[Federal Register Volume 65, Number 236 (Thursday, December 7, 2000)]
[Proposed Rules]
[Pages 76832-76861]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-30816]



[[Page 76831]]

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Part V





Department of Agriculture





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Agricultural Marketing Service



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7 CFR Part 1000, et al.



Milk in the Northeast and Other Marketing Areas; Tentative Decision on 
Proposed Amendments and Opportunity to File Written Exceptions to 
Tentative Marketing Agreements and to Orders; Proposed Rule

Federal Register / Vol. 65, No. 236 / Thursday, December 7, 2000 / 
Proposed Rules

[[Page 76832]]


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DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Parts 1000, 1001, 1005, 1006, 1007, 1030, 1032, 1033, 1124, 
1126, 1131, and 1135

[Docket No. AO-14-A69, et al.: DA-00-03]


Milk in the Northeast and Other Marketing Areas; Tentative 
Decision on Proposed Amendments and Opportunity To File Written 
Exceptions to Tentative Marketing Agreements and to Orders

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Proposed rule.

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            7 CFR  part                Marketing area         AO Nos.
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1001..............................  Northeast...........       AO-14-A69
1005..............................  Appalachian.........      AO-388-A11
1006..............................  Florida.............      AO-356-A34
1007..............................  Southeast...........      AO-366-A40
1030..............................  Upper Midwest.......      AO-361-A34
1032..............................  Central.............      AO-313-A43
1033..............................  Mideast.............      AO-166-A67
1124..............................  Pacific Northwest...      AO-368-A27
1126..............................  Southwest...........      AO-231-A65
1131..............................  Arizona-Las Vegas...      AO-271-A35
1135..............................  Western.............      AO-380-A17
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SUMMARY: This tentative decision responds to a Congressional mandate to 
reconsider the Class III and Class IV pricing formulas included in the 
final rule for the consolidation and reform of Federal milk orders. The 
mandate was included in the Consolidated Appropriations Act, 2000. A 
hearing was held May 8-12, 2000, in Alexandria, Virginia, to consider 
proposals submitted by the industry to change the formulas. The 
material issues on the record of the hearing relate to the elements of 
the Class III and Class IV pricing formulas, including: commodity 
prices, manufacturing (make) allowances, factors related to product 
yield, role of producer costs of production, and the issue of whether 
to omit a recommended decision.
    The major changes in the decision would reduce the cheese make 
allowance used in the Class III component price calculations, increase 
the make allowances used in the Class IV component price calculations, 
provide for separate Class III and Class IV butterfat prices, and 
remove the butterfat adjustment factor from the protein price formula. 
In addition, the decision requires that processes be undertaken to 
determine if producers approve issuance of the amended orders on an 
interim basis.

DATE: Comments are due on or before February 5, 2001.

ADDRESSES: Comments (six copies) should be filed with the Hearing 
clerk, Room 1081, South Building, U.S. Department of Agriculture, 
Washington, DC 20250.

FOR FURTHER INFORMATION CONTACT: Constance M. Brenner, Marketing 
Specialist, USDA/AMS/Dairy Programs, Order Formulation Branch, Room 
2968, South Building, P.O. Box 96456, Washington, DC 20090-6456, (202) 
720-2357, e-mail address <a href="/cdn-cgi/l/email-protection#bfdcd0d1d1d6da91ddcddad1d1dacdffcaccdbde91d8d0c9"><span class="__cf_email__" data-cfemail="3c5f5352525559125e4e595252594e7c494f585d125b534a">[email protected]</span></a>.

SUPPLEMENTARY INFORMATION: 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.
    These proposed amendments have been reviewed under Executive Order 
12988, Civil Justice Reform. This action is not intended to have a 
retroactive effect. If adopted, this proposed action will not preempt 
any state or local laws, regulations, or policies, unless they present 
an irreconcilable conflict with this rule.
    The Agricultural Marketing Agreement Act of 1937, as amended (7 
U.S.C. 601-674), provides that administrative proceedings must be 
exhausted before parties may file suit in court. Under section 
608c(15)(A) of the Act, any handler subject to an order may request 
modification or exemption from such order by filing with the Secretary 
a petition stating that the order, any provision of the order, or any 
obligation imposed in connection with the order is not in accordance 
with the law. A handler is afforded the opportunity for a hearing on 
the petition. After a hearing, the Secretary would rule on the 
petition. The Act provides that the district court of the United States 
in any district in which the handler is an inhabitant, or has its 
principal place of business, has jurisdiction in equity to review the 
Secretary'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 Analysis

    This decision responds to a Congressional mandate to reconsider the 
Class III and Class IV pricing formulas included in the final rule for 
the consolidation and reform of Federal milk orders. The mandate was 
included in the Consolidated Appropriations Act, 2000 (Pub. L. 106-113, 
115 Stat. 1501).
    In accordance with the Regulatory Flexibility Act (RFA) (5 U.S.C. 
601 et seq.), the Agricultural Marketing Service (AMS) has considered 
the economic impact of this action on small entities and has prepared 
this regulatory flexibility analysis. When preparing such analysis an 
agency shall address: the reasons, objectives, and legal basis for the 
anticipated proposed rule; the kind and number of small entities which 
would be affected; the projected recordkeeping, reporting, and other 
requirements; and federal rules which may duplicate, overlap, or 
conflict with the proposed rule. Finally, any significant alternatives 
to the proposal should be addressed. This final regulatory flexibility 
analysis considers these points and the impact of this final regulation 
on small entities. The legal basis for this action is discussed in the 
preceding section.
    The RFA seeks to ensure that, within the statutory authority of a 
program, the regulatory and informational requirements are tailored to 
the size and nature of small businesses. For the purpose of the RFA, a 
dairy farm is considered a ``small business'' if it has an annual gross 
revenue of less than $500,000, 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 $500,000 
per year criterion was used to establish a production guideline of 
326,000 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.
    USDA has identified as small businesses approximately 66,327 of the 
71,716 dairy producers (farmers) that have their milk pooled under a 
Federal order. Thus, small businesses constitute approximately 92.5 
percent of the dairy farmers in the United States. On the processing 
side, there are approximately 1,200 plants associated with Federal 
orders, and of these plants, approximately 720 qualify as ``small 
businesses,'' constituting about 60 percent of the total.
    During January 2000, there were approximately 240 fully regulated 
handlers (of which 186 were small businesses), 43 partially regulated 
handlers (of which 28 were small businesses), and 71 producer-handlers 
of which all were considered small businesses for the purpose of this 
initial

[[Page 76833]]

regulatory flexibility analysis, submitting reports under the Federal 
milk marketing order program. This volume of milk pooled under Federal 
orders represents 72 percent of all milk marketed in the U.S. and 74 
percent of the milk of bottling quality (Grade A) sold in the country. 
Forty-four distributing plants were exempt from Federal order 
regulation on the basis of their small volume of distribution.
    Producer deliveries of milk used in Class I products (mainly fluid 
milk products) totaled 3.965 billion pounds in January 2000--38.8 
percent of total Federal order producer deliveries. More than 200 
million Americans reside in Federal order marketing areas--
approximately 77 percent of the total U.S. population.
    In order to accomplish the goal of imposing no additional 
regulatory burdens on the industry, a review of the current reporting 
requirements was completed pursuant to the Paperwork Reduction Act of 
1995 (44 U.S.C. Chapter 35). In light of this review, it was determined 
that these proposed amendments would have little or no impact on 
reporting, recordkeeping, or other compliance requirements because 
these would remain identical to the current Federal order program. No 
new forms have been proposed, and no additional reporting would be 
necessary.
    This notice does not require additional information collection that 
requires clearance by the OMB beyond the currently approved information 
collection. The primary sources of data used to complete the forms are 
routinely used in most business transactions. 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 industry average.
    No other burdens are expected to fall upon the dairy industry as a 
result of overlapping Federal rules. This proposed rulemaking does not 
duplicate, overlap or conflict with any existing Federal rules.
    To ensure that small businesses are not unduly or 
disproportionately burdened based on these proposed amendments, 
consideration was given to mitigating negative impacts.
    One of the principal issues considered at the hearing was the 
source of price data that should be used to generate prices for milk 
components and, thereby, prices to be paid to producers. The options 
considered were the National Agricultural Statistics Service (NASS) 
surveys of selling prices of manufactured dairy products, Chicago 
Mercantile Exchange (CME) prices, and producer costs of production. The 
decision selects the NASS-reported prices as the most appropriate for 
use in determining product prices because of the considerably larger 
volume of product represented in those prices series than in the CME 
price data. Producer cost of production was not included in the 
calculation of prices because assuring dairy farmers that their costs 
of production will be covered addresses only the milk supply side of 
the market and ignores factors underlying demand or changes in demand 
for milk and milk products.
    Various proposals to reduce or increase the levels of the 
manufacturing (make) allowances of butter, nonfat dry milk, cheddar 
cheese and dry whey were considered. This decision adjusts these make 
allowances from their current levels on the basis of data and testimony 
contained in the hearing record. Most of the adjustments are minimal. 
Primarily, manufacturing cost surveys done by USDA's Rural Cooperative 
Business Service and the California Department of Food and Agriculture 
were used to determine the most appropriate levels of make allowance 
for the products used in calculating Federal order class prices.
    The only other actual collection of manufacturing cost data for 
cheddar cheese and dry whey that was cited in the hearing record was a 
survey of cheddar cheese and dry whey manufacturing costs arranged for 
by the National Cheese Institute. This survey was conducted by persons 
unfamiliar with the dairy industry among cheese processors who would 
benefit from having overstated costs included in the results, and as a 
result has less reliability than the two studies used to determine the 
cheddar cheese make allowance. In addition, one nonfat dry milk 
manufacturer testified to costs of manufacture that exceeded those of 
the two studies by a significant amount, mostly in the areas of return 
on investment and marketing costs. The data did not include any 
information about the pounds of product manufactured, and could not 
have been weighted with the data from the two other studies.
    Several proposals to change the factor reflecting the yield of 
nonfat dry milk from nonfat solids in milk would have increased the 
nonfat solids price, and the Class IV skim price, but ignored the need 
to reflect the generally lower price and higher manufacturing cost of 
buttermilk powder that also must be considered in calculating the Class 
IV nonfat solids price. Testimony and data in the record was used to 
determine a factor more representative of nonfat dry milk yield and the 
effect of buttermilk powder price and cost. The alternatives to the 
formula adopted did not include consideration of the price, cost, and 
volume of buttermilk powder relative to those of nonfat dry milk.
    Proposals were made to reduce the butter and cheese product prices 
used in calculating the Class IV butterfat price and the Class III 
prices. The record of this proceeding continues to support the use of 
the product prices adopted in the final rule in the Federal milk order 
reform process as representing accurately the values of these products. 
In the case of adjusting the Grade AA butter price to reflect the value 
of Grade A butter, the record fails to reveal any source of information 
for obtaining current prices for Grade A butter. In the case of 
proposals to remove the 3-cent adjustment between the barrel and 40-
pound block cheese prices, there was no testimony about the actual 
difference in cost between the two types of packaging that overcame 
testimony that 3 cents is the actual cost difference, or data that 
indicates that the customary price difference is at least 3 cents.
    Proposals to reconsider the class price relationships in the orders 
were considered, although a proposal to use a weighted average of the 
Class III and Class IV prices as a Class I price mover was not noticed 
for hearing in this proceeding. The hearing record supports the 
continued relationships between the Class IV and Class II prices, and 
between the higher of the manufacturing class prices and the Class I 
price.
    A proposal that the Class II differential be changed to negate any 
changes in the Class IV price formula that would affect the current 
price relationship between nonfat dry milk and Class II failed to 
consider that the Class II-Class IV price difference adopted in Federal 
order reform is based on the difference in the value of milk used to 
make dry milk and the value of milk used to make Class II products.
    Proposals that any increases resulting from changes to the Class 
III and Class IV price formulas not be allowed to result in increases 
in Class I prices did not address the rationale for the current Class I 
price differentials above the manufacturing price levels for the 
purpose of obtaining an adequate supply of milk for fluid (drinking) 
use.
    The changes to the Class III and Class IV price formulas included 
in this decision should have no special impact on small handler 
entities. All handlers manufacturing dairy products from milk

[[Page 76834]]

classified as Class III or Class IV would remain subject to the same 
minimum prices regardless of the size of their operations. Such 
handlers would also be subject to the same minimum prices to be paid to 
producers. These features of minimum pricing are required by the 
Agricultural Marketing Agreement Act and should not raise barriers to 
the ability of small handlers to compete in the marketplace. It is 
similarly expected that small producers would not experience any 
particular disadvantage to larger producers as a result of any of the 
proposed amendments.
    Interested parties are invited to comment on the probable 
regulatory and informational impact of the amended provisions of this 
decision on small businesses. Also, parties may suggest modifications 
of this decision for the purpose of tailoring the applicability of the 
provisions to small businesses.
    An analysis was done on the effects of the alternatives selected, 
and is summarized below.

Analysis

    In order to assess the impact of changes in Federal order milk 
pricing formulas, the Department conducted an economic analysis. While 
the primary purpose of this decision is to amend the product pricing 
formulas used to price milk regulated under Federal milk marketing 
orders and classified as either Class III or Class IV milk, these 
product price formulas also affect the prices of regulated milk 
classified as Class I and Class II.
    The modifications in this decision are analyzed simultaneously as a 
change from the current set of formulas. This analysis focuses on 
impacts on milk marketed under all Federal milk marketing orders, and 
treats the Federal order system as a single entity. Milk marketed in 
California, milk marketed under other state regulations and unregulated 
milk are treated separately. The hard manufactured dairy product 
markets are national.

Scope of Analysis

    Impacts were measured as changes from the model baseline as adapted 
from the USDA dairy baseline published in February 2000. The USDA 
baseline is a national, annual projection of the supply-demand-price 
situation for milk and dairy products. Baseline assumptions are: (1) 
The price support program would end on December 31, 2000; (2) the Dairy 
Export Incentive Program would continue to be utilized; and (3) the 
Federal Milk Marketing Order Program would continue as reformed on 
January 1, 2000.
    It was necessary to make the following simplifying assumptions in 
order to conduct the analysis. The Federal order share of U.S. milk 
marketings is about 67 percent. About 60 percent of all milk 
manufactured (Classes II, III, and IV) is marketed under Federal order 
regulation. Given the prominence of Federal order marketings in the 
U.S. milk manufacturing industry, prices paid for manufactured milk 
under Federal orders cannot get too far out of alignment with the value 
of milk for manufacturing in the rest of the United States. Similarly, 
the fluid prices in non-Federal order markets are largely reflective of 
Federal order minimum Class I prices.
    California stands out as the state with the highest production and 
has its own market regulations. California milk marketings are 
estimated as a function of the California pool price. Non-California 
milk marketings are estimated as a function of an all-milk price that 
incorporates the Federal order pool price and over-order payment 
estimates. The Federal order share of those non-California marketings 
is estimated as a function of the Federal order all-milk price relative 
to the estimated value of manufactured milk.
    Cooperatives manufacture about 40 percent of the cheese and about 
70 percent of the butter and nonfat dry milk manufactured nationally, 
and sell such dairy products in wholesale and retail markets in 
competition with other manufacturers. A baseline assumption is that a 
cooperative passes through to its members the best price and best 
return on investment that it can. A higher minimum Federal order price 
could result in cooperatives paying higher monthly prices for milk, but 
would result in lower returns on investments paid at the end of the 
year. Total cash receipts for member milk marketings processed by 
cooperatives would be changed only by changes in wholesale product 
prices.
    Specifically, it is assumed that changes in pay prices and cash 
receipts to cooperative members for raw milk marketed by cooperatives, 
or to non-members for milk marketed to proprietary handlers would be 
fully reflected by lower or higher Federal minimum class prices. 
Changes in pay prices and cash receipts to cooperative members for milk 
manufactured by cooperatives would be fully reflected by the 
manufacturing milk price that moves with changes in manufactured 
product prices only. This applies to 40 percent of the Class III milk 
and 70 percent of the Class IV milk. In the case of cooperatives, it is 
assumed that differences between the model generated average value for 
manufactured milk and the average of the Class II, Class III, and Class 
IV prices would be passed on to producer-members in the form of higher 
or lower pay prices. In the case of proprietary plants, it is assumed 
that the plants would retain the differences. However, in the case of a 
loss, proprietary manufacturing plants could de-pool milk to equalize 
their margins with cooperative plant margins. In the model, this is 
accounted for by an equation that estimates the Federal order share of 
non-California marketings as a function of the ratio of the Federal 
order all-milk price relative to the estimated value of manufactured 
milk. The Federal order share increases as the price ratio increases.
    In addition to altering the sharing of manufacturing proceeds 
between manufacturing plants and producers the decision's formula 
changes have an impact on Class I and Class II prices. Class II prices 
move in concert with changes in Class IV. The effects on Class I prices 
depend upon the effect on the Class III price relative to the Class IV 
price. Class I prices are based on the higher of the Class III or Class 
IV prices.
    Retail prices of fluid milk and Class II soft manufactured products 
are assumed to respond penny for penny to changes in the milk cost of 
these products. Wholesale and retail margins are assumed unchanged from 
baseline. Demands for Class I and Class II products are functions of 
price, per capita consumption and population. Wholesale prices for 
cheese, butter and nonfat dry milk reflect supply and demand for these 
products. The milk supply for manufacturing these hard products is the 
result of milk marketings minus the volumes demanded for Class I and 
Class II products. The remaining volume is allocated to Class III and 
Class IV according to returns to manufacturing in each class. Demands 
for products in these classes are functions of per capita consumption 
and population. Per capita consumption for the major milk and dairy 
products are estimated as functions of price, income, and the 
proportion of food expenditures spent away from home.

Summary of Results

    The results of the amendments to the Class III and Class IV 
formulas are summarized using five-year, 2001-2005, average changes 
from the model baseline. The results presented for the Federal order 
system are in the context of the larger U.S. market. In particular, the 
Federal order price formulas use national manufactured dairy product 
prices.

[[Page 76835]]

    In addition, the advanced Class I base price is driven by the 
higher of the Class III or Class IV prices. With the amended formulas, 
the Class I base price is the Class IV price in all years of the 
analytical period. In each year, the Class I price, at the class 
average test of 2 percent butterfat, is slightly above the baseline. 
This results in a small reduction in the demand for skim milk, and to a 
lesser extent butterfat, for Class I use. Milk generally shifts from 
Class I use to the production of butter, nonfat dry milk, and cheese in 
generally the same proportions as in the baseline. As a result, the 
wholesale prices of butter, nonfat dry milk and cheese each decrease 
slightly.
    Producers. Over the five-year period, the changes taken as a whole 
result in a small increase of about $0.007 per hundredweight in the 
Federal order minimum blend price for milk at test. Including the 
effect of premiums, the average milk price received by Federal order 
producers is expected to average up $0.009 per hundredweight. Federal 
order marketings increase by an average 139 million pounds and cash 
receipts increase by $30 million (0.18 percent) from baseline receipts 
of $16,414 million. U.S. milk marketings increase by an average 24 
million pounds annually, and cash receipts increase by $15.5 million 
(0.07 percent) from baseline receipts of $23,841 million.
    There is an increase of $0.007 per hundredweight in the five-year 
annual average U.S. all-milk price.
    Milk Manufacturers and Processors. For 2001, the Class III price at 
test (3.61 percent butterfat) is increased by $0.02 per hundredweight 
under the amended marketing orders. For the second year, Class III is 
unchanged from baseline and then decreases slightly in 2003-2005. For 
the five-year period, Class III at test averages down about $0.015 per 
hundredweight.
    The major change is the five-year annual average increase in the 
minimum Class III butterfat price of about $0.73 per pound, and a 
decline in the average minimum Class III skim milk price of about $2.72 
per hundredweight. The estimated NASS cheese price, at 38 percent 
moisture, decreases an average $0.003 per pound (0.2 percent).
    Butterfat prices for Class II and Class IV average down slightly 
($0.008 per pound) for the five-year period, while skim milk prices 
increase about $0.11 per hundredweight. This results in an increased 
Class II milk cost, at test, to processors of about 0.12 percent. The 
butter price decreases an average 0.5 percent while the average nonfat 
dry milk price decreases by about 0.3 percent for the period.
    The average U.S. value of milk in manufactured products decreases 
by about $0.03 per hundredweight for the period.
    Class I costs to fluid processors (at the class average butterfat 
of 2 percent) average about $0.03 per hundredweight (0.23 percent) 
higher, as a result of higher skim milk prices each year.
    Consumers. The expected $0.03 per hundredweight increase in the 
Class I price for 2001-2005 results in about a $0.0025 increase in the 
price per gallon of fluid milk for consumers. Consumer costs for fluid 
milk are estimated to increase on average by about $10.4 million 
annually over the five-year period.
    The price of butter is estimated to decrease on average $0.006 per 
pound for the period. Cheese is estimated to decrease $0.003 per pound. 
Consumer expenditures on butter are estimated to decrease by about $5.6 
million, and on American cheese, decrease by about $10.6 million 
annually over the five-year period.
    A complete economic analysis is available upon request from Howard 
McDowell, Senior Economist, USDA/AMS/Dairy Programs, Office of the 
Chief Economist, Room 2753, South Building, U.S. Department of 
Agriculture, Washington, DC 20250, (202) 720-7091, e-mail address 
<a href="/cdn-cgi/l/email-protection#f79f9880968593d99a94939880929b9bb782849396d9909881"><span class="__cf_email__" data-cfemail="543c3b233526307a3937303b2331383814212730357a333b22">[email protected]</span></a>

Civil Rights Impact Statement

    This decision is based on the record of a public hearing held May 
8-12, 2000, in Alexandria, Virginia, in response to a mandate from 
Congress via the Consolidated Appropriations Act, 2000, that required 
the Secretary of Agriculture to conduct a formal rulemaking proceeding 
to reconsider the Class III and Class IV milk pricing formulas included 
in the final rule for the consolidation and reform of Federal milk 
orders. The consolidated orders were implemented on January 1, 2000.
    Pursuant to Departmental Regulation (DR) 4300-4, a comprehensive 
Civil Rights Impact Analysis (CRIA) was conducted and published with 
the final decision on Federal milk order consolidation and reform. That 
CRIA included descriptions of (1) the purpose of performing a CRIA; (2) 
the civil rights policy of the U.S. Department of Agriculture; and (3) 
basics of the Federal milk marketing order program to provide 
background information. Also included in that CRIA was a detailed 
presentation of the characteristics of the dairy producer and general 
populations located within the former and current marketing areas.
    The conclusion of that analysis disclosed no potential for 
affecting dairy farmers in protected groups differently than the 
general population of dairy farmers. All producers, regardless of race, 
national origin, or disability, who choose to deliver milk to handlers 
regulated under a Federal order will receive the minimum blend price. 
It also was concluded that ``one of the reasons for success of the 
Federal milk order program is that all producers benefit through 
assistance in developing steady, dependable markets, reducing price 
instability and unnecessary price fluctuations, and assurances of a 
minimum price for their milk. With this assurance, producers are more 
willing to make the significant cost investments in milk cows and 
equipment needed to produce high-quality milk. Federal orders provide 
the same assurance for all producers, without regard to sex, race, 
origin, or disability. The value of all milk delivered to handlers 
competing for sales within a defined marketing area is divided equally 
among all producers delivering milk to those handlers.''
    The issues addressed at the May 2000 hearing are issues that were 
addressed as part of Federal milk order consolidation and reform. 
Establishing representative make allowances in the formulas that price 
milk used in Class III and Class IV dairy products is an issue that 
affects the obligations of handlers of those products to the Federal 
milk order pool, and similarly the pool obligations of Class I and 
Class II handlers. The decision should result in no differential 
benefits in dividing the pool among all producers delivering milk to 
those regulated handlers. Therefore, USDA sees no potential for 
affecting dairy farmers in protected groups differently that the 
general population of dairy farmers.
    Decisions on proposals to amend Federal milk marketing orders must 
be based on testimony and evidence presented on the record of the 
proceeding. The hearing notice in this proceeding invited interested 
persons to address any possible civil rights impact of the proposals 
being considered in testimony at the hearing. No such testimony was 
received.
    Copies of the Civil Rights Impact Analysis done for the final 
decision on Federal milk order consolidation and reform can be obtained 
from AMS Dairy Programs at (202) 720-4392; any Milk Market 
Administrator office; or via the Internet at: www.ams.usda.gov/dairy/.

[[Page 76836]]

    Prior documents in this proceeding: Notice of Hearing: Issued April 
6, 2000; published April 14, 2000 (65 FR 20094).

Preliminary Statement

    Notice is hereby given of the filing with the Hearing Clerk of this 
tentative decision with respect to proposed amendments to the tentative 
marketing agreements and 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 of 1937, as 
amended (7 U.S.C. 601 et seq.), 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 tentative 
decision with the Hearing Clerk, United States Department of 
Agriculture, Washington, DC 20250, by the 60th day after publication of 
this decision in the Federal Register. Six 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 probably regulatory and informational 
impact of the proposals on small businesses. To the extent that this 
issue was raised, it is considered in the following findings and 
conclusions.
    This decision responds to a Congressional mandate to reconsider the 
Class III and Class IV pricing formulas included in the final rule for 
the consolidation and reform of Federal milk orders. The mandate was 
included in the Consolidated Appropriations Act, 2000 (Pub. L. 106-113, 
115 Stat. 1501). The findings and conclusions set forth below are based 
on the record of a public hearing to consider proposals submitted by 
the industry to change the pricing formulas in the marketing agreements 
and the orders regulating the handling of milk in the Northeast and ten 
other marketing areas held in Alexandria, Virginia, on May 8-12, 2000. 
Notice of such hearing was issued on April 6, 2000 and published on 
April 14, 2000 (65 FR 20094).

Brief Summary of Changes to Class III and IV Formulas

    As instructed by the legislation requiring this proceeding, the 
Class III and IV pricing formulas, and all of the elements of the 
formulas, were re-considered in developing this decision. The changes 
made in the Class IV component formulas are minimal. The product prices 
used in the Class IV formulas (butterfat and nonfat solids) are 
unchanged. The make allowances for butter and nonfat dry milk are 
increased slightly, by .1 cents for butter and .3 cents for nonfat dry 
milk. The divisor used in the Class IV butterfat component formula is 
unchanged, while the 1.02 divisor used in the nonfat solids price 
formula to reflect the relative values and yields of buttermilk powder 
and nonfat dry milk is eliminated.
    The Class III component price formulas are changed to a greater 
degree. The most substantive change is to calculate a Class III 
butterfat price on the basis of the value of butterfat in cheese, not 
on its value in butter. At the same time, the protein price formula 
would reflect the value of protein in cheese, without including a 
butterfat factor in the formula to adjust for the differential value of 
butterfat used in butter and cheese. The product price for cheese is 
changed to reflect a 38-percent moisture adjustment in the barrel 
cheese price to place that price on the same moisture basis as the 
block cheese price. The dry whey price, for computing the other solids 
price, is unchanged. The change in the make allowance for cheese is 
minimal, and the whey powder make allowance is increased only enough to 
remain the same as that for nonfat dry milk. As with the current 
component prices, the Van Slyke formula is used to determine the yield 
effects of both the Class III protein and butterfat prices.
    The material issues on the record of the hearing relate to:

1. Role of producer costs of production.
2. Commodity prices (CME vs. NASS).
3. Commodity and component price issues.
    a. General approaches on make allowances.
    b. Class IV butterfat and nonfat solids prices.
    c. Class III butterfat, protein and other nonfat solids prices.
    d. Effects of changes to Class III and Class IV price formulas.
4. Class price relationships.
5. Class I price mover.
6. Miscellaneous and conforming changes.
    a. Advance Class I butterfat price.
    b. Classification.
    c. Distribution of butterfat value to producers.
    d. Inclusion of Class I other source butterfat in producer 
butterfat price computation.
7. Issue of whether to omit a recommended decision.

Findings and Conclusions

    The following findings and conclusions on the material issues are 
based on evidence presented at the hearing and the record thereof:

1. Role of Producer Costs of Production

    Proposal 29 in the hearing notice proposed that producers' costs of 
production be incorporated into the Class III and Class IV pricing 
formulas. A number of dairy farmer witnesses testified that, just as 
manufacturing processors are assured that their costs of processing 
milk products will be covered, dairy farmers should also have some 
assurance that they will be able to continue to operate their dairy 
farms without losing money. Under the current system, according to the 
National Farmers Union (NFU) witness, incorporating a make allowance 
for processors but not for producers leaves dairy farmers to bear the 
entire burden of changes in supply and demand.
    Unfortunately, as explained in both the proposed and final rules 
under Federal order reform, assuring producers that their costs of 
production will be covered addresses only the milk supply side of the 
market and ignores factors underlying demand or changes in demand for 
milk and milk products. As noted by the DFA witness, although pricing 
proposals incorporating cost of production have been noticed and 
reviewed several times in the last decade without success, if a sound 
mechanical concept could be advanced that overcomes the objections 
relative to supply and demand, it should be considered.
    The witnesses testifying on behalf of NFU and National Farmers 
Organization (NFO) both supported the concept of variable make 
allowances, in which the allowances would be adjusted for changes in 
supply and demand as a means of addressing the problem of manufacturers 
being insulated from changes in supply and demand by their fixed make 
allowances. In other words, increases in dairy farmers' costs of 
production would be reflected in reductions in manufacturers' margins. 
Both proposals would divide Class III and Class IV values by dairy 
farmers' costs of production. The NFU proposal would use an average 
national cost of production, presumably as published by USDA's Economic 
Research Service, and the NFO proposal would use the CDFA milk 
production cost index.
    Although the concept of assuring that as costs of production 
increase, manufacturing allowances would decline to the extent product 
prices do not also increase has appeal, it is difficult to believe that 
such a proposal would be in the best long-term interests of dairy 
farmers, processors, or consumers. It certainly could easily fail to 
cover processors' costs to the extent that would keep them operating. 
It is

[[Page 76837]]

easy to construct a situation in which milk production costs increase 
because of feed shortages, resulting in reduced make allowances to 
processors. When the manufacturers' make allowances decline to the 
point the variable costs of processing are not covered, they would have 
little choice but to cease processing. At that point, dairy farmers who 
are facing high costs of production would have to find alternative 
outlets for their milk. If many processors reach the point at which 
they must make the decision to cease operating near the same time, 
there likely would be very disorderly conditions among dairy farmers 
looking for outlets for their milk. In addition, consumers would be 
likely to find shortages in the availability of dairy products.
    This proceeding must join the list of those in which cost of 
production proposals have been considered and found wanting in terms of 
being able to reflect both the supply and demand sides of the market 
for dairy products. There is no evidence in the record that either the 
ERS or the CDFA index has been used to price milk. As noted by the NFO 
witness, the current pricing system uses the interaction of supply and 
demand for milk products as an indirect method of meeting the pricing 
requirements of the Agricultural Marketing Agreement Act of 1937 for 
milk. According to the witness, producer milk has a value before it is 
processed. In today's market, it is hard to agree that milk has a 
market value to consumers without being pasteurized, at least.

2. Commodity Prices (CME vs. NASS)

    As recommended in the proposed rule and adopted in the final rule 
on Federal order reform (published on September 1, 1999 (64 FR 47898)), 
commodity prices determined by surveys conducted by USDA's National 
Agricultural Statistics Service (NASS) are currently being used in the 
component price formulas that replaced the BFP. This decision makes no 
changes in the source of product price data.
    Several proposals (1, 5, 10 and 19) were considered during the 
current proceeding that recommended using prices reported by the 
Chicago Mercantile Exchange (CME) instead of the NASS surveys to 
determine commodity prices. Both the CME and the NASS surveys were 
supported by testimony at the hearing and in briefs. The CME is a cash 
market where speculators, producers, and processors can buy and sell 
products. It is a mechanism for establishing prices on which the dairy 
industry relies. Thus, a lot of contracts to buy and sell dairy 
products are based on CME prices. A USDA witness testified that he is 
unaware of any other indices used to price cheese in the U.S. According 
to several witnesses, cheese and butter processors generally base their 
contract sales on CME prices.
    The NASS price survey gathers selling prices of cheddar cheese, 
Grade AA butter, nonfat dry milk and dry whey from a number of 
manufacturers of these products nationwide. At the time the proposed 
rule on Federal order reform was published (January 30, 1998), the NASS 
survey included prices for cheddar cheese only. This survey had begun 
in March 1997. In September 1998, before the final decision was 
published in April 1999, NASS began surveys of Grade AA butter prices, 
dry whey prices, and nonfat dry milk prices. In developing these 
commodity surveys, input was obtained from the dairy industry on 
appropriate types of products, packaging, and package sizes to be 
included for the purpose of obtaining unbiased representative prices. A 
sale is considered to occur when a transaction is completed, the 
product is shipped out, or title transfer occurs. In addition, all 
prices are f.o.b. the processing plant/storage center, with the 
processor reporting total volume sold and total dollars received or 
price per pound. NASS Dairy Products Prices reports wholesale cheddar 
cheese prices for both 500-pound barrels and 40-pound blocks, USDA 
Grade AA butter, USDA Extra Grade or USPH Grade A non-fortified dry 
milk and USDA Extra Grade edible non-hygroscopic dry whey. A more-
detailed description of the surveys can be found in the final decision 
of April 2, 1999 (64 FR 16093).
    The proponents of proposal 1, Western States Dairy Producers Trade 
Association, et al. (WSDPTA), a group of several trade associations and 
cooperatives, proposed that the NASS commodity prices for butter, 
cheese, and nonfat dry milk that currently are used for computing the 
Federal order component prices be replaced with prices determined by 
trading on the CME. Dry whey was not included in the proposal because 
there is no dry whey cash contract traded on the CME. A witness from 
WSDPTA did not oppose the collection and reporting of NASS data, but 
expressed the opinion that while it serves an important function as 
information, it should not be used to establish prices. The proponents 
presented several benefits of using the CME over the NASS survey for 
commodity prices.
    Proponents explained that by using CME prices in the formulas, 
prices would be known immediately rather than a week later when the 
NASS prices are published, reflecting more quickly the supply-demand 
conditions for dairy products. The one-week delay is caused by the time 
necessary to collect data. A witness for National Farmers Organization 
noted that interested persons are able to check the CME value of 
products on a daily basis and use the reported prices as a factor to 
establish what they're going to be paying or paid for cheese.
    A witness from WSDPTA went on to explain that buyers, sellers, and 
speculators trade the CME, trying to obtain a price in their favor, 
while the price actually is determined by supply and demand forces. He 
described the rules as fair and the results as transparent, with 
participants having a number of interests. The witness continued by 
noting that the CME price result is instant and results cannot be 
altered. In contrast, he stated, NASS prices are reported by sellers 
only, who are not disinterested parties. He argued that NASS 
respondents can modify their numbers or file an initial report after 
calculating the price impact of the latest reports.
    The proponents also concluded that the urging by many hearing 
participants that the NASS price series include mandatory participation 
and be audited proves that the NASS series is not reliable enough to be 
used as a price-discovery method.
    Finally, the witness from WSDPTA expressed the view that the NASS 
price series would feed on itself and result in price setting, not 
price discovery. He continued by noting that plants and their buyers 
will obtain prices one week and sell the commodity in the following 
week at a price derived in large part from the price obtained in the 
prior week. The witness compared the NASS survey to the California 
State survey of powder prices which, he claimed, results in a circular 
pricing system that is mathematically incapable of fully reflecting the 
top of the market price for powder because so little of the survey 
volume is priced off of the spot market. Proponents expressed the 
belief that this circularity causes prices to remain lower than they 
would without it, and that prices would increase more slowly and 
decrease more rapidly than would prices on the CME, causing overall 
lower prices for dairy farmers.
    Opponents of changing from NASS to CME prices to compute component 
prices included International Dairy Foods Association (IDFA), Dairy 
Farmers of America (DFA), and National Milk Producers Federation 
(NMPF). Witnesses for these parties argued that the NASS survey 
includes pricing based

[[Page 76838]]

on a significantly larger volume of product than does the CME. In the 
case of the nonfat dry milk market, the table of 1999 monthly Chicago 
Mercantile Exchange Cash Markets data from the 1999 Annual Dairy Market 
Statistics showed that there were no sales reported for either extra 
grade or Grade A in the year 1999.
    According to a witness from IDFA, the volume of cheddar cheese in 
the NASS survey is equal to 26.4 percent of all cheddar cheese 
production in the U.S. for the period September 1998 through February 
2000. During the same period, the CME volume of cheddar cheese traded 
represented only 1.7 percent of U.S. cheddar cheese production. The 
witness stated that for the same 18-month period, the NASS survey 
volumes represented 14.4 percent of all U.S. butter production while 
CME trading consisted of only 2.6 percent. He also noted that switching 
from the NASS survey data to the CME data would result in a change from 
a very broad to an extremely thin representation of actual product 
transactions.
    Opponents to the proposal to use CME prices also pointed out that 
prices at the CME are Chicago or Midwest prices based on the delivery 
location specification of the contract. Therefore, they argued, the 
scope of the reported prices for cheese, butter, and nonfat dry milk 
are not national. A witness for Kraft noted that reliance on the CME 
alone would exclude the substantial and growing volume of cheese 
produced in the western United States (U.S.), particularly California. 
A witness for Northwest Dairy Association suggested that a 
transportation credit would need to be used with CME prices, at least 
in the West, to reduce the value of the CME to a more representative 
level. Opponents went on to explain that since the NASS survey contains 
data from plants located all over the United States, NASS prices 
represent a national scope of the prices of each of the particular 
commodities.
    According to the testimony in the record and a number of the 
briefs, the cheese and butter sellers and buyers look to the CME to 
identify the most current price levels. As a result, prices move in 
response to supply and demand conditions in the marketplace as 
reflected at the CME. Since the transaction prices of commodities are 
based off of the CME, it is difficult to see how the NASS survey can 
cause, or result in, circularity. The NASS prices reflect the CME 
prices with a short lag, but are based on a much greater volume, 
enhancing the stability of the price series. Continued use of the NASS 
price survey appears to be the best method of obtaining reliable data 
about commodity prices.
    As stated in the final decision on Federal order reform, NASS data 
traditionally have been collected via a survey with voluntary 
participation. The price information, like most NASS data, is not 
audited. NASS, however, applies various statistical techniques and 
cross-checking with other sources to provide the most reliable 
information available. The issue of mandatory and audited NASS data, 
however, will not be discussed further as NASS is not authorized to 
conduct such activities, and these issues are not within the scope of 
this rulemaking.

3. Commodity and Component Price Issues

a. General Approaches on Make Allowances
    Changes to the make allowances for each of the product formulas 
used in calculating component prices were proposed and discussed at 
length during this proceeding. Except in the case of dry whey, make 
allowances adopted in the component price formulas in this decision are 
calculated using a weighted average of the most recent California cost 
of production study and the Rural Business Cooperative Services (RBCS) 
study. A marketing cost of $.0015 per pound is added to both the 
California costs and the RBCS costs, as in the Final Rule, and the 
California value for return on investment is used to adjust the RBCS 
cost. This is generally the same approach used to determine the 
appropriate make allowances in the current orders, and results in 
values that differ little from the formulas in the current orders.
    For the calculation of the Class III ``other nonfat solids'' price, 
neither the California nor RBCS studies included information on the 
cost of making dry whey, and a survey done for this proceeding under 
the auspices of IDFA was not considered sufficiently reliable for use 
in establishing a make allowance. Consequently, the ``other solids'' 
make allowance should continue to be the same as that used for nonfat 
dry milk.
    A number of the proposals considered in this proceeding would 
change the manufacturing, or make, allowances adopted for the pricing 
formulas under Federal order reform. There was considerable testimony 
on the appropriate factors to be considered in establishing make 
allowances, and several sources of data were cited as the most accurate 
to use for such a purpose. In addition, a number of witnesses testified 
about the philosophical basis for determining appropriate manufacturing 
allowances for milk pricing formulas.
    Two surveys of product manufacturing costs that were averaged for 
use in calculating make allowances under Federal order reform were the 
California Department of Food and Agriculture (CDFA) study, which is 
done annually and includes nearly 100 percent of dairy products 
manufactured in California, and the Rural Business Cooperative Service 
(RBCS) study, which is conducted annually by USDA as an in-plant 
benchmark study for participating cooperative associations. These two 
surveys had both been updated since earlier versions had been used in 
determining the manufacturing allowances used in the current component 
pricing formulas. In addition, the National Cheese Institute (NCI), an 
affiliate of the International Dairy Foods Association (IDFA), 
contracted with a third party to conduct a survey of the costs of 
manufacturing cheese and whey powder for use in this proceeding.
    A witness for National Milk Producers Federation (NMPF) stated that 
make allowances should reflect the costs incurred by average plants 
manufacturing the particular dairy product used in the component/Class 
price formulas: butter, nonfat dry milk, cheese, and dry whey. The 
witness went on to explain that the procedure used by the Secretary for 
determining the make allowances for the Final Rule, using an average of 
the California cost of production studies and the Rural Business 
Cooperative Services (RBCS) study, was sound and that the same 
procedure should be used as a result of this hearing, using the updated 
data from both surveys. In calculating an appropriate make allowance, 
the witness supported addition of a marketing cost of $.0015 per pound 
to both the California costs and the RBCS costs, as in the Final Rule, 
and the California value for return on investment used to adjust the 
RBCS costs in the Final Rule. The witness explained that both of these 
factors should be included as they are legitimate and necessary costs 
incurred in operating manufacturing plants.
    The witness for IDFA supported inclusion of the California cost 
studies in the computation of the make allowance; however, the witness 
stated that the appropriate procedure for computing the make allowance 
for cheese was to compute a weighted average of the California cost 
studies and the NCI survey. The witness explained that the RBCS study 
does not

[[Page 76839]]

include all the necessary costs that must be recovered in the make 
allowance, and that the NCI survey is needed to determine what the 
additional cost values should be. The costs that the IDFA witness 
pointed out that are not included in the RBCS survey, but are included 
in the NCI survey, are general plant administrative costs, such as the 
plant manager's salary and corporate overhead; return on investment or 
capital costs; and marketing costs.
    The IDFA representative testified that the danger inherent in 
regulated prices is setting the manufacturing allowance at a level too 
low to assure that manufacturers will be able to recover their costs of 
manufacturing finished products and have the money needed to invest in 
new plants. The witness pointed out that an inadequate make allowance 
would force manufacturers either to move to areas that do not have 
regulated pricing or go out of business. At the very least, the witness 
explained, the manufacturers would not invest in new plants and 
equipment, which in the long run would cause a decline in the 
productivity of the dairy industry. A number of briefs filed on the 
basis of the hearing transcript emphasized the importance of covering 
all of handlers' costs of manufacturing, and not just average costs.
    The IDFA witness explained that if make allowances are established 
at too low a level, proprietary plants are placed at a competitive 
disadvantage relative to cooperative-owned plants. The witness 
explained that since cooperatives do not have to pay their producers 
the minimum order price, as proprietary plants are required to do, 
cooperative plants can reduce the prices paid to member producers to 
make up the difference in cost.
    The IDFA witness explained further that the problem with a make 
allowance established below the amount needed to cover plant costs 
occurs because the plant sells the finished product at the same price 
that is used in the formula for establishing the minimum price the 
plant must pay for the raw material, milk. The manufacturing allowances 
are the only place the plant has the opportunity to cover its costs, 
and those allowances are fixed in the formula that determines the raw 
material price.
    The witness for IDFA asserted that there was very little risk in 
setting a make allowance too high. He explained that if the make 
allowance is established at a level above plant costs, the additional 
revenue stream will be corrected through market forces by requiring the 
plant operators to pay competitive over-order premiums to milk 
suppliers to obtain an adequate supply of milk.
    A witness for Western States Dairy Producers Trade Association, et 
al. (WSDPTA), explained that the most important part of determining a 
manufacturing allowance is to pick a method and stick with that method. 
The witness testified that the appropriate method is to use the results 
of the RBCS study with adjustments to include factors for marketing 
costs and for capital costs. The witness pointed out that use of the 
RBCS study is appropriate because the study is voluntary, represents 
the costs of making the particular commodities, and the plants are 
geographically widely dispersed. The WSDPTA witness stated that 
including the results of the California study in the computation of the 
make allowance for pricing Federal order milk is inappropriate since 
there is no logical reason for considering the manufacturing costs of 
plants that do not procure any of the milk that would be priced using 
those costs.
    A witness for the National Farmers Organization (NFO) proposed a 
variable make allowance using the RBCS make allowances as a base 
adjusted by the relationship between the particular commodity prices 
for butter, nonfat dry milk, dry whey, and cheese, and the California 
Department of Food and Agriculture (CDFA) milk production cost index. 
The witness explained that a fixed make allowance, as contained in the 
current pricing system, does not vary with market conditions and 
creates a situation in which manufacturers will not respond to market 
signals since the manufacturers will receive a profit no matter what 
the supply and demand is for the finished products. The witness 
explained that as long as the make allowance allows manufacturers a 
sufficient return the manufacturers will continue to produce the 
finished product even if there is limited demand for the product, thus 
resulting in a continued low price paid to producers for their milk. 
The witness characterized a variable make allowance tied to the cost of 
producing milk as a market-oriented system.
    A witness for National Farmers Union (NFU) also proposed a variable 
make allowance composed of the weighted average RBCS and California 
manufacturing cost surveys, without a marketing allowance, adjusted by 
the national average cost of production. The witness explained that the 
current system does not have market accountability, since there is no 
incentive for a manufacturer to restrict production when declining 
prices indicate reduced demand for the product. As a result, according 
to the witness, the pricing system effectively isolates the 
manufacturing side of the industry from supply and demand forces, 
leaving the producers left to bear the burden of changes in supply and 
demand. The witness explained that the California system, in which 
manufacturers' production costs are covered by producers through the 
make allowance, continues to produce a large quantity of lower-valued 
products because the pricing system makes the manufacturer immune to 
the supply of and demand for the products. The witness blamed the 
California make allowance system for the traditionally low milk prices 
in California, that, he claimed, result in expansion of dairy herds to 
make up for reduced cash flow. The witness predicted that if the 
Federal order system follows the same pricing path, the same production 
patterns as witnessed in California would follow in the rest of the 
United States.
    Most hearing participants agreed that the make allowance should 
cover the cost of converting milk to a finished manufactured dairy 
product. However, several participants disagreed with the IDFA 
contention that there is very little risk in setting the make allowance 
too high. They argued that if the make allowance is set in excess of 
the cost to manufacture finished products, the additional revenue would 
be kept by the manufacturing plants as higher profits and not 
distributed to the producers supplying milk to the plant. They 
explained that in many parts of the country there is little if any 
competition for the dairy farmers' milk and therefore no incentive for 
a plant to pay above the minimum Federal order price. These plants, 
according to the witnesses, could be expected to keep the extra make 
allowance for themselves.
    Several witnesses opposed the idea of setting make allowances at 
levels that guarantee plants a profit, or at least a return on 
investment, when the dairy farmers supplying milk to the manufacturing 
plants have no similar assurances for covering the costs of producing 
milk. These witnesses pointed to the Agricultural Marketing Agreement 
Act of 1937, Sec. 608c(18), as justification for setting a lower make 
allowance for plants, resulting in higher milk prices that would come 
closer to covering dairy farmers' costs of producing milk.
    As supported by most of the hearing participants, the make 
allowances incorporated in the component price formulas under the 
Federal milk orders should cover the costs of most of the processing 
plants that receive milk pooled under the orders. In part, this

[[Page 76840]]

approach is necessary because pooled handlers must be able to compete 
with processors whose milk receipts are not priced in regulated 
markets. The principal reason for this approach, however, is to assure 
that the market is cleared of reserve milk supplies.
    Although the RBCS survey does not include such costs as general 
plant administrative costs, return on investment or capital costs, and 
marketing costs, it is a survey that has been done for sixteen years 
with the same fundamental methodology, and with some continuity of 
participants. Because the survey is done for the benefit of the 
participating organizations (cooperatives) to help them identify their 
costs and compare them with those of their peer group, there is every 
reason to believe that the costs provided are as accurate as possible. 
In addition, the years of experience with the survey have enabled USDA 
to shape the questions to obtain more accurate results.
    When the RBCS survey results are adjusted to include the factors 
that were mentioned above as not included by using the values for those 
factors from the CDFA survey, the two surveys' costs are comparable, 
especially considering that the RBCS survey represents manufacturing 
plants with a wide distribution around the U.S., while the CDFA survey 
includes only California plants. The CDFA survey is also done every 
year, and is done according to a published procedure manual, with the 
costs being audited by personnel employed by the State for that 
purpose. Although no CDFA employee was available to respond to 
questions about the conduct of the survey, official notice was taken of 
the procedure manual and of California publications associated with 
manufacturing cost data. In addition, several witnesses who are deeply 
involved with the California dairy industry testified regarding the 
perceived reliability of the survey results.
    In contrast to the RBCS and CDFA surveys, the survey of cheese and 
whey powder manufacturing costs arranged for by NCI was developed 
solely for the purpose of establishing costs to be used in determining 
make allowances for this proceeding. The survey was conducted by 
persons unfamiliar with the dairy industry among cheese processors who 
would benefit from having overstated costs included in the results. No 
one who actually conducted the survey was made available to testify, 
and although the IDFA witness stated that survey participants would 
testify regarding their responses to the survey later in the hearing, 
none of the participating firms' witnesses would respond to questions 
about their firms' results. Although less weight must be given the NCI 
survey than either the RBCS or the CDFA surveys for the reasons stated 
above, the NCI survey's resulting manufacturing costs for cheese are 
not considerably different from a weighted average of the RBCS and the 
CDFA surveys. In fact, although the IDFA hearing participants went to 
great lengths to discredit the RBCS study for use in identifying an 
appropriate level of manufacturing costs, the hearing record reflects 
that the NCI survey of cheese and dry whey manufacturing costs used the 
RBCS 1996 survey results to identify outliers (plus or minus 10 
percent) in the study commissioned by NCI.
    As a result of the differences in conduct of the three surveys, 
manufacturing costs used to determine appropriate make allowances for 
cheddar cheese, butter and nonfat dry milk in this proceeding are 
calculated primarily from a weighted average of the RBCS and CDFA 
surveys, with a check against the NCI survey cost of manufacturing 
cheddar cheese. The cost of manufacturing nonfat dry milk continues to 
be used as the cost of making whey powder due to the nature of the 
information in the hearing record about the actual costs of drying 
whey.
    One proposal included in the hearing notice would have eliminated 
any marketing allowance from the make allowances, and a number of 
witnesses' testimony objected to the inclusion of return on investment. 
The American Farm Bureau witness questioned the need for a marketing 
allowance since producers already pay a 15-cent assessment for 
promotion and research. A brief filed by the proponent of eliminating 
the marketing allowance stated that the allowance appears to be an 
``adjustment'' or a ``hedge,'' since it is not defined in the final 
rule.
    There was general agreement among those testifying that a marketing 
allowance should be included in manufacturing costs, but no consensus 
about the appropriate number. Some of the costs covered by the 
marketing allowance include maintaining and staffing warehouses, 
supporting a marketing and sales staff, transporting product to market, 
and accounting costs associated with the sale of products. The NCI 
survey identified a marketing cost of $.0011 per pound of product, 
while the Dairy Farmers of America (DFA) witness stated that DFA's 
costs were approximately $.0018. The DFA witness testified that because 
the costs included in the activities designated as marketing generally 
fall within a common department under common management, it is 
appropriate to apply the same allowance to each product.
    A witness for Northwest Dairy Association, a cooperative 
association in the Pacific Northwest, stated that their marketing costs 
are $.0026, but identified costs associated with the aging of cheese as 
included in that number. Since the NASS survey price does not include 
cheese intended for aging, the marketing allowance certainly should not 
include costs of aging cheese. The Associated Milk Producers, Inc., 
(AMPI) witness used a $.0024 marketing allowance in the calculation of 
AMPI's proposed make allowance for nonfat dry milk. The witness for 
Agri-Mark, Inc., a large Northeast cooperative association with several 
processing plants, stated that Agri-Mark's estimates of marketing costs 
ranged from $.0025 to $.005.
    The costs identified as those included in a marketing allowance are 
necessarily incurred in getting a product to market, and are not 
related to the consumer education and advertising activities covered by 
the National Dairy Board assessment. Since the marketing cost 
determined by NCI is the only one of the estimates included in the 
hearing record that is supported by a survey, and it varies from the 
$.0015 rate included in the Final Rule by only 4 one-hundredths of a 
cent and applies only to cheese and dry whey, there seems to be no 
solid basis for making any change to the current marketing allowance.
    Some producer witnesses objected to the inclusion of any allowance 
for return on investment in manufacturing allowances on the basis that 
dairy farmers are assured of no such return. The CDFA manufacturing 
cost surveys include allowances for depreciation, included in the non-
labor processing costs; and for return on investment, which represents 
the opportunity cost of the processors' resources invested in the 
business. These costs are supported by audited data.
    Both the marketing allowance and return on investment factors 
should be included in the manufacturing allowances provided in the 
component price formulas at the rates supported by the California data. 
If processors are not provided enough of a manufacturing allowance to 
market the product they process, or to earn any return on investment, 
they will not continue to provide processing capacity for producers' 
milk. At the same time, the manufacturing allowances incorporated in 
the formulas will not provide enough of an allowance to assure that 
every processor, no matter how inefficient or high-cost, will earn a 
profit. Allowances set at such a level certainly could result

[[Page 76841]]

in the situation warned of by producer groups in which processors 
manufacture greater volumes of product than the market demands because 
they are guaranteed a profit on all their production. As a result, the 
only way to market all of the product would be to reduce prices, with a 
profit still locked in through the make allowance, which would result 
in decreasing prices paid to producers. In addition, manufacturers who 
are assured a profit on all of their output would have no incentive to 
make a sufficient quantity of milk available for fluid use--a basic 
goal of the Federal milk order program.
    One area addressed by several hearing participants in testimony and 
in briefs as appropriate to consider in establishing make allowances or 
yields was the loss of milk components during manufacturing processes. 
The orders have always provided an allowance for shrinkage, and 
continue to do so, but inflating costs of production or reducing yield 
factors to reflect shrinkage would not properly reflect the value of 
producers' milk used in manufactured products. Processing costs 
determined by the surveys described above, which underlie the 
manufacturing costs incorporated in the pricing formulas, are expressed 
in cents per pound of end product manufactured, not in the cost per 
hundredweight of milk of converting milk to manufactured products. The 
component pricing formulas are based on the content of those components 
in the finished products for which a manufacturing cost per pound has 
been established. Both the CDFA and RBCS cost surveys allocate all 
plant costs to actual end product, a process which should take 
shrinkage into account. Similarly, the yield factors in the formulas 
refer to the amount of finished product resulting from the processing 
of a given volume of input. Both of these factors in the pricing 
formulas include consideration of shrinkage.
    The detailed explanation of each product's manufacturing allowance 
is included with the description of its primary component's pricing 
formula later in this decision.
b. Class IV Butterfat and Nonfat Solids Prices.
    Class IV Butterfat Price. This decision continues to use the NASS 
price for Grade AA butter for calculating the Class IV butterfat price, 
and changes the manufacturing allowance in the butterfat price formula 
by \1/10\ of a cent per pound of butter. The .82 divisor in the price 
formula is unchanged.
    Several proposals were heard that would reduce butterfat prices, 
either by reducing the butter price used in the computation of the 
butterfat prices for all classes, or subtracting a fixed amount from 
the butterfat price computed for Class IV. Proposals also were made 
that would change the make allowance used in calculation of the 
butterfat prices. There were no proposals to change the butterfat 
divisor of .82, although one witness representing a western cooperative 
association suggested that it be reconsidered as he felt it didn't 
include a shrinkage factor.
    Product Price (Butter). Several witnesses for proprietary processor 
proponents of the proposal to deduct six cents from the butter price 
before computing the butterfat price stated that historically the value 
of butterfat in the Federal milk orders has been based on the price of 
Grade A butter. The witnesses explained that an equivalent price 
determination had been issued in 1998 when the CME discontinued trading 
Grade A butter that nine cents would be subtracted from the Grade AA 
butter price for use in calculating Federal order butterfat prices. 
This equivalent price, according to the witnesses, was found to be 
``essential'' to the continued operation of the Federal milk order 
program and continued the policy of basing butterfat pricing under the 
Federal milk orders on a value below that of Grade AA butter.
    The witnesses complained that under Federal order reform the 
butterfat value is determined by using the NASS Grade AA price of 
butter, which effectively increases the butterfat value under Federal 
milk orders. According to proponents' calculations, the increase does 
not amount to a full nine cents, but is tempered by the use of the NASS 
Grade AA price, which has averaged approximately three cents below the 
CME Grade AA price, in the butterfat pricing formula. Therefore, they 
stated, the actual increase in the butter price used to calculate 
butterfat prices is approximately six cents. According to the 
witnesses, subtraction of six cents from the NASS butter price would 
return the relationship between the butterfat value under the orders 
and the selling price of butter to the relationship that existed prior 
to Federal order reform.
    Several witnesses explained that when handlers must pay for 
butterfat on the basis of the Grade AA butter market they cannot then 
sell cream or finished products at a price that would allow them to 
recover their costs. They testified that cream is sold at a price that 
is termed a ``multiple'' of the butter price, and that the multiples 
used when the butterfat price was calculated from the Grade A butter 
price have not adjusted to the new pricing formula using Grade AA 
butter.
    The IDFA witness pointed out that the IDFA proposal to subtract six 
cents from the NASS Grade AA butter price would apply not only to the 
butterfat formula for Class II, Class III, and Class IV but would apply 
to the advance butterfat formula used for computing the Class I 
butterfat price. The witness testified that by applying the same 
formula to all classes of butterfat the current relationship between 
the class prices would be maintained. The witness contended that there 
is no justification for changing the relationships between the class 
prices, particularly if the adjustment would widen the class price 
spreads or, in effect, increase the Class I and Class II differentials.
    Witnesses for National Milk Producers Federation (NMPF) and several 
large cooperative associations testified in support of NMPF's proposal 
to reduce the calculated butterfat price by six cents, with the 
reduction applied to Class IV butterfat only. Under this proposal, the 
computation of the butterfat prices for other classes would not contain 
the six-cent adjustment. Several witnesses representing cooperative 
associations that process butter explained that butter manufacturers 
incur additional costs when procuring cream used for manufacturing 
butter as opposed to the cost of converting producer milk to butter. 
The witnesses explained that these additional costs include 
transportation, additional handling, and additional pasteurization. The 
witness for Land O'Lakes (LOL) testified that the additional costs 
amounted to 4.57 cents per pound of butterfat for transportation and .4 
cents per pound for receiving, storing, and repasteurization. A witness 
for Agri-Mark stated that Agri-Mark's transportation costs are slightly 
less than LOL's, probably due to the proximity of the Agri-Mark plant 
to the sources of cream, but that the other additional costs are 
slightly higher than the LOL costs, at .5 cents per pound of butterfat.
    The proponents of reducing the Class IV butterfat value also 
referred to the computation of the California Class 4a butterfat price, 
which involves a subtraction of 4.5 cents per pound from the CME Grade 
AA butter price to adjust for the costs of moving butter from the west 
coast to the Midwest.
    Those parties who favored reducing the butter price before using 
the butterfat price formula to calculate any of the butterfat prices 
disagreed vehemently with the proposal to reduce only the Class IV 
butterfat price. They

[[Page 76842]]

argued that such a reduction would distort the relationship between the 
Class II and Class IV prices, resulting in a greatly-increased price 
for Class II butterfat in relation to Class IV butterfat.
    Specifically, the projected increase in the Class II-Class IV 
butterfat price difference was cited as 6.7 cents per pound (from the 
current difference of .7 cents). These parties argued that butterfat 
values would most appropriately be reduced to the same degree in all 
classes.
    The Class IV butterfat price should be computed by subtracting a 
make allowance of .115 dollars per pound from the monthly average NASS 
Grade AA butter price and dividing the result by .82. The Class II 
butterfat price should continue to be the Class IV butterfat price plus 
.007 cents, while the Class I butterfat price will be the higher of the 
advance Class III and advance Class IV butterfat prices plus the 
applicable Class I differential.
    Contrary to the belief stated by some witnesses, whether qualified 
experts or not, the use of the Grade AA butter price for computing the 
butterfat price under Federal order reform was not an ``oversight.'' 
Trading of Grade A butter on the CME was ended (not by USDA, as implied 
in one brief, but by the CME) because the volume of Grade A butter 
traded was not great enough to warrant maintaining a trading venue. 
Although one brief argued that the Grade A butter price represents a 
minimum price, and that there is no need for concern that there will 
not be an available market for Grade A and Grade B butter, with the end 
of trading in Grade A butter on the CME there is no published (or any 
other known) source for obtaining a price for Grade A butter.
    The use of the Grade AA butter price for establishing butterfat 
prices is appropriate since that is the only grade of butter that has 
significant enough trading volume to warrant a publicly-reported price. 
Grade AA butter prices are the only butter prices regularly available, 
and represent the vast majority (about 95 percent) of the butter sold. 
Although the ``multiples'' of the butter price apparently had not 
adjusted to the use of the Grade AA price during the first 4 months of 
experience under the revised orders, and probably should not be 
expected to adjust during the period in which this proceeding is under 
consideration, the marketplace should, in time, make the needed 
adjustments.
    Various witnesses estimated that Grade A and Grade B butter 
combined make up 3-7 percent of the butter in the U.S. Although a 
witness noted that the Minnesota-Wisconsin (M-W) price for non-Grade A 
milk continued to be surveyed even after the percentage of milk 
eligible for the survey had fallen below a 5-percent level, it was 
widely recognized for some time that a pricing alternative to the M-W 
must be found because the M-W eventually would no longer provide a 
representative price for a large volume of unregulated milk. Similarly, 
with the decline of Grade A butter (and the unavailability of prices 
for that product), the only alternative available for determining price 
is Grade AA butter. A finding in the equivalent price determination 
that a Grade A butter price was ``essential'' to continued operation of 
the orders referred solely to the fact that the Grade A price was 
specified in all of the orders at that time, not that the butterfat 
value under Federal milk orders could never be based on any other 
price.
    Making an adjustment to a clearly valid price series to approximate 
a price series that has been discontinued for several years due to 
insufficient volume for trading is inappropriate. In any case, it is 
impossible to determine what the current difference between these 
prices would be because there are no reports of the Grade A price 
available. The vast majority of butter made and sold in the U.S. is 
Grade AA, and that is the appropriate product to which to look for a 
value of butterfat used in butter. The 3-cent average difference 
between the CME and NASS butter prices makes up \2/3\ of the 4.5-cent 
adjustment made by California in calculating the value of butterfat 
used in butter. An additional 6 cents deducted from the Class IV 
butterfat price calculated from the NASS price would much more than 
make up the remaining 1.5-cent difference. Also, the 4.5-cent 
California adjustment is made for the purpose of reflecting the cost of 
moving butter from California to Chicago. The butterfat price 
calculated under the Federal order program is not intended to apply to 
only one state. The NASS price is a nationwide survey, and likely 
includes a significant representation of California butter prices. If 
there are additional costs involved in making butter, they would more 
appropriately be included in the make allowance for butter.
    Make Allowance (Butter). The make allowance factor in the Class IV 
butterfat formula should be derived from a combination of the 
manufacturing costs determined by the California Department of Food and 
Agriculture (CDFA) and by USDA's Rural Business Cooperative Service 
(RBCS), as they were in the final decision. The CDFA cost data is 
divided into two groups representing high cost and low cost butter 
plants, with the 4 plants in the high cost group manufacturing, on 
average, about the same average number of pounds of butter as the 7 
plants in the RBCS study. Use of the data for the California high-cost 
group of butter plants is more appropriate than use of the weighted 
average cost for all of the CDFA plants because it is more likely that 
the high-cost plants, like the plants in the RBCS survey, serve a 
predominately balancing function.
    When the RBCS data is adjusted to reflect the same packaging cost, 
general and administrative costs, and return on investment as the CDFA 
data for the high cost group, and a marketing allowance of $0.0015 is 
added to both sets of data, the weighted average of the two data sets 
is $0.115. This butter manufacturing allowance is very close to the 
current allowance of $0.114, and should continue to provide a 
representative level of the costs of making butter in plants that serve 
a balancing function.
    The increased costs of making butter, not including transportation, 
cited by the proponents of reducing the Class IV butterfat price are 
expected to be included in this manufacturing allowance, which exceeds 
the low cost group in the CDFA survey by 3 cents per pound. The only 
class of use for which adjustments for transportation have regularly 
been included under Federal order regulation is Class I. Assuring that 
the order provides an allowance for moving milk for use in manufactured 
products would interfere with provisions designed to assure an adequate 
supply of milk for fluid use.
    Yield (Butter). Although one witness suggested that the divisor in 
the butter price formula that reflects the butterfat content of butter 
be reconsidered, he did not indicate any number more appropriate than 
the .82 divisor used in the current formula. There was no other 
testimony in the record questioning the butter content factor. In fact, 
the only data in the record applicable to the issue was a CDFA report 
on butter and powder yields at California plants in 1996 that was 
included in an exhibit. This report shows a 1.2213 weighted average 
butter yield (1 pound of butterfat results in 1.2213 pounds of butter), 
which corresponds to the use of the .82 divisor.
    The record does not support adoption of a Class IV butterfat price 
that is not reflected directly in the Class II butterfat price. There 
was testimony from several witnesses that the current Class IV-Class II 
price relationship is rational and appropriate, and an adjustment to 
the Class IV butterfat price that is not reflected in the Class II 
butterfat price would disrupt the current relationship.

[[Page 76843]]

In addition, it would seem reasonable that some of the extra costs 
claimed by butter manufacturers, such as transportation costs for 
supplemental cream supplies, butterfat standardization of outside cream 
sources, and additional pasteurization would be as applicable for Class 
II manufacturers of high-fat products using surplus cream as for butter 
makers. Accordingly, reduction of the Class IV butterfat price only is 
not considered appropriate.
    Class IV Nonfat Solids Price. This decision maintains the use of 
the NASS survey price reported for nonfat dry milk and increases the 
make allowance for nonfat dry milk from 13.7 cents to 14 cents per 
pound of nonfat dry milk. In addition, the 1.02 divisor used in the 
current nonfat solids price formula to reflect the incorporation of dry 
buttermilk (with a lower product price and higher make allowance) in 
the nonfat solids price formula is changed to 1; or, in other words, 
eliminated.
    Six proposals to change some part of the nonfat solids price 
formula were considered at the hearing. Three of the proposals dealt 
with the manufacturing allowance for nonfat dry milk (NFDM), with two 
of the proposals advocating use of the RBCS survey results and one 
proposal supporting an increase in the make allowance. The other three 
proposals supported changes in the yield factor of the nonfat solids 
price formula that would reflect greater powder yield from a pound of 
nonfat solids. Two of the proposals to change yield factors included 
using CME NFDM prices instead of the NASS survey. As discussed earlier 
in this decision, the product prices used in the component pricing 
formulas should continue to be obtained from the NASS survey.
    Product Price (Nonfat dry milk). No proposals were considered that 
would have changed the product price used in the nonfat solids price 
formula, and the record contains no basis for making any change in this 
formula factor.
    Make Allowance (Nonfat dry milk). At the time the hearing notice 
was issued, the most recent RBCS data were not available, and those 
costs were not specified in the proposals. By the time the hearing was 
held, however, the RBCS data had been released and were included in the 
information introduced at the hearing. National Milk Producers 
Federation (NMPF) supported continued use of a weighted average of the 
California and the RBCS manufacturing cost surveys, with inclusion of a 
marketing allowance and the California factor for return on investment. 
NMPF proposed that the NFDM make allowance be $0.140.
    South East Dairy Farmers Association also proposed that the RBCS 
survey be used to determine a make allowance for NFDM, but did not 
propose that a marketing allowance be included. The necessity of 
including a marketing allowance is discussed earlier in this decision.
    Associated Milk Producers, Inc. (AMPI), proposed that the NFDM 
manufacturing allowance be increased from $0.137 to $0.1563, a rate 
based on AMPI's cost of making NFDM at its own three plants in the 
upper Midwest over a 5-year period. The AMPI witness stated that in 
addition to a processing and packaging cost of $0.1254, the make 
allowance should include a marketing allowance of $0.0024 and return on 
investment of $0.026, for a total allowance of $0.1538, modified from 
the level proposed in the hearing notice. The witness testified that 
the three AMPI plants operate at approximately 80 percent of capacity.
    On the basis of the data and testimony included in the hearing 
record, the manufacturing cost level that appears to be most 
appropriate for use in the pricing formula for nonfat solids is $0.14. 
This value is calculated by using a weighted average of the RBCS survey 
and the two less-cost California groups of plants, adding the 
California General and Administrative costs and Return on Investment 
expenses for those two groups to the RBCS numbers, and a $0.0015 
marketing allowance to both sets of data. The basis for using the two 
lower-cost groups of California plants are that the mid-cost group is 
of a similar average size as the group included in the RBCS survey, and 
that the lowest-cost California group has a very similar total cost to 
the mid-cost group. These three groups of plants (the RBCS plants and 
the two California groups) are similar enough in size and cost to 
consider as fairly representative, and should encompass those plants 
that perform a market balancing function. The highest-cost California 
group should not be included, as its average cost is more than ten 
cents per pound of NFDM above the RBCS group or either of the other two 
California groups.
    The AMPI cost numbers cannot be included in the weighted average 
since the number of pounds of NFDM associated with those costs is not 
available. When the AMPI marketing allowance and return on investment 
estimates are replaced with the more moderate numbers used in the make 
allowance calculation, the AMPI manufacturing costs do not differ much 
from the other two sources. This is true even of a comparison between 
the RBCS data and the AMPI data despite the wide discrepancy in the 
capacity utilization percentage estimates for the two data sets (80 
percent for the AMPI plants versus less than 50 percent for the plants 
in the RBCS survey). Inclusion of the AMPI costs in the RBCS survey 
would have included a larger representation of NFDM manufactured 
outside California. However, the record indicates that a high 
percentage of the NFDM manufactured in the U.S. comes from California, 
and the proportion of cost data representing California in the 
manufacturing allowance is reasonable.
    Yield (Nonfat solids). A considerable portion of the testimony 
dealing with the nonfat solids pricing formula pertained to the divisor 
of 1.02, which is intended to reflect the amount of nonfat solids in 
NFDM, with an adjustment for the small amount of buttermilk powder that 
is made in conjunction with the manufacture of butter and NFDM. 
Testimony by a number of witnesses asserted that the product price 
minus the make allowance should be either multiplied by a number 
greater than 1 (such as 1.02) or divided by a number smaller than 1 
(such as .99 or .975) to reflect the fact that more than 1 pound of 
NFDM can be expected to be manufactured from 1 pound of nonfat solids 
due to the moisture content of NFDM.
    Many of the hearing participants supported the current 1.02 
divisor, and expressed understanding of the approach of adjusting the 
``yield'' of NFDM to compensate for the fact that some of the powdered 
product made from Class IV milk is buttermilk powder (BMP). Although 
1.03 to 1.05 pounds of NFDM generally can be obtained per pound of 
nonfat solids, the formula also recognizes a lower value and higher 
manufacturing cost for BMP.
    Several witnesses correctly assessed an alternate solution to the 
dilemma of calculating a component price from two commodities with 
different prices and different make allowances as one requiring 
addition of dry buttermilk as another component price in the Federal 
milk order pricing system. As described by at least one witness, such 
an undertaking would require adding dry buttermilk to the NASS price 
survey, determining a separate make allowance, and calculating a yield 
factor. This procedure would be a burdensome undertaking for very 
little benefit, since dry buttermilk represents only about 5 percent of 
the dry products resulting from the manufacture of butter and nonfat 
dry milk. The issue that remains is how best to reflect the value of 
nonfat solids used in both NFDM and BMP in the same component pricing 
formula.

[[Page 76844]]

    The IDFA witness testified that for the 19-month period beginning 
with September 1998, the central states' dry buttermilk average price 
had averaged $0.798 per pound, while the central states' ``mostly'' 
price for NFDM averaged $1.043. The Land O'Lakes witness similarly 
testified that the 1999 Northeast ``mostly'' price for NFDM averaged 
$1.0389, while the BMP price was $0.7686 per pound. On the basis of 
these numbers, it would appear that the price of BMP is roughly 75% 
that of NFDM. However, comparison of BMP and NFDM prices for the years 
of 1996 through 1999 and into 2000 reflects a more complex relationship 
between these prices than the hearing testimony would indicate. The BMP 
price as a percentage of the nonfat dry milk price (using Western 
prices) was 100.9% in 1996, 94.5% in 1997, 88 percent in 1998, and 71% 
in 1999. During the first third of 2000, BMP prices generally averaged 
less than 70% of NFDM prices. As the year 2000 has progressed, however, 
the percentage has increased, being at levels up to 100% in late July.
    The witness representing Agri-Mark stated that Agri-Mark employees 
engaged in manufacturing operations had estimated that the costs of 
producing BMP range from 1 to 3 cents more per pound than those of 
producing NFDM. Given that the manufacturing costs estimated by the 
Agri-Mark witness for other products were somewhat higher than those 
supported by the bulk of the hearing record, it is reasonable to 
consider the extra cost of manufacturing BMP to be generally not more 
than 2 cents in excess of the cost of manufacturing NFDM. In addition, 
it is difficult to justify increasing the powder make allowance for all 
of the powdered product represented in the make allowance since the 
RBCS witness testified that manufacturing costs of BMP manufactured at 
the plants included in the RBCS survey are included in the powder costs 
reported by RBCS.
    Testimony regarding actual yields of NFDM and BMP were provided by 
only one witness representing a manufacturing plant operator. The 
numbers provided, while not complete enough for an exact accounting of 
the ultimate disposition of the plant's receipts of producer milk, 
indicate strongly that the approximate loss of nonfat solids used in 
the manufacture of NFDM at the specific plant was 3 percent, with 16 
percent lost in the manufacture of BMP; a weighted average loss of more 
than 3.5 percent. In comparison, data published by the State of 
California showed a weighted average loss of solids not fat of 2.13 
percent in the manufacture of butter and powdered products.
    The California data indicate a weighted average powder yield of 
1.0252 pounds of NFDM and BMP from 1 pound of nonfat solids. One 
witness discounted this data by observing that the ``high'' California 
yield was reported as 1.0406, which would represent a higher-than-
allowable moisture content. This number is undoubtedly influenced by 
the ``high'' reported BMP yield of .0749.
    As noted above, the general impression conveyed by testimony in the 
hearing record, that BMP is worth considerably less than NFDM and that 
the cost of processing it is significantly greater than that of 
processing NFDM, is misleading. The average BMP price over the period 
1996-July 2000 is approximately 87 percent of the NFDM price, and the 
cost of manufacturing BMP is, on the basis of the information 
available, no more than 2 cents in excess of the $0.14 recommended as 
the NFDM make allowance. These small adjustments to the product price 
and the make allowance used in the nonfat solids formula apply to 
little more than 5 percent of powder manufactured. It is apparent from 
the information contained in the record of this proceeding that the 
1.02 factor, as a divisor, is excessive.
    The following information from the hearing record was used to 
determine a multiplier or divisor for the total nonfat solids pricing 
formula that would result in a minimum price for nonfat solids while 
incorporating the data and testimony in the record about the 
manufacture of NFDM and BMP. To assure that the result represents a 
minimum price, the low or high areas of ranges of numbers related to 
the manufacture of these two products were used. The CDFA report on 
butter and powder yield in California plants in 1996 was used in making 
some of the calculations regarding this factor.
    a. The price of BMP represents roughly 80 percent of the price of 
NFDM (80 percent is less than the average historical relationship of 
these prices over the past 5 years).
    b. The cost of manufacturing BMP is not more than 2 cents greater 
than the make allowance for manufacturing NFDM.
    c. Using a theoretical yield of 1.03 pounds of powder containing 3 
percent moisture made from milk containing 8.62 percent nonfat solids 
would result in .054 pounds of BMP and .976 pounds of NFDM.
    d. Adjusting the theoretical yield of 1.03 pounds to minimal yield 
of 1.01 pounds (the ``low'' yield in the CDFA report) and prorating the 
BMP and NFDM to 1.01 pounds instead of to 1.03 pounds, the amount of 
BMP manufactured from a pound of nonfat solids used in butter/powder is 
approximately .053 pounds. When the NFDM yield is prorated, the 
resulting minimum yield is .957 pounds.
    Using a NFDM price of $1.03 per pound, a make allowance of $0.14 
cents per pound of NFDM, and a divisor (or multiplier) of 1, the 
resulting calculation is: $1.03-$0.14 = $0.89 per pound of nonfat 
solids. The same result is achieved through a more complicated 
calculation using both product prices and make allowances, as follows:

Buttermilk powder:

($1.03  x  .80)-$0.16 = $0.664; $0.664  x  .053 = $0.03519 + Nonfat dry 
milk:
[GRAPHIC] [TIFF OMITTED] TP07DE00.000

    Therefore, no multiplier or divisor is necessary in this formula.
c. Class III Butterfat, Protein and Other Nonfat Solids Prices
    In a change from the current orders, a Class III butterfat price is 
calculated from the value of butterfat in cheese rather than using the 
same butterfat price as is used in Class IV that is calculated from the 
value of butter. The Class III butterfat price, like the protein price, 
is calculated to represent the value of the component in the NASS 
cheddar cheese price. The only modification made to the specifications 
of the cheese price, currently a weighted average of the prices of 
cheese sold in 40-pound blocks and 500-pound barrels (with a 3-cent 
addition to the barrel price) is to adjust the price of 500-

[[Page 76845]]

pound barrels to 38 percent moisture instead of the 39 percent moisture 
price currently reported by NASS.
    This decision would reduce the make allowance for cheese from 17.02 
to 16.5 cents per pound. Using the Van Slyke cheese yield formula to 
represent the effects of butterfat and protein on cheese yield, the 
cheese price minus the make allowance is multiplied by 1.582 to 
calculate the Class III butterfat price, while the cheese price minus 
the make allowance is multiplied by 1.405 to calculate the protein 
price. The portion of the current protein price formula that adjusts 
the protein price to accommodate the differential value of butterfat in 
cheese, as opposed to butter, is eliminated. Both the protein and 
butterfat components of milk used to make cheese should track the 
cheese price much more closely than has been the case using the current 
Class III component pricing formulas.
    The other nonfat solids price would continue to be calculated by 
subtracting the make allowance from the NASS-reported price for dry 
whey and dividing by .968. However, the make allowance is increased 
from 13.7 cents to 14 cents per pound of dry whey.
    Class III Product Price (Cheese). Several proposals included in the 
hearing notice would, if adopted, change the NASS cheese price used in 
the Class III pricing formulas. One proposal would limit the cheese 
prices included to 40-pound blocks reported by the Chicago Mercantile 
Exchange (CME), while another would add 640-pound blocks to the prices 
surveyed by NASS for inclusion in the cheddar cheese price. A third 
proposal would replace the current 3-cent price adjustment between 500-
pound barrel prices and 40-pound block prices to a value that reflects 
the actual differential industry cost of making 40-pound blocks over 
500-pound barrels. Still another proposal would adjust 40-pound block 
cheese prices for moisture, as 500-pound barrel prices are adjusted.
    As discussed above, CME commodity prices should not be used as the 
basis for calculating component prices. Eliminating 500-pound barrels, 
which represent approximately two-thirds of the cheese represented in 
the NASS survey, from calculation of the market value of cheddar cheese 
would reduce greatly the degree to which the current product prices 
represent U.S. cheddar cheese prices. The record of this hearing 
provides no support for relying solely on prices for 40-pound blocks to 
identify a market price of cheddar cheese.
    The NASS weighted average cheese price should not include the value 
of 640-pound block cheese. Several parties testified that including 
640's in the cheese price computation would improve the reliability of 
the average cheese price by adding a substantial quantity of cheese to 
the price survey. Witnesses' estimates of the percentage of U.S. 
cheddar cheese production represented by 640-pound blocks ranged from 
20 to 27 percent. Witnesses testified that the increased volume would 
better reflect the true value of cheese and additionally would reduce 
the potential for price distorting manipulation by individual handlers.
    Opponents to inclusion of the 640's in the cheese price computation 
explained that the vast majority of 640's are made on a custom basis to 
customers' specifications, and therefore are not sufficiently uniform 
to have a standard identity.
    Without a standard identity for the product, standardized pricing 
cannot be developed. At the beginning of the NASS survey, price data 
for 640-pound blocks initially was collected, but was discontinued due 
to lack of volume and too few participants to allow disclosure of data. 
Even earlier (1995-96), the former National Cheese Exchange attempted 
to include trading in 640-pound blocks, but discontinued doing so 
because of lack of interest. Several of the witnesses who testified in 
favor of including 640-pound blocks in the NASS survey also indicated 
that the 640-pound blocks manufactured by their organizations are used 
internally. Thus, the prices represented by these products would not be 
eligible for inclusion in the NASS survey.
    Several witnesses at the hearing and comments contained in post-
hearing briefs advocated reducing the three-cent adjustment that is 
added to the barrel price for computing the weighted average cheese 
price to one cent or eliminating it altogether. The witnesses argued 
that since the barrel cheese price is adjusted to 39 percent moisture 
and block cheese is approximately 38 percent moisture, at least 2 cents 
of the observed difference in price between 40-pound blocks and 500-
pound barrels is due to moisture and has nothing to do with actual 
differences in costs. In fact, they argued that there is no difference 
in packaging costs between block and barrel cheese.
    The witness for DFA, a cooperative that manufactures cheese 
packaged in both 40-pound blocks and 500-pound barrels, testified that 
three cents is an acceptable and reasonable spread between blocks and 
barrels and that there is no compelling reason to change the three-cent 
addition to the barrel price. The witness for LOL testified that the 
three cents is an appropriate difference between blocks and barrels and 
that adding three cents to the barrel price when computing the weighted 
cheese price is an appropriate adjustment. A brief filed on behalf of 
DFA and the Association of Dairy Cooperative in the Northeast argued 
that the record supports a conclusion that the 3-cent adjustment of the 
barrel price is attributable to volume utility and cost differences in 
packaging and handling.
    The National Cheese Institute, which proposed reducing or 
eliminating the 3-cent adjustment, argued that the adjustment should 
include only the actual cost differences involved in manufacturing and 
packaging the two sizes of cheese. Although a number of witnesses 
representing cheese manufacturers testified in favor of reducing or 
eliminating the adjustment, including one whose employer makes both 
sizes of cheddar, none of them addressed the actual cost differences of 
packaging and manufacturing 40-pound blocks and 500-pound barrels. 
Instead, the only testimony that was offered involved attributing a 2-
cent difference to the moisture-adjusted value of the two sizes of 
cheese packages.
    If the difference between the block and barrel prices were due to 
the difference in moisture, the difference between the prices should 
widen as the cheese price increases since the moisture adjustment is 
based on the price and moisture of the cheese. An analysis of 
historical cheese prices indicates that the difference between the 
block cheese and barrel cheese prices does not change with changes in 
price level. In fact, three of the largest differences between the 
block and barrel prices occurred at approximately the 40-month NASS 
weighted average monthly prices.
    The record contains no basis for concluding that the actual cost of 
manufacturing and packaging the two sizes of cheese is not the 
historical 3-cent price spread. In fact, during the period September 
1998 through June 2000 the difference between the block and barrel 
prices has been 4.4 cents per pound. The record of this proceeding does 
not support reducing or eliminating the 3-cent addition to the barrel 
cheese price.
    An expert witness, and several other witnesses, testified that the 
moisture content of the cheese used for determining the NASS cheese 
prices and the moisture content used in the Van Slyke cheese yield 
formula used for computing the ``yield'' coefficients in the protein 
formula should be the same. The witnesses explained that failure to 
align the formula and the moisture

[[Page 76846]]

content represented by the cheese price survey would result in over or 
understating the formula coefficients.
    The expert witness explained that the barrel cheese price is 
reported at 39 percent moisture after being adjusted from the actual 
moisture, while the block cheese price is reported at an unknown 
moisture level. The only testimony dealing with the actual moisture 
level of block cheese indicates that it averages about 38 percent.
    The coefficients originally used for determining the Class III 
protein price and the Class III butterfat price, and used in the 
formulas in this decision, were derived from using the Van Slyke cheese 
yield formula at 38 percent moisture. Therefore, it is appropriate to 
use cheese prices that reflect cheese containing 38 percent moisture. 
The current practice of using the 40-pound block cheese price 
unadjusted for moisture and the 500-lb barrel price adjusted for 
moisture should be continued, but with the barrel price adjusted to 38 
percent moisture instead of 39.
    The hearing record provides no basis for altering the composition 
of cheese prices surveyed for use in the Class III pricing formulas, or 
for changing the calculation of the NASS weighted average cheese price, 
other than the moisture adjustment to 38 percent for 500-pound barrels.
    Several witnesses testified that types of cheeses other than 
cheddar should be included in the NASS price survey as a more 
comprehensive basis for identifying a cheese price, although such a 
proposal was not included in the hearing notice. The cheddar cheese 
included in the NASS survey meets certain standard criteria that makes 
prices for the reported cheese sales comparable. If the survey included 
other descriptions of cheddar and other types of cheese, such as 
mozzarella, it would not be possible to consider the reported price as 
representative of the value of any particular product. Further, the 
manufacturing costs surveyed are, to a great extent, limited to the 
costs of processing cheddar cheese.
    Class III Make Allowance (Cheese). Several proposals to adjust the 
manufacturing allowance for cheese were included in the hearing notice 
and considered at the hearing. The NMPF witness testified that the 
organization had determined that the most appropriate cheese make 
allowance would be a weighted average of the updated RBCS and CDFA 
surveys, with addition of a marketing allowance, and modified the 
Federation's proposal accordingly, supporting adoption of a cheese make 
allowance of $0.1536. Several witnesses representing cooperative 
associations supported the NMPF $0.1536 proposal and the inclusion of 
cost factors for a marketing allowance and return on investment. One 
witness testified that the make allowance should be based on data from 
actual plant operations through the surveys conducted by RBCS and CDFA 
and testimony from individual plant operators; that it should include 
California data, as California plants represent a large proportion of 
cheese manufacture; and that it should be generous enough to assure 
adequate plant capacity for continued manufacture of cheese.
    The witness representing NCI testified that the cheese make 
allowance should be no less that $0.1687, the weighted average of the 
NCI-sponsored and CDFA surveys with the addition of a marketing cost of 
$0.0011. He stated that such an allowance would represent the 
production of 24 cheese plants and 53% of U.S. cheese. Several cheese 
manufacturer representatives supported use of the NCI-supported make 
allowance, stressing the importance of adoption of an allowance that 
covers all of the costs of manufacturing cheese.
    A witness representing Farmers Union and the American Farm Bureau 
witness both supported adoption of a make allowance of $0.1521, as a 
weighted average of RBCS and CDFA data, and a witness for National 
Farmers Organization supported a make allowance of $0.141 composed of 
the RBCS cost with the addition of a marketing allowance and return on 
investment.
    The make allowance used for computing the Class III protein and 
butterfat prices, $.165, was determined by combining the CDFA plant 
survey with the RBCS survey. As was pointed out by several witnesses at 
the hearing, several cost factors that are necessary to maintain the 
viability of processing plants are not represented in one or both of 
the RBCS and the CDFA studies. These cost factors include marketing 
costs, return on investment, and general and administrative expenses. A 
discussion of these expenses is included earlier in this decision. 
Neither the CDFA nor the RBCS survey included a marketing cost, so the 
$0.0015 marketing allowance was added to both studies. In addition, the 
CDFA return on investment cost of $0.0103 and general and 
administrative expense of $0.0190 was added to the RBCS study, which 
included neither factor. The resulting adjusted costs for each survey 
are $0.1708 for RBCS and $0.15996 for CDFA. A weighted average of the 
two studies was computed using the respective adjusted make allowances 
and the pounds of cheese reported in each study; 466,396,548 for the 
CDFA study and 633,142,812 for the RBCS study, to arrive at the Class 
III price make allowance of $0.165.
    Class III Butterfat Price (and effect of butterfat on cheese 
yield). Testimony at the hearing and analysis of the relationship 
between the current cheese, butterfat and protein prices revealed that 
the current Class III pricing formulas cause inequities in producer 
payments based on the relationship between producers' butterfat and 
protein tests. The inequities were attributed to the use of the 1.28 
factor used in the portion of the protein price formula that is 
designed to incorporate the butterfat value of milk used in cheese that 
is not already accounted for by the Class III and IV butterfat price. 
Further analysis also revealed that there is very little relationship 
between the current butterfat price and the cheese price or between the 
current protein price and the cheese price.
    Under the current system, market distortions occur due to using the 
Class IV butterfat price, calculated from the value of butterfat in 
butter, to also represent the value of butterfat in cheese, (Class 
III), and trying to incorporate the difference in value in the protein 
price. As a result, instances have occurred when the protein price 
declines while, at the same time, the cheese price is increasing. This 
outcome is completely contrary to the concept of pricing components on 
the basis of the value of the products in which they are used. The same 
inverse price scenario has affected the butterfat price, with 
occurrences in which the Class III butterfat price increases because 
the butter price has increased while the cheese market has been 
declining. For example, in April of 2000 the protein price was $1.7399, 
based on a cheese price of $1.1011, while in May the cheese price 
increased slightly to $1.1022 but the protein price declined 
approximately $0.18 to $1.5514. The decline in the protein price was 
directly attributable to the increase in the butter price and the 
resulting increase in the butterfat price.
    The reasons for using the same butterfat price in Class III and 
Class IV under Federal order reform have been outweighed by the outcome 
of that decision. The pricing concept of reflecting the value of a 
manufactured product in the prices for the milk components that are 
instrumental in the yield of that product require that the Class III 
protein and butterfat prices be tied more directly to their value in 
the cheese that is produced using those

[[Page 76847]]

components. Therefore, it is necessary to separate the value of 
butterfat used in the manufacture of cheese from the value of that 
component in butter. The pricing system contained in this decision will 
eliminate the distorted relationships between the Class III butterfat 
and protein prices and the cheese price.
    Calculating the Class III butterfat price on the basis of the 
effect of butterfat on cheese yield, as described in the Van Slyke 
cheese yield formula, rather than from the butter price makes 
alternative uses based on price differences clearly visible. The Class 
III butterfat price formula should be:
    (NASS weighted average cheese price-.165)  x 1.582. Adoption of 
more logical relationships between the value of butterfat and its 
various uses will allow butterfat to move to the use with best return.
    Protein price (and effect of protein on cheese yield). The method 
of computing the protein price described in this decision results in a 
protein price that, like the recommended Class III butterfat price, has 
a 100 percent correlation with the cheese market. In addition, the 
recommended formula eliminates many of the problems discussed at the 
hearing concerning the current formula. The protein price formula will 
be modified by removing the butterfat portion of the formula. Removal 
of the butterfat pricing factor from the protein price formula 
eliminates the contentious issue of the 1.28 butterfat-to-protein 
ratio.
    As contained in this decision, the protein price will be: (NASS 
weighted average cheese price-.165)  x 1.405.

Class III--Other Nonfat Solids Price (Dry Whey)

    This decision continues to calculate the price of the nonfat solids 
other than protein in milk used to make cheese by subtracting a 
manufacturing allowance from the NASS dry whey price and dividing the 
result by the content of these ``other nonfat solids'' in dry whey. No 
change is made, or was proposed, in the dry whey product price or 
divisor in the formula. The manufacturing allowance for dry whey is 
increased from 13.7 cents to 14 cents per pound of dry whey to reflect 
the increase in the NFDM make allowance. The decision would snub the 
other nonfat solids price at zero rather than allowing it to become a 
negative factor in determining payments to producers.
    The hearing included several proposals that would change the dry 
whey or other solids price formula by changing the make allowance. 
Although the hearing notice included a proposal to use the CME average 
dry whey price, the proponent withdrew support for the proposal when it 
became apparent that the CME has no cash exchange market for dry whey. 
The NASS survey that currently is being used to identify commodity 
prices has included price data on dry whey since September 1998. There 
were no proposals to change the 0.968 yield factor in the other solids 
price formula. The 0.968 factor reflects the solids content of dry 
whey, given a 3.2 percent moisture content.
    Make Allowance (Dry Whey). Since the most recent CDFA and RBCS cost 
surveys did not include costs for drying whey, there is no information 
from those two studies to use for computing the dry whey make 
allowance. A witness from the National Milk Producers' Federation 
suggested using the nonfat dry milk manufacturing cost allowance for 
dry whey since both products involve similar processing equipment, and 
then adding $0.01 per pound to reflect the additional energy and higher 
equipment costs incurred in drying whey. Since the proposed make 
allowance for nonfat dry milk is $0.140, this procedure would result in 
a dry whey make allowance of $0.150.
    Dairy Farmers of America (DFA) proposed a dry whey make allowance 
of $0.1478 per pound based on costs at its plant at Smithfield, Utah. 
The plant is a cheddar block plant running throughout the year that 
condenses and dries whey from the cheese manufactured in this 
Smithfield plant only. The DFA costs include both direct and indirect 
costs, and return on investment and marketing cost data.
    A witness from WSDPTA testified that there is no reason to change 
the other solids price computation from the current formula, and that 
it is a necessary component of the cheese pricing formula. He noted 
that the use of dry whey as a commodity is correct and that the 0.968 
factor in the pricing formula reflects 96.8 pounds of solids in 100 
pounds of dry whey.
    Most witnesses who testified about the cost of drying whey 
expressed the belief that drying whey costs more than drying nonfat dry 
milk. Two cooperative association witnesses testified that their 
organizations have determined that the returns from whey powder with 
the current make allowance would not cover the costs associated with 
building and operating whey powder plants.
    IDFA presented the results of the survey, discussed earlier in this 
decision, contracted for by NCI. The IDFA witness testified that the 
survey showed a dry whey make allowance of at least $0.1592. The IDFA 
witness testified that using the nonfat dry milk make allowance 
significantly understates the manufacturing cost of dry whey due to the 
relatively higher percentage of water in liquid whey compared to skim 
milk, and the additional crystallization process required.
    A witness representing Leprino Foods testified on the differences 
in the manufacturing processes for dry whey and nonfat dry milk that 
result in higher costs to produce whey powder. The witness concluded 
that the cost of making dry whey is $0.02559 above the cost of drying 
nonfat dry milk.
    The brief submitted by Leprino argued that the additional costs of 
processing whey powder over those of processing nonfat dry milk should 
include additional staffing, cleaning, and maintenance associated with 
the additional equipment for whey product.
    A witness from Kraft agreed that the dry whey manufacturing costs 
are about 2.6 cents per pound greater than the nonfat dry milk 
manufacturing costs. Although Kraft described its Tulare plant as large 
and efficient, it also represents a recent capital investment, meaning 
that depreciation costs are likely higher than average.
    Although a number of witnesses testified that the cost of drying 
whey is greater than that of drying nonfat milk, the record does not 
provide clear support for any particular differential over the NFDM 
make allowance. The differential costs of manufacturing whey powder 
over those of nonfat dry milk do not provide close enough agreement 
with the NCI-sponsored survey to use either means of determining a make 
allowance with any confidence. Neither of the witnesses who testified 
that the extra costs of drying whey are 2.6 cents greater than the 
costs of drying nonfat dry milk testified about the total costs of the 
operations they were describing. Therefore, the make allowance used to 
calculate the other solids price should continue to be the same as that 
used in the total nonfat solids component price formula. The other 
solids price will be computed by subtracting the make allowance of 
$0.14 from the NASS dry whey survey price and dividing the result by 
.968.
    The other solids price should be snubbed at zero. This means that 
if the NASS dry whey price minus the make allowance results in a 
negative number, the other solids price would become zero. A brief 
filed by Michigan Milk Producers Association (MMPA) supported the 
inclusion of such a ``snubber'' concept for the whey price. The brief 
cited testimony in which the DFA witness referred to the difficulty of 
explaining to producers a negative component price.

[[Page 76848]]

    The value of other solids used in the Class III milk price should 
add to the value of milk and not be allowed to subtract from the milk 
value. Snubbing the other solids price to zero will prevent it from 
negatively affecting the value of other Class III components or having 
a negative impact on the producer price differential.
d. Effects of Changes to Class III and Class IV Price Formulas
    The changes to the Class III and Class IV component price formulas 
discussed above would result not only in changes to the respective 
component prices, but to the resulting Class III and Class IV skim milk 
and hundredweight milk prices at 3.5 percent butterfat. With the 
exception of the 38-percent moisture adjustment to barrel cheese 
prices, all of the differences calculated between the current prices 
and the proposed prices are due to changes in the formulas' make 
allowances and/or the ``yield'' coefficients.
    It is important to note that these calculated class price 
differences are based on historical product price data, and not on 
product prices that will occur in the future. The price differences 
calculated in this portion of the decision cannot be used to calculate 
or estimate changes in revenue that would have occurred or may occur in 
the future, as changing intersections of supply and demand for each 
product result in different prices.
    All of the comparisons that follow are calculated based on the NASS 
weighted average commodity prices from September 1998 through June 
2000. NASS weighted average commodity prices for this time period were 
available, and no estimates of the relevant commodity prices need to be 
made. Although this time period is relatively short, a number of 
interesting price relationships occurred in the data series. For 
instance during this period the cheese market went from a record high 
of $1.8643 per pound to $1.1011 per pound, which is just over the $1.10 
per pound support price for 40-pound blocks of cheddar. During this 
same 22-month period the NASS weighted average nonfat dry milk price 
showed almost no movement, ranging from $1.0864 per pound to $1.0071 
per pound, approximately two cents below the support price. In fact, 
the nonfat dry milk price has stayed below the support price since 
March 1999. Unlike the cheese and nonfat dry milk market, the butter 
price has not traded anywhere near the butter support price of $0.65, 
trading in a range from $2.6726 per pound to a low of $0.8820 per 
pound. It is important to keep in mind that since all milk is priced on 
the basis of butterfat and skim or nonfat components under Federal 
orders, focusing on the calculated hundredweight prices at 3.5 percent 
butterfat that are announced for comparison purposes can result in 
misleading conclusions.
    Changing the Class IV butterfat price make allowance from $0.114 to 
$0.115 results in a calculated average decline in the Class IV 
butterfat price of $0.0012 over the 22-month period studied. The two 
changes to the Class IV nonfat solids formula, increasing the make 
allowance from $0.137 to $0.140 and eliminating the 1.02 divisor, would 
result in a net increase of $0.0144 per pound in the Class IV nonfat 
solids price in the absence of any other changes. Since the Class II 
prices are to continue to be computed on the basis of the Class IV 
formulas plus the Class II differential of $0.70, changes to the Class 
II prices will be the same as the changes to the Class IV prices. The 
calculated Class IV skim milk price would increase by an average of 
$0.13 per hundredweight. The calculated 3.5 percent Class IV milk price 
would increase by an average of $0.12 per hundredweight, reflecting the 
net difference between the $0.13 increase in the skim milk price and 
the very small decline in the Class IV butterfat price.
    As a result of the 38-percent moisture adjustment to barrel cheese 
prices, the NASS weighted average cheese price used for computing the 
Class III protein and Class III butterfat price would be calculated to 
have increased by $0.014 per pound over the 22-month period September 
1998 thru June 2000.
    The changes to the formulas used to compute the Class III component 
prices would result in fairly significant changes to the component 
prices, as might be expected. For instance, since the current Class III 
butterfat price is based on the butter market and the proposed 
butterfat price is based on the cheese market, the proposed Class III 
butterfat price would average $0.4651 per pound above the current Class 
III butterfat price over the 22-month period if cheese and butter 
prices had been the same. However, the component prices are expected to 
track the underlying commodity prices to a much greater extent than 
they did previously.
    The change in the protein formula over the past 22 months would 
result in a calculated protein price averaging approximately 53 cents 
below the current protein price. At the same time, the increase from 
$0.137 to $0.14 in the dry whey make allowance for calculating the 
other solids price results in a calculated decline in the other solids 
price of $0.003 over the 22-month period. The combination of the 
reductions in both the protein price and the other solids price would 
have resulted in an average $1.65 decrease in the Class III skim milk 
price over the 22-month period if cheese and dry whey prices were 
unchanged.
    The calculation of the Class III price at 3.5 percent butterfat, 
based on the formulas contained in this decision, would have averaged 
$0.02 per hundredweight above the 3.5 percent Class III price based on 
the current Class III formulas.

4. Class Price Relationships

    The price relationships between classes established in the Final 
rule under the Federal order reform process should be maintained. One 
proposal heard in this proceeding would have reduced the Class IV 
butterfat price without affecting the computation of other butterfat or 
product prices. That proposal is addressed specifically in the section 
of this decision dealing with Class IV Butterfat price.
    Several witnesses testified as to what the class price 
relationships should be if changes were made to any of the Class III or 
Class IV component price formulas. The current pricing system uses the 
same formulas for computing the advance component prices used to 
compute the Class I skim milk and butterfat prices and Class II skim 
milk price as are used to calculate the Class III and Class IV 
component prices. The witness for IDFA and several other parties stated 
that any changes to the Class III and Class IV formulas should also 
apply to the advance price formulas used for computing the Class I and 
Class II prices. The witness explained that failure to use the same 
formulas between the related classes of use would result in a direct 
impact on the Class I and Class II differentials which was clearly not 
the intent of Congress when Congress instructed the Secretary to 
conduct a rulemaking proceeding concerning the Class III and Class IV 
price formulas.
    A witness for Hershey Foods pointed out that the Secretary went to 
great lengths to justify the seventy-cent Class II differential above 
the Class IV price. The witness said that there is no justification or 
new evidence for changing the current price relationship that exists 
between the manufactured products (butter and nonfat dry milk) and the 
Class II price if the Class IV formulas were revised as suggested in 
several proposals. The witness stated that such changes in price 
relationships clearly were not the intent of Congress. A brief filed on 
behalf of IDFA stated

[[Page 76849]]

that the correct price relationship between NFDM and Class II is 70 
cents, and that the record provides no basis for changing that 
relationship. Actually, as explained in the final decision on Federal 
order reform, 70 cents represents the correct price relationship 
between milk used to make dry milk powder and milk used in Class II, as 
nearly as can be determined from the information available.
    A proposal by two parties that any increases resulting from changes 
to the Class III and Class IV price formulas not be allowed to result 
in increases in Class I prices was supported in testimony by one of the 
parties, who argued that any increases in the Class I price mover 
should be balanced with reductions in Class I differentials. The 
witness stated that the proponents want to be sure that Class I prices 
are not further decoupled from Class III and Class IV pricing formulas, 
or that Class I prices are not artificially inflated.
    Neither the price relationships established in the final decision 
between milk used in Class III or Class IV and milk used in Classes I 
and II should be changed. To the extent that there may be differences 
in the Class III or Class IV prices between the current prices and 
those adopted in this decision as a result of adjustments to the 
component pricing formulas, those changes should be reflected in the 
Class I and Class II prices. Any reevaluation of the formulas used to 
price the components used in manufactured products should be carried 
through to the class prices that are based on those component prices. A 
change in the computation of the nonfat solids price, for instance, is 
intended to better reflect the value of those solids in dry milk 
products. If the new nonfat solids price formula results in an increase 
in the Class IV price, the record provides no basis for changing the 
difference in the value of the milk used in those solids between Class 
IV and Class II use. Similarly, the availability of milk for use in 
Class I is related to the higher of the alternative manufacturing 
values for that milk. The current relationships should be maintained.

5. Class I Price Mover

    Although not included in the hearing notice, a proposal was made by 
Family Dairies, USA, to change the Class I price mover from the higher 
of the Class III and Class IV prices to a weighted average of the two. 
The witness for Family Dairies testified that the results of the 
current regulation are disturbing and unanticipated with the unexpected 
strength of the Class IV price relative to Class III. He complained 
that 10 percent of production under Federal orders (milk used to make 
nonfat dry milk) has been driving the (Class I) price of 40% of the 
milk. As a result, he testified, milk production for fluid purposes is 
encouraged in markets with high Class I differentials and relatively 
high Class I use at a time when marketing conditions (an oversupply of 
milk) should have the opposite effect. As fluid-oriented markets are 
receiving increased prices relative to markets in which cheese is the 
dominant use, he complained, inequities in blend prices between markets 
are increasing.
    A group representing upper Midwest producer interests filed a brief 
that described the recent movement of milk from the Upper Midwest pool 
onto the Central and Mideast marketwide pools as disorderly marketing 
caused by increases of Class I prices in these higher-Class I use 
markets. This shift in the pooling of milk from the upper Midwest to 
higher-valued markets has been a long-sought outcome on the part of 
upper Midwest producer groups. It is difficult to understand why it is 
now seen as a manifestation of disorderly marketing.
    A brief filed by another group representing fluid milk handlers 
suggested that USDA should give careful consideration to the proposal 
to use a weighted average of the Class III and Class IV prices to move 
Class I prices. Any means of reducing Class I prices to handlers should 
meet with the approval of these processors, regardless of the economic 
merits of the proposal.
    In several briefs it was argued that the Regulatory Impact Analysis 
(RIA) published with the final decision on Federal order reform stated 
that the price formulas adopted therein were expected to generate a 
sufficient quantity of milk, and that both the adoption of Class I 
pricing option IA and use of the higher of the Class III and IV prices 
as the price mover have worked to enhance Class I price levels. It 
should be noted that use of the higher of the Class III and IV prices 
was included in that decision and considered in the RIA, not added 
later by Congress, as was the change in the Class I pricing surface.
    Another brief argued that since the 1960's the dairy industry has 
used a Class I mover tied to a market-clearing price represented by a 
weighted average of milk used in butter, cheese and powder. The price 
referred to, first the Minnesota-Wisconsin price series, and later that 
price adjusted by a weighted average of current product prices for the 
products mentioned, was specific to the upper Midwest area and included 
very little powder, as that area manufactures a higher percentage of 
cheese, relative to NFDM, than the rest of the U.S. The current pricing 
system is much more representative of national supply and demand for 
manufactured dairy products than either of the versions of the former 
Class I mover.
    As explained in the final decision on Federal order reform, the 
higher of the Class III or Class IV prices are used to move the Class I 
price to assure that fluid plants will be better able to attract milk 
away from manufacturing uses. Use of the weighted average of the two 
prices when there is a significant difference between them would 
provide no assurance that milk would be available as needed for fluid 
uses, and would be more likely to result in Class price inversions 
(where the Class I price falls below one or more of the manufacturing 
class prices). In addition, use of a weighted average Class I price 
mover would increase the occurrence of the blend price falling below 
the Class III or IV price in markets with low Class I utilization.
    Aside from the fact that the proposal to use a weighted average of 
the Class III and Class IV prices as the Class I mover was not noticed 
for consideration in this proceeding, it should be rejected on the 
basis of its lack of merit.

6. Miscellaneous and Conforming Changes

a. Advanced Class I Butterfat Price
    Because of changes in the Class III and Class IV pricing formulas 
made in this decision, especially the adoption of different butterfat 
prices for the two classes, a conforming change should be made to the 
procedure for calculating the Class I butterfat and hundredweight 
prices. The advanced butterfat price used for pricing Class I butterfat 
would be the butterfat price used in calculating the higher of the 
advanced Class III or Class IV prices on a 3.5 percent butterfat basis.
b. Classification
    As a conforming change to the development of different prices for 
butterfat used in Class III and Class IV products, the classification 
of anhydrous milkfat, butteroil, and plastic cream should be changed 
from Class III to Class IV. The record contains a plethora of testimony 
about the use of these products as substitutes for butterfat, and 
therefore for butter, in manufactured products. In a pricing plan where 
butterfat used in Class III products has the same value as butterfat 
used in Class IV products, a difference between the classification of 
these products, which have a very high

[[Page 76850]]

butterfat content, and butter should not cause any market dislocation. 
However, as extensively pointed out in testimony, continuing to 
classify these products as Class III when the Class III butterfat price 
is changed to reflect the value of butterfat in cheese, rather than its 
value in butter, would place the manufacturers of these products at a 
significant competitive disadvantage to manufacturers of butter.
c. Distribution of Butterfat Value to Producers
    There were several responses to the issue of whether the butterfat 
price paid to producers should be the result of pooling butterfat 
prices from the different classes or continue to reflect the value of 
butterfat in Class III. A witness from Northwest Dairy Association 
testified that being able to line up the Class III price to plants with 
the component value calculation for producers is helpful, especially 
with regard to forward pricing. A brief filed on behalf of DFA and 
ADCNE supported continued use of the Class III butterfat price as the 
producer butterfat price. According to the brief, changes in direct 
pricing to the producer are not prudent at this time, and any change 
between the Class III and Class IV butterfat price should be settled 
through the producer price differential mechanism in the market order 
pools. The brief continued that the producer price differential is a 
blending of various debits and credits in the pooling process and the 
additional equalizing of any butterfat pricing adjustments through this 
procedure currently makes the most sense.
    The post-hearing brief filed by National All-Jersey urged that USDA 
retain the current practice of using Class III milk component values to 
price producer component values. The brief noted that this scenario 
makes it easier to use accepted hedging tools, such as Class III 
futures contracts, and helps simplify pricing for producers. The brief 
further stated that the current procedure maintains the same producer 
butterfat price in all Federal orders with multiple component pricing.
    Although hearing participants supported continuing to use the same 
butterfat price for Class III milk and producer payments, the butterfat 
values of the 4 classes should be pooled in calculating the value of 
butterfat received from producers. Producers should see the classified 
use value of the butterfat portion of their milk reflected in the value 
they receive for that component of their milk. Pooling the butterfat 
values would accomplish this principle. In addition, potential large 
differences between the Class III and Class IV/II butterfat prices as a 
result of the Class III component prices calculated from the formulas 
in this decision would be likely to result in significant distortions 
in the effect of those differences on the producer price differential. 
It is possible that pool calculations in some markets would result in a 
negative producer price differential if the producer butterfat price is 
not changed to represent a blend of the values of butterfat in the four 
classes of use.
    Pooling butterfat values will also have the effect of providing 
more consistency among the orders. Currently, the four orders that do 
not have component pricing pool the class use butterfat values and 
return a weighted average butterfat price to producers. In the 
component pricing orders, butterfat values are not pooled and producers 
receive the Class III butterfat value. Pooling butterfat values to 
producers will result in producers sharing in the class use value of 
butterfat.
d. Inclusion of Class I Other Source Butterfat in Producer Butterfat 
Price Computation
    In pooling the class butterfat values to determine butterfat prices 
to producers, the value associated with the occasional classification 
of other source milk as Class I should be included. This change should 
be made so that the value of all of the butterfat in the pool will be 
reflected in the producer butterfat price.
    In addition, a change in the component pricing orders should be 
made in the paragraph in which the ``Handler's value of milk'' is 
calculated by replacing the differential value of other source milk 
allocated to Class I with the Class I value of that milk. These orders 
currently subtract the Class III value of such milk from its Class I 
value in the ``Handler's value of milk computation,'' include that 
differential value in the ``Computation of producer price 
differential,'' and credit the handler for the other source milk that 
was classified in Class I at the producer price differential in 
``Payments to the producer-settlement fund.''
    With the adoption of a producer butterfat price that can be 
expected to differ from the Class III butterfat price, however, it is 
more appropriate to include in the ``Handler's value of milk'' the 
entire Class I value of other source milk classified as Class I, deduct 
the portion of its producer value that does not include the producer 
price differential during the computation of the producer price 
differential, and credit the handler for the milk's value at producer 
prices in the calculation of ``Payments to the producer-settlement 
fund.''

7. Issue of Whether To Omit a Recommended Decision

    The statute requiring that this proceeding be held to reconsider 
the Class III and Class IV pricing formulas also requires that a final 
decision be published by December 1, 2000, with any amendments to the 
orders to be effective January 1, 2001.
    A number of hearing participants indicated understanding of the 
difficulty in issuing a recommended decision, allowing for comments and 
exceptions on the decision, and then issuing a final decision by the 
deadline of December 1, 2000. However, the hearing record reflects 
unanimity among those addressing the issue that the industry should be 
afforded the opportunity to comment on a decision before its content 
results in a final rule.
    Therefore, USDA is issuing this Tentative Final Decision, which 
will require producer approval before the included proposed amendments 
become effective in an Interim Final Rule, with a subsequent Final 
Decision and Final Rule to follow. This procedure will allow industry 
comment on the content of this decision, while allowing USDA to comply 
with the statutorily-imposed timetable.

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 each of the aforesaid 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.
    The following findings are hereby made with respect to each of the 
aforesaid interim marketing agreements and orders;

[[Page 76851]]

    (a) The interim 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 aforesaid marketing areas, and the 
minimum prices specified in the interim marketing agreements and the 
orders, as hereby proposed to be amended, are such prices as will 
reflect the aforesaid factors, insure a sufficient quantity of pure and 
wholesome milk, and be in the public interest; and
    (c) The interim 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.

Interim Marketing Agreement and Interim Order Amending the Orders

    Annexed hereto and made a part hereof are two documents, an Interim 
Marketing Agreement regulating the handling of milk, and an Interim 
Order amending the orders regulating the handling of milk in the 
aforesaid marketing areas, which have been decided upon as the detailed 
and appropriate means of effectuating the foregoing conclusions.
    It is hereby ordered, That this entire tentative decision and the 
interim order and the interim marketing agreement annexed hereto be 
published in the Federal Register.

Referendum Order To Determine Producer Approval; Determination of 
Representative Periods; and Designation of Referendum Agents

    It is hereby directed that referenda be conducted and completed on 
or before the 30th day from the date this decision is issued, in 
accordance with the procedure for the conduct of referenda (7 CFR 
900.300-311), to determine whether the issuance of the orders as 
amended and as hereby proposed to be amended, regulating the handling 
of milk in the Northeast and Mideast marketing areas is approved or 
favored by producers, as defined under each of those orders, as amended 
and as hereby proposed to be amended, who during such representative 
period were engaged in the production of milk for sale within the 
aforesaid marketing areas.
    The representative period for the conduct of such referenda is 
hereby determined to be May 2000 for the Northeast order and September 
2000 for the Mideast order.
    The agents of the Secretary to conduct such referenda are hereby 
designated to be the respective market administrators of the aforesaid 
orders.

Determination of Producer Approval and Representative Periods for 
All Other Orders

    May 2000 is hereby determined to be the representative period for 
the purpose of ascertaining whether the issuance of the orders, as 
amended and as hereby proposed to be amended, regulating the handling 
of milk in the Appalachian, Southeast and Florida marketing areas are 
approved or favored by producers, as defined under the terms of each of 
those orders as amended and as hereby proposed to be amended, who 
during such representative period were engaged in the production of 
milk for sale within the aforesaid marketing areas.
    September 2000 is hereby determined to be the representative period 
for the purpose of ascertaining whether the issuance of the orders, as 
amended and as hereby proposed to be amended, regulating the handling 
of milk in the Upper Midwest, Central, Pacific Northwest, Southwest, 
Arizona-Las Vegas and Western marketing areas are approved or favored 
by producers, as defined under the terms of each of those orders as 
amended and as hereby proposed to be amended, who during such 
representative period were engaged in the production of milk for sale 
within the aforesaid marketing areas.

List of Subjects in 7 CFR Parts 1000, 1001, 1005, 1006, 1007, 1030, 
1032, 1033, 1124, 1126, 1131, and 1135

    Milk marketing orders.

    Dated: November 29, 2000.
Enrique E. Figueroa,
Deputy Under Secretary, Marketing and Regulatory Programs.

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

    This interim order shall not become effective unless and 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 aforesaid marketing areas. The 
hearing was held pursuant to the provisions of the Agricultural 
Marketing Agreement Act of 1937, as amended (7 U.S.C. 601-674), and the 
applicable rules of practice and procedure (7 CFR part 900).
    Upon the basis of the evidence introduced at such hearing and the 
record thereof, it is found that:
    (1) The said orders as hereby amended, and all of the terms and 
conditions thereof, will tend to effectuate the declared policy of the 
Act;
    (2) The parity prices of milk, as determined pursuant to section 2 
of the Act, are not reasonable in view of the price of feeds, available 
supplies of feeds, and other economic conditions which affect market 
supply and demand for milk in the aforesaid marketing areas; and 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; and
    (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, 
marketing agreements upon which a hearing has been held.

Order Relative to Handling

    It is therefore ordered, that on and after the effective date 
hereof, the handling of milk in the Northeast and other marketing areas 
shall be in conformity to and in compliance with the terms and 
conditions of the orders, as amended, and as hereby amended, as 
follows:
    The authority citation for 7 CFR parts 1000, 1001, 1005, 1006, 
1007, 1030, 1032, 1033, 1124, 1126, 1131, and 1135 continues to read as 
follows:

    Authority: 7 U.S.C. 601-674, 7253, P.L. 106-113, 115 Stat. 1501.

PART 1000-GENERAL PROVISIONS OF FEDERAL MILK MARKETING ORDERS

    1. Section 1000.40 is amended by removing and reserving paragraph

[[Page 76852]]

(c)(1)(ii) and revising paragraph (d)(1)(i) to read as follows:


Sec. 1000.40  Classes of Utilization.

* * * * *
    (c) * * *
    (1) * * *
    (ii) [Reserved]
* * * * *
    (d) Class IV milk shall be all skim milk and butterfat:
    (1) Used to produce:
    (i) Butter, plastic cream, anhydrous milkfat, and butteroil; and
* * * * *
    2. Section 1000.50 is amended by revising the last sentence of the 
introductory text and paragraphs (a), (b), (c), (g), (h), (j), (l), 
(m), (n), (o), (p)(1), and (q)(3) and adding paragraph (q)(4) to read 
as follows:


Sec. 1000.50  Class prices, component prices, and advanced pricing 
factors.

     * * * The price described in paragraph (d) of this section shall 
be derived from the Class II skim milk price announced on or before the 
23rd day of the month preceding the month to which it applies and the 
Class IV butterfat price announced on or before the 5th day of the 
month following the month to which it applies.
    (a) Class I price. The Class I price per hundredweight shall be the 
adjusted Class I differential specified in Sec. 1000.52 plus the higher 
of the advanced Class III or advanced Class IV prices calculated in 
paragraph (q)(4) of this section.
    (b) Class I skim milk price. The Class I skim milk price per 
hundredweight shall be the adjusted Class I differential specified in 
Sec. 1000.52 plus the advanced Class III or advanced Class IV skim milk 
price used in the calculation of the higher of the advanced Class III 
or advanced Class IV prices calculated in paragraph (q)(4) of this 
section.
    (c) Class I butterfat price. The Class I butterfat price per pound 
shall be the adjusted Class I differential specified in Sec. 1000.52 
divided by 100, plus the advanced Class III or advanced Class IV 
butterfat price used in the calculation of the higher of the advanced 
Class III or advanced Class IV prices calculated in paragraph (q)(4) of 
this section.
* * * * *
    (g) Class II butterfat price. The Class II butterfat price per 
pound shall be the Class IV butterfat price plus $.007.
    (h) Class III price. The Class III price per hundredweight, rounded 
to the nearest cent, shall be .965 times the Class III skim milk price 
plus 3.5 times the Class III butterfat price.
* * * * *
    (j) Class IV price. The Class IV price per hundredweight, rounded 
to the nearest cent, shall be .965 times the Class IV skim milk price 
plus 3.5 times the Class IV butterfat price.
* * * * *
    (l) Class III and Class IV butterfat prices.
    (1) The Class III butterfat price per pound, rounded to the nearest 
one-hundredth cent, shall be computed as follows:
    (i) Compute a weighted average of the following prices:
    (A) The U.S. average NASS survey price for 40-lb. block cheese 
reported by the Department for the month; and
    (B) The U.S. average NASS survey price for 500-pound barrel cheddar 
cheese (38 percent moisture) reported by the Department for the month 
plus 3 cents;
    (ii) Subtract 16.5 cents from the price computed pursuant to 
paragraph (l)(1)(i) of this section and multiply the result by 1.582;
    (2) The Class IV butterfat price per pound, rounded to the nearest 
one-hundredth cent, shall be the U.S. average NASS AA butter survey 
price reported by the Department for the month less 11.5 cents, with 
the result divided by 0.82.
    (m) Nonfat solids price. The nonfat solids price per pound, rounded 
to the nearest one-hundredth cent, shall be the U.S. average NASS 
nonfat dry milk survey price reported by the Department for the month 
less 14 cents.
    (n) Protein price. The protein price per pound, rounded to the 
nearest one-hundredth cent, shall be computed by subtracting 16.5 cents 
from the price computed pursuant to paragraph (l)(1)(i) of this section 
and multiplying the result by 1.405;
    (o) Other solids price. The other solids price per pound, rounded 
to the nearest one-hundredth cent, shall be the U.S. average NASS dry 
whey survey price reported by the Department for the month minus 14 
cents, with the result divided by 0.968. The other solids price shall 
not be less than zero.
    (p) * * *
    (1) Multiply .0005 by the weighted average price computed pursuant 
to paragraph (l)(1)(i) of this section and round to the 5th decimal 
place;
* * * * *
    (q) * * *
    (3) Calculate the advanced Class III and advanced Class IV 
butterfat prices as follows:
    (i) The advanced Class III butterfat price shall be calculated by 
subtracting 16.5 cents per pound from a weighted average of the 2 most 
recent U.S. average NASS survey prices for 40-lb.block cheese and for 
500-pound barrel cheddar cheese (at 38 percent moisture) plus 3 cents 
announced before the 24th day of the month, with the result multiplied 
by 1.582;
    (ii) The advanced Class IV butterfat price shall be calculated by 
subtracting 11.5 cents from a weighted average of the 2 most recent 
U.S. average NASS AA butter survey prices announced before the 24th day 
of the month, with the result divided by 0.82.
    (4) Calculate the advanced Class III and advanced Class IV prices 
as follows:
    (i) The advanced Class III price shall be the sum of the value 
calculated pursuant to paragraph (q)(1) of this section multiplied by 
.965 plus the value calculated pursuant to paragraph (q)(3)(i) of this 
section multiplied by 3.5, rounded to the nearest cent.
    (ii) The advanced Class IV price shall be the sum of the value 
calculated pursuant to paragraph (q)(2) of this section multiplied by 
.965 plus the value calculated pursuant to paragraph (q)(3)(ii) of this 
section multiplied by 3.5, rounded to the nearest cent.

PART 1001--MILK IN THE NORTHEAST MARKETING AREA

    1. Section 1001.60 is amended by revising paragraphs (c)(3), 
(d)(2), and (h) to read as follows:


Sec. 1001.60  Handler's value of milk.

* * * * *
    (c) * * *
    (3) Add an amount obtained by multiplying the pounds of butterfat 
in Class III by the Class III butterfat price.
    (d) * * *
    (2) Add an amount obtained by multiplying the pounds of butterfat 
in Class IV by the Class IV butterfat price.
* * * * *
    (h) Multiply the Class I skim milk and Class I butterfat prices 
applicable at the location of the nearest unregulated supply plants 
from which an equivalent volume was received by the pounds of skim milk 
and butterfat in receipts of concentrated fluid milk products assigned 
to Class I pursuant to Sec. 1000.43(d) and Sec. 1000.44(a)(3)(i) and 
the corresponding step of Sec. 1000.44(b) and the pounds of skim milk 
and butterfat subtracted from Class I pursuant to Sec. 1000.44(a)(8) 
and the corresponding step of Sec. 1000.44(b), excluding such skim milk 
and butterfat in receipts of fluid milk products from an unregulated 
supply plant to the extent that an equivalent amount of skim milk or 
butterfat disposed of to such plant by handlers fully regulated under 
any Federal milk order is classified and priced as Class I milk and

[[Page 76853]]

is not used as an offset for any other payment obligation under any 
order.
* * * * *
    2. Section 1001.61, is revised to read as follows:


Sec. 1001.61  Computation of producer butterfat price and producer 
price differential.

    For each month, the market administrator shall compute a producer 
butterfat price per pound of butterfat and a producer price 
differential per hundredweight for producer milk receipts. The report 
of any handler who has not made payments required pursuant to 
Sec. 1001.71 for the preceding month shall not be included in the 
computation of these prices, and such handler's report shall not be 
included in the computation for succeeding months until the handler has 
made full payment of outstanding monthly obligations. Subject to the 
aforementioned conditions, the market administrator shall compute the 
producer butterfat price and the producer price differential in the 
following manner:
    (a) Producer butterfat price. The producer butterfat price per 
pound, rounded to the nearest one-hundredth cent, shall be computed by:
    (1) Multiplying the pounds of butterfat in producer milk allocated 
to each class pursuant to Sec. 1000.44(b) by the respective class 
butterfat prices;
    (2) Adding the butterfat value calculated in Sec. 1001.60(h) for 
other source milk allocated to Class I pursuant to Sec. 1000.43(d) and 
the steps of Sec. 1000.44(b) that correspond to Sec. 1000.44(a)(3)(i) 
and Sec. 1000.44(a)(8) by the Class I price; and
    (3) Dividing the sum of paragraphs (a)(1) and (a)(2) of this 
section by the sum of the pounds of butterfat in producer milk and 
other source milk used to calculate the values in paragraphs (a)(1) and 
(a)(2) of this section.
    (b) Producer price differential.
    (1) Combine into one total the values computed pursuant to 
Sec. 1001.60 for all handlers required to file reports prescribed in 
Sec. 1001.30;
    (2) Subtract the total of the values obtained:
    (i) By multiplying the total pounds of protein, other solids, and 
butterfat contained in each handler's producer milk for which an 
obligation was computed pursuant to Sec. 1001.60(a) through (g) and 
Sec. 1001.60(i) by the protein price, other solids price, and producer 
butterfat price, respectively;
    (ii) By multiplying each handler's pounds of skim milk and 
butterfat for which a value is computed pursuant to Sec. 1001.60(h) by 
the Class III skim milk price and the producer butterfat price, 
respectively;
    (3) Add an amount equal to the minus location adjustments and 
subtract an amount equal to the plus location adjustments computed 
pursuant to Sec. 1001.75;
    (4) Add an amount equal to not less than one-half of the 
unobligated balance in the producer-settlement fund;
    (5) Divide the resulting amount by the sum of the following for all 
handlers included in these computations:
    (i) The total hundredweight of producer milk; and
    (ii) The total hundredweight for which a value is computed pursuant 
to Sec. 1001.60(h); and
    (6) Subtract not less than 4 cents nor more than 5 cents from the 
price computed pursuant to paragraph (b)(5) of this section. The result 
shall be known as the producer price differential for the month.
    3. Section 1001.62 is amended by revising paragraphs (e) and (g) to 
read as follows:


Sec. 1001.62  Announcement of producer prices.

* * * * *
    (e) The producer butterfat price;
* * * * *
    (g) The statistical uniform price computed by adding the following 
values:
    (1) The Class III skim milk price computed in Sec. 1000.50(i) 
multiplied by .965;
    (2) The producer butterfat price computed in Sec. 1001.61(a) 
multiplied by 3.5; and
    (3) The producer price differential computed in Sec. 1001.61(b).
    4. Section 1001.71 is amended by revising paragraphs (b)(2) and (3) 
to read as follows:


Sec. 1001.71  Payments to the producer-settlement fund.

* * * * *
    (b) * * *
    (2) An amount obtained by multiplying the total pounds of protein, 
other solids, and butterfat contained in producer milk by the protein, 
other solids, and producer butterfat prices respectively; and
    (3) An amount obtained by multiplying the hundredweight, the pounds 
of skim milk, and the pounds of butterfat for which a value was 
computed pursuant to Sec. 1001.60(h) by the producer price 
differential, the Class III skim milk price, and the producer butterfat 
price, respectively, as adjusted pursuant to Sec. 1001.75 applicable at 
the location of the plant from which received.
    5. Section 1001.73 is amended by revising paragraphs (a)(2)(ii) and 
(b)(3)(vi) to read as follows:


Sec. 1001.73  Payments to producers and to cooperative associations.

    (a) * * *
    (2) * * *
    (ii) Multiply the pounds of butterfat received by the producer 
butterfat price for the month;
* * * * *
    (b) * * *
    (3) * * *
    (vi) Multiply the pounds of butterfat in Class III and Class IV 
milk by the respective butterfat prices for the month;
* * * * *

PART 1005--MILK IN THE APPALACHIAN MARKETING AREA

    1. Section 1005.60 is amended by revising paragraph (e) to read as 
follows:


Sec. 1005.60  Handler's value of milk.

* * * * *
    (e) Multiply the Class I skim milk and Class I butterfat prices 
applicable at the location of the nearest unregulated supply plants 
from which an equivalent volume was received by the pounds of skim milk 
and butterfat in receipts of concentrated fluid milk products assigned 
to Class I pursuant to Sec. 1000.43(d) and Sec. 1000.44(a)(3)(i) and 
the corresponding step of Sec. 1000.44(b) and the pounds of skim milk 
and butterfat subtracted from Class I pursuant to Sec. 1000.44(a)(8) 
and the corresponding step of Sec. 1000.44(b), excluding such skim milk 
and butterfat in receipts of fluid milk products from an unregulated 
supply plant to the extent that an equivalent amount of skim milk or 
butterfat disposed of to such plant by handlers fully regulated under 
any Federal milk order is classified and priced as Class I milk and is 
not used as an offset for any other payment obligation under any order.
* * * * *
    2. Section 1005.61 is amended by revising paragraphs (a) and (b)(4) 
to read as follows:


Sec. 1005.61  Computation of uniform prices.

* * * * *
    (a) Uniform butterfat price. The uniform butterfat price per pound, 
rounded to the nearest one-hundredth cent, shall be computed by:
    (1) Multiplying the pounds of butterfat in producer milk allocated 
to each class pursuant to Sec. 1000.44(b) by the respective class 
butterfat prices;
    (2) Adding the butterfat value calculated in Sec. 1005.60(e) for 
other

[[Page 76854]]

source milk allocated to Class I pursuant to Sec. 1000.43(d) and the 
steps of Sec. 1000.44(b) that correspond to Sec. 1000.44(a)(3)(i) and 
Sec. 1000.44(a)(8) by the Class I price; and
    (3) Dividing the sum of paragraphs (a)(1) and (a)(2) of this 
section by the sum of the pounds of butterfat in producer milk and 
other source milk used to calculate the values in paragraphs (a)(1) and 
(a)(2) of this section.
    (b) * * *
    (4) Subtract the value of the total pounds of butterfat for all 
handlers. The butterfat value shall be computed by multiplying the sum 
of the pounds of butterfat in producer milk and other source milk used 
to calculate the values in paragraghs (a)(1) and (a)(2) of this section 
by the butterfat price computed in paragraph (a) of this section;
* * * * *

PART 1006--MILK IN THE FLORIDA MARKETING AREA

    1. Section 1006.60 is amended by revising paragraph (e) to read as 
follows:


Sec. 1006.60  Handler's value of milk.

* * * * *
    (e) Multiply the Class I skim milk and Class I butterfat prices 
applicable at the location of the nearest unregulated supply plants 
from which an equivalent volume was received by the pounds of skim milk 
and butterfat in receipts of concentrated fluid milk products assigned 
to Class I pursuant to Sec. 1000.43(d) and Sec. 1000.44(a)(3)(i) and 
the corresponding step of Sec. 1000.44(b) and the pounds of skim milk 
and butterfat subtracted from Class I pursuant to Sec. 1000.44(a)(8) 
and the corresponding step of Sec. 1000.44(b), excluding such skim milk 
and butterfat in receipts of fluid milk products from an unregulated 
supply plant to the extent that an equivalent amount of skim milk or 
butterfat disposed of to such plant by handlers fully regulated under 
any Federal milk order is classified and priced as Class I milk and is 
not used as an offset for any other payment obligation under any order.
* * * * *
    2. Section 1006.61 is amended by revising paragraphs (a) and (b)(4) 
to read as follows:


Sec. 1006.61  Computation of uniform prices.

* * * * *
    (a) Uniform butterfat price. The uniform butterfat price per pound, 
rounded to the nearest one-hundredth cent, shall be computed by:
    (1) Multiplying the pounds of butterfat in producer milk allocated 
to each class pursuant to Sec. 1000.44(b) by the respective class 
butterfat prices;
    (2) Adding the butterfat value calculated in Sec. 1006.60(e) for 
other source milk allocated to Class I pursuant to Sec. 1000.43(d) and 
the steps of Sec. 1000.44(b) that correspond to Sec. 1000.44(a)(3)(i) 
and Sec. 1000.44(a)(8) by the Class I price; and
    (3) Dividing the sum of paragraphs (a)(1) and (a)(2) of this 
section by the sum of the pounds of butterfat in producer milk and 
other source milk used to calculate the values in paragraphs (a)(1) and 
(a)(2) of this section.
    (b) * * *
    (4) Subtract the value of the total pounds of butterfat for all 
handlers. The butterfat value shall be computed by multiplying the sum 
of the pounds of butterfat in producer milk and other source milk used 
to calculate the values in paragraphs (a)(1) and (a)(2) of this section 
by the butterfat price computed in paragraph (a) of this section;
* * * * *

PART 1007--MILK IN THE SOUTHEAST MARKETING AREA

    1. Section 1007.60 is amended by revising paragraph (e) to read as 
follows:


Sec. 1007.60  Handler's value of milk.

* * * * *
    (e) Multiply the Class I skim milk and Class I butterfat prices 
applicable at the location of the nearest unregulated supply plants 
from which an equivalent volume was received by the pounds of skim milk 
and butterfat in receipts of concentrated fluid milk products assigned 
to Class I pursuant to Sec. 1000.43(d) and Sec. 1000.44(a)(3)(i) and 
the corresponding step of Sec. 1000.44(b) and the pounds of skim milk 
and butterfat subtracted from Class I pursuant to Sec. 1000.44(a)(8) 
and the corresponding step of Sec. 1000.44(b), excluding such skim milk 
and butterfat in receipts of fluid milk products from an unregulated 
supply plant to the extent that an equivalent amount of skim milk or 
butterfat disposed of to such plant by handlers fully regulated under 
any Federal milk order is classified and priced as Class I milk and is 
not used as an offset for any other payment obligation under any order.
* * * * *
    2. Section 1007.61 is amended by revising paragraphs (a) and (b)(4) 
to read as follows:


Sec. 1007.61  Computation of uniform prices.

* * * * *
    (a) Uniform butterfat price. The uniform butterfat price per pound, 
rounded to the nearest one-hundredth cent, shall be computed by:
    (1) Multiplying the pounds of butterfat in producer milk allocated 
to each class pursuant to Sec. 1000.44(b) by the respective class 
butterfat prices;
    (2) Adding the butterfat value calculated in Sec. 1007.60(e) for 
other source milk allocated to Class I pursuant to Sec. 1000.43(d) and 
the steps of Sec. 1000.44(b) that correspond to Sec. 1000.44(a)(3)(i) 
and Sec. 1000.44(a)(8) by the Class I price; and
    (3) Dividing the sum of paragraphs (a)(1) and (a)(2) of this 
section by the sum of the pounds of butterfat in producer milk and 
other source milk used to calculate the values in paragraphs (a)(1) and 
(a)(2) of this section.
    (b) * * *
    (4) Subtract the value of the total pounds of butterfat for all 
handlers. The butterfat value shall be computed by multiplying the sum 
of the pounds of butterfat in producer milk and other source milk used 
to calculate the values in paragraphs (a)(1) and (a)(2) of this section 
by the butterfat price computed in paragraph (a) of this section;
* * * * *

PART 1030--MILK IN THE UPPER MIDWEST MARKETING AREA

    1. Section 1030.60 is amended by revising paragraphs (c)(3), 
(d)(2), and (i) to read as follows:


Sec. 1030.60  Handler's value of milk.

* * * * *
    (c) * * *
    (3) Add an amount obtained by multiplying the pounds of butterfat 
in Class III by the Class III butterfat price.
    (d) * * *
    (2) Add an amount obtained by multiplying the pounds of butterfat 
in Class IV by the Class IV butterfat price.
* * * * *
    (i) Multiply the Class I skim milk and Class I butterfat prices 
applicable at the location of the nearest unregulated supply plants 
from which an equivalent volume was received by the pounds of skim milk 
and butterfat in receipts of concentrated fluid milk products assigned 
to Class I pursuant to Sec. 1000.43(d) and Sec. 1000.44(a)(3)(i) and 
the corresponding step of Sec. 1000.44(b) and the pounds of skim milk 
and butterfat subtracted from Class I pursuant to Sec. 1000.44(a)(8) 
and the corresponding step of Sec. 1000.44(b), excluding such skim milk 
and butterfat in receipts of fluid milk products from an unregulated 
supply plant to the extent that an equivalent amount of skim milk or 
butterfat disposed of to

[[Page 76855]]

such plant by handlers fully regulated under any Federal milk order is 
classified and priced as Class I milk and is not used as an offset for 
any other payment obligation under any order.
* * * * *
    2. Section 1030.61 is revised to read as follows:


Sec. 1030.61  Computation of producer butterfat price and producer 
price differential.

    For each month the market administrator shall compute a producer 
butterfat price per pound of butterfat and a producer price 
differential per hundredweight for producer milk receipts. The report 
of any handler who has not made payments required pursuant to 
Sec. 1030.71 for the preceding month shall not be included in the 
computation of these prices, and such handler's report shall not be 
included in the computation for succeeding months until the handler has 
made full payment of outstanding monthly obligations. Subject to the 
conditions of this paragraph, the market administrator shall compute 
the producer butterfat price and the producer price differential in the 
following manner:
    (a) Producer butterfat price. The producer butterfat price per 
pound, rounded to the nearest one-hundredth cent, shall be computed by:
    (1) Multiplying the pounds of butterfat in producer milk allocated 
to each class pursuant to Sec. 1000.44(b) by the respective class 
butterfat prices;
    (2) Adding the butterfat value calculated in Sec. 1030.60(i) for 
other source milk allocated to Class I pursuant to Sec. 1000.43(d) and 
the steps of Sec. 1000.44(b) that correspond to Sec. 1000.44(a)(3)(i) 
and Sec. 1000.44(a)(8) by the Class I price; and
    (3) Dividing the sum of paragraphs (a)(1) and (a)(2) of this 
section by the sum of the pounds of butterfat in producer milk and 
other source milk used to calculate the values in paragraphs (a)(1) and 
(a)(2) of this section.
    (b) Producer price differential. (1) Combine into one total the 
values computed pursuant to Sec. 1030.60 for all handlers required to 
file reports prescribed in Sec. 1030.30;
    (2) Subtract the total of the values obtained:
    (i) By multiplying the total pounds of protein, other solids, and 
butterfat contained in each handler's producer milk for which an 
obligation was computed pursuant to Sec. 1030.60(a) through (h) and 
Sec. 1030.60(j) by the protein price, other solids price, and producer 
butterfat price, respectively, and the total value of the somatic cell 
adjustment pursuant to Sec. 1030.30(a)(1) and (c)(1);
    (ii) By multiplying each handler's pounds of skim milk and 
butterfat for which a value is computed pursuant to Sec. 1030.60(i) by 
the Class III skim milk price and the producer butterfat price, 
respectively;
    (3) Add an amount equal to the minus location adjustments and 
subtract an amount equal to the plus location adjustments computed 
pursuant to Sec. 1030.75;
    (4) Add an amount equal to not less than one-half of the 
unobligated balance in the producer-settlement fund;
    (5) Divide the resulting amount by the sum of the following for all 
handlers included in these computations:
    (i) The total hundredweight of producer milk; and
    (ii) The total hundredweight for which a value is computed pursuant 
to Sec. 1030.60(i); and
    (6) Subtract not less than 4 cents nor more than 5 cents from the 
price computed pursuant to paragraph (b)(5) of this section. The result 
shall be known as the producer price differential for the month.
    3. Section 1030.62 is amended by revising paragraphs (e) and (h) to 
read as follows:


Sec. 1030.62  Announcement of producer prices.

* * * * *
    (e) The producer butterfat price;
* * * * *
    (h) The statistical uniform price computed by adding the following 
values:
    (1) The Class III skim milk price computed in Sec. 1000.50(i) 
multiplied by .965;
    (2) The producer butterfat price computed in Sec. 1030.61(a) 
multiplied by 3.5; and
    (3) The producer price differential computed in Sec. 1030.61(b).
    4. Section 1030.71 is amended by revising paragraphs (b)(2) and 
(b)(4) to read as follows:


Sec. 1030.71  Payments to the producer-settlement fund.

* * * * *
    (b) * * *
    (2) An amount obtained by multiplying the total pounds of protein, 
other solids, and butterfat contained in producer milk by the protein, 
other solids, and producer butterfat prices respectively;
* * * * *
    (4) An amount obtained by multiplying the hundredweight, the pounds 
of skim milk, and the pounds of butterfat for which a value was 
computed pursuant to Sec. 1030.60(i) by the producer price 
differential, the Class III skim milk price, and the producer butterfat 
price, respectively, as adjusted pursuant to Sec. 1030.75 applicable at 
the location of the plant from which received.
    5. Section 1030.73 is amended by revising paragraphs (a)(2)(ii), 
(c)(2)(v), and (c)(3)(ii) to read as follows:


Sec. 1030.73  Payments to producers and to cooperative associations.

    (a) * * *
    (2) * * *
    (ii) The pounds of butterfat received times the producer butterfat 
price for the month;
* * * * *
    (c) * * *
    (2) * * *
    (v) The pounds of butterfat in Class III and Class IV milk by the 
respective butterfat prices for the month;
* * * * *
    (3) * * *
    (ii) The pounds of butterfat received times the producer butterfat 
price for the month;
* * * * *

PART 1032--MILK IN THE CENTRAL MARKETING AREA

    1. Section 1032.60 is amended by revising paragraphs (c)(3), 
(d)(2), and (i) to read as follows:


Sec. 1032.60  Handler's value of milk.

* * * * *
    (c) * * *
    (3) Add an amount obtained by multiplying the pounds of butterfat 
in Class III by the Class III butterfat price.
    (d) * * *
    (2) Add an amount obtained by multiplying the pounds of butterfat 
in Class IV by the Class IV butterfat price.
* * * * *
    (i) Multiply the Class I skim milk and Class I butterfat prices 
applicable at the location of the nearest unregulated supply plants 
from which an equivalent volume was received by the pounds of skim milk 
and butterfat in receipts of concentrated fluid milk products assigned 
to Class I pursuant to Sec. 1000.43(d) and Sec. 1000.44(a)(3)(i) and 
the corresponding step of Sec. 1000.44(b) and the pounds of skim milk 
and butterfat subtracted from Class I pursuant to Sec. 1000.44(a)(8) 
and the corresponding step of Sec. 1000.44(b), excluding such skim milk 
and butterfat in receipts of fluid milk products from an unregulated 
supply plant to the extent that an equivalent amount of skim milk or 
butterfat disposed of to such plant by handlers fully regulated

[[Page 76856]]

under any Federal milk order is classified and priced as Class I milk 
and is not used as an offset for any other payment obligation under any 
order.
* * * * *
    2. Section 1032.61 is revised to read as follows:


Sec. 1032.61  Computation of producer butterfat price and producer 
price differential.

    For each month the market administrator shall compute a producer 
butterfat price per pound of butterfat and a producer price 
differential per hundredweight for producer milk receipts. The report 
of any handler who has not made payments required pursuant to 
Sec. 1032.71 for the preceding month shall not be included in the 
computation of these prices, and such handler's report shall not be 
included in the computation for succeeding months until the handler has 
made full payment of outstanding monthly obligations. Subject to the 
conditions of this paragraph, the market administrator shall compute 
the producer butterfat price and the producer price differential in the 
following manner:
    (a) Producer butterfat price. The producer butterfat price per 
pound, rounded to the nearest one-hundredth cent, shall be computed by:
    (1) Multiplying the pounds of butterfat in producer milk allocated 
to each class pursuant to Sec. 1000.44(b) by the respective class 
butterfat prices;
    (2) Adding the butterfat value calculated in Sec. 1032.60(i) for 
other source milk allocated to Class I pursuant to Sec. 1000.43(d) and 
the steps of Sec. 1000.44(b) that correspond to Sec. 1000.44(a)(3)(i) 
and Sec. 1000.44(a)(8) by the Class I price; and
    (3) Dividing the sum of paragraphs (a)(1) and (a)(2) of this 
section by the sum of the pounds of butterfat in producer milk and 
other source milk used to calculate the values in paragraphs (a)(1) and 
(a)(2) of this section.
    (b) Producer price differential. (1) Combine into one total the 
values computed pursuant to Sec. 1032.60 for all handlers required to 
file reports prescribed in Sec. 1032.30;
    (2) Subtract the total of the values obtained:
    (i) By multiplying the total pounds of protein, other solids, and 
butterfat contained in each handler's producer milk for which an 
obligation was computed pursuant to Sec. 1032.60(a) through (h) and 
Sec. 1032.60(j) by the protein price, other solids price, and producer 
butterfat price, respectively, and the total value of the somatic cell 
adjustment pursuant to Sec. 1032.30(a)(1) and (c)(1);
    (ii) By multiplying each handler's pounds of skim milk and 
butterfat for which a value is computed pursuant to Sec. 1032.60(i) by 
the Class III skim milk price and the producer butterfat price, 
respectively;
    (3) Add an amount equal to the minus location adjustments and 
subtract an amount equal to the plus location adjustments computed 
pursuant to Sec. 1032.75;
    (4) Add an amount equal to not less than one-half of the 
unobligated balance in the producer-settlement fund;
    (5) Divide the resulting amount by the sum of the following for all 
handlers included in these computations:
    (i) The total hundredweight of producer milk; and
    (ii) The total hundredweight for which a value is computed pursuant 
to Sec. 1032.60(i); and
    (6) Subtract not less than 4 cents nor more than 5 cents from the 
price computed pursuant to paragraph (b)(5) of this section. The result 
shall be known as the producer price differential for the month.
    3. Section 1032.62 is amended by revising paragraphs (e) and (h) to 
read as follows:


Sec. 1032.62  Announcement of producer prices.

* * * * *
    (e) The producer butterfat price;
* * * * *
    (h) The statistical uniform price computed by adding the following 
values:
    (1) The Class III skim milk price computed in Sec. 1000.50(i) 
multiplied by .965;
    (2) The producer butterfat price computed in Sec. 1032.61(a) 
multiplied by 3.5; and
    (3) The producer price differential computed in Sec. 1032.61(b).
    4. Section 1032.71 is amended by revising paragraphs (b)(2) and (3) 
to read as follows:


Sec. 1032.71  Payments to the producer-settlement fund.

* * * * *
    (b) * * *
    (2) An amount obtained by multiplying the total pounds of protein, 
other solids, and butterfat contained in producer milk by the protein, 
other solids, and producer butterfat prices respectively;
* * * * *
    (4) An amount obtained by multiplying the hundredweight, the pounds 
of skim milk, and the pounds of butterfat for which a value was 
computed pursuant to Sec. 1032.60(i) by the producer price 
differential, the Class III skim milk price, and the producer butterfat 
price, respectively, as adjusted pursuant to Sec. 1032.75 applicable at 
the location of the plant from which received.
    5. Section 1032.73 is amended by revising paragraphs (a)(2)(ii), 
(c)(2)(v), and (c)(3)(ii) to read as follows:


Sec. 1032.73  Payments to producers and to cooperative associations.

    (a) * * *
    (2) * * *
    (ii) The pounds of butterfat received times the producer butterfat 
price for the month;
* * * * *
    (c) * * *
    (2) * * *
    (v) The pounds of butterfat in Class III and Class IV milk by the 
respective butterfat prices for the month;
* * * * *
    (3) * * *
    (ii) The pounds of butterfat received times the producer butterfat 
price for the month;
* * * * *

PART 1033--MILK IN THE MIDEAST MARKETING AREA

    1. Section 1033.60 is amended by revising paragraphs (c)(3), 
(d)(2), and (i) to read as follows:


Sec. 1033.60  Handler's value of milk.

* * * * *
    (c) * * *
    (3) Add an amount obtained by multiplying the pounds of butterfat 
in Class III by the Class III butterfat price.
    (d) * * *
    (2) Add an amount obtained by multiplying the pounds of butterfat 
in Class IV by the Class IV butterfat price.
* * * * *
    (i) Multiply the Class I skim milk and Class I butterfat prices 
applicable at the location of the nearest unregulated supply plants 
from which an equivalent volume was received by the pounds of skim milk 
and butterfat in receipts of concentrated fluid milk products assigned 
to Class I pursuant to Sec. 1000.43(d) and Sec. 1000.44(a)(3)(i) and 
the corresponding step of Sec. 1000.44(b) and the pounds of skim milk 
and butterfat subtracted from Class I pursuant to Sec. 1000.44(a)(8) 
and the corresponding step of Sec. 1000.44(b), excluding such skim milk 
and butterfat in receipts of fluid milk products from an unregulated 
supply plant to the extent that an equivalent amount of skim milk or 
butterfat disposed of to such plant by handlers fully regulated

[[Page 76857]]

under any Federal milk order is classified and priced as Class I milk 
and is not used as an offset for any other payment obligation under any 
order.
* * * * *
    2. Section 1033.61 is revised to read as follows:


Sec. 1033.61  Computation of producer butterfat price and producer 
price differential.

    For each month the market administrator shall compute a producer 
butterfat price per pound of butterfat and a producer price 
differential per hundredweight for producer milk receipts. The report 
of any handler who has not made payments required pursuant to 
Sec. 1033.71 for the preceding month shall not be included in the 
computation of these prices, and such handler's report shall not be 
included in the computation for succeeding months until the handler has 
made full payment of outstanding monthly obligations. Subject to the 
conditions of this paragraph, the market administrator shall compute 
the producer butterfat price and the producer price differential in the 
following manner:
    (a) Producer butterfat price. The producer butterfat price per 
pound, rounded to the nearest one-hundredth cent, shall be computed by:
    (1) Multiplying the pounds of butterfat in producer milk allocated 
to each class pursuant to Sec. 1000.44(b) by the respective class 
butterfat prices;
    (2) Adding the butterfat value calculated in Sec. 1033.60(i) for 
other source milk allocated to Class I pursuant to Sec. 1000.43(d) and 
the steps of Sec. 1000.44(b) that correspond to Sec. 1000.44(a)(3)(i) 
and Sec. 1000.44(a)(8) by the Class I price; and
    (3) Dividing the sum of paragraphs (a)(1) and (a)(2) of this 
section by the sum of the pounds of butterfat in producer milk and 
other source milk used to calculate the values in paragraphs (a)(1) and 
(a)(2) of this section.
    (b) Producer price differential. (1) Combine into one total the 
values computed pursuant to Sec. 1033.60 for all handlers required to 
file reports prescribed in Sec. 1033.30;
    (2) Subtract the total of the values obtained:
    (i) By multiplying the total pounds of protein, other solids, and 
butterfat contained in each handler's producer milk for which an 
obligation was computed pursuant to Sec. 1033.60(a) through (h) and 
Sec. 1033.60(j) by the protein price, other solids price, and producer 
butterfat price, respectively, and the total value of the somatic cell 
adjustment pursuant to Sec. 1033.30(a)(1) and (c)(1);
    (ii) By multiplying each handler's pounds of skim milk and 
butterfat for which a value is computed pursuant to Sec. 1033.60(i) by 
the Class III skim milk price and the producer butterfat price, 
respectively;
    (3) Add an amount equal to the minus location adjustments and 
subtract an amount equal to the plus location adjustments computed 
pursuant to Sec. 1033.75;
    (4) Add an amount equal to not less than one-half of the 
unobligated balance in the producer-settlement fund;
    (5) Divide the resulting amount by the sum of the following for all 
handlers included in these computations:
    (i) The total hundredweight of producer milk; and
    (ii) The total hundredweight for which a value is computed pursuant 
to Sec. 1033.60(i); and
    (6) Subtract not less than 4 cents nor more than 5 cents from the 
price computed pursuant to paragraph (b)(5) of this section. The result 
shall be known as the producer price differential for the month.
    3. Section 1033.62 is amended by revising paragraphs (e) and (h) to 
read as follows:


Sec. 1033.62  Announcement of producer prices.

* * * * *
    (e) The producer butterfat price;
* * * * *
    (h) The statistical uniform price computed by adding the following 
values:
    (1) The Class III skim milk price computed in Sec. 1000.50(i) 
multiplied by .965;
    (2) The producer butterfat price computed in Sec. 1033.61(a) 
multiplied by 3.5; and
    (3) The producer price differential computed in Sec. 1033.61(b).
    4. Section 1033.71 is amended by revising paragraphs (b)(2) and (4) 
to read as follows:


Sec. 1033.71  Payments to the producer--settlement fund.

* * * * *
    (b) * * *
    (2) An amount obtained by multiplying the total pounds of protein, 
other solids, and butterfat contained in producer milk by the protein, 
other solids, and producer butterfat prices respectively;
* * * * *
    (4) An amount obtained by multiplying the hundredweight, the pounds 
of skim milk, and the pounds of butterfat for which a value was 
computed pursuant to Sec. 1033.60(i) by the producer price 
differential, the Class III skim milk price, and the producer butterfat 
price, respectively, as adjusted pursuant to Sec. 1033.75 applicable at 
the location of the plant from which received.
    5. Section 1033.73 is amended by revising paragraphs (a)(2)(ii) and 
(b)(3)(v) to read as follows:


Sec. 1033.73  Payments to producers and to cooperative associations.

    (a) * * *
    (2) * * *
    (ii) The pounds of butterfat received times the producer butterfat 
price for the month;
* * * * *
    (b) * * *
    (3) * * *
    (v) The pounds of butterfat in Class III and Class IV milk by the 
respective butterfat prices for the month;
* * * * *

PART 1124--MILK IN THE PACIFIC NORTHWEST MARKETING AREA

    1. Section 1124.60 is amended by revising paragraphs (c)(3), 
(d)(2), and (h) to read as follows:


Sec. 1124.60  Handler's value of milk.

* * * * *
    (c) * * *
    (3) Add an amount obtained by multiplying the pounds of butterfat 
in Class III by the Class III butterfat price.
    (d) * * *
    (2) Add an amount obtained by multiplying the pounds of butterfat 
in Class IV by the Class IV butterfat price.
* * * * *
    (h) Multiply the Class I skim milk and Class I butterfat prices 
applicable at the location of the nearest unregulated supply plants 
from which an equivalent volume was received by the pounds of skim milk 
and butterfat in receipts of concentrated fluid milk products assigned 
to Class I pursuant to Sec. 1000.43(d) and Sec. 1000.44(a)(3)(i) and 
the corresponding step of Sec. 1000.44(b) and the pounds of skim milk 
and butterfat subtracted from Class I pursuant to Sec. 1000.44(a)(8) 
and the corresponding step of Sec. 1000.44(b), excluding such skim milk 
and butterfat in receipts of fluid milk products from an unregulated 
supply plant to the extent that an equivalent amount of skim milk or 
butterfat disposed of to such plant by handlers fully regulated under 
any Federal milk order is classified and priced as Class I milk and is 
not used as an offset for any other payment obligation under any order.
* * * * *

[[Page 76858]]

    2. Section 1124.61, including the section heading, is revised to 
read as follows:


Sec. 1124.61  Computation of producer butterfat price and producer 
price differential.

    For each month, the market administrator shall compute a producer 
butterfat price per pound of butterfat and a producer price 
differential per hundredweight. The report of any handler who has not 
made payments required pursuant to Sec. 1124.71 for the preceding month 
shall not be included in these computations, and such handler's report 
shall not be included in the computation for succeeding months until 
the handler has made full payment of outstanding monthly obligations. 
Subject to the aforementioned conditions, the market administrator 
shall compute the producer butterfat price and the producer price 
differential in the following manner:
    (a) Producer butterfat price. The producer butterfat price per 
pound, rounded to the nearest one-hundredth cent, shall be computed by:
    (1) Multiplying the pounds of butterfat in producer milk allocated 
to each class pursuant to Sec. 1000.44(b) by the respective class 
butterfat prices;
    (2) Adding the butterfat value calculated in Sec. 1124.60(h) for 
other source milk allocated to Class I pursuant to Sec. 1000.43(d) and 
the steps of Sec. 1000.44(b) that correspond to Sec. 1000.44(a)(3)(i) 
and Sec. 1000.44(a)(8) by the Class I price; and
    (3) Dividing the sum of paragraphs (a)(1) and (a)(2) of this 
section by the sum of the pounds of butterfat in producer milk and 
other source milk used to calculate the values in paragraphs (a)(1) and 
(a)(2) of this section.
    (b) Producer price differential. (1) Combine into one total the 
values computed pursuant to Sec. 1124.60 for all handlers required to 
file reports prescribed in Sec. 1124.30;
    (2) Subtract the total of the values obtained:
    (i) By multiplying the total pounds of protein, other solids, and 
butterfat contained in each handler's producer milk for which an 
obligation was computed pursuant to Sec. 1124.60(a) through (g) and 
Sec. 1124.60(i) by the protein price, other solids price, and producer 
butterfat price, respectively;
    (ii) By multiplying each handler's pounds of skim milk and 
butterfat for which a value is computed pursuant to Sec. 1124.60(h) by 
the Class III skim milk price and the producer butterfat price, 
respectively;
    (3) Add an amount equal to the minus location adjustments and 
subtract an amount equal to the plus location adjustments computed 
pursuant to Sec. 1124.75;
    (4) Add an amount equal to not less than one-half of the 
unobligated balance in the producer-settlement fund;
    (5) Divide the resulting amount by the sum of the following for all 
handlers included in these computations:
    (i) The total hundredweight of producer milk; and
    (ii) The total hundredweight for which a value is computed pursuant 
to Sec. 1124.60(h); and
    (6) Subtract not less than 4 cents nor more than 5 cents from the 
price computed pursuant to paragraph (b)(5) of this section. The result 
shall be known as the producer price differential for the month.
    3. Section 1124.62 is amended by revising paragraphs (e) and (g) to 
read as follows:


Sec. 1124.62  Announcement of producer prices.

* * * * *
    (e) The producer butterfat price;
* * * * *
    (g) The statistical uniform price computed by adding the following 
values:
    (1) The Class III skim milk price computed in Sec. 1000.50(i) 
multiplied by .965;
    (2) The producer butterfat price computed in Sec. 1124.61(a) 
multiplied by 3.5; and
    (3) The producer price differential computed in Sec. 1124.61(b).
    4. Section 1124.71 is amended by revising paragraphs (b)(2) and (3) 
to read as follows:


Sec. 1124.71  Payments to the producer-settlement fund.

* * * * *
    (b) * * *
    (2) An amount obtained by multiplying the total pounds of protein, 
other solids, and butterfat contained in producer milk by the protein, 
other solids, and producer butterfat prices respectively; and
    (3) An amount obtained by multiplying the hundredweight, the pounds 
of skim milk, and the pounds of butterfat for which a value was 
computed pursuant to Sec. 1124.60(h) by the producer price 
differential, the Class III skim milk price, and the producer butterfat 
price, respectively, as adjusted pursuant to Sec. 1124.75 applicable at 
the location of the plant from which received.
    5. Section 1124.73 is amended by revising paragraphs (a)(2)(ii), 
(c)(2)(v), and (c)(3)(ii) to read as follows:


Sec. 1124.73  Payments to producers and to cooperative associations.

    (a) * * *
    (2) * * *
    (ii) The pounds of butterfat received times the producer butterfat 
price for the month;
* * * * *
    (c) * * *
    (2) * * *
    (v) The pounds of butterfat in Class III and Class IV milk by the 
respective butterfat prices for the month;
* * * * *
    (3) * * *
    (ii) The pounds of butterfat received times the producer butterfat 
price for the month;
* * * * *

PART 1126--MILK IN THE SOUTHWEST MARKETING AREA

    1. Section 1126.60 is amended by revising paragraphs (c)(3), 
(d)(2), and (i) to read as follows:


Sec. 1126.60  Handler's value of milk.

* * * * *
    (c) * * *
    (3) Add an amount obtained by multiplying the pounds of butterfat 
in Class III by the Class III butterfat price.
    (d) * * *
    (2) Add an amount obtained by multiplying the pounds of butterfat 
in Class IV by the Class IV butterfat price.
* * * * *
    (i) Multiply the Class I skim milk and Class I butterfat prices 
applicable at the location of the nearest unregulated supply plants 
from which an equivalent volume was received by the pounds of skim milk 
and butterfat in receipts of concentrated fluid milk products assigned 
to Class I pursuant to Sec. 1000.43(d) and Sec. 1000.44(a)(3)(i) and 
the corresponding step of Sec. 1000.44(b) and the pounds of skim milk 
and butterfat subtracted from Class I pursuant to Sec. 1000.44(a)(8) 
and the corresponding step of Sec. 1000.44(b), excluding such skim milk 
and butterfat in receipts of fluid milk products from an unregulated 
supply plant to the extent that an equivalent amount of skim milk or 
butterfat disposed of to such plant by handlers fully regulated under 
any Federal milk order is classified and priced as Class I milk and is 
not used as an offset for any other payment obligation under any order.
* * * * *
    2. Section 1126.61, is revised to read as follows:

[[Page 76859]]

Sec. 1126.61  Computation of producer butterfat price and producer 
price differential.

    For each month, the market administrator shall compute a producer 
butterfat price per pound of butterfat and a producer price 
differential per hundredweight. The report of any handler who has not 
made payments required pursuant to Sec. 1126.71 for the preceding month 
shall not be included in these computations, and such handler's report 
shall not be included in the computation for succeeding months until 
the handler has made full payment of outstanding monthly obligations. 
Subject to the aforementioned conditions, the market administrator 
shall compute the producer butterfat price and the producer price 
differential in the following manner:
    (a) Producer butterfat price. The producer butterfat price per 
pound, rounded to the nearest one-hundredth cent, shall be computed by:
    (1) Multiplying the pounds of butterfat in producer milk allocated 
to each class pursuant to Sec. 1000.44(b) by the respective class 
butterfat prices;
    (2) Adding the butterfat value calculated in Sec. 1126.60(i) for 
other source milk allocated to Class I pursuant to Sec. 1000.43(d) and 
the steps of Sec. 1000.44(b) that correspond to Sec. 1000.44(a)(3)(i) 
and Sec. 1000.44(a)(8) by the Class I price; and
    (3) Dividing the sum of paragraphs (a)(1) and (a)(2) of this 
section by the sum of the pounds of butterfat in producer milk and 
other source milk used to calculate the values in paragraphs (a)(1) and 
(a)(2) of this section.
    (b) Producer price differential. (1) Combine into one total the 
values computed pursuant to Sec. 1126.60 for all handlers required to 
file reports prescribed in Sec. 1126.30;
    (2) Subtract the total of the values obtained:
    (i) By multiplying the total pounds of protein, other solids, and 
butterfat contained in each handler's producer milk for which an 
obligation was computed pursuant to Sec. 1126.60(a) through (h) and 
Sec. 1126.60(j) by the protein price, other solids price, and producer 
butterfat price, respectively, and the total value of the somatic cell 
adjustment pursuant to Sec. 1126.30(a)(1) and (c)(1);
    (ii) By multiplying each handler's pounds of skim milk and 
butterfat for which a value is computed pursuant to Sec. 1126.60(i) by 
the Class III skim milk price and the producer butterfat price, 
respectively;
    (3) Add an amount equal to the minus location adjustments and 
subtract an amount equal to the plus location adjustments computed 
pursuant to Sec. 1126.75;
    (4) Add an amount equal to not less than one-half of the 
unobligated balance in the producer-settlement fund;
    (5) Divide the resulting amount by the sum of the following for all 
handlers included in these computations:
    (i) The total hundredweight of producer milk; and
    (ii) The total hundredweight for which a value is computed pursuant 
to Sec. 1126.60(i); and
    (6) Subtract not less than 4 cents nor more than 5 cents from the 
price computed pursuant to paragraph (b)(5) of this section. The result 
shall be known as the producer price differential for the month.
    3. Section 1126.62 is amended by revising paragraphs (e) and (h) to 
read as follows:


Sec. 1126.62  Announcement of producer prices.

* * * * *
    (e) The producer butterfat price;
* * * * *
    (h) The statistical uniform price computed by adding the following 
values:
    (1) The Class III skim milk price computed in Sec. 1000.50(i) 
multiplied by .965;
    (2) The producer butterfat price computed in Sec. 1126.61(a) 
multiplied by 3.5; and
    (3) The producer price differential computed in Sec. 1126.61(b).
    4. Section 1126.71 is amended by revising paragraphs (b)(2) and (4) 
to read as follows:


Sec. 1126.71  Payments to the producer-settlement fund.

* * * * *
    (b) * * *
    (2) An amount obtained by multiplying the total pounds of protein, 
other solids, and butterfat contained in producer milk by the protein, 
other solids, and producer butterfat prices respectively;
* * * * *
    (4) An amount obtained by multiplying the hundredweight, the pounds 
of skim milk, and the pounds of butterfat for which a value was 
computed pursuant to Sec. 1126.60(i) by the producer price 
differential, the Class III skim milk price, and the producer butterfat 
price, respectively, as adjusted pursuant to Sec. 1126.75 applicable at 
the location of the plant from which received.
    5. Section 1126.73 is amended by revising paragraphs (a)(2)(ii) and 
(b)(3)(v) to read as follows:


Sec. 1126.73  Payments to producers and to cooperative associations.

    (a) * * *
    (2) * * *
    (ii) Multiply the pounds of butterfat received times the producer 
butterfat price for the month;
* * * * *
    (b) * * *
    (3) * * *
    (v) The pounds of butterfat in Class III and Class IV milk by the 
respective butterfat prices for the month;
* * * * *

PART 1131--MILK IN THE ARIZONA-LAS VEGAS MARKETING AREA

    1. Section 1131.60 is amended by revising paragraph (e) to read as 
follows:


Sec. 1131.60  Handler's value of milk.

* * * * *
    (e) Multiply the Class I skim milk and Class I butterfat prices 
applicable at the location of the nearest unregulated supply plants 
from which an equivalent volume was received by the pounds of skim milk 
and butterfat in receipts of concentrated fluid milk products assigned 
to Class I pursuant to Sec. 1000.43(d) and Sec. 1000.44(a)(3)(i) and 
the corresponding step of Sec. 1000.44(b) and the pounds of skim milk 
and butterfat subtracted from Class I pursuant to Sec. 1000.44(a)(8) 
and the corresponding step of Sec. 1000.44(b), excluding such skim milk 
and butterfat in receipts of fluid milk products from an unregulated 
supply plant to the extent that an equivalent amount of skim milk or 
butterfat disposed of to such plant by handlers fully regulated under 
any Federal milk order is classified and priced as Class I milk and is 
not used as an offset for any other payment obligation under any order.
* * * * *
    2. Section 1131.61 is amended by revising paragraphs (a) and (b)(4) 
to read as follows:


Sec. 1131.61  Computation of uniform prices.

* * * * *
    (a) Uniform butterfat price. The uniform butterfat price per pound, 
rounded to the nearest one-hundredth cent, shall be computed by:
    (1) Multiplying the pounds of butterfat in producer milk allocated 
to each class pursuant to Sec. 1000.44(b) by the respective class 
butterfat prices;
    (2) Adding the butterfat value calculated in Sec. 1131.60(e) for 
other source milk allocated to Class I pursuant to Sec. 1000.43(d) and 
the steps of Sec. 1000.44(b) that correspond to Sec. 1000.44(a)(3)(i) 
and Sec. 1000.44(a)(8) by the Class I price; and

[[Page 76860]]

    (3) Dividing the sum of paragraphs (a)(1) and (a)(2) of this 
section by the sum of the pounds of butterfat in producer milk and 
other source milk used to calculate the values in paragraphs (a)(1) and 
(a)(2) of this section.
    (b) * * *
    (4) Subtract the value of the total pounds of butterfat for all 
handlers. The butterfat value shall be computed by multiplying the sum 
of the pounds of butterfat in producer milk and other source milk used 
to calculate the values in (a)(1) and (a)(2) of this section by the 
butterfat price computed in paragraph (a) of this section;
* * * * *

PART 1135--MILK IN THE WESTERN MARKETING AREA

    1. Section 1135.60 is amended by revising paragraphs (c)(3), (d)(2) 
and (h) to read as follows:


Sec. 1135.60  Handler's value of milk.

* * * * *
    (c) * * *
    (3) Add an amount obtained by multiplying the pounds of butterfat 
in Class III by the Class III butterfat price.
    (d) * * *
    (2) Add an amount obtained by multiplying the pounds of butterfat 
in Class IV by the Class IV butterfat price.
* * * * *
    (h) Multiply the Class I skim milk and Class I butterfat prices 
applicable at the location of the nearest unregulated supply plants 
from which an equivalent volume was received by the pounds of skim milk 
and butterfat in receipts of concentrated fluid milk products assigned 
to Class I pursuant to Sec. 1000.43(d) and Sec. 1000.44(a)(3)(i) and 
the corresponding step of Sec. 1000.44(b) and the pounds of skim milk 
and butterfat subtracted from Class I pursuant to Sec. 1000.44(a)(8) 
and the corresponding step of Sec. 1000.44(b), excluding such skim milk 
and butterfat in receipts of fluid milk products from an unregulated 
supply plant to the extent that an equivalent amount of skim milk or 
butterfat disposed of to such plant by handlers fully regulated under 
any Federal milk order is classified and priced as Class I milk and is 
not used as an offset for any other payment obligation under any order.
* * * * *
    2. Section 1135.61 is revised to read as follows:


Sec. 1135.61  Computation of producer butterfat price and producer 
price differential.

    For each month, the market administrator shall compute a producer 
butterfat price per pound of butterfat and a producer price 
differential per hundredweight. The report of any handler who has not 
made payments required pursuant to Sec. 1135.71 for the preceding month 
shall not be included in these computations, and such handler's report 
shall not be included in the computation for succeeding months until 
the handler has made full payment of outstanding monthly obligations. 
Subject to the conditions of this paragraph, the market administrator 
shall compute the producer butterfat price and the producer price 
differential in the following manner:
    (a) Producer butterfat price. The producer butterfat price per 
pound, rounded to the nearest one-hundredth cent, shall be computed by:
    (1) Multiplying the pounds of butterfat in producer milk allocated 
to each class pursuant to Sec. 1000.44(b) by the respective class 
butterfat prices;
    (2) Adding the butterfat value calculated in Sec. 1135.60(h) for 
other source milk allocated to Class I pursuant to Sec. 1000.43(d) and 
the steps of Sec. 1000.44(b) that correspond to Sec. 1000.44(a)(3)(i) 
and Sec. 1000.44(a)(8) by the Class I price; and
    (3) Dividing the sum of paragraphs (a)(1) and (a)(2) of this 
section by the sum of the pounds of butterfat in producer milk and 
other source milk used to calculate the values in paragraphs (a)(1) and 
(a)(2) of this section.
    (b) Producer price differential. (1) Combine into one total the 
values computed pursuant to Sec. 1135.60 for all handlers required to 
file reports prescribed in Sec. 1135.30;
    (2) Subtract the total of the values obtained:
    (i) By multiplying the total pounds of protein, other solids, and 
butterfat contained in each handler's producer milk for which an 
obligation was computed pursuant to Sec. 1135.60(a) through (g) and 
Sec. 1135.60(i) by the protein price, other solids price, and producer 
butterfat price, respectively;
    (ii) By multiplying each handler's pounds of skim milk and 
butterfat for which a value is computed pursuant to Sec. 1135.60(h) by 
the Class III skim milk price and the producer butterfat price, 
respectively;
    (3) Add an amount equal to the minus location adjustments and 
subtract an amount equal to the plus location adjustments computed 
pursuant to Sec. 1135.75;
    (4) Add an amount equal to not less than one-half of the 
unobligated balance in the producer-settlement fund;
    (5) Divide the resulting amount by the sum of the following for all 
handlers included in these computations:
    (i) The total hundredweight of producer milk; and
    (ii) The total hundredweight for which a value is computed pursuant 
to Sec. 1135.60(h); and
    (6) Subtract not less than 4 cents nor more than 5 cents from the 
price computed pursuant to paragraph (b)(5) of this section. The result 
shall be known as the producer price differential for the month.
    3. Section 1135.62 is amended by revising paragraphs (e) and (g) to 
read as follows:


Sec. 1135.62  Announcement of producer prices.

* * * * *
    (e) The producer butterfat price;
* * * * *
    (g) The statistical uniform price computed by adding the following 
values:
    (1) The Class III skim milk price computed in Sec. 1000.50(i) 
multiplied by .965;
    (2) The producer butterfat price computed in Sec. 1135.61(a) 
multiplied by 3.5; and
    (3) The producer price differential computed in Sec. 1135.61(b).
* * * * *
    4. Section 1135.71 is amended by revising paragraph (b)(2) and 
adding paragraph (b)(3) to read as follows:


Sec. 1135.71  Payments to the producer--settlement fund.

* * * * *
    (b) * * *
    (2) An amount obtained by multiplying the total pounds of protein, 
other solids, and butterfat contained in producer milk by the protein, 
other solids, and producer butterfat prices respectively; and
    (3) An amount obtained by multiplying the hundredweight, the pounds 
of skim milk, and the pounds of butterfat for which a value was 
computed pursuant to Sec. 1135.60(h) by the producer price 
differential, the Class III skim milk price, and the producer butterfat 
price, respectively, as adjusted pursuant to Sec. 1135.75 applicable at 
the location of the plant from which received.
* * * * *
    5. Section 1135.73 is amended by revising paragraphs (a)(2)(ii) and 
(b)(3)(v) to read as follows:


Sec. 1135.73  Payments to producers and to cooperative associations.

    (a) * * *
    (2) * * *

[[Page 76861]]

    (ii) The pounds of butterfat received times the producer butterfat 
price for the month;
* * * * *
    (b) * * *
    (3) * * *
    (v) The pounds of butterfat in Class III and Class IV milk times 
the respective butterfat prices for the month;
* * * * *

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 Secs. ______ \1\ to ______, all inclusive, of 
the order regulating the handling of milk in the (______ Name of 
order ______) marketing area (7 CFR PART ______ \2\) which is 
annexed hereto; and
---------------------------------------------------------------------------

    \1\ First and last sections of order.
    \2\ Appropriate Part number.
---------------------------------------------------------------------------

    II. The following provisions: Sec. ______ \3\ Record of milk 
handled and authorization to correct typographical errors.
---------------------------------------------------------------------------

    \3\ Next consecutive section number.
---------------------------------------------------------------------------

    (a) Record of milk handled. The undersigned certifies that he/
she handled during the month of ______ \4\, ______ hundredweight of 
milk covered by this marketing agreement.
---------------------------------------------------------------------------

    \4\ Appropriate representative period for the order.
---------------------------------------------------------------------------

    (b) Authorization to correct typographical errors. The 
undersigned hereby authorizes the Deputy Administrator, or Acting 
Deputy Administrator, Dairy Programs, Agricultural Marketing 
Service, to correct any typographical errors which may have been 
made in this marketing agreement.
    Sec. ______\3\ Effective date. This marketing agreement shall 
become effective upon the execution of a counterpart hereof by the 
Secretary 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
[FR Doc. 00-30816 Filed 12-1-00; 9:19 am]
BILLING CODE 3410-02-P


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