[Federal Register: October 25, 2001 (Volume 66, Number 207)]
[Proposed Rules]
[Page 54063-54096]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr25oc01-13]
[[Page 54063]]
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Part II
Department of Agriculture
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7 CFR Part 1000, et al.
Milk in the Northeast and Other Marketing Areas; Recommended Decision
and Opportunity To File Written Exceptions on Proposed Amendments to
Tentative Marketing Agreements and to Orders; Proposed Rule
[[Page 54064]]
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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; Recommended
Decision and Opportunity To File Written Exceptions on Proposed
Amendments 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 decision recommends changes to Federal milk orders based
on the record of a hearing held May 8-12, 2000, to consider proposals
submitted by the industry to change the pricing formulas included in
the final rule for the consolidation and reform of Federal milk orders
and on comments filed in response to a tentative final decision issued
November 29, 2000. The proceeding was undertaken in response to a
Congressional mandate included in the Consolidated Appropriations Act,
2000, to reconsider the Class III and Class IV pricing 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. After issuance of the tentative final
decision, approval of the proposed order amendments by producers, and
issuance of an interim final rule, some of the provisions of the
interim final rule were enjoined by the U.S. District Court for the
District of Columbia. This decision considers comments filed in
response to the tentative final decision and recommends changes that
are consistent with the Court's ruling. Changes from the tentative
final decision would increase the dry whey make allowance and remove a
snubber used in the other solids component price calculation, revise
the Class III butterfat and protein component price formulas consistent
with the Court's ruling, eliminate the pooling of butterfat values in
paying producers in component pricing orders, and change the
classification of several high-fat products from Class IV back to Class
III.
DATES: Comments should be submitted on or before November 26, 2001.
ADDRESSES: Comments (six copies) should be filed with the Hearing
Clerk, Room 1081, South Building, U.S. Department of Agriculture,
Washington, DC 20250. Reference should be made to the title of action
and docket number.
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 connie.brenner@usda.gov.
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. The amendments are not intended to have a
retroactive effect. If adopted, the proposed amendments 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 regulatory flexibility
analysis considers these points and the impact of this proposed
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
[[Page 54065]]
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
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 the 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.
A comment filed by the managing partner of a large dairy farm
argued that dairy producers selling less than 326,000 pounds of milk
per month may comprise the majority of dairy farms, but not the
majority of milk sold. The comment further stated that it is not
appropriate to identify one sector and imply that they are most in need
of protection and preservation.
The production guideline of 326,000 pounds per month in identifying
small dairy farms is an attempt to relate a measure of size for which
data is available (pounds of production per farm) with the criteria
specified by the Small Business Administration (revenue from sales),
for which data is not readily available to USDA on an individual farm
basis. The Regulatory Flexibility Analysis does not represent an
attempt to create special privileges for farms defined as small, but to
examine the regulations to assure that they do not create a
disproportionate burden or competitive disadvantage for such farms.
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 price 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 the levels adopted under Federal order reform 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 (RBCS) and the California
Department of Food and Agriculture (CDFA) 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 (NCI). This survey was conducted by
persons unfamiliar with the dairy industry among cheese processors who
did not testify about the data that they submitted for the survey, and
entered into the hearing record by a witness who had no firsthand
knowledge of the data included. As a result, the NCI survey should be
relied upon to a lesser degree than the two studies used to determine
the cheddar cheese make allowance. In the case of the RBCS study, the
person who gathered the data testified about its collection and what it
represented. In the case of the CDFA-collected data, a manual detailing
the method by which the data was collected and presented was made
available, and several witnesses familiar with the survey testified
about it.
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
[[Page 54066]]
factor more representative of nonfat dry milk yield and the effect of
buttermilk powder price and cost. The alternatives to the formula
adopted either did not include consideration of the price, cost, and
volume of buttermilk powder relative to those of nonfat dry milk, or
gave those factors too great an influence.
Proposals were made to reduce the butter and cheese product prices
used in calculating the butterfat price and the Class III component
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 any data that
indicates that the customary price difference is not 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
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 set of formulas implemented on January 1, 2000. This
analysis focuses on impacts on milk marketed under all Federal milk
marketing orders, and treats the Federal order system as a single
entity for purposes of generating system-wide price and quantity
changes. Order-specific changes in uniform blend prices and blend
prices plus premiums are estimated as well. Milk marketed in
California, milk marketed under other state regulations and unregulated
milk are treated separately. The hard manufactured dairy product
markets are national.
Comments Concerning Model Analysis
In response to the tentative final decision, several commenters
raised issues regarding model analysis of the effects of changes in
order provisions. Select Milk Producers, Inc., et al. (Select),
expressed reservations about analysis of the Federal order system as a
whole, without including analysis for each order. Select asserted that
use of the Model as a national evaluation masks the damage of a low
Class III price in some orders, such as the Western and the Upper
Midwest where Class III utilization, pooled or not, is high. Select
also contended that a national model ignores the fact that the impact
of higher nonfat dry milk prices and corresponding increases in Class I
and Class II prices may increase national average returns, but do not
have such an effect in areas where Class III use is dominant. Select
claimed that national analysis violates the Agricultural Marketing
Agreement Act of 1937.
The dairy industry model is a national model that includes three
separate marketing areas: the aggregated Federal Milk Order system,
California, and aggregated all other markets. The aggregated Federal
order system includes a minimum Class I differential that is an average
over the 11 orders, as well as the Federal order minimum prices for
Classes II, III, and IV. Changes in the Federal order system prices
adopted in the tentative final decision were reported in Table 1 of the
Economic Analysis available for that decision, both for milk at 3.5
percent butterfat and at average class test. Since Class I
differentials are held constant in the analysis, any changes in Class I
minimum prices must be caused by changes in Class III and Class IV
prices. Blend prices are affected in relation to an order's class
utilizations and the changes in the class prices.
Concerns that markets with high Class III utilizations would suffer
sharp declines in producer income and milk marketings were considered
and dismissed without further analysis because of the minuscule price
changes resulting from the formula changes. The analysis of the
tentative final decision indicates that the Federal order Class III
price (at test) would have decreased by an average of $0.015 per
hundredweight over the five-year period. Even if an order had a Class
III utilization of 100 percent, such a small price change would result
in no observable change in milk supplied. The estimated changes in all
the class prices at test under the tentative final decision were so
small that no single order blend price could have been increased or
reduced by more than about 2 cents per hundredweight, or less than .2
percent. A change of this magnitude has to be considered
``approximately zero'' in an analysis of milk markets. [See Table 1 of
the Economic Analysis for the Tentative Final Decision on Class III and
Class IV Price Formulas].
Select also raised an issue over the use of the model, asserting
that its use could represent post-hearing testimony that is not subject
to cross-examination by hearing participants. Select argued
[[Page 54067]]
that changes in the model between any description of it in testimony at
the hearing and analysis used in the decision would represent evidence
not legitimately part of the record, and concluded that the Secretary
should clearly identify any alterations in the model.
The model used to analyze the tentative final decision was modified
and substantially improved between the preliminary economic analysis (a
summary of which was published with the hearing notice in this
proceeding) and the Economic Analysis for the Tentative Final Decision
on Class III and Class IV Price Formulas. The original model accounted
for milk on a butterfat basis. The improved model accounts for both
nonfat solids and fat solids in milk and allocates the solids among the
various milk and dairy products. The improved model's performance is
much better, particularly with respect to simulating the effects of
program changes on the manufactured dairy product markets which
generate the prices used to drive the Federal milk order pricing
system. Further improvements have been completed recently, including
re-estimating the supply and demand relationships using data from 1980
forward. Previous estimates used data from 1970 forward. The economic
analysis of this recommended decision uses the model as modified, with
new supply and demand relationships documented in the complete Economic
Analysis for the Recommended Decision on Class III and Class IV Price
Formulas.
More to the point, however, is that Federal milk order decisions do
not depend upon the model results. Proposals must have their own
economic substantiation. Testimony and evidence relative to the issues
considered in the proceeding must be submitted to support the need for
changes in order provisions. Thus, the model is not the evidentiary
record for the proposals in this decision. The function of the model is
to evaluate the impacts of the proposed changes on the dairy industry
generally, and particularly to assess if an adequate supply of milk
will be forthcoming to meet the Class I needs of the order marketing
areas. The preliminary economic analysis, published with the hearing
notice, was performed with the intention of providing analysis that the
industry might find useful. In the period between the hearing and the
tentative final decision, the model was improved and an economic
analysis was performed on the tentative decision and made public. The
model-estimated results of implementing the tentative final decision
changes were deemed to have no discernable effect on the quantity of
milk supplied. Thus, it was concluded that Class I needs would continue
to be met in all orders.
In comments filed in response to the tentative final decision,
National Farmers Union (NFU) questioned the baseline assumption that
the price support program would end on December 31, 2000. Subsequently,
the support program was extended for another year, and NFU questioned
whether the results of the analysis would have been different if the
analysis had incorporated an extension of the support program.
The official USDA baseline considers policies and programs as given
at the time of its development. The baseline provides AMS and other
agencies with an official interagency forecast against which to conduct
policy analysis. To have assumed continuation of the support price
program would have required that a number of other assumptions be made,
including the relationship of butter and nonfat dry milk support
prices. Dairy Programs does not create its own baseline because it
might direct debate toward the correctness of the baseline and away
from the issues under consideration. With respect to the effect on the
results, it is not thought that including an additional year of dairy
price support would have much effect.
Scope of Analysis
Impacts are measured as changes from the model baseline as adapted
from the USDA dairy baseline published in February 2001. This baseline
used the Class III and IV pricing formulas implemented on January 1,
2000, as a result of Federal order reform. 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, 2001; (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 71 percent. About 65 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 blend price relative to
the minimum prices of Class III and IV value of manufactured milk.
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 of the formula
changes 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.
Demands for fluid milk and manufactured dairy products are
functions of per capita consumption and population. Per capita
consumption for the major milk and dairy products are estimated as
functions of own prices, substitute prices, and income. Retail and
wholesale margins are assumed unchanged from the baseline. The demands
for fluid milk and soft manufactured products are satisfied by the
eligible supply of milk. The milk supply for manufacturing hard
products is the result of milk marketings minus the volumes demanded
for fluid and soft manufactured products. The remaining volume is
allocated to making cheese and making butter/nonfat dry milk according
to returns to manufacturing in each class. Wholesale prices for cheese,
butter, nonfat dry milk, and dry whey reflect supply and demand for
these products. These prices underlie the Federal pricing system.
Summary of Results
The results of the changes to the Class III and Class IV formulas
adopted under Federal order reform that are recommended in this
decision are summarized using five-year, 2002-2006, 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 54068]]
The advanced Class I base price is the higher of the Class III or
Class IV advance pricing factors. The Class I base price is the Class
IV price in all years of the analytical period for the baseline, while
Class III becomes the Class I base price in 2002 and 2006 under this
decision. The Class I price, at the class average test of 2 percent
butterfat, is slightly above the baseline in each year. This slight
price increase results in small proportional reductions in the demand
for skim milk and 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, which reduces the returns per hundredweight for U.S. milk for
manufacturing.
Producers. Over the five-year period, the changes taken as a whole
result in an increase of about $0.20 per hundredweight in the Federal
order minimum blend price for milk at test. Including the effects of
Class I premiums and the reduced returns from manufactured milk, the
Federal order all-milk price is increased by $0.10 per hundredweight.
Federal order marketings increase by an average 83 million pounds due
to an increase in production in response to higher producer prices.
Cash receipts increase by $136 million (0.8 percent) from baseline
receipts of $17,194 million.
The distribution of the 2002-2006 annual average price changes
across the 11 orders varies with the distribution of Class III and
Class IV utilizations. Estimates of annual average price changes by
order are provided in the economic analysis for this decision.
The five-year annual average U.S. all-milk price increases by $0.07
per hundredweight, and includes an average manufactured milk value
decline of $0.05 per hundredweight. U.S. milk marketings increase by an
average 65 million pounds annually, and cash receipts increase by $126
million (0.5 percent) from baseline receipts of $23,884 million.
Milk Manufacturers and Processors. Annual Class IV and Class II
skim milk prices increase each year for an average of $0.08 per
hundredweight (1.1 percent) for the 2002-2006 period. This increase
results mainly from changing the conversion factor for nonfat dry milk
to nonfat solids from 1.02 to 1.0. The Class I skim milk price
increases by an average of $0.10 per hundredweight. Butterfat prices
decline each year by an average of 1.05 cents per pound.
The Class IV price at test (about 6.82 percent butterfat) declines
by an average of -$0.07 per hundredweight, mainly as the result of a
slight reduction in the butterfat content of Class IV over 2002-2006.
The Class II price at test is unchanged. The Class I price at test
(about 2 percent butterfat) increases on average $0.07 per
hundredweight (0.57 percent).
The annual average Class III price at test (3.82 percent butterfat)
increases by about $0.38 per hundredweight during 2002-2006. From the
2002 and 2003 Class III price increase of $0.47 and $0.48 per
hundredweight, respectively, the changes steadily decline, ending in an
increase of $0.23 in 2006. The major change in the Class III price is
the average protein price increase of $0.18 per pound, ranging from an
increase of $0.22 in 2002 and 2003 and declining steadily to an
increase of about $0.13 in 2006. The change in the Class III price
results primarily from a combination of changes in the protein formula
that reduces the impact of the butterfat price on the protein price.
The major changes in the protein price formula are multiplying the
butterfat price by 0.90, reflecting a 90 percent butterfat retention
rate in the cheese, and replacing the 1.28 factor with 1.17.
Consumers. The expected $0.07 per hundredweight increase in the
minimum Class I price for 2002-2006 results in an average $0.006
increase in the price per gallon of fluid milk for consumers. Annual
consumer costs for fluid milk over 2002-2006 are estimated to increase
on average by about $28 million in the Federal order system and by $26
million in the U.S.
The price of butter is estimated to decrease on average $0.008 per
pound for the period. Cheese is estimated to decrease $0.005 per pound.
Annual consumer expenditures over the five-year period are estimated to
decrease by $10 million on butter, and by $16 million on American
cheese.
A complete Economic Analysis for the Recommended Decision on Class
III and Class IV Price Formulas 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
howard.mcdowell@usda.gov.
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. A
tentative final decision on the issues considered at the hearing was
issued November 29, 2000 (65 FR 76832), and an interim final order (65
FR 82832) became effective January 1, 2001. A preliminary injunction
enjoining portions of the interim final order was granted in the U.S.
District Court for the District of Columbia on January 31, 2001.
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.
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 than the
general population of dairy farmers.
[[Page 54069]]
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/
Prior documents in this proceeding:
Notice of Hearing: Issued April 6, 2000; published April 14, 2000
(65 FR 20094).
Tentative Final Decision: Issued November 29, 2000; published
December 7, 2000 (65 FR 76832).
Interim Final Rule: Issued December 21, 2000; published December
28, 2000 (65 FR 82832).
Preliminary Statement
Notice is hereby given of the filing with the Hearing Clerk of this
recommended decision with respect to proposed amendments to the
tentative marketing 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 30th 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 probable 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 recommended 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).
In addition, this recommended decision is issued in response to
comments received on the tentative final decision (issued November 29,
2000; 65 FR 76832) on the above hearing and is consistent with the
injunction issued by the U.S. District Court for the District of
Columbia on January 31, 2001.
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 the tentative final decision
and this recommended decision. The changes made in the Class IV
component formulas adopted in Federal order reform 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 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 follow the format of the
formulas included in Federal order reform and made effective pursuant
to the injunction granted by the Federal District Court for the
District of Columbia. The formulas revert to using the same butterfat
price calculated from the butter price as in Class IV, and a protein
price formula that includes an adjustment to represent the differential
value of butterfat used in cheese and butterfat used in butter. In the
butterfat adjustment to the protein price, the amount of butterfat
accounted for at its value in butter is reduced to the same amount as
that accounted for at its value in cheese (90 percent), and the 1.28
multiplier is changed to 1.17. The dry whey price, for computing the
other solids price, is unchanged. The whey powder make allowance is
increased from the tentative final decision to recognize the somewhat
greater cost of drying whey than of drying skim milk, and the snubber
on the other solids price is removed.
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. Re-opening of hearing, issuance of a final decision, or issuance of
a recommended decision.
Summary of Changes to the Interim Amendments
This recommended decision differs from the tentative final decision
in several respects and includes summaries of comments submitted on
each of the issues within the discussion of the issue. The key changes
that would be made to the interim order amendments are as follows:
1. In Issue 3c, changes are made to the formulas for calculating
the protein and other solids prices, and the Class III butterfat price
would be the same as that calculated for Class IV on the basis of
butter.
2. In Issue 3d, the changes made in the Class III component price
formulas would result in different effects on Class III component,
skim, and hundredweight prices.
3. In Issue 6b, the classification of frozen cream, plastic cream
and anhydrous milkfat would be changed back to Class III.
4. In Issue 6c, butterfat values would be pooled for the purpose of
calculating producer butterfat prices in the orders in which producers
are not paid on a component basis. In orders under which producers are
paid on a multiple component basis, however, the producer
[[Page 54070]]
butterfat price would be the same as that for butterfat used in Classes
III and IV.
5. In Issue 6d, the butterfat in other source milk used in Class I
is included in calculating the producer butterfat price in marketwide
pools that do not use multiple component pricing, but would continue to
be included in the producer price differential calculation in multiple
component pricing pools.
6. Issue 7 is changed to explain the reasons for issuing a
recommended decision at this point in this proceeding, instead of a
final 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.
Support for using cost of production in the Class III and IV
pricing formulas was reiterated in the comments received in response to
the tentative final decision issued November 29, 2000. The National
Farmers' Union comment expressed disappointment that no portion of the
milk pricing formulas was based on producer cost of production. The
American Raw Milk Producers Pricing Association suggested that the USDA
ignored existing law as written in the 1937 Agricultural Agreement Act,
section 608c(18). Two dairy farmers also mentioned their concern about
the need to follow 608c(18). Another dairy farmer advocated a producer-
influenced supply control/price control system.
As explained in both the proposed rule and final decision under
Federal order reform and in the tentative final decision in this
proceeding, 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 Dairy Farmers of America (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 proposals by NFU and National Farmers Organization (NFO) that
advocated adoption of make allowances that would be adjusted for
changes in indexes reflecting dairy farmers' production costs are
discussed under Issue 3a, General Approaches on Make Allowances.
In this recommended decision, consideration has again been given to
cost of production proposals. 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 (the Act) for milk.
The record of this proceeding contains no new dairy farmer cost of
production data that could be used to reflect both the supply and
demand sides of the market for dairy products. There is no evidence in
the record that either USDA's Economic Research Service or the CDFA
costs of production have ever been used to price milk.
The Act stipulates that the price of feeds, the availability of
feeds, and other economic conditions which affect market supply and
demand for milk and its products be taken into account in the
determination of milk prices. This requirement currently is fulfilled
by the Class III and Class IV component price calculations. If
conditions increase supply costs, the quantity of milk produced would
be reduced due to lower profit margins. As the milk supply declines,
plants buying manufacturing milk would pay a higher price to maintain
an adequate supply of milk to meet their needs. As the resulting farm
profit margins increase, so should the supply of milk. Likewise, the
reverse would occur if economic conditions reduce supply costs. The
price of feed is not directly included in the determination of the
price for milk, but rather is one economic condition which may cause a
situation in which the price of milk may increase or decrease. A change
in feed prices may not necessarily result in a change in milk prices.
For instance, if the price of feed increases but the demand for cheese
declines, the milk price may not increase since milk plants would need
less milk and therefore would not bid the price up in response to lower
milk supplies. Also, other economic conditions could more than offset a
change in feed prices and, thus, not necessitate a change in milk
prices.
The pricing system continued in this decision will continue to
account for changes in feed costs, feed supplies and other economic
conditions, as explained above. The product price formulas adopted in
this rule should reflect accurately the market values of the products
made from producer milk used in manufacturing. As supply costs increase
with a resulting decline in production, commodity prices would increase
as a result of manufacturers attempting to secure enough milk to meet
their needs. Such increases in commodity prices would mean higher
prices for milk. The opposite would be true if supply costs were
declining. Additionally, since Federal order prices are minimum prices,
handlers may increase their pay prices in response to changing supply/
demand conditions even when Federal order prices do not increase.
Additionally, the pricing formulas developed in this decision are
applicable to handlers, since handlers are the regulated parties under
Federal milk order regulation. The formulas are used to establish
minimum prices for milk used in making particular dairy products, not
for determining payments to dairy farmers.
2. Commodity Prices (CME vs. NASS)
As adopted in the interim final rule in this proceeding (published
on December 28, 2000 (65 FR 82832)), commodity prices determined by
surveys conducted by USDA's National Agricultural Statistics Service
(NASS) continue to be used in the component price formulas that
replaced the BFP. This decision recommends 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.
[[Page 54071]]
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 in
establishing what they will pay, or what they will be 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 CDFA 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.
In the comments filed on the tentative final decision, the
proponents of changing from NASS to CME prices commented only that USDA
should reconsider the use of NASS prices. A partner/manager of a dairy
farm stated that there is little correlation between the NASS and
wholesale prices, and questioned the accuracy of NASS survey numbers.
He also stated that block and barrel cheese is traded only between
manufacturers and that they therefore have an influence on setting the
price, especially if the percentage of the product traded is very low.
He argued that a fair price would reflect retail prices or at least
true wholesale price, not the value of the last pound of product
produced.
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 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.
Several of the comments filed in response to the tentative final
decision supported use of the NASS price series to determine product
prices.
[[Page 54072]]
According to the testimony in the record and a number of the
briefs, 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, has not been
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 was
not within the scope of the rulemaking and could not be addressed on
the basis of the hearing record. At the time of the hearing NASS was
not authorized to conduct such activities, but legislation has since
been passed that authorizes mandatory and verified price reporting.
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 CDFA study and
the RBCS study. A marketing cost of $.0015 per pound is added to both
the CDFA costs and the RBCS costs, and the CDFA 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 under
Federal order reform, and results in values that differ little from the
formulas adopted at that time.
For the calculation of the Class III ``other nonfat solids'' price,
neither the CDFA nor RBCS studies included information on the cost of
making dry whey. The tentative final decision determined that the make
allowance for dry whey should remain the same as that for nonfat dry
milk. However, the results of a survey done for this proceeding under
the auspices of IDFA are being recommended in this decision for use in
determining the make allowance for dry whey.
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.
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 component pricing
formulas adopted under Federal order reform. In addition, the National
Cheese Institute (NCI), an affiliate of 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 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
under Federal order reform, using an average of the CDFA cost of
production studies and the 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 CDFA costs and the RBCS costs, as under Federal order
reform, and the CDFA value for return on investment used to adjust the
RBCS costs under Federal order reform. 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 CDFA 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 CDFA cost studies and
the NCI survey. The witness explained that the RBCS study does not
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--those which are not included in the RBCS survey but which
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 to 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 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.
[[Page 54073]]
The witness for IDFA asserted that there is 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 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 and 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 CDFA 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.
Witnesses testifying on behalf of NFU and NFO both supported the
concept of variable make allowances, in which changes in dairy farmer
production cost indexes would be used to adjust handler make
allowances. 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. The witnesses supported such an approach as a means of
addressing the problem of manufacturers being insulated from changes in
supply and demand by their fixed make allowances.
The NFU and NFO witnesses 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
witnesses testified 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. As a result, they argued, producers are left to bear the
burden of changes in supply and demand. The NFO witness characterized a
variable make allowance tied to the cost of producing milk as a market-
oriented system.
The NFU witness described the California milk pricing system, in
which manufacturers' production costs are covered through the make
allowance, as an example of the problems encountered by producers with
the use of product price formulas incorporating make allowances. He
testified that California 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.
In comments filed in response to the tentative final decision, NFU
stated that producers, as well as processors, will fail if they don't
attain their costs of production. NFU also argued in its comments that
under a variable make allowance processors can avoid reduced make
allowances by increasing product prices.
The NFU comment overlooks the fact that the make allowances
included in the component price formulas do not cover all of the costs
of all processors, and probably allow for greater costs than are
experienced by some processors. In this sense, the margins experienced
by processors under product price formulas are variable between plants.
Also, it is likely that processors share some of their margin with
producers in the form of over order prices. The degree to which this
sharing occurs certainly may vary with producers' cost/price
situations, as perceived by processors. Although increased product
prices would have the effect of increasing manufacturing margins, the
ability of processors to increase prices while maintaining sales is
limited by the fact that the marketplace in which they sell their
products is competitive.
There would appear to be no logical or economic reason for changing
make allowances for processing plants because of a change in the cost
of producing milk. If milk is to clear the market, plants must be
willing to accept it. Make allowances that decline as a result of
increasing milk production costs would squeeze plant margins, and
manufacturers will have to choose between not receiving milk, refusing
to receive pooled milk, or paying less than order prices to cooperative
associations for milk used in manufactured products. None of these
outcomes would be in the best long-term interests of dairy farmers,
processors, or consumers. Many dairy farmers, facing increased costs of
production, would have to find alternative outlets for their milk.
Decisions on the part of many processors to cease operating, use only
nonpool milk, or buy milk below order prices likely would result in
very disorderly conditions among dairy farmers looking for outlets for
their milk.
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. Comments filed by Michigan Milk Producers
Association continued to urge caution against logic that suggests a low
risk of setting make allowances too high. The cooperative stated that
not all of its 2,700 members might survive a market adjustment period
if make allowances were set too high, even if theoretically greater
premiums might be returned to producers.
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. This point
of view was reiterated in a half-dozen comments filed in response to
the tentative final decision.
As supported by most of the hearing participants, the make
allowances
[[Page 54074]]
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 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.
In comments on the tentative final decision, IDFA continued to
argue that some legitimate manufacturing costs are excluded from the
RBCS survey and attacked the data gathered as ``inherently suspicious
and unreliable.'' IDFA also stated that the survey is not taken
seriously by some of its participants. Both IDFA and Leprino Foods
Company argued in comments on the tentative final decision that adding
factors for costs excluded in the RBCS study constitutes a less
accurate result than if those costs were included in a comprehensive
study. IDFA also commented that the need to allow for changes in cost
factors that might occur over time (such as recent increases in energy
costs) also supports the need for a make allowance that is too high
rather than one that is too low.
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.
The use of manufacturing plant data from California plants that do
not procure any of the milk that would be priced using those costs
should not cause concern. The costs of manufacturing dairy products may
vary slightly by region, but adoption of representative make allowances
in product price formulas should not fail to use a well-documented
study that includes a large amount of audited data, such as the CDFA
survey.
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 the adoption of overgenerous make allowances. 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.
In comments filed on the tentative final decision, IDFA urged that
USDA use the NCI and CDFA studies for use in determining make
allowances for cheese and whey powder rather than using the RBCS and
CDFA studies. The IDFA comments stated that the characterization of the
RBCS study as neutral and not developed or commissioned for use in this
proceeding was inaccurate, as cooperative associations attending the
National Milk Producers Federation annual meeting were encouraged to
participate in the survey so the results could be used in this
proceeding. Since the RBCS study was developed and has continued for
sixteen years for purposes other than establishing make allowances, and
the methodology did not change from past years for the study used in
the hearing, it is unlikely that it was designed for any purpose other
than the one for which it was developed and has been used for that
period. If the comment is intended to raise concerns that cooperative
associations generally favor lower make allowances, it should be noted
that only manufacturing cooperatives were surveyed. The record contains
ample evidence that many manufacturing cooperatives desire make
allowances just as generous as those favored by proprietary
manufacturers.
A comment filed on behalf of the Association of Dairy Cooperatives
in the Northeast (ADCNE), some of which are national in scope, argued
that use of the NCI data would demean the importance of sworn first-
hand testimony that is subject to cross-examination.
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. Since the record lacks any other data regarding the
cost of making whey powder, the NCI survey results are used for the
make allowance in the other solids formula.
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
decision in the Federal order reform process.
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
[[Page 54075]]
marketing and sales staff, and transporting product to market, as well
as accounting costs associated with the sale of products. The NCI
survey identified a marketing cost of $.0011 per pound of product,
while the 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 (NDA), a cooperative
association in the Pacific Northwest, stated that NDA's 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 per pound.
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 Federal order reform 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, which is 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 CDFA 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 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
to processors 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 a lesser 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.
Two cheese manufacturers, IDFA, and Land O'Lakes (LOL) continued to
argue in their comments on the tentative final decision that make
allowances should be increased, or yields reduced, to reflect shrinkage
between farms and warehouses.
As stated in the tentative final decision, 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 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 products, 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 or to the
amount of component present in the finished product. Both of these
factors in the pricing formulas include consideration of shrinkage.
A comment filed by Lamers Dairy argued that using make allowances
to calculate Class III and Class IV prices but not Class I and Class II
prices constitutes unequal treatment. The comment disregards the fact
that the make allowances in the Class III and Class IV price
calculations are used to determine prices for milk used in those
classes, and that the prices for milk used in Classes I and II are
based on those milk prices. The Class I and II prices are determined
for the purpose of valuing milk in uses that are alternatives to
manufacturing uses. Once the Class III and IV prices have been
established, the Class I and II prices can be calculated using
differentials from the base prices.
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
Butterfat Price. This decision continues to use the NASS price for
Grade AA butter for calculating the butterfat price to be used in Class
IV and to change the manufacturing allowance in the butterfat price
formula by \1/10\ of a cent per pound of butter from the allowance used
under Federal order reform. The .82 divisor in the price formula is
unchanged. The make allowance change is the same as that included in
the tentative final decision, and neither it nor the other factors were
affected by the injunction. However, the injunction resulted in the
same butterfat price formula being used to value both Class III
butterfat and Class IV butterfat.
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 by 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 did not
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
[[Page 54076]]
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. Further, they argued that its adoption 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 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 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 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 price to be used for butterfat in Class III and Class IV 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 since 1.2213 pounds of butter can be made from 1 pound of
butterfat. 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 advance butterfat price plus the applicable Class I
differential.
Contrary to the belief stated by some witnesses, 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 as of June 26, 1998 (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. 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. However, 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
[[Page 54077]]
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. Comments to the
tentative final decision from IDFA and Schreiber Foods continued to
encourage the use of an estimate of the discontinued Grade A price
series for the current formulas. Since it has been about four years
since a publicly-traded price for Grade A butter has been available, 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 CDFA in
calculating the value of butterfat used in butter. An additional 6
cents deducted from the butterfat price calculated from the NASS price
would much more than make up the remaining 1.5-cent difference. Also,
the 4.5-cent CDFA 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 butterfat
price formula should be derived from a combination of the manufacturing
costs determined by CDFA and by RBCS, as they were in the tentative
final decision. The CDFA cost data is divided into two groups
representing high cost and low cost butter plants, with the four plants
in the high cost group manufacturing, on average, about the same
average number of pounds of butter as the seven plants in the RBCS
study. Use of the data for the CDFA high-cost group of butter plants is
more appropriate than use of the weighted average cost for all of the
California 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 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. 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. As in the tentative final decision,
this recommended 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 tentative final decision change to eliminate the
1.02 divisor in the nonfat solids price formula to reflect the
incorporation of dry buttermilk (with a lower product price and higher
make allowance) is continued. This decision maintains the nonfat solids
price formula continued under the injunction.
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. NMPF supported continued use of
a weighted average of the CDFA and the RBCS manufacturing cost surveys,
with inclusion of a marketing allowance and the CDFA factor for return
on investment. NMPF proposed that the NFDM make allowance be $0.140 per
pound.
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
[[Page 54078]]
from $0.137 to $0.1563 per pound, 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 per pound, modified from the level proposed in the
hearing notice. The witness testified that the three AMPI plants
operate at approximately 80 percent of capacity.
No comments were filed that specifically addressed the adopted make
allowance for use in the nonfat solids price.
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
per pound. This value is calculated by using a weighted average of the
RBCS survey and the two less-cost California groups of plants, adding
the CDFA General and Administrative costs and Return on Investment
expenses for those two groups to the RBCS numbers, and adding 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 since 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 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). The elimination of the divisor of the
nonfat solids price formula adopted in the tentative final decision and
continued in effect after the injunction should be maintained.
A considerable portion of the testimony dealing with the nonfat
solids pricing formula pertained to the 1.02 divisor. The divisor is
not strictly a yield factor but 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 1.02 divisor,
adopted under Federal order reform, 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.
The IDFA witness testified that for the 19-month period beginning
with September 1998, the central states' dry buttermilk price had
averaged $0.798 per pound, while the central states' ``mostly'' price
for NFDM averaged $1.043. The LOL 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 progressed, however, the
percentage increased, being at levels up to 100% in late July and
remaining above 85% for the second half of the year in all areas.
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, for a combined weighted average
loss of more than 3.5 percent of nonfat solids. In comparison,
[[Page 54079]]
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 may be 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 or 3 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 the 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 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:
$1.03 - $.014 = $0.89; $0.89 x .957 = $0.85173
----------
$0.88692
(Rounded
to $0.89)
On the basis of this analysis, no multiplier or divisor is necessary in
this formula.
A number of comments were filed in response to this aspect of the
tentative final decision, with some supporting the use of a divisor of
``1,'' two comments suggesting that a divisor of 1.01 would be more
appropriate (but one determining that such a change would not be
possible on the record of this proceeding), and several insisting that
the above analysis is flawed by use of incorrect or inappropriate data
and that the divisor should be returned to the 1.02 level in effect
before January 1, 2001.
The IDFA comments stated that, in the interest of establishing
minimum pricing, no more than 70 percent of the NFDM value should be
assumed for the BMP price and that 3 cents should be added to the BMP
make allowance instead of 2. IDFA also indicated that the formula
should include shrinkage. NDA and LOL criticized the use of the
California yield data in determining the comparative yields of NFDM and
BMP, both because some of the data reflected information that included
powder with higher-than-allowable moisture and because no witnesses who
had participated in the survey were present to testify about it. LOL
criticized USDA's use of Western prices rather than the Northeast and
Central prices quoted by witnesses who discussed the relative values of
NFDM and BMP.
Comments filed by Agri-Mark protested elimination of the 1.02
divisor, arguing that USDA relied on a casual remark about the
difference between the cost of manufacturing BMP and NFDM rather than
on detailed cost information as in the other make allowances. Agri-Mark
also stated that the role of Class IV in balancing surplus cream from
Class I use increases the ratio of BMP to NFDM over that calculated
from an assumption about uses of the nonfat solids in producer milk.
Criticism of use of the Western BMP and NFDM price series to
analyze the relative values of BMP and NFDM in the tentative final
decision did not consider the fact that the Western price (mostly)
series is the only one with an uninterrupted data series for the five
years considered. In addition, the percentage of the NFDM price
represented by the BMP price for the Western region was lower during
each of the years 1996-2000 than for the Central region; and very
similar, with some years averaging higher and some lower, to the
Northeast region. Criticism of the CDFA yield data ignores the fact
that the yield factors used in the initial analysis for the tentative
final decision adjusted the relative ``weighted average'' yields of BMP
and NFDM to the ``low'' yield.
The hearing record contains enough information on the issue of the
relative weights, values, and costs of manufacturing NFDM and BMP to
support the conclusion reached in the tentative final decision about
the appropriate divisor in the nonfat solids price formula. The .96
divisor considered in the proposed rule on Federal order reform
represented the pounds of nonfat solids in NFDM rather than the yield
of nonfat dry milk from nonfat solids. Use of the divisor of 1 adopted
in the tentative final decision accounts for all of the nonfat solids
used in Class IV and results in 3-4 cents less per pound of nonfat
solids (over a NFDM price range of $.86-$1.10) than the value that
would be calculated if the formula attributed all of the Class IV skim
value to NFDM.
The Agri-Mark comment emphasized that the ratio of BMP to NFDM milk
considered in the nonfat solids price calculation should be calculated
on the basis of the butterfat content in Class IV because butterfat
surplus to Class I use is used in butter. The Agri-Mark comment
observed that the butterfat percentage of milk used in Class IV in the
Northeast over a 3-month period averaged 5.67%.
Even if the national average of butterfat in Class IV (6.4%) is
used to
[[Page 54080]]
determine the breakdown between nonfat solids used in BMP and nonfat
solids used in NFDM, less than .8 pounds of nonfat solids out of the
8.4 contained in a hundredweight of Class IV milk at 6.4% butterfat
should be attributed to use in BMP. In effect, the price of each of the
8.4 pounds would be reduced by 3-4 cents. Such a calculation results in
25.2-33.6 cents per hundredweight of milk containing 6.4% butterfat to
cover the additional costs of making .8 pounds of BMP and the lower
value of .8 pounds of BMP compared to the NFMP manufacturing cost and
price. A 3-cent additional cost per pound of manufacturing .8 pounds of
BMP would equal 2.4 cents, and a 25-percent reduction of the BMP value
from that of NFDM would equal approximately 20 cents. These
calculations would still leave 2.8-11.2 cents per hundredweight to
cover any additional costs of making and selling BMP over those of
NFDM.
It should be noted that the additional 3 cents per pound cost of
making BMP is on the high end of the information in the hearing record,
and that the 25% reduction in value of BMP compared to NFDM is on the
low end. Over the past 5 years, only during the period cited by
witnesses testifying about the relative values of BMP and NFDM and
during the first 4 months of 2000 has the BMP price as a percentage of
the NFDM price fallen below eighty percent. In addition, the preceding
calculations assumed that all of the nonfat solids not used in NFDM
were used in BMP, whereas some are used in whole milk powder, which has
a higher value than either NFDM or BMP. Therefore, elimination of the
1.02 divisor is appropriate.
c. Class III Butterfat, Protein, and Other Nonfat Solids Prices
In a change from the orders promulgated under the Federal order
reform process, the tentative final decision calculated a Class III
butterfat price from the value of butterfat in cheese rather than using
the butterfat price calculated from the value of butter for both
Classes III and IV. The Class III butterfat price in the tentative
final decision was calculated to represent the value of the component
in the NASS cheddar cheese price, as was a revised protein price
formula.
Before the interim final rule became effective on January 1, 2001,
several petitions were filed requesting the Secretary to delay
implementation because industry participants objected to the effects of
the separate Class III butterfat price. Implementation could not be
stayed because of the Congressional deadline on the rulemaking
procedure, and partial implementation was not possible because the
interim final rule had been approved by producers in its entirety.
Before the separate Class III and Class IV butterfat prices could
become effective, implementation of the separate butterfat prices was
enjoined in the Federal District Court for the District of Columbia at
the urging of organizations representing most of the interests in the
dairy industry. The Court's order returned the price formulas for the
Class III components to their earlier forms, with the new make
allowances and cheese moisture adjustment incorporated.
By the end of the comment period, comments representing nearly 100
interested parties from most segments of the industry were received
that objected to separating the Class III and Class IV butterfat prices
and reducing the level of the protein price. The comments urged USDA to
continue to calculate the Class III butterfat price on the basis of the
value of butterfat in butter, and return to the Class III price formula
formats in use before effectuation of the interim final rule.
Several reasons were given for rejecting the change to Class III
component prices based on the contribution of butterfat and protein to
cheese yield. Numerous commenters cited the negative effects of a
marked increase in the cost of milk for use in high-fat cheeses and the
incentive created for handlers to substitute lower-valued Class IV
forms of butterfat for use in cheese-making. Others stressed the
difficulties created by the decision in marketing cream. Several
commenters argued that the shift in value from protein to butterfat
caused by the decision did not make sense in light of the importance of
protein in cheese-making, and that the reduced protein price would send
incorrect economic signals to dairy farmers. One particular concern was
the potential significant reduction in the Class I skim value if the
Class III price at 3.5 percent butterfat became the mover for the Class
I price.
Based on comments received, this decision recommends that the Class
III butterfat price be the same as the Class IV butterfat price,
calculated from the value of butterfat in butter. In addition, the
portion of the protein price formula that adjusts the protein price to
accommodate the differential value of butterfat in cheese, as opposed
to butter, is incorporated in the formula. Technical corrections to the
protein price formula are recommended that should make the protein
price correlate somewhat more closely with the cheese price than has
been the case with the earlier formula.
The tentative final decision made only one modification 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). That change, to adjust the price
of 500-pound barrels to 38 percent moisture instead of the 39 percent
moisture price currently reported by NASS, is continued in this
decision. Also as in the tentative final decision, this decision would
reduce the make allowance for cheese from 17.02 to 16.5 cents per
pound.
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 (14 cents in the tentative final decision) to 15.9
cents per pound of dry whey.
Class III Product Price (Cheese). Several proposals included in the
hearing notice would, if adopted, have changed 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 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 in Issue 2, 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.
Several parties testified that the NASS weighted average cheese
price should include the value of 640-pound block cheese in the cheese
price computation. They contended that such inclusion would improve the
reliability of the average cheese price by adding a substantial
quantity of cheese to the price survey. Witnesses' estimates of the
[[Page 54081]]
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.
In comments filed on the tentative final decision, IDFA stated that
USDA had erred by excluding 640-pound blocks. IDFA reiterated the
argument that 640-pound blocks represent as much as 27 percent of total
cheddar cheese production. Furthermore, the comment noted that past
data-collection problems are irrelevant because ``all participation in
NASS surveys regarding data used to calculate federal order minimum
prices is now mandatory.'' IDFA concluded that the argument that 640-
pound blocks should not be used due to their being made on a custom
basis to customers' specifications is not valid because adjustments can
be made, as they are for moisture in barrel cheese.
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. One witness noted that much of the commerce
in 640's is made on a long-term contractual basis and as such would
rarely be reflective of changing market conditions.
ADCNE's comments on the tentative final decision reiterated USDA's
position, stating that ``the market in 640-pound blocks of cheddar
cheese does not involve sufficient buyers and sellers in arms-length
transactions to provide good data to establish the Class III price for
producer milk in all federal milk orders.''
As stated in the tentative final decision, standardized pricing
cannot be developed without a standard identity for the product, which
640-pound blocks lack. In addition, there appears to be an insufficient
volume of 640-pound block cheese transactions to warrant inclusion. At
the beginning of the NASS survey, price data for 640-pound blocks 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.
Testimony from witnesses representing organizations that manufacture
cheese in 640-pound blocks, and who favored inclusion of such product
in the NASS survey, stated that the 640-pound blocks manufactured by
their organizations are used internally, making that cheese ineligible
for inclusion. Therefore, even though price reporting is now mandatory,
640-pound blocks of cheese do not meet the criteria necessary for the
prices of these products to be eligible for inclusion in the NASS
survey.
Elimination or reduction to one cent of the three-cent adjustment
that is added to the barrel price for computing the weighted average
cheese price was advocated in testimony at the hearing, comments
contained in post-hearing briefs, and comments responding to the
tentative final decision. 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. DFA and ADCNE argued, in a
brief filed on behalf of both parties, 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. In comments responding to the tentative final
decision, ADCNE argued that the 3-cent adjustment is representative of
the historical difference in market value between barrel cheese and
block cheese after adjustments for moisture.
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.
In comments filed by Leprino Foods Company (Leprino) on the
tentative final decision, Leprino argued that comparisons of the block
and barrel cheese prices from May 1995 through December 1999 are not
valid because of artificial market distortions. Leprino stated that
valid relative price data is available only for calendar year 2000,
during which the average spread is 1.54 cents. Leprino continued, in
its comment, that the price spread between blocks and barrels does not
move in lock-step because it is affected by many factors, and will
continue to be driven by current market forces.
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
supports maintaining 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 content represented by the cheese
price survey would result in overstating 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.
[[Page 54082]]
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.
In several comments on the tentative final decision, commenters
stated that the 38-percent moisture adjustment to the barrel price
requires an adjustment to 1 cent and not 3 cents for the price spread
between 500-pound barrels and 40-pound blocks. Other interested persons
filed comments supporting both adjustments. DFA argued in its comment
that eliminating either adjustment should result in use of only 40-
pound block cheese prices.
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. Thus, the NMPF
supported adoption of a cheese make allowance of $0.1536 per pound of
cheese. Several witnesses representing cooperative associations
supported the NMPF $0.1536 proposal but also would have included a cost
factor for 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.
Although ADCNE, in its comments on the tentative final decision,
supported the use of California data as compiled and audited by a state
agency, ADCNE disagreed with inclusion in the cheese make allowance of
the CDFA ``general and administrative expense'' item, which added 1.9
cents per pound to the make allowance. ADCNE described this allowance
as ``generous, to say the least,'' as it represents $2-$3.5 million for
the newest, largest, and most efficient cheese plants, and stated a
preference for having some basis in testimony before building that sort
of expense level into plant costs at the expense of minimum producer
prices.
The general and administrative expense was one of the cost factors
included in the CDFA weighted average cost study, but not in the RBCS
study. Therefore, it must be added to the RBCS data to make the two
cost studies comparable.
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 the general and
administrative expense of $0.0190, both of which were included in the
CDFA weighted average cost, were added to the RBCS study, which
included neither factor. The resulting adjusted costs for each survey
are $0.1708 for CDFA and $0.15996 for RBCS. 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.
In a comment filed in response to the tentative final decision, NFU
stated that the reduction in the cheese make allowance should have been
greater than $.0052, but that the cooperative could support an
increased make allowance if it were tied to producer cost of production
and market price through implementation of a variable make allowance.
The $.165 make allowance is based on actual costs discovered by two
surveys, the conduct of which were open to review in the hearing
record, and is very close to the results of another that was conducted
in a somewhat less accessible manner. There is no basis in the record
for adopting a lower make allowance and, as discussed earlier, no
acceptable rationale for implementing variable make allowances.
Class III Butterfat Price. As discussed in the introductory portion
of the Class III price section of this decision, above, the Class III
butterfat price adopted in the tentative final decision was changed by
a court injunction to be the same as the Class IV butterfat price.
Based on evaluation of that decision and the comments received, this
decision recommends that the butterfat prices for all classes of use be
based on the value of butterfat in butter. The order will refer to both
the Class III and Class IV butterfat prices as ``the butterfat price,''
as it did previously.
The tentative final decision was based on the observation that
market
[[Page 54083]]
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. Analysis shows that there is
very little relationship between the cheese price and either the
current butterfat price or the current 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 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.
Although reflection of the value of a manufactured product in the
prices for the milk components that are instrumental in the yield of
that product would require that the Class III protein and butterfat
prices be tied more directly to their value in cheese than the result
obtained from the Federal order reform price formulas, that outcome
cannot be accomplished on the basis of this hearing record. However,
any distortion between the Class III butterfat and protein prices and
the cheese price should be ameliorated partially by the following
changes recommended in the protein formula.
Protein price. The tentative final decision on the hearing record
for this proceeding derived formulas for calculating a Class III
butterfat price and a protein price that considered only the
contribution of each of those components to cheese yield and resulted
in a 100 percent correlation with the cheese market. Therefore, the
individual factors in the portion of the earlier protein price formula
that adjusted the contribution of protein to cheese yield to account
for differences in value between butterfat used in cheese and in butter
and accounted for much debate in the hearing record were not considered
in any detail.
The protein price formula resulting from the tentative final
decision took the following form:
(NASS weighted average cheese price--.165) x 1.405. This formula
eliminated the following butterfat adjustment portion of the earlier
protein price formula:
+ {[(NASS weighted average cheese price--.165) x 1.582]--[the
butterfat price]} x 1.28
This butterfat adjustment portion of the formula represents the
difference between the value of butterfat used in cheese and the value
of butterfat used in butter. The butterfat adjustment portion became
unnecessary when the Class III butterfat price was calculated from the
value of butterfat in cheese in the tentative final decision.
Reconsideration of the protein formula in light of the
determination that there should be only one butterfat price for Class
III and Class IV results in the following recommended protein price
formula:
[(NASS weighted average cheese price--.165) x 1.405] + ({[(NASS
weighted average cheese price--.165) x 1.582]--[the butterfat price
x .9]} x 1.17).
Leprino, in response to the tentative final decision, urged that
the 1.405 factor used to reflect the yield effect of one pound of
protein in milk be reduced to 1.367 because the 1.405 factor assumes
that true protein contains more casein (83.3%) than is supported by
testimony in the record (82.2--82.4%).
The hearing record contains much discussion of the derivation of
the 1.32 cheese yield factor per pound of crude protein used to
determine the 1.405 cheese yield factor per pound of true protein. Two
explanations of the factor were advanced. The first involved assumption
of 75 percent casein retention, 90 percent butterfat retention, and 38
percent moisture content in the cheese. Holding butterfat and moisture
constant and changing the protein content by .1 results in a .1318
(rounded to .132) pound change in the cheese yield, or a one percent
change in protein results in a 1.32 pound change in cheese yield. The
second method assumes 78 percent casein retention, 90 percent butterfat
retention, and a 38 percent moisture content in the cheese. In this
second method the cheese yield is computed using a 3.2 percent protein
and zero butterfat. The resulting cheese yield is divided by 3.2 to
arrive at 1.316 pounds of cheese per pound of protein. The 1.316 was
rounded to 1.32. Given these particular assumptions, both methods
resulted in the same answer--1.32. A witness for National All Jersey
testified that the second method is the appropriate procedure and was
the one used to compute the 1.32 yield factor in past Federal order
protein price decisions. However, if 78 percent is a more appropriate
factor to use as the appropriate value for casein retention, then the
first method yields a 1.37 yield factor. The 1.32 factor was used in
the protein price formula in the Federal order reform proposed rule and
in the five Upper Midwest markets beginning in January 1996 to compute
the protein price prior to Federal order reform. The 1.32 yield factor
generally has been accepted as an appropriate factor to use for
computing a protein price.
When the final decision on Federal order reform was issued, the
protein price computation was changed to compute the protein price on
the basis of true protein rather than crude protein, which had been the
basis for protein price computations in the past. As in determining the
1.32 factor, certain assumptions were made to arrive at the current
1.405 yield factor. The 1.405 factor was computed based on the
assumption that milk testing 3.3 percent crude protein has an
equivalent true protein test of 3.1 percent. The relationship between
crude protein and true protein was based on the results of laboratory
testing of producer milk for both crude and true protein. The resulting
percentage change in protein is 106.4516 (3.3/3.1), which was then
multiplied by 1.32 to arrive at 1.405. In addition, use of the 1.405
yield factor when pricing true protein results in a protein value
equivalent to use of the 1.32 factor in pricing crude protein.
Regardless of which procedure is used, assumptions must be made
with regard to the various factors used in the formulas. These
assumptions directly affect the outcome of the factors used in the
protein formula and the resulting protein price and value. Since use of
the 1.405 factor results in an equivalent protein value to use of the
1.32--and there was no testimony or comments filed that the 1.32 factor
was not appropriate--there is no reason to change the 1.405 cheese
yield factor in this decision.
Leprino argued that the appropriate casein recovery should be 82.3
percent which, when using the second procedure above with a 2.99 true
protein level, would result in a factor of 1.388. However, the majority
(\2/3\) of the difference between 1.405 and the 1.367 factor advocated
by Leprino accounts for shrinkage between the farm and the cheese vat.
The issue of including shrinkage as an additional make allowance or
yield factor in the calculation of component prices has been discussed
earlier in this decision and determined to be inappropriate.
Eliminating shrinkage from the 1.367 protein factor results in a factor
close to the 1.405. In fact, using the second procedure above and a
82.95 casein recovery, which an expert witness testified is equivalent
to the 78 percent casein recovery used for crude protein, and a true
protein test of 3 percent, which is equivalent to the 3.2 percent
[[Page 54084]]
used in the second procedure, the protein factor would be 1.3997, not
significantly less than the 1.405. Testimony from other parties stated
that the 1.405 is appropriate and should be continued.
Based on the hearing record, comments filed in response to the
hearing and tentative final decision, and the above analysis, there is
no justification for reducing the 1.405 cheese yield factor.
Since all of the butterfat used in Class III is to be priced on the
basis of its value in butter, an adjustment must be made to account for
the difference in butterfat values between cheese and butter. The
butterfat adjustment portion of the protein price formula is the method
chosen for making that adjustment. The first part of the butterfat
adjustment portion of the protein price formula calculates the value of
butterfat in Cheddar cheese using the Van Slyke formula, assuming a 90
percent recovery of butterfat in the finished cheese. The resulting
cheese yield factor attributable to butterfat is a multiplier of 1.582.
Testimony in the hearing record and comments on the tentative final
decision urged adoption of different multipliers in the butterfat
adjustment portion of the protein price formula that represents the
effects of butterfat on cheese yield. Suggestions to increase the
butterfat recovery factor of 1.582 (to 1.6 or 1.617) were made by DFA;
Select, Elite, et al.; and National All-Jersey, Inc. These commenters
relied on hearing testimony that butterfat recovery in cheddar cheese
generally ranges between 90 and 93 percent, although Kraft testified
that their butterfat recovery is lower. The commenters favored use of a
factor that reflected 91 or 92 percent fat recovery because that level
of recovery is common. In a comment filed by Leprino, the cheese
manufacturer urged that the 1.582 factor not be increased, as any
increase would exacerbate the overvaluation of whey fat in the current
formula and because the 90 percent recovery factor reflects results
from many cheese vats installed prior to the late 1980's.
Even though many cheese makers may be able to achieve a higher fat
retention in cheese, use of the 1.582 factor representing 90 percent
fat recovery in cheese continues to be appropriate. As a result of the
90 percent level, butterfat in cheese is not overvalued, and those
cheese makers who fail to recover more than 90 percent of the fat will
not suffer a competitive disadvantage. The preponderance of the record
indicates that most cheese manufacturers should be able to obtain a 90
percent butterfat recovery.
In testimony at the hearing and comments filed on the tentative
final decision the issue was raised of whether the butterfat adjustment
portion of the protein price formula in which the value of butterfat in
butter is subtracted from the value of butterfat in cheese is based on
equivalent amounts of butterfat. The 1.582 factor represents 90 percent
recovery in cheese of one pound of butterfat used in its manufacture,
while the butterfat price represents the value of one pound of
butterfat used to make butter. Clearly, subtracting the value of a
pound of butterfat in butter from the value of .9 pounds of butterfat
in cheese reduces the actual value of butterfat used in cheese.
Therefore, the value of butterfat used in butter should be reduced by
10 percent in this calculation.
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.
Such a factor is necessary to reflect the fact that there is more than
one pound of butterfat in cheese for every pound of protein.
The record supports a conclusion that when the price of butter
increases, the price paid for milk used in cheese and for milk
delivered by producers will decline if the milk has a fat to protein
ratio of less than 1.28, and decline at a more rapid rate than that at
which the butter price increases. According to the record and numerous
comments filed, most milk delivered by producers has a fat-to-protein
ratio less than 1.28.
In a number of the comments filed in response to the tentative
final decision, commenters argued that this factor should be reduced--
to 1.22, 1.19, or 1.17--to better reflect the fat-to-protein ratio in
producer milk. The factor, which originally appeared in a comment filed
early in the Federal order reform process as 1.20, was calculated by
dividing 1.582 by 1.32. When the change was made from crude protein to
true protein, 1.20 was multiplied by 1.0645 to reflect that change,
becoming 1.28. The recommended factor of 1.17 in the protein price
formula represents a minimum value for the ratio of butterfat to true
protein in producer milk. Its use assures that the value adjustment for
butterfat in butter to butterfat in cheese included in the protein
price formula accounts for the full amount of butterfat in producer
milk.
The Alliance of Western Milk Producers argued in a comments filed
in response to the tentative final decision that the Class III
component price formulas adopted in that decision would lead to
disorderly marketing and provide an incentive for processors to seek
alternative sources of butterfat, resulting in negative effects on
producer income. The Alliance favored a return to the Federal order
reform Class III component price formulas, but suggested that a snubber
to prevent the butterfat value adjustment to the protein price from
becoming negative would mitigate the potential for undervaluing protein
under the formula.
Although the protein formula recommended in this decision would
still allow the butterfat value adjustment to have a negative effect on
the protein price, use of the .9 multiplier in the butter portion of
the butterfat value adjustment and reduction of the 1.28 multiplier to
1.17 should reduce the magnitude of that effect.
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 the
14 cents per pound adopted in the tentative final decision to 15.9
cents per pound of dry whey to reflect a higher cost of drying whey
than of drying nonfat dry milk. This decision is also changed from the
tentative final decision to remove the snubber in the other solids
formula that would prevent the other solids price from falling below
zero.
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
[[Page 54085]]
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 NMPF 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 make allowance for nonfat dry milk adopted under the
tentative final decision is $0.140, this procedure would result in a
dry whey make allowance of $0.150.
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 manufacturing cost 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 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.
Comments on the dry whey make allowance portion of the tentative
final decision generally followed the lines of the testimony in the
hearing record. WSDPTA favored maintaining the 14-cent make allowance
adopted in the tentative final decision, and ADCNE/DFA supported not
using the NCI survey on the manufacturing cost of dry whey. IDFA,
Leprino, and Northwest Dairy Association advocated adoption of a dry
whey make allowance of at least 15.92 cents per pound, the level
determined in the NCI survey. These comments cited testimony in the
record that the cost of drying whey is as much as 2.6 cents greater
than that of drying skim milk, a calculation that would result in a
make allowance of 16.6 cents. Kraft favored adding a value reflecting
the reduced value of butterfat in whey to the whey make allowance and
increasing the make allowance by at least 2 cents.
Since information regarding the costs of drying whey was not
available from the sources used for determining the other make
allowances in product price formulas, the tentative final decision
determined that the dry whey make allowance should remain the same as
that for nonfat dry milk. However, that determination should be changed
to reflect testimony and other evidence in the hearing record that the
cost of drying whey is greater than that of drying nonfat dry milk.
The other solids price will be computed by subtracting the make
allowance of $0.159 from the NASS weighted average dry whey price and
dividing the result by .968. The differential costs of manufacturing
whey powder, from one source, over those of nonfat dry milk, from
others, do not provide close enough agreement with the NCI-sponsored
survey to use them 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 either operation.
In lieu of other studies and direct evidence of the total cost of
drying whey, the NCI-commissioned study results, rounded to the nearest
1/10 cent, should be used for determining the make allowance.
Snubber/Other Solids Price. The tentative final decision snubbed
the other solids price at zero. Thus, if the NASS dry whey price minus
the make allowance resulted in a negative number, the other solids
price would become zero. Michigan Milk Producers Association supported
the inclusion of such a ``snubber'' concept for the whey price in a
brief, citing testimony in which the DFA witness referred to the
difficulty of explaining to producers a negative component price.
Snubbing the other solids price to zero would have prevented it from
negatively affecting the value of other Class III components or having
a negative impact on the producer price differential. Support was
expressed for use of the snubber in two comments.
The snubber in the other solids price formula was opposed in
comments filed by two parties. Leprino stated that sound policy should
allow not only positive, but negative net revenues to be reflected in
the milk price to prevent overvaluing milk. IDFA opposed the snubber on
the grounds that it would prevent manufacturers of dry whey from
covering all manufacturing costs if wholesale prices for dry whey
failed to fully cover manufacturing costs. Both commenters suggested
that if the component price were to become negative, the negative value
could be pooled as part of the producer price differential, as inferred
by the DFA witness.
The prices calculated for the components in Class III milk are
intended to reflect the value of those components in the products from
which the prices are calculated. Use of a snubber to limit the other
nonfat solids price would be inconsistent with the purpose of a pricing
formula to reflect a component value and would appear to be an
arbitrary adjustment to the price formula. After a thorough review of
the record, including briefs and the comments on the tentative final
decision, USDA has determined that the snubber on the other solids
price should be eliminated.
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
[[Page 54086]]
to the respective component prices, but also to the resulting Class III
and Class IV skim milk and hundredweight milk prices at 3.5 percent
butterfat. The changes discussed in this portion of the decision are
relative to the formulas resulting from Federal order reform. The
calculations that follow, and those included in the model analysis of
this recommended decision, show some increase in the level of the Class
III price. USDA believes that the Class III pricing formulas
incorporated in this decision are more technically correct than those
adopted as a result of Federal order reform because they are based on
more complete information derived through the formal rulemaking
process.
It is important to note that these calculated class price
differences, or the ``static effect'' of the recommended changes, 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 because
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 January 2000 through July 2001.
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 cheddar cheese (39 percent
moisture) market ranged from a low of $1.0245 per pound during November
2000 to a high of $1.6434 per pound during July 2001. The November low
was about 7.5 cents below the $1.10 per pound support price for 40-
pound blocks of cheddar. During this same 19-month period the NASS
weighted average nonfat dry milk price showed little movement until
July 2001, ranging from a high of $1.0165 per pound during January 2001
to $0.9634 per pound during July 2001. The July 2001 decline was the
result of a reduced support price. In fact, the nonfat dry milk price
stayed within about one cent of support over the January 2000 through
June 2001 period.
Unlike the cheese and nonfat dry milk market, the butter price did
not trade anywhere near the butter support price of $0.65 per pound or
the revised support price of $0.8548 per pound. The butter price traded
in a range from a low of $0.8820 per pound during January 2000 to a
high of $1.9263 per pound during June 2001. 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 may result in misleading conclusions.
The formulas used for computing the Class IV prices are unchanged
from those contained in the interim final decision, which currently are
being used.
Changing the 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 19-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 $0.0141 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 per hundredweight, 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
$0.127 per hundredweight. The calculated 3.5 percent Class IV milk
price would increase by an average of $0.118 per hundredweight,
reflecting the net difference between the 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 price would be calculated to be higher by $0.011 per
pound over the 19-month period January 2000 through July 2001. Use of
this cheese price increase in the recommended protein price formula
results in an increase of 3.6 cents per pound of protein. The decrease
in the make allowance from $0.1702 to $0.165 in the recommended protein
price formula accounts for an increase of 1.7 cents per pound of
protein. The two changed factors in the protein price formula (0.9 and
1.17), using data for the 19-month period, result in an increase in the
calculated protein price averaging approximately 14.8 cents. The total
increase in the protein price as a result of three changes to aspects
of the Federal order reform protein price formula (moisture adjustment,
make allowance, and formula changes) would be approximately 20.6 cents
above the price that would have been computed based on the formula
prior to 2001.
At the same time, the increase from $0.137 to $0.159 in the dry
whey make allowance for calculating the other solids price results in a
calculated decline in the other solids price of $0.0227 over the 19-
month period. Elimination of the snubber on the other solids price
would have made no difference during the period considered. The
combination of the changes in both the protein price and the other
solids price would have resulted in an average of about $0.50 per
hundredweight increase in the Class III skim milk price over the 19-
month period if cheese and dry whey prices were unchanged.
The changes in the protein price formula improve significantly the
relationship between the cheese price and the protein price, from a
correlation coefficient of 0.54, using the Federal order reform protein
formula, to a correlation coefficient of .70 using the formula
recommended in this decision. In addition to improving the relationship
between the cheese price and the protein price, the recommended protein
formula reduces the variability of the protein price and moderates the
extremes that occurred under the Federal order reform protein formula,
thereby giving producers a more consistent and positive protein price
signal.
The calculation of the Class III price at 3.5 percent butterfat,
based on the formulas contained in this decision, would have averaged
about $0.48 per hundredweight above the 3.5 percent Class III price
based on the Class III formulas implemented under Federal order reform.
In comments filed in response to the tentative final decision, IDFA
and Leprino urged that in no case should the Class III price be
enhanced relative to price levels under Federal order reform. Leprino
reiterated arguments addressed earlier as to the importance of assuring
that yield factors not be too high or make allowances too low for
cheese plants to make enough profit to maintain their operations. IDFA
focused on the negative long-term effects on producer prices, as
described in USDA's analysis, of adopting enhanced Class III and Class
IV prices. As described in detail above (in Issue 3c), the factors
incorporated in the Class III component price calculations are based
solidly on testimony and data in the hearing record.
The record provides ample basis for believing that the margins
allowed for cheesemakers under these recommended price formulas should
be entirely adequate for them to maintain
[[Page 54087]]
their operations. As observed at the hearing and in comments filed in
response to the tentative final decision by the expert witness from
Cornell, a break-even point would be where the value of cheese plus
whey cream plus whey powder equals the value of the milk price plus the
make allowances. According to the witness, under Federal order reform,
and to a greater extent in the tentative final decision, the total
value of these products exceeded the sum of the milk price and the make
allowances.
The discussion at the hearing centered specifically on the make
allowance used in the protein formula, with the implication that it
represented the entire make allowance for cheese. Unlike the Class IV
price formulas, where the make allowances used in the butterfat and
nonfat solids price formulas can be attributed directly to butter and
nonfat dry milk, the make allowances used for butterfat, protein, and
other solids in the pricing formulas for Class III must be looked at in
aggregate. All three components are involved in the cheesemaking
process and have a significant effect on cheesemakers' costs and
returns.
Gross margins (including make allowances) can be compared using
both the cost of milk based on the Federal order reform Class III
formulas, and the cost of milk based on the Class III formulas
recommended in this decision. For this purpose, gross margins are
defined as the difference between the sum of the selling price of
cheese and dry whey based on monthly average NASS prices and whey
butter, estimated at nine cents below the NASS AA butter price, and the
cost of milk under the two sets of formulas. The gross margins
therefore reflect the amount of money available to processors to
procure, process, and market the end products of milk used in Class
III: cheese, whey butter and dry whey.
Using Class III component tests from the Upper Midwest market to
estimate product yields, the estimated gross margins would have
averaged approximately $3.00 per hundredweight using the Federal order
reform Class III formulas and $2.52 per hundredweight over the 19-month
period of January 2000 through July 2001 if the recommended Class III
formulas had been in effect. These gross margins are significantly
different than the cheese make allowances of $0.1702 and $0.165 used in
the formulas, which would be equivalent to approximately $1.70 and
$1.65 per hundredweight of milk with a estimated yield of 10 pounds of
cheese. Such a difference is expected since the make allowances for
whey butter and dry whey are significantly lower than the cheese make
allowance. Any residual value can be used by the handler to improve
returns or increase producer pay prices. Also, the lower gross margins
under the recommended formulas could lead to reduced over-order
premiums to reflect increased milk costs and maintain current gross
margins.
4. Class Price Relationships
The price relationships between classes established 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.
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. 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 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 70-cent Class II differential above the
Class IV price. In support of Proposal 31, 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 in support of Proposal 31 stated 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 (Proposal 30) 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 Proposal 30 nor Proposal 31 were adopted under the
tentative final decision.
In comments on the tentative final decision filed by ADCNE and
fully supported by DFA, consideration of Proposal 30 was opposed as
being beyond the scope of the Congressional mandate and not fully
debated at the hearing. ADCNE further opposed any modifications to
Proposal 30, such as the Family Dairies' testimony supporting a
weighted average Class I price mover, or to a similar proposal relative
to the Class II price, that would change the basis for Class I and
Class II prices or Class I and Class II differentials. ADCNE continued
that there was no evidence presented at the hearing that would support
the substantial revenue reductions to farmers throughout the Federal
order system which Proposals 30 and 31 would cause. ADCNE urged that
the conclusions of the tentative final decision to deny proposals 30
and 31 be affirmed.
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
[[Page 54088]]
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
A proposal that was not included in the hearing notice was made at
the hearing by a Family Dairies, USA, witness on behalf of that
cooperative and the Midwest Dairy Coalition, which represents 13
additional organizations representing dairy farmers. The proposal would
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.
In testimony at the hearing, the Family Dairies representative
complained that 10 percent of production under Federal orders (milk
used to make nonfat dry milk) has been driving the Class I price that
applies to 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
describing 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.
An argument stated in another brief stated 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.
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.
A brief filed by a 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.
Based on analysis of the hearing record and briefs filed by
interested persons, the tentative final decision continued use of the
higher of the advance Class III or Class IV prices as the mover for
Class I prices.
In comments on the tentative final decision, the Midwest Dairy
Coalition repeated its position that the existing mover should be
changed to a weighted average of the advanced Class III and advanced
Class IV prices, with the weight based on the portion of manufacturing
milk used for Class III and Class IV during the prior year. The
Coalition stated that using the higher of Class III or Class IV prices
could result in setting a minimum fluid milk price that is actually
above the market clearing price for milk, especially if the higher of
the Class III and IV prices were not representative of manufacturing
markets. The Coalition also expressed concern that the tentative final
decision adopted, as an unnoticed and unsupported change, the higher of
the advanced Class III or Class IV milk prices at 3.5 percent butterfat
as the new Class I mover instead of using the skim value.
In comments, NMPF noted that significant fluctuation that could
occur in the Class I skim milk price mover due to using the higher of
the advanced Class III or Class IV prices at 3.5 percent butterfat.
Several parties noted that use of the advanced price at 3.5 percent
butterfat could cause the Class III price to be the Class I price
mover, even with a very low Class III skim milk price, causing
significant month-to-month changes in the Class I skim milk price.
Michigan Milk Producers Association (MMPA) filed comments, stating
that using a weighted average to set the Class I mover would severely
impact fluid users' ability to attract sufficient quantities of milk
when there were large differences between Class III and Class IV
prices. MMPA and NMPF supported the continued use of the higher of the
Class III or Class IV prices as the Class I mover.
ADCNE's comments, fully supported by DFA, expressed opposition to
the Family Dairies' proposal for a weighted average Class I price mover
or any other proposal that would change the basis for Class I and Class
II prices or Class I and Class II differentials. ADCNE argued that
there was no evidence presented at the hearing that would support the
substantial revenue reductions to farmers throughout the Federal order
system which would result from adoption of the weighted average Class I
price mover. ADCNE urged that the conclusions of the tentative final
decision to continue to use the higher of the advanced Class III and IV
prices as the basis for calculating the Class I price mover be
affirmed.
The shift in the pooling of milk from the upper Midwest to higher-
valued markets complained of in one upper Midwest brief 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.
Those briefs that cited the sufficient level of milk production
projected under the RIA for Federal order reform appeared to base their
arguments in opposition to use of the ``higher of'' Class I price mover
on that projection. It should be noted that Congressional action
relative to Class I prices following issuance of the final decision on
Federal order reform applied only to the Class I pricing surface. Use
of the higher of the Class III and IV prices as the Class I price mover
was included in Federal order reform and in the accompanying RIA.
The Upper Midwest Coalition's concern that the tentative final
decision adopted the higher of the advanced Class III or Class IV milk
prices at 3.5 percent butterfat instead of using the skim value as the
new Class I mover, and the NMPF criticism that doing so would result in
significant fluctuations in the Class I skim price is now moot because
of the return to the use of one butterfat price. Use of the same
butterfat price for the Class III and Class IV prices will result in
the ``higher of'' the two being determined by the relative skim milk
prices. Therefore, fluctuations in the Class I skim milk price
projected under the tentative final decision should be reduced as a
result of this decision.
The price referred to in the brief expressing preference for the
historical use of a weighted average of prices paid for milk used in
butter, cheese, and powder was, at first, the Minnesota-Wisconsin price
series (the M-W). The M-W, and later the M-W adjusted by a weighted
average of current product prices for manufactured products, was
specific to the upper Midwest area and included very little NFDM, since
that area manufactures a higher percentage of cheese, relative to NFDM,
than the rest of the U.S. The current pricing
[[Page 54089]]
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 the change made between the interim final rule and this
recommended decision--to use only one butterfat price for butterfat
used in both Class III and Class IV--a conforming change made in the
interim final rule to the procedure for calculating the Class I
butterfat and hundredweight prices is unnecessary. The advanced
butterfat price used for pricing Class I butterfat would continue to be
the advanced butterfat price calculated for both classes.
b. Classification
The classification of anhydrous milkfat, butteroil, and plastic
cream was changed in the tentative final decision from Class III to
Class IV as a conforming change required by the adoption of separate
butterfat prices for the two classes. The hearing notice contained no
proposal to change the classification of these products, and there was
no testimony in the record of the proceeding supporting their re-
classification. Therefore, with the elimination of the separate Class
III butterfat price, the sole basis for the change in classification is
also eliminated. As noted in the tentative final decision, a difference
between the classification of these products, which have a very high
butterfat content, and butter should not cause any market dislocation
in a pricing plan where butterfat used in Class III products has the
same value as butterfat used in Class IV products. One commenter
opposed changing the classification of these products.
In a comment filed in response to the tentative final decision,
Hershey Foods urged that the Federal orders adopt a 2-class pricing
system. Such a suggestion is entirely outside the scope of the current
proceeding.
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. In a brief filed on behalf of DFA and
ADCNE, the co-op groups 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.
In a post-hearing brief, National All-Jersey (NAJ) urged that USDA
retain the current practice of using Class III milk component values to
price producer component values. NAJ noted that this scenario makes it
easier to use accepted hedging tools, such as Class III futures
contracts, and helps simplify pricing for producers. NAJ further stated
that the current procedure maintains the same producer butterfat price
in all Federal orders with multiple component pricing (MCP).
Seventy-nine dairy organizations supported payment to producers on
the basis of the milk components priced in Class III, including the
Class III butterfat price instead of a pooled butterfat price, plus the
producer price differential in a comment filed in response to the
tentative final decision. The commenters argue that payment to
producers on the basis of Class III components facilitates the use of
risk management tools by producers and avoids wider fluctuations in
Class I and producer fat, skim, and component values.
One of the principal reasons given in the tentative final decision
for changing the pooling provisions of the MCP orders was that
potential large differences between the Class III and Class IV/II
butterfat prices would be likely to result in significant distortions
in the effect of those differences on the producer price differential.
In addition, the decision observed that 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.
This reversal of the decision to calculate separate Class III and
Class IV butterfat prices invalidates the principal reason for pooling
butterfat under the MCP orders.
Therefore, producer payments under the MCP orders will continue to
be made on the basis of the prices for milk components used in Class
III rather than pooling the butterfat values of the four classes. The
four orders that do not have component pricing will continue to pool
the class use butterfat values and return a weighted average butterfat
price to producers. As a result of this change between the tentative
final decision and this recommended decision, some inconsistency
between the producer butterfat prices under MCP and non-MCP orders will
remain. It is not expected that this inconsistency will result in
disorderly marketing.
d. Inclusion of Class I Other Source Butterfat in Producer Butterfat
Price Computation
In the process of promulgating the tentative final decision, it was
determined that the value associated with the occasional classification
of other source milk as Class I should be included in pooling the class
butterfat values to determine butterfat prices to producers. For the
orders under which butterfat is pooled, this change was made in the
interim final rule, and should continue, so that the value of all of
the butterfat in the pool will be reflected in the producer butterfat
price.
In the component pricing orders, the changes made in the interim
final rule to include the Class I other source butterfat value in the
butterfat pool should be reversed. Although the District Court's
injunction had the effect of reversing these changes and the Federal
order reform language has continued in effect, the order language
[[Page 54090]]
in the Code of Federal Regulations reflects the provisions adopted in
the interim final rule. The proposed order language amendments
accompanying this decision will reflect the language that is currently
in effect in the MCP orders, reversing the changes that were made to
include Class I other source butterfat in the butterfat pool.
7. Re-opening of Hearing, Issuance of a Final Decision, or Issuance of
a Recommended Decision
The statute requiring that this proceeding be held to reconsider
the Class III and Class IV pricing formulas also required that a final
decision be published by December 1, 2000, with any amendments to the
orders to be effective January 1, 2001.
The hearing record reflected 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. Consequently,
a tentative final decision was issued, affording interested persons an
opportunity to comment, even though the amendments adopted in the
decision were to become effective January 1, 2001. Subsequently, an
injunction was issued to prevent some of the provisions adopted in the
interim final rule from becoming effective.
One option for dealing with the injunction would be to reopen the
hearing for the purpose of considering additional testimony on the
issue of pricing the components of milk used in cheese in such a way
that the component prices track the cheese price more closely than they
have done under the Federal order reform pricing formulas, or would
continue to do under the formulas recommended in this decision.
Several interested parties commented in opposition to any reopening
of the proceeding with regard to the Class III butterfat and protein
price formulas. The only commenter that favored revisiting any of the
issues involved stated that some way of reflecting increased energy
costs to make allowances should be explored. The commenter seemed to
refer to conducting a new proceeding rather than reopening the current
proceeding. Given the present lack of interest in pursuing development
of Class III component prices that are more closely correlated with
cheese prices, reopening this proceeding should not be considered.
Two commenters on the Tentative Final Decision urged that USDA act
quickly to conclude this proceeding. The most rapid conclusion to this
proceeding would be through issuance of a Final Decision, followed by a
determination of producer approval and issuance of a Final Rule for the
orders approved. However, significant changes were made to the
Tentative Final Decision by the District Court order and this decision.
Interested parties should have an additional opportunity to comment on
those changes as well as other changes from the tentative final
decision that are included in this decision. Therefore, USDA is issuing
this Recommended Decision, which will allow comments (a 30-day comment
period is provided) on the changes to be filed and considered before
issuing a Final Decision, which producers will be asked to approve.
Rulings on Proposed Findings and Conclusions
Briefs, proposed findings and conclusions, and comments on the
tentative final decision were filed on behalf of certain interested
parties. These briefs, proposed findings and conclusions, comments
filed, 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;
(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.
Recommended Marketing Agreements and Order Amending the Orders
The recommended marketing agreements are not included in this
decision because the regulatory provisions thereof would be the same as
those contained in the orders, as hereby proposed to be amended. The
following order amending the orders, as amended, regulating the
handling of milk in the Northeast and other marketing areas is
recommended as the detailed and appropriate means by which the
foregoing conclusions may be carried out.
List of Subjects in 7 CFR Parts 1000, 1001, 1005, 1006, 1007, 1030,
1032, 1033, 1124, 1126, 1131, and 1135
Milk marketing orders.
For the reasons set forth in the preamble, 7 CFR Parts 1000, 1001,
1005, 1006, 1007, 1030, 1032, 1033, 1124, 1126, 1131, and 1135 are
proposed to be amended as follows:
1. 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, Pub. L. 106-113, 115 Stat.
1501.
PART 1000--GENERAL PROVISIONS OF FEDERAL MILK MARKETING ORDERS
1. Section 1000.40 is amended by adding paragraph (c)(1)(ii) and
revising paragraph (d)(1)(i) to read as follows:
Sec. 1000.40 Classes of Utilization.
* * * * *
(c) * * *
(1) * * *
(ii) Plastic cream, anhydrous milkfat, and butteroil; and
* * * * *
(d) * * *
(1) * * *
(i) Butter; 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),
(n), (o), (p)(1), and (q)(3); and removing paragraph (q)(4) to read as
follows:
[[Page 54091]]
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
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, rounded to
the nearest cent, shall be .965 times the Class I skim milk price plus
3.5 times the Class I butterfat price.
(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 higher of the advanced pricing factors computed
in paragraph (q)(1) or (2) 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 butterfat price computed in paragraph
(q)(3) of this section.
* * * * *
(g) Class II butterfat price. The Class II butterfat price per
pound shall be the 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 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 butterfat price.
* * * * *
(l) Butterfat price. The 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 .82.
* * * * *
(n) Protein price. The protein price per pound, rounded to the
nearest one-hundredth cent, shall be computed as follows:
(1) Compute a weighted average of the amounts described in
paragraphs (n)(1)(i) and (ii) of this section:
(i) The U.S. average NASS survey price for 40-lb. block cheese
reported by the Department for the month; and
(ii) 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;
(2) Subtract 16.5 cents from the price computed pursuant to
paragraph (n)(1) of this section and multiply the result by 1.405;
(3) Add to the amount computed pursuant to paragraph (n)(2) of this
section an amount computed as follows:
(i) Subtract 16.5 cents from the price computed pursuant to
paragraph (n)(1) of this section and multiply the result by 1.582; and
(ii) Subtract .9 times the butterfat price computed pursuant to
paragraph (l) of this section from the amount computed pursuant to
paragraph (n)(3)(i) of this section; and
(iii) Multiply the amount computed pursuant to paragraph (n)(3)(ii)
of this section by 1.17.
(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 15.9
cents, with the result divided by 0.968.
(p) * * *
(1) Multiply .0005 by the weighted average price computed pursuant
to paragraph (n)(1) of this section and round to the 5th decimal place;
* * * * *
(q) * * *
(3) An advanced butterfat price per pound, rounded to the nearest
one-hundredth cent, shall be calculated by computing a weighted average
of the 2 most recent U.S. average NASS AA Butter survey prices
announced before the 24th day of the month, subtracting 11.5 cents from
this average, and dividing the result by 0.82.
PART 1001--MILK IN THE NORTHEAST MARKETING AREA
1. In Sec. 1001.60 paragraphs (c)(3), (d)(2), and (h) are revised
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 butterfat price.
(d) * * *
(2) Add an amount obtained by multiplying the pounds of butterfat
in Class IV by the butterfat price.
* * * * *
(h) Multiply the difference between the Class I price applicable at
the location of the nearest unregulated supply plants from which an
equivalent volume was received and the Class III price 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 1001.61 is revised to read as follows:
Sec. 1001.61 Computation of producer price differential.
For each month, the market administrator shall compute a producer
price differential per hundredweight. 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 the producer price
differential, 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
in this paragraph, the market administrator shall compute the producer
price differential in the following manner:
(a) Combine into one total the values computed pursuant to
Sec. 1001.60 for all handlers required to file reports prescribed in
Sec. 1001.30;
(b) Subtract the total of the values obtained by multiplying each
handler's total pounds of protein, other solids, and butterfat
contained in the milk for which an obligation was computed pursuant to
Sec. 1001.60 by the protein price, other solids price, and the
butterfat price, respectively;
(c) 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;
(d) Add an amount equal to not less than one-half of the
unobligated balance in the producer-settlement fund;
(e) Divide the resulting amount by the sum of the following for all
handlers included in these computations:
(1) The total hundredweight of producer milk; and
(2) The total hundredweight for which a value is computed pursuant
to Sec. 1001.60(h); and
(f) Subtract not less than 4 cents nor more than 5 cents from the
price computed pursuant to paragraph (e) of this section. The result,
rounded to the nearest cent, shall be known as the
[[Page 54092]]
producer price differential for the month.
3. In Sec. 1001.62 paragraphs (e) and (g) are revised to read as
follows:
Sec. 1001.62 Announcement of producer prices.
* * * * *
(e) The butterfat price;
* * * * *
(g) The statistical uniform price for milk containing 3.5 percent
butterfat computed by combining the Class III price and the producer
price differential.
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 butterfat prices respectively; and
(3) An amount obtained by multiplying the pounds of skim milk and
butterfat for which a value was computed pursuant to Sec. 1001.60(h) by
the producer price differential as adjusted pursuant to Sec. 1001.75
for 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 butterfat
price for the month;
* * * * *
(b) * * *
(3) * * *
(vi) Multiply the pounds of butterfat in Class III and Class IV
milk by the butterfat price for the month;
* * * * *
PART 1030--MILK IN THE UPPER MIDWEST MARKETING AREA
1. In Sec. 1030.60 paragraphs (c)(3), (d)(2), and (i) are revised
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 butterfat price.
(d) * * *
(2) Add an amount obtained by multiplying the pounds of butterfat
in Class IV by the butterfat price.
* * * * *
(i) Multiply the difference between the Class I price applicable at
the location of the nearest unregulated supply plants from which an
equivalent volume was received and the Class III price 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 1030.61 is revised to read as follows:
Sec. 1030.61 Computation of producer price differential.
For each month the market administrator shall compute a producer
price differential per hundredweight. 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 the producer price
differential, 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
price differential in the following manner:
(a) Combine into one total the values computed pursuant to
Sec. 1030.60 for all handlers required to file reports prescribed in
Sec. 1030.30;
(b) Subtract the total values obtained by multiplying each
handler's total pounds of protein, other solids, and butterfat
contained in the milk for which an obligation was computed pursuant to
Sec. 1030.60 by the protein price, other solids price, and the
butterfat price, respectively, and the total value of the somatic cell
adjustment pursuant to Sec. 1030.30(a)(1) and (c)(1);
(c) 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;
(d) Add an amount equal to not less than one-half of the
unobligated balance in the producer-settlement fund;
(e) Divide the resulting amount by the sum of the following for all
handlers included in these computations:
(1) The total hundredweight of producer milk; and
(2) The total hundredweight for which a value is computed pursuant
to Sec. 1030.60(i); and
(f) Subtract not less than 4 cents nor more than 5 cents from the
price computed pursuant to paragraph (e) 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 butterfat price;
* * * * *
(h) The statistical uniform price for milk containing 3.5 percent
butterfat, computed by combining the Class III price and the producer
butterfat price differential.
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 butterfat prices respectively;
* * * * *
(4) An amount obtained by multiplying the pounds of skim milk and
butterfat for which a value was computed pursuant to Sec. 1030.60(i) by
the producer price differential as adjusted pursuant to Sec. 1030.75
for 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 butterfat price for
the month;
* * * * *
(c) * * *
(2) * * *
[[Page 54093]]
(v) The pounds of butterfat in Class III and Class IV milk times
the butterfat price;
* * * * *
(3) * * *
(ii) The pounds of butterfat received times the butterfat price for
the month;
PART 1032--MILK IN THE CENTRAL MARKETING AREA
1. In Sec. 1032.60 paragraphs (c)(3), (d)(2), and (i) are revised
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 butterfat price.
(d) * * *
(2) Add an amount obtained by multiplying the pounds of butterfat
in Class IV by the butterfat price.
* * * * *
(i) Multiply the difference between the Class I price applicable at
the location of the nearest unregulated supply plants from which an
equivalent volume was received and the Class III price 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 1032.61 is revised to read as follows:
Sec. 1032.61 Computation of producer price differential.
For each month the market administrator shall compute a producer
price differential per hundredweight. 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 the producer price
differential, 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
price differential in the following manner:
(a) Combine into one total the values computed pursuant to
Sec. 1032.60 for all handlers required to file reports prescribed in
Sec. 1032.30;
(b) Subtract the total values obtained by multiplying each
handler's total pounds of protein, other solids, and butterfat
contained in the milk for which an obligation was computed pursuant to
Sec. 1032.60 by the protein price, the other solids price, and the
butterfat price, respectively, and the total value of the somatic cell
adjustment pursuant to Sec. 1032.30(a)(1) and (c)(1);
(c) 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;
(d) Add an amount equal to not less than one-half of the
unobligated balance in the producer-settlement fund;
(e) Divide the resulting amount by the sum of the following for all
handlers included in these computations:
(1) The total hundredweight of producer milk; and
(2) The total hundredweight for which a value is computed pursuant
to Sec. 1032.60(i); and
(f) Subtract not less than 4 cents nor more than 5 cents from the
price computed pursuant to paragraph (e) 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 butterfat price;
* * * * *
(h) The statistical uniform price for milk containing 3.5 percent
butterfat, computed by combining the Class III price and the producer
price differential.
4. Section 1032.71 is amended by revising paragraphs (b)(2) and (4)
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 butterfat prices respectively;
* * * * *
(4) An amount obtained by multiplying the pounds of skim milk and
butterfat for which a value was computed pursuant to Sec. 1032.60(i) by
the producer price differential as adjusted pursuant to Sec. 1032.75
for 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 butterfat price for
the month;
* * * * *
(c) * * *
(2) * * *
(v) The pounds of butterfat in Class III and Class IV milk times
the butterfat price;
* * * * *
(3) * * *
(ii) The pounds of butterfat received times the butterfat price for
the month;
* * * * *
PART 1033--MILK IN THE MIDEAST MARKETING AREA
1. In Sec. 1033.60 paragraphs (c)(3), (d)(2), and (i) are revised
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 butterfat price.
(d) * * *
(2) Add an amount obtained by multiplying the pounds of butterfat
in Class IV by the butterfat price.
* * * * *
(i) Multiply the difference between the Class I price applicable at
the location of the nearest unregulated supply plants from which an
equivalent volume was received and the Class III price 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 54094]]
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 price differential.
For each month the market administrator shall compute a producer
price differential per hundredweight. 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 the producer price
differential, 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
price differential in the following manner:
(a) Combine into one total the values computed pursuant to
Sec. 1033.60 for all handlers required to file reports prescribed in
Sec. 1033.30;
(b) Subtract the total values obtained by multiplying each
handler's total pounds of protein, other solids, and butterfat
contained in the milk for which an obligation was computed pursuant to
Sec. 1033.60 by the protein price, the other solids price, and the
butterfat price, respectively, and the total value of the somatic cell
adjustment pursuant to Sec. 1033.30(a)(1) and (c)(1);
(c) 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;
(d) Add an amount equal to not less than one-half of the
unobligated balance in the producer-settlement fund;
(e) Divide the resulting amount by the sum of the following for all
handlers included in these computations:
(1) The total hundredweight of producer milk; and
(2) The total hundredweight for which a value is computed pursuant
to Sec. 1033.60(i); and
(f) Subtract not less than 4 cents nor more than 5 cents from the
price computed pursuant to paragraph (e) 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 butterfat price;
* * * * *
(h) The statistical uniform price for milk containing 3.5 percent
butterfat, computed by combining the Class III price and the producer
price differential.
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 butterfat prices, respectively;
* * * * *
(4) An amount obtained by multiplying the pounds of skim milk and
butterfat for which a value was computed pursuant to Sec. 1033.60(i) by
the producer price differential as adjusted pursuant to Sec. 1033.75
for 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 butterfat price for
the month;
* * * * *
(b) * * *
(3) * * *
(v) The pounds of butterfat in Class III and Class IV milk times
the butterfat price;
* * * * *
PART 1124--MILK IN THE PACIFIC NORTHWEST MARKETING AREA
1. In Sec. 1124.60 paragraphs (c)(3), (d)(2), and (h) are revised
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 butterfat price.
(d) * * *
(2) Add an amount obtained by multiplying the pounds of butterfat
in Class IV by the butterfat price.
* * * * *
(h) Multiply the difference between the Class I price applicable at
the location of the nearest unregulated supply plants from which an
equivalent volume was received and the Class III price 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 1124.61 is revised to read as follows:
Sec. 1124.61 Computation of producer price differential.
For each month the market administrator shall compute 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 the computation of the producer price
differential, 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
price differential in the following manner:
(a) Combine into one total the values computed pursuant to
Sec. 1124.60 for all handlers required to file reports prescribed in
Sec. 1124.30;
(b) Subtract the total values obtained by multiplying each
handler's total pounds of protein, other solids, and butterfat
contained in the milk for which an obligation was computed pursuant to
Sec. 1124.60 by the protein price, the other solids price, and the
butterfat price, respectively;
(c) 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;
(d) Add an amount equal to not less than one-half of the
unobligated balance in the producer-settlement fund;
(e) Divide the resulting amount by the sum of the following for all
handlers included in these computations:
(1) The total hundredweight of producer milk; and
[[Page 54095]]
(2) The total hundredweight for which a value is computed pursuant
to Sec. 1124.60(h); and
(f) Subtract not less than 4 cents nor more than 5 cents from the
price computed pursuant to paragraph (e) 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 butterfat price;
* * * * *
(g) The statistical uniform price for milk containing 3.5 percent
butterfat, computed by combining the Class III price and the producer
price differential.
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 butterfat prices respectively; and
(3) An amount obtained by multiplying the pounds of skim milk and
butterfat for which a value was computed pursuant to Sec. 1124.60(h) by
the producer price differential as adjusted pursuant to Sec. 1124.75
for 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 butterfat price for
the month;
* * * * *
(c) * * *
(2) * * *
(v) The pounds of butterfat in Class III and Class IV milk times
the butterfat price;
* * * * *
(3) * * *
(ii) The pounds of butterfat received times the butterfat price for
the month;
* * * * *
PART 1126--MILK IN THE SOUTHWEST MARKETING AREA
1. In Sec. 1126.60 paragraphs (c)(3), (d)(2), and (i) are revised
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 butterfat price.
(d) * * *
(2) Add an amount obtained by multiplying the pounds of butterfat
in Class IV by the butterfat price.
* * * * *
(i) Multiply the difference between the Class I price applicable at
the location of the nearest unregulated supply plants from which an
equivalent volume was received and the Class III price 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:
Sec. 1126.61 Computation of producer price differential.
For each month the market administrator shall compute 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 the computation of the producer price
differential, 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
price differential in the following manner:
(a) Combine into one total the values computed pursuant to
Sec. 1126.60 for all handlers required to file reports prescribed in
Sec. 1126.30;
(b) Subtract the total of the values obtained by multiplying each
handler's total pounds of protein, other solids, and butterfat
contained in the milk for which an obligation was computed pursuant to
Sec. 1126.60 by the protein price, other solids price, and the
butterfat price, respectively, and the total value of the somatic cell
adjustment pursuant to Sec. 1126.30(a)(1) and (c)(1);
(c) 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;
(d) Add an amount equal to not less than one-half of the
unobligated balance in the producer-settlement fund;
(e) Divide the resulting amount by the sum of the following for all
handlers included in these computations:
(1) The total hundredweight of producer milk; and
(2) The total hundredweight for which a value is computed pursuant
to Sec. 1126.60(i); and
(f) Subtract not less than 4 cents nor more than 5 cents from the
price computed pursuant to paragraph (e) 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 butterfat price;
* * * * *
(h) The statistical uniform price for milk containing 3.5 percent
butterfat, computed by combining the Class III price and the producer
price differential.
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 butterfat prices respectively;
* * * * *
(4) An amount obtained by multiplying the pounds of skim milk and
butterfat for which a value was computed pursuant to Sec. 1126.60(i) by
the producer price differential as adjusted pursuant to Sec. 1126.75
for 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:
[[Page 54096]]
Sec. 1126.73 Payments to producers and to cooperative associations.
(a) * * *
(2) * * *
(ii) Multiply the pounds of butterfat received times the butterfat
price for the month;
* * * * *
(b) * * *
(3) * * *
(v) The pounds of butterfat in Class III and Class IV milk times
the butterfat price;
* * * * *
PART 1135--MILK IN THE WESTERN MARKETING AREA
1. In Sec. 1135.60 paragraphs (c)(3), (d)(2) and (h) are revised 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 butterfat price.
(d) * * *
(2) Add an amount obtained by multiplying the pounds of butterfat
in Class IV by the butterfat price.
* * * * *
(h) Multiply the difference between the Class I price applicable at
the location of the nearest unregulated supply plants from which an
equivalent volume was received and the Class III price 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 price differential.
For each month the market administrator shall compute 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 the computation of the producer price
differential, 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
price differential in the following manner:
(a) Combine into one total the values computed pursuant to
Sec. 1135.60 for all handlers required to file reports prescribed in
Sec. 1135.30;
(b) Subtract the total values obtained by multiplying each
handler's total pounds of protein, other solids, and butterfat
contained in the milk for which an obligation was computed pursuant to
Sec. 1135.60 by the protein price, the other solids price, and the
butterfat price, respectively;
(c) 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;
(d) Add an amount equal to not less than one-half of the
unobligated balance in the producer-settlement fund;
(e) Divide the resulting amount by the sum of the following for all
handlers included in these computations:
(1) The total hundredweight of producer milk; and
(2) The total hundredweight for which a value is computed pursuant
to Sec. 1135.60(h); and
(f) Subtract not less than 4 cents nor more than 5 cents from the
price computed pursuant to paragraph (e) 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 butterfat price;
* * * * *
(g) The statistical uniform price for milk containing 3.5 percent
butterfat computed by combining the Class III price and the producer
price differential.
* * * * *
4. Section 1135.71 is amended by revising paragraph (b)(2) and
removing and reserving 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 butterfat prices respectively; and
(3) [Reserved]
* * * * *
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.
(2) * * *
(ii) The pounds of butterfat received times the butterfat price for
the month;
* * * * *
(b) * * *
(3) * * *
(v) The pounds of butterfat in Class III and Class IV milk times
the butterfat price;
* * * * *
Dated: October 19, 2001.
Kenneth C. Clayton,
Associate Administrator, Agricultural Marketing Service.
[FR Doc. 01-26901 Filed 10-24-01; 8:45 am]
BILLING CODE 3410-02-P
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