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.

Proposed Rules Federal Register

32147

Vol. 63, No. 113

Friday, June 12, 1998

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

Missouri.

AO–313–A42

1033 Ohio Valley ....................... AO–166–A66

1036 Eastern Ohio-Western

Pennsylvania.

AO–179–A60

1040 Southern Michigan ........... AO–225–A47

1044 Michigan Upper Peninsula AO–299–A30

1046 Louisville-LexingtonEvansville.AO–123–A68

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-Eastern Oregon.AO–380–A16

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.

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

ConnielMlBrenner@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
32148 Federal Register / Vol. 63, No. 113 / Friday, June 12, 1998 / Proposed Rules

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 http://www.ams.usda.gov/dairy.

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
Federal Register / Vol. 63, No. 113 / Friday, June 12, 1998 / Proposed Rules 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 highquality 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 lowervalued 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.
32150 Federal Register / Vol. 63, No. 113 / Friday, June 12, 1998 / Proposed Rules

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 lowervalued 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]

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