supplying the needs of the fluid milk market and the 
reserve supplies that are necessary to ensure that fluid demands are 
met.
    The hearing record reflects, and this decision finds, that the 
current Mideast Pool Plant provisions (7 CFR 1033.7) do not adequately 
define the plants and the producer milk associated with those plants, 
which serve the needs of the fluid milk market and should therefore 
share in the additional revenue arising from fluid milk sales. The 
hearing record reflects that disorderly marketing conditions arise when 
a handler that has significant route distribution into Federally 
regulated areas is able to avoid regulation by altering its 
distribution patterns. FMMOs, through the fundamental tools of 
classified pricing and marketwide pooling, serve to minimize disorderly 
marketing conditions like the ones presented in this proceeding. A 
plant's ability to avoid regulation by altering its distribution 
pattern undermines the classified pricing and marketwide pooling 
fundamentals that are essential in maintaining orderly marketing.
    FMMOs require that distributing plants meeting the Class I 
utilization and in-area route distribution standards be fully regulated 
under the terms of the appropriate order. Along the same line, plants 
with minimal sales into a regulated area and therefore minimal impact 
on the market fall under partial, not full, regulation. The record 
reflects that prior to March 2011 Superior Dairy was fully regulated by 
either the Mideast or Northeast order. Superior Dairy revealed at the 
hearing that it was the purchase of the Wauseon, Ohio, distributing 
plant and the subsequent change in distribution patterns between the 
two plants that enabled the Canton, Ohio, plant to become a PRDP, not 
because its overall milk sales decreased to a volume where it no longer 
had an association with the fluid market. In fact, the record shows 
that Superior Dairy's Class I utilization has remained around 80 
percent regardless of its regulatory status and 90 percent of its sales 
are into regulated Federal milk marketing areas.
    The Ohio region where Superior Dairy's plants are located is in 
relative proximity to five other Federal milk marketing area 
boundaries. This unique location lends opportunity to adjust route 
disposition to avoid meeting the in-area route standard of any one 
Federal order.
    The record reflects that Superior Dairy utilizes the ``Wichita 
Option'' to account for its Class I sales into regulated areas. This 
choice allows the Canton plant to operate as an individual handler 
pool. Superior Dairy's operation as an individual handler pool, after 
having been regulated continuously for decades as a fully regulated 
distributing plant with a significant volume and an overwhelming 
majority of its Class I sales into Federally regulated areas, 
undermines the order's classified pricing and marketwide pooling 
system--essential principles for orderly marketing and competitive 
equity. Additionally, handler equity, which the FMMO system strives to 
maintain, can be evaluated on two fronts: where handlers compete in 
route distribution and where handlers compete in milk procurement. Both 
factors are important. However, when the balance of competition is 
disrupted through uneconomic movements of milk, one factor may become 
more important in

[[Page 12224]]

order to restore competitive equity amongst competing handlers.
    The classified pricing system ensures regulated handlers that their 
competitors are paying uniform minimum raw milk costs. In this way, no 
competitor has an advantage or disadvantage in its raw milk costs 
because of its regulatory status. While a fully regulated handler must 
account to the pool for its classified use value and pay its producers 
the market's blend price, a PRDP using the ``Wichita Option''--as in 
the case of Superior Dairy--must only show that it paid its producer 
suppliers, in aggregate, the classified use values of its raw milk 
supply. A PRDP operating essentially as an individual handler pool that 
has a higher in-plant Class I utilization than the market has a 
competitive advantage when it comes to raw milk procurement over a 
regulated competitor since it is able to pay its suppliers a higher in-
plant blend price. At the hearing, a Superior Dairy witness testified 
that their Class I utilization was approximately 82 percent. The Class 
I utilization for the Mideast order in October 2011 (the month the 
hearing was held) was 38.1 percent. Superior Dairy's raw milk cost 
advantage due to its partially regulated status is equal to the 
difference between the in-plant blend price and the market's blend 
price. This is revenue that a fully regulated handler would have been 
required to pay into the order's PSF to be shared with all the market's 
producers, but which Superior has available to pay directly to its 
producers because of its partially regulated status.
    Additionally, because Superior Dairy can include over-order 
premiums as part of the calculation relied on to prove to the Market 
Administrator under the ``Wichita Option'' that minimum classified 
prices are being paid, similarly situated handlers are not guaranteed 
the same raw milk costs. The record reflects that the payment of over-
order premiums is prevalent in the Mideast marketing area. While a 
regulated handler must pay the order's minimum blend price plus any 
over-order premium they have negotiated with its suppliers, a PRDP is 
able to use the over-order premium to offset its regulatory PSF payment 
obligation to its suppliers. For example, assume a prevailing over-
order premium of $2.00 per cwt on all Class I milk is charged by 
cooperatives servicing distributing plants and the order's Class I 
price for the month is $19.00 per cwt. A fully regulated handler would 
account to the PSF at $19.00 per cwt for any Class I milk utilized, and 
pay the additional over-order premium of $2.00 per cwt directly to the 
cooperative--meaning that they are actually paying $21.00 per cwt for 
Class I milk. A PRDP can include the $2.00 per cwt over-order premium 
paid directly to its suppliers when calculating whether it has an 
additional pool obligation under the ``Wichita Option.'' In effect, the 
PRDP pays $19.00 per cwt while the fully regulated plant must pay 
$21.00 per cwt. This theoretical $2.00 per cwt advantage can be used by 
the plant in any way it deems fit: to procure additional milk 
suppliers, to pass the money on to its suppliers, to create a sales 
advantage over its competitors, or to simply keep as company profit.
    This decision also finds that marketwide pooling principles are 
undermined because of Superior Dairy's PRDP status. It is clear that 
Superior is able to retain monies that it otherwise would pay into the 
PSF if it were fully regulated. The hearing record reflects attempts by 
proponents to estimate Superior Dairy's cost advantage, and taken a 
step further, monies that would otherwise be paid into the marketwide 
pool. In its post-hearing brief, Superior Dairy refutes some of the 
proponents' assumptions and argues that its cost advantage is lower. 
Estimating the exact amount of Superior Dairy's purported cost 
advantage gained by avoiding full regulation is difficult without 
disclosing confidential business information; furthermore, determining 
the exact level of that advantage is not necessary to demonstrate its 
existence and consequent market disorder. What is important is that 
money is not being equitably shared with all producers supplying the 
Class I market. Even if Superior Dairy was sharing that money with all 
its producer-suppliers, it is money that should be shared with all 
producers servicing the market. Consequently, producers serving the 
market are receiving a lower blend price than they otherwise would if 
Superior Dairy were fully regulated.
    This decision recommends the adoption of Proposal 1 as modified by 
Superior Dairy as an appropriate solution to the current market 
disorder. While FMMOs typically regulate (pool) plants based on where 
their fluid milk sales occur, the hearing record reflects that it is 
not unprecedented for a plant to be regulated based on competing milk 
procurement areas. A 1988 decision (53 FR 14804), for example, 
regulated a plant into the then Louisville-Lexington-Evansville FMMO, 
despite the plant having greater route disposition into another FMMO. 
This finding was based on the fact that despite having greater sales 
into another FMMO, the raw milk procurement area of the plant was the 
same as other handlers who were regulated by the Louisville-Lexington-
Evansville FMMO.
    Additionally, all Federal orders contain provisions to regulate 
plants that primarily process ultra-high temperature or ESL milk 
products in the Federal order where the plant is physically located. 
Plants producing longer shelf-life products are regulated by the order 
where they are physically located \4\ primarily because the wide and 
ever changing geographic distribution patterns of their products can 
lead to regulation under multiple orders over time. This is not unlike 
Superior Dairy, who distributes product into seven marketing areas.
---------------------------------------------------------------------------

    \4\ 7 CFR 10----.7(b).
---------------------------------------------------------------------------

    The record reflects that Superior Dairy's Canton, Ohio plant is 
located in the middle of the Mideast marketing area and competes for a 
raw milk supply with other pool distributing plants that are regulated 
by the Mideast order. Furthermore, the record reflects that while 
Superior Dairy has been able to stay below the 25 percent in-area route 
distribution standard in other marketing areas, its route distribution 
into some Federal marketing areas exceeds 20 percent. Given that the 
plant has route distribution into 7 marketing areas, a 25 percent route 
distribution threshold could cause future market disorder if the plant 
shifts regulation from one order to another. Therefore, this decision 
finds it appropriate under the facts presented at this hearing to more 
heavily rely on milk procurement area, not route disposition, as the 
fundamental determinant in recommending changes to the Pool Plant 
provisions of the Mideast FMMO. Consequently, this decision recommends 
that distributing plants physically located in the Mideast marketing 
area who do not meet the 25 percent in-area route distribution standard 
(the current pooling standard for distributing plants to be regulated 
by the Mideast order), but do have a majority (50 percent or more) of 
their fluid milk sales into Federally regulated areas, be regulated by 
the Mideast order.
    In their post-hearing brief, Superior Dairy reiterated its opinion 
that a modified Proposal 1 would ``lock-in'' the Superior Canton plant 
into regulation under the Mideast order, regardless of future route 
distribution patterns. However, FMMO's contain a provision in each 
order (Sec.  1033.7(h)(3) in the Mideast order) which specifies that if 
a pool plant has route disposition greater than 50 percent into another 
Federal order for at least 3 consecutive months then that plant will 
become

[[Page 12225]]

regulated by that Federal order. This decision does not amend that 
provision. If at any time a pool plant regulated by the Mideast order 
has route disposition of greater than 50 percent into another Federal 
order for 3 or more consecutive months, that plant would then become 
regulated by the order where it has a majority of its sales.
    Superior Dairy argued in their post-hearing brief that a different 
provision contained in each order, (Sec.  1033.7(h)(5) in the Mideast 
order) could be relied upon to ``lock-in'' Superior Dairy to the 
Mideast order. This provision allows the Mideast order to regulate a 
pool plant even if it meets the pooling standards of another order--
essentially it allows the Mideast regulations to trump another order's 
regulations if the plant is ``required'' to be pooled by the Mideast 
order. Although this decision recommends changes to the Pool Plant 
provisions of the Mideast order based on clear evidence of disorderly 
marketing conditions resulting from the partial regulation of Superior 
Dairy and relies heavily on milk procurement area as one of the reasons 
behind this change, this decision does not ``lock-in'' or require 
Superior Dairy, or any other handler, to be regulated by the Mideast 
FMMO. This decision simply modifies the Pool Plant provisions so that 
any plant located in the Mideast marketing area that does not meet the 
in-area route distribution standard, but has at least 50 percent of its 
total route distribution into Federal marketing areas, becomes 
regulated under the Mideast order. To be clear, a situation could arise 
where a plant physically located in the Mideast marketing area meets 
the in-area route distribution standard of another order but is still 
regulated on the Mideast order. However, as current regulations already 
provide for, any plant located in the Mideast marketing area that has 
more than 50 percent of its route distribution into another Federal 
order for 3 consecutive months would still become regulated by that 
other Federal order.
    Lastly, in their post-hearing brief the Northeast Cooperatives took 
exception to the two modified proposal options offered by Superior 
Dairy. The Northeast Cooperatives were of the opinion that the two 
modified proposals presented at the hearing were not properly noticed 
and that interested parties did not have the opportunity to offer 
evidence regarding the modifications. This decision finds that the 
modifications offered by Superior Dairy at the hearing were in fact 
reasonable given the scope of the initial hearing request and that all 
interested parties in all Federal orders were given notice and had 
ample opportunity to offer evidence at the hearing and comment in a 
post-hearing brief.
    Proponents and supporters of the originally noticed Proposal 1 
requested that the Department consider this proceeding on an emergency 
basis because of the ongoing market disorder. The Department finds that 
issuing a decision on an emergency basis is not warranted. This 
decision recommends adoption of Proposal 1 as was modified at the 
hearing. It is appropriate to give all interested parties the 
opportunity to consider the Department's findings and file written 
comments and exceptions to this decision before requesting producers to 
vote on the order, as amended. Additionally, this rulemaking will 
adhere to the Supplemental Rules of Practice that were issued as a 
result of the Food, Conservation and Energy Act of 2008 (as contained 
in 7 CFR part 900.20-.33). These newly established rules provide 
specific timeframes that the Department must adhere to when amending 
Federal milk marketing agreements and orders. Therefore, there is 
insufficient justification for issuing this decision on an emergency 
basis as the market disorder can still be addressed in a timely manner 
while allowing for maximum public input before any regulatory changes 
are made.
    AMS has made a conforming change to the regulatory text as offered 
by Superior Dairy and as recommended for adoption in this decision. The 
reference to the 30 percent Class I utilization standard that is 
already contained in the Pool Distributing plant definition has been 
added to the proposed amendment. This addition clarifies that a pool 
plant physically located in the Mideast marketing area that meets the 
50 percent route disposition into Federally regulated marketing areas 
must still meet the 30 percent Class I utilization standard in order to 
be regulated on the Mideast order.

Rulings on Proposed Findings and Conclusions

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

General Findings

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

Recommended Marketing Agreement and Order Amending the Order

    The recommended marketing agreement is not included in this 
decision because the regulatory provisions thereof would be the same as 
those contained in the order, as hereby proposed to be amended. The 
following order amending the order, as amended, regulating the handling 
of milk in the Mideast marketing area is recommended as the detailed 
and appropriate means by which the foregoing conclusions may be carried 
out.

List of Subjects in 7 CFR Part 1033

    Milk marketing orders.

    For the reasons set forth in the preamble, 7 CFR part 1033, is 
proposed to be amended as follows:
    1. The authority citation for 7 CFR part 1033 continues to read as 
follows:


[[Page 12226]]


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

PART 1033--MILK IN THE MIDEAST MARKETING AREA

    2. Amend Sec.  1033.7 by revising paragraph (a) to read as follows:


Sec.  1033.7  Pool Plant.

* * * * *
    (a) A distributing plant, other than a plant qualified as a pool 
plant pursuant to paragraph (b) of this section or Sec.  ----.7(b) of 
any other Federal milk order, from which during the month 30 percent or 
more of the total quantity of fluid milk products physically received 
at the plant (excluding concentrated milk received from another plant 
by agreement for other than class I use) are disposed of as route 
disposition or are transferred in the form of packaged fluid milk 
products to other distributing plants. At least 25 percent of such 
route disposition and transfers must be to outlets in the marketing 
area. Plants located within the marketing area that meet the 30 percent 
route disposition standard contained above, and have combined route 
disposition and transfers of at least 50 percent into Federal order 
marketing areas will be regulated as a distributing plant in this 
order.
* * * * *

    Dated: February 24, 2012.
Robert C. Keeney,
Acting Administrator, Agricultural Marketing Service.
[FR Doc. 2012-4827 Filed 2-28-12; 8:45 am]
BILLING CODE 3410-02-P


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