[Federal Register Volume 63, Number 113 (Friday, June 12, 1998)]
[Proposed Rules]
[Pages 32147-32150]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-15775]


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Proposed Rules
                                                Federal Register
________________________________________________________________________

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

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Federal Register / Vol. 63, No. 113 / Friday, June 12, 1998 / 
Proposed Rules

[[Page 32147]]


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DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Parts 1001, 1002, 1004, 1005, 1006, 1007, 1012, 1013, 1030, 
1032, 1033, 1036, 1040, 1044, 1046, 1049, 1050, 1064, 1065, 1068, 
1076, 1079, 1106, 1124, 1126, 1131, 1134, 1135, 1137, 1138, and 
1139

[Docket No. AO-14-A68, et al.; DA-98-01]


Milk in the New England and Other Marketing Areas; Final Decision 
on Proposed Amendments to Tentative Marketing Agreements and to Orders 
and Termination of Proceeding

------------------------------------------------------------------------
    7 CFR Part           Marketing area                 AO Nos.         
------------------------------------------------------------------------
1001.............  New England..............  AO-14-A68                 
1002.............  New York-New Jersey......  AO-71-A83                 
1004.............  Middle Atlantic..........  AO-160-A72                
1005.............  Carolina.................  AO-388-A10                
1006.............  Upper Florida............  AO-356-A33                
1007.............  Southeast................  AO-366-A39                
1012.............  Tampa Bay................  AO-347-A36                
1013.............  Southeastern Florida.....  AO-286-A43                
1030.............  Chicago Regional.........  AO-361-A33                
1032.............  Southern Illinois-Eastern  AO-313-A42                
                    Missouri.                                           
1033.............  Ohio Valley..............  AO-166-A66                
1036.............  Eastern Ohio-Western       AO-179-A60                
                    Pennsylvania.                                       
1040.............  Southern Michigan........  AO-225-A47                
1044.............  Michigan Upper Peninsula.  AO-299-A30                
1046.............  Louisville-Lexington-      AO-123-A68                
                    Evansville.                                         
1049.............  Indiana..................  AO-319-A43                
1050.............  Central Illinois.........  AO-355-A30                
1064.............  Greater Kansas City......  AO-23-A63                 
1065.............  Nebraska-Western Iowa....  AO-86-A52                 
1068.............  Upper Midwest............  AO-178-A50                
1076.............  Eastern South Dakota.....  AO-260-A34                
1079.............  Iowa.....................  AO-295-A46                
1106.............  Southwest Plains.........  AO-210-A56                
1124.............  Pacific Northwest........  AO-368-A26                
1126.............  Texas....................  AO-231-A64                
1131.............  Central Arizona..........  AO-271-A34                
1134.............  Western Colorado.........  AO-301-A25                
1135.............  Southwestern Idaho-        AO-380-A16                
                    Eastern Oregon.                                     
1137.............  Eastern Colorado.........  AO-326-A29                
1138.............  New Mexico-West Texas....  AO-335-A40                
1139.............  Great Basin..............  AO-309-A34                
------------------------------------------------------------------------

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Final decision and termination of proceeding.

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SUMMARY: We are denying a proposal to establish a price floor under the 
Basic Formula Price (BFP) used to calculate Federal milk marketing 
order prices for Class I and Class II milk, and we are terminating the 
rulemaking proceeding The record does not justify establishing a price 
floor, given the current and projected supply and demand for milk. The 
price floor would have unequal effects in different regions of the 
country, even for farms of similar size, because of different Class I 
milk utilization rates. As a result, those who would benefit the most 
from a price floor would not necessarily be the farms that have the 
greatest financial need for such assistance.

FOR FURTHER INFORMATION CONTACT: Constance M. Brenner, Marketing 
Specialist, USDA/AMS/Dairy Programs, Order Formulation Branch, Room 
2971, South Building, P.O. Box 96456, Washington, DC 20090-6456, (202) 
720-2357, e-mail address Connie__M__Brenner@usdagov.

SUPPLEMENTARY INFORMATION: This action is covered by Sections 556 and 
557 of Title 5 of the United States Code and, therefore, is excluded 
from the requirements of Executive Order 12866.

Small Business Consideration

    In accordance with the Regulatory Flexibility Act (5 U.S.C. 601 et 
seq.), the Agricultural Marketing Service (AMS) has considered the 
economic effect of this action on small entities. For the purpose of 
the Regulatory Flexibility Act, a dairy farm is considered a small 
business if it has annual gross revenue of less than $500,000, and a 
handler is a small business if it has fewer than 500 employees. To 
determine which farms are small businesses, we determined that the 
$500,000 annual revenue criterion equals 326,000 pounds of milk 
production per month. A small plant will be considered a large business 
if it is part of a company with more than 500 employees.
    AMS analyzed the regulatory impact of the proposal on small 
entities and determined that adoption of the proposed $13.50 floor 
would have unequal effects on similar-sized farms in different regions 
of the country because of differences in Class I milk utilization 
rates, and that it would benefit the largest farms most. During the 
effective period, the floor would have increased the average gross 
Class I price by $1.05 per hundredweight (cwt). The benefit to an 
individual producer would have depended on the blend price under the 
order in which the producer's milk was pooled. The blend price is the 
weighted average of all revenues from all uses of milk in the order 
area. So, a producer whose milk is pooled under an order with high 
Class I use of 80 percent would receive $0.84 of the overall $1.05 per 
cwt. On the other hand, a producer whose milk is pooled under an order 
with low Class I use such as 20 percent would only receive an 
additional $0.21 per cwt.
    This means that, for a small farm in Wisconsin with 60 cows, 
average revenues would increase by only $630 for the last half of 1998 
because the blend price would increase only $0.14 per cwt. The same 
size farm in New York would receive $0.48 per cwt, or $2,160 more 
revenue for the same period. The difference is caused by the higher 
percentage of Class I use in the order covering New York.
    For a medium-sized farm in Texas with 400 cows, the average revenue 
increase would be $23,040, based on a higher blend price of $0.64. 
However, because of differences in blend prices, the same size farm in 
Illinois would receive over $40,000 in additional revenue over the last 
half of 1998.
    Finally, for a large 2,000-cow farm in New Mexico, average revenues 
would increase by $72,000, based on a higher blend price of $0.36, 
while the same size farm in Florida would have average revenues 
increase by $216,000. Again, this difference is due to a higher 
percentage of Class I use in Florida than in New Mexico.
    Clearly, farms in higher Class I utilization markets, or large 
farms, would have benefited more than farms in markets with lower Class 
I utilization, or small farms, regardless of financial need.
    Because this action terminates the rulemaking proceeding without 
amending the present rules, the economic conditions of small entities 
will remain unchanged. Also, this action does not change reporting, 
record keeping, or other compliance requirements.

Economic Analyses

    The Notice of Hearing in this proceeding contained an Initial 
Regulatory Flexibility Analysis and a Preliminary Cost-Benefit 
Analysis. We

[[Page 32148]]

analyzed the effects of adopting the proposal using March 1998 
projections of milk production, use, and prices. The analysis, and a 
description of the economic model used in the analysis, are available 
in the Regulatory Impact Analysis (RIA) of Establishing a Price Floor 
Under Class I Milk Marketed Under Federal Milk Marketing Orders, and 
can be obtained from Dairy Programs at (202) 720-4392, any Market 
Administrator office, or via the Internet at <a href="http://www.ams.usda.gov/
dairy">http://www.ams.usda.gov/
dairy</a>.
    Prior document in this proceeding:
    Notice of Hearing: Issued January 21, 1998; published January 26, 
1998 (63 FR 3667).

Preliminary Statement

    The United States Department of Agriculture (USDA) held a public 
hearing to consider proposed amendments to all marketing agreements and 
orders regulating the handling of milk. The hearing was held at 
Washington, D.C., between February 17 and 20, 1998.
    The deadline for post-hearing briefs on the proposal and on whether 
the proposal should be considered on an expedited basis was March 11, 
1998.
    The issues of the hearing were:
    1. Should we adopt a floor under the Basic Formula Price (BFP) used 
to compute the Federal milk marketing order Class I and Class II 
prices?
    2. If such a floor were adopted, should it be implemented on an 
emergency basis?

Findings and Conclusions

    We have adopted the following findings and conclusions relating to 
the material issues of this proceeding:
    1. Should we adopt a floor under the Basic Formula Price used to 
compute the Federal milk order Class I and Class II prices. A proposal 
by Mid-America Dairymen, Inc., (now part of Dairy Farmers of America, 
or DFA) would establish a $13.50 per cwt. floor under the Basic Formula 
Price (BFP) for Class I and Class II milk. The proposed floor would 
remain in effect only until the Federal milk marketing order reform 
process is complete, no later than April 4, 1999. Proponents urged that 
the proposed floor be adopted on an emergency basis, without first 
issuing a recommended decision. The record does not contain sufficient 
evidence to adopt the proposed pricing floor, as explained below.
    Fourteen U.S. dairy farmers and seven representatives of 
cooperative associations spread across the country testified in support 
of the proposal, saying that the current BFP does not accurately 
represent the value of milk used in manufactured products, that 
volatility in farm-level milk prices has damaged producers, and that 
many producers are in debt and in danger of financial failure. 
According to proponents, prices paid to producers in recent years have 
been below the costs of producing milk, making it hard for the U.S. 
dairy industry to ensure an adequate supply of milk for fluid use. 
Proponents testified that producers are earning returns that are less 
than the minimum wage, and that price volatility makes planning and 
budgeting nearly impossible.
    The proponents argued that the brief duration of the proposed floor 
price would make it unlikely that increased prices would lead to 
increased production. In addition, they stated that such a floor would 
not necessarily cause higher prices to consumers. The witnesses 
acknowledged that, while retail milk prices generally rise when prices 
to producers rise, retail prices do not fall by the same amount or as 
fast as falling farm prices. According to one cooperative association 
representative, the recent volatility of milk prices has increased the 
margin between farm and retail prices. The witness stated that it is 
important, therefore, to establish a BFP floor while the BFP is 
relatively high to avoid having middlemen increase retail margins 
further after the BFP declines.
    The proponents noted that feed costs, which make up approximately 
50 percent of the cost of producing milk, have risen while the price of 
milk has not risen comparably. They also stated that other production 
costs, such as supplies and utilities, are also increasing at a much 
faster rate than milk prices to producers, which have changed little in 
20 years.
    The proponents also said that handlers are paying producers more 
than minimum Class I order prices for milk used for fluid use in order 
to insure a sufficient supply for most markets. The larger payments, 
they said, are evidence that Class I differentials under the orders are 
not high enough. The Northeast Interstate Dairy Compact (the Compact), 
which has established a $13.70 floor under Class I prices, and Maine's 
state-regulated prices were cited as examples of effective programs. A 
witness stated that Maine's price level is enhanced by $1.00 under 
State regulation while, at the same time, Maine's consumers enjoy low 
prices. The Vermont Commissioner of Agriculture argued, in a brief, 
that the Compact has not harmed retail sales or boosted production. 
Several witnesses stated that the proposed floor under Class I and II 
prices would provide some price stability for producers, and help 
dairymen stay in business.
    Six dairy farmers and a representative of a national farmers 
organization testified that they support a $14.50 price floor for all 
milk uses. They said that such a level would not cause burdensome 
production increases. Additionally, a brief filed on behalf of a 
cooperative association argued that a $14.00 floor on all milk would 
reflect the minimum cost of producing milk. A business that supplies 
hay to dairy farms recommended a $14.50 floor for both Class I and II 
milk.
    Proponents noted a decline in the number of dairy farms and, in 
some regions, declining production, as factors that severely affect 
small firms that do business with dairy farms, such as those that 
provide feed, equipment, and veterinary service. When the number of 
dairy farms in a region declines below a certain level, they testified, 
these small businesses disappear, making it more difficult for milk 
production to continue.
    A DFA witness stated that domestic use of milk was greater than 
domestic production during 1997. The witness projected that per capita 
consumption of dairy products would increase by 5 pounds per year for 
the near future, and that DFA expects the milk production shortage to 
worsen if no action is taken to increase revenue to producers.
    The Louisiana and Mississippi Commissioners of Agriculture, a 
Louisiana State Senator, and an Extension Service dairy economist from 
Louisiana State University testified that their dairy industries are in 
desperate straits, marked by a decrease in the number of dairy farmers 
and milk production. They favored adopting the proposed floor for a 
short period to provide stability for dairy farmers, until milk 
marketing order reform is completed. These witnesses said that many 
young people see no future in dairy farming, and are not becoming dairy 
farmers.
    A brief filed on behalf of a cooperative association argued that 
the proposed floor would not interfere with the operation of futures 
markets. Even if it did, the brief concluded, the interests of futures 
markets should not be preferred over the interests of dairy farmers. 
According to proponents, the pilot program recently announced by USDA 
to encourage producers to use risk management tools to minimize their 
exposure to price volatility would affect producers in only 36 counties 
nationwide, and should not be a reason to deny the BFP floor proposal.
    Most of the witnesses supporting adoption of a Class I price floor 
also

[[Page 32149]]

supported such a floor for the Class II price. The proponents argued 
that Class I and II prices currently move together based on the BFP for 
the second previous month, that products in both classes often are 
marketed and distributed together, that products in both classes are 
perishable, and that the use of milk in both classes is driven by 
consumer demand.
    However, several cooperative association representatives expressed 
reservations about adopting a floor under the Class II price because 
regulated handlers who process Class II products compete with 
unregulated handlers. Because they could make more money, handlers who 
process milk for Class II use might use nonfluid ingredients rather 
than fluid milk if the Class II and III or III-A prices differ by a 
large amount.
    One Northeast Class I handler representative reluctantly supported 
the proposed floor for Class I milk only, but generally opposed 
decoupling prices for Class I milk from the value of milk used in 
manufactured products. The witness argued that the New York milkshed 
needs to be more competitive in pricing Class I milk relative to milk 
in the Compact region, and that the interim Class I pricing stability 
needs to be ensured in case Federal order Class I differentials are 
invalidated by court action before the conclusion of the Federal order 
reform process.
    Two New Mexico producers opposed the floor but testified that the 
current BFP does not fully reflect the value of Grade A milk used in 
manufactured products. A New Mexico producer organization argued in a 
brief that replacing the current BFP with a price series that tracks 
both Grade A and Grade B prices for milk used in manufactured products 
would result in more accurate Class I prices, would increase income to 
farmers, and would better reflect market forces. A New Mexico dairy 
farmer testified that high-quality milk from very large farms can be 
delivered regularly between regions and arrive at its destination 
sooner, and fresher, than locally produced milk that is picked up at 
the farm every other day.
    Opponents of the price-flooring proposal included two witnesses 
representing upper Midwest producers, a Midwest cooperative association 
representative, the Wisconsin State Secretary of Agriculture, the 
Minnesota State Commissioner of Agriculture, and two University of 
Wisconsin dairy economists. They contended that the proposal would have 
a negative effect on upper Midwest dairy farmers, and would not affect 
U.S. producers equally because of different Class I utilization between 
regions. They stated that enhancement of Class I prices would increase 
production and reduce Class I use nationally, reducing returns to upper 
Midwest producers as a result of lower prices paid for milk used in 
manufactured products. In addition, they argued, flooring Class I and 
II prices would shift more price volatility to the manufacturing 
markets. The upper Midwest witnesses stated that the number of dairy 
farms in the upper Midwest is declining, threatening the existence of 
the dairy processing industry, and argued that adopting the proposal 
would hasten the decline of the upper Midwest dairy industry.
    They argued further that the average BFP has not been above $13.00 
for some time, and is not projected to reach the proposed floor level 
during the proposed period. One upper Midwest witness also stated that 
production and demand are in balance nationally, and are expected to 
remain so for the foreseeable future. These witnesses argued that 
Federal orders were not intended as a price support system, and should 
not be so used.
    Twenty representatives of milk processors, including 12 
representatives of processors of Class II products, also testified in 
opposition to the proposal. They argued that current national milk 
production is in balance with consumption of dairy products and is 
projected to remain so. Any price increase not justified by the supply/
demand interaction reflected in the BFP almost certainly would 
stimulate production, which would divert large surpluses of milk to 
manufactured product markets, they said. This, they argued, would drive 
down prices of milk used in manufactured products, even as the proposed 
floor would increase costs of fluid milk to consumers and reduce its 
consumption. Further, they argued that adopting such a floor for Class 
I and II prices would hurt dairy industry efforts to create export 
markets for value-added dairy products.
    Most processors and some producer organizations opposed a pricing 
floor on Class II milk. Opponents stated that Class II products are 
processed in plants that also process fluid milk products and are fully 
regulated under Federal milk marketing orders, or in plants that 
process only one or two Class II products and are not fully regulated. 
Members of the Class II milk processing industry argued that, if fully 
regulated handlers processing Class II products are subject to a 
floored Class II price, they will not be able to compete with handlers 
who are not subject to Federal order pricing, such as California 
handlers.
    Class II milk processors stated that flooring the BFP for Class II 
milk may cause handlers to switch to nonfat dry milk and butter as 
ingredients in such products as ice cream, cottage cheese, and yogurt. 
They argued that fluid milk that would have been used in these products 
would be shifted to lower-valued manufacturing uses. They concluded 
that producers, therefore, would lose revenue.
    The milk processor representatives claimed that current efforts to 
encourage the use of futures contracts, as well as USDA's pilot program 
for risk management for dairy farmers, would be meaningless if the 
floor were adopted. They argued this because, they claimed, a major 
portion of the U.S. milk supply would be without price risk, as the 
proposed price floor of $13.50 would be higher than any of the futures 
options for the period for which the floor is proposed. They argued 
that futures and options on futures are market-oriented pricing tools 
for producers and the industry to manage risk and stabilize revenues in 
a less regulated market.
    A milk processor representative opposed flooring the Class I price 
because the resulting increase in producer prices would not be pooled 
nationally. Another milk processor stated that the declining number of 
farms is affecting the dairy processing industry, but concluded that 
this does not mean that there will be a shortage of milk.
    Two representatives of consumer organizations testified that the 
proposed floor would increase prices of fluid milk to consumers, reduce 
fluid milk consumption, and increase government program costs for the 
school lunch program and the Special Supplemental Program for Women, 
Infants and Children.
    Several opponents indicated that proponents' argument for flooring 
was based on the faulty premise that Federal milk marketing orders 
should insure an adequate supply of milk for all uses, instead of for 
fluid use only.

Conclusions

    Despite a 46-percent reduction in the number of U.S. dairy farms 
from 1988 through 1997, milk production increased 8 percent. The data 
contained in the record of the public hearing in this proceeding 
provide no basis to expect that an adequate supply of milk for fluid 
use will not be available nationwide. Therefore, the record does not 
support adopting the proposal, which would encourage more milk 
production.

[[Page 32150]]

    Proponents argue from USDA statistical data that consumption of 
dairy products exceeded commercially marketed milk in 1997, and that 
the gap between consumption and production will continue to grow. We 
have concluded, however, that the data in fact demonstrate that 
production and consumption are in balance. Milk production increased by 
11.3 billion pounds from 1985 to 1996. During the same period, 
commercial use increased by 24.5 billion pounds as prices decreased and 
annual net removals (USDA purchases) declined by 13.1 billion pounds. 
When the USDA price support program ends on December 31, 1999, USDA 
projects that imports will remain flat through 2007 and growth in use 
will come from increased milk production.
    DFA's projection that consumption will exceed production by a 
widening margin through the year 2010 is derived by extending the 1985-
1996 trends in milk consumption and production. However, extending 
these two independent trend lines into the future ignores the ongoing 
interaction between milk prices, supply, and demand.
    USDA baseline projections of milk production and commercial use 
through marketing year 2007/08 indicate continued balance between 
production and use, with no sharp increase in farm or retail milk 
prices that would accompany a shortfall in milk production.
    National milk production has increased by 8 percent since 1988 
while the U.S. population has increased by 7.3 percent. The hearing 
record provides no evidence that milk production will not continue to 
keep pace with population growth and the increase in demand for fluid 
milk. There is even less evidence to show that there is now or will be 
a national shortage of fluid milk over the next several years.
    Based on the March 1998 USDA economic analysis referred to earlier 
in the Economic Analyses section of this document, the percentage of 
milk in Class I use may decrease by approximately 0.2 percent for the 
period that the floor would be in effect, with minor changes from the 
baseline through 2002.
    USDA analysis of the proposed floor for Class I prices indicates 
that commercially marketed milk production would increase by 
approximately 0.11 percent during the period the floor would be in 
effect. Commercially marketed milk production would increase an 
additional 0.09 percent through 2002. This additional milk production 
would result in the increased manufacture of dairy products in lower-
priced classes, primarily in the areas of the country where more milk 
is used in manufactured dairy products than in fluid products.
    The proposed floor under Class I and II prices would have unequal 
effects on farm-level milk prices unrelated to the financial need of 
the farmers affected. The benefit of the proposed floor to a producer 
would depend on the proportion of Class I and II milk used in the order 
in which the producer's milk is pooled. Thus, a producer whose milk is 
pooled under a marketing order with a relatively high 80 percent Class 
I and Class II use would get 80 percent of the projected $1.05 
difference between the proposed floored price and the projected BFP for 
the last half of 1998 and early 1999, or $0.84 per cwt. On the other 
hand, producers in marketing order areas with a relatively low 20 
percent Class I and Class II use would receive the benefit of only 
$0.21 of the $1.05 increase in class prices. Producers in high Class I 
use areas already receive higher blend prices for their milk than 
producers in areas with lower levels of Class I use, and the effects of 
the price floor proposal would widen the differences between such 
areas.
    The higher Class I and II prices would also increase milk 
production and reduce fluid milk consumption, which would lower prices 
for milk used in manufactured dairy products. Lower prices for these 
other classes of milk would be even more detrimental to producers in 
low Class I and II utilization markets.
    The petition for flooring the BFP is denied because there is no 
evidence of a national milk shortage, either for all uses or for fluid 
uses. Furthermore, flooring the BFP would have widely varying effects 
in different regions of the country unrelated to the financial need of 
farmers. In addition, flooring the BFP to establish Class II prices is 
denied because it would interfere with competitive relationships within 
the industry. The record indicates that most handlers who manufacture 
Class II products can easily switch to nonfluid ingredients, such as 
butter and nonfat dry milk when they are less costly than fluid milk. 
Even handlers who cannot make the switch immediately may nonetheless 
find that a shift to nonfluid ingredients might be in their long-term 
interest. The substitution of lower-valued nonfat dry milk and butter 
for fresh milk valued at the higher Class II price could result in the 
loss of Class II revenues to farmers.
    2. If such a floor were adopted, should it should be implemented on 
an emergency basis? Proponents of the BFP floor proposal urged that 
USDA take emergency action to make the Class I and II price flooring 
action effective as soon as possible. They stressed that dairy farmers 
need immediate price relief, and they emphasized the importance of 
establishing a floor before the BFP declines. According to the 
proponents, adopting the floor when the BFP is at a relatively high 
level, rather than when the BFP has fallen seasonally, would eliminate 
the incentive for wholesalers and retailers to raise prices to 
consumers.
    Opponents of the proposed pricing floor argued that no emergency 
exists, and that there is no evidence that milk supplies are threatened 
in the near or distant future.
    The facts clearly demonstrate that the proposed floor is not 
required by supply and demand conditions. Further briefing or argument 
would not change these facts, but would only cause further uncertainty 
in the industry. Therefore, this decision denying the proposal is 
issued on an expedited basis to let producers and processors know that 
the proposed floor is not approved.

Rulings on Proposed Findings and Conclusions

    All briefs, proposed findings and conclusions, and the evidence in 
the record were considered in reaching the findings and conclusions set 
forth above. The petition to floor the BFP used to calculate Federal 
milk marketing order prices for Class I and Class II milk is denied for 
the reasons previously stated in this decision.
    Our action makes it unnecessary to address legal arguments advanced 
in opposition to this proceeding.

Determination

    Our findings and conclusions do not require any changes in the 
marketing orders regulating the handling of milk.

    Authority: 7 U.S.C. 601-674.

    Dated: June 9, 1998.
Kenneth C. Clayton,
Acting Administrator, Agricultural Marketing Service.
[FR Doc. 98-15775 Filed 6-10-98; 3:00 pm]
BILLING CODE 3410-02-P