[Federal Register Volume 59, Number 239 (Wednesday, December 14, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-30417]
[[Page Unknown]]
[Federal Register: December 14, 1994]
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Part II
Department of Agriculture
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Agricultural Marketing Service
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7 CFR Part 1040
Milk Marketing Orders; Southern Michigan; Proposed Rule
DEPARTMENT OF AGRICULTURE
Agricultural Marketing Service
7 CFR Part 1040
[Docket No. AO-225-A45-R01; DA-92-10]
Milk in the Southern Michigan Marketing Area; Revised Recommended
Decision and Opportunity to File Written Exceptions on Proposed
Amendments to Tentative Marketing Agreement and to Order
AGENCY: Agricultural Marketing Service, USDA.
ACTION: Proposed rule.
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SUMMARY: This document recommends incorporating a multiple component
pricing system in the Southern Michigan Federal Milk Order. The three
components to be priced are butterfat, protein, and a ``fluid carrier''
residual. The proposed plan includes adjustments to the producer
protein price based on the somatic cell count of producer milk. The
decision recommends changes in qualifying shipments from pool supply
plants and would give the market administrator the authority to adjust
the monthly shipping percentage requirements for a cooperative supply
plant or unit of supply plants. In addition, the maximum allowable
administrative and marketing service assessment rates would be
increased to 4 and 7 cents, respectively.
DATES: Comments are due on or before January 13, 1995.
ADDRESSES: Comments (six copies) should be filed with the Hearing
Clerk, room 1083, South Building, United States Department of
Agriculture, Washington, DC 20250.
FOR FURTHER INFORMATION CONTACT: Constance M. Brenner, Marketing
Specialist, USDA/AMS/Dairy Division, Order Formulation Branch, room
2971, South Building, P.O. Box 96456, Washington, DC 20090-6456, (202)
720-7183.
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.
The Regulatory Flexibility Act (5 U.S.C. 601-612) requires the
Agency to examine the impact of a proposed rule on small entities.
Pursuant to 5 U.S.C. 605(b), the Administrator of the Agricultural
Marketing Service has certified that this proposed rule will not have a
significant economic impact on a substantial number of small entities.
The amendments would promote orderly marketing of milk by producers and
regulated handlers.
The amendments to the rules proposed herein have been reviewed
under Executive Order 12778, Civil Justice Reform. They are not
intended to have a retroactive effect. If adopted, the proposed
amendments would not preempt any state or local laws, regulations, or
policies, unless they present an irreconcilable conflict with this
rule.
The Agricultural Marketing Agreement Act of 1937, as amended (7
U.S.C. 601-674), 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 file 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 and requesting a modification of an order or to
be exempted from the order. 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.
Prior documents in this proceeding:
Notice of Hearing: Issued December 3, 1992; published December 10,
1992 (57 FR 58418).
Supplemental Notice of Hearing: Issued January 19, 1993; published
January 29, 1993 (58 FR 6447).
Recommended Decision: Issued November 29, 1993; published December
6, 1993 (58 FR 64176).
Notice of Reopened Hearing: Issued February 18, 1994; published
February 24, 1994 (59 FR 8874).
Extension of Time for Filing Briefs: Issued April 6, 1994;
published April 13, 1994 (59 FR 17497).
Emergency Partial Final Decision: Issued May 12, 1994; published
May 23, 1994 (59 FR 26603).
Final Rule: Issued June 22, 1994; published June 29, 1994 (59 FR
33418).
Preliminary Statement
Notice is hereby given of the filing with the Hearing Clerk of this
revised recommended decision with respect to proposed amendments to the
tentative marketing agreement and the order regulating the handling of
milk in the Southern Michigan marketing area. This notice is issued
pursuant to the provisions of the Agricultural Marketing Agreement Act
and the applicable rules of practice and procedure governing the
formulation of marketing agreements and marketing orders (7 CFR Part
900).
Interested parties may file written exceptions to this decision
with the Hearing Clerk, U.S. Department of Agriculture, 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 proposed amendments set forth below are based on the record of
public hearings on February 17-18, 1993, at Novi, Michigan, and on
March 1, 1994, at Grand Rapids, Michigan. The February 1993 hearing was
held pursuant to a notice of hearing issued December 3, 1992 (57 FR
58418), and a supplemental notice of hearing issued January 19, 1993
(58 FR 6447). The March 1994 reopened hearing was held pursuant to a
notice of hearing issued February 18, 1993 (59 FR 8874).
The material issues on the record of the hearings relate to:
1. Pool supply plant definition.
2. Modification of cooperative pool supply plant shipping
requirement by market administrator.
3. Multiple component pricing.
4. Somatic cell adjustment.
5. Administrative assessment.
6. Marketing service assessment.
7. Pool distributing plant definition (UHT plant ``lock-in'').
8. Emergency action with respect to issue 7.
9. Conforming changes.
Issues 1, 5, and 6 were discussed in the initial recommended
decision issued in November 1993 and were not addressed in the reopened
hearing. No changes have been made in the discussion of these issues in
this revised recommended decision.
Issues 7 and 8 were dealt with in an emergency partial final
decision issued May 12, 1994, and the resulting final order amendments
were made effective for June 1994. The amendments were issued June 22,
1994, and published June 29, 1994 (59 FR 33418).
Issues 2, 3, 4, and 9 were addressed in the reopened hearing on
March 1, 1994, and the discussion of Issues 3 and 4 in this revised
recommended decision has been revised to reflect the record of that
hearing session. Issues 2 and 9 are additions to the original
recommended decision.
Findings and Conclusions
The following findings and conclusions on the material issues are
based on evidence presented at the hearings and the record thereof:
Background Statement
A public hearing was held February 17-18, 1993, to consider the
implementation of multiple component pricing in the Southern Michigan
marketing area. On November 29, 1993, the Department issued a
recommended decision in this proceeding. The decision proposed a
multiple component pricing plan for Order 40. The hearing was reopened
at the request of proponents on March 1, 1994, to consider
modifications to the pricing plan recommended for the order. An
additional proposal considered during the reopened hearing would
authorize the market administrator to adjust pool supply plant shipping
standards to reflect changes in marketing conditions. A third proposal,
to ``lock-in'' to regulation under the Southern Michigan order a
distributing plant processing ultra-high temperature milk, was
considered on an emergency basis. The decision and final rule
pertaining to the ``lock-in'' were published on May 23, 1994 (59 FR
26603) and June 29, 1994 (59 FR 33418), respectively.
This recommended decision is revised with respect to the portions
dealing with the multiple component pricing issue and somatic cell
adjustments (Issues 3 and 4). Portions of the decision dealing with
adjustment of cooperative pool supply plant shipping requirements by
the market administrator and conforming changes have been added in this
revised recommended decision (Issues 2 and 9).
No comments were received in response to the November 1993
recommended decision regarding the pool supply plant definition,
administrative assessment, and marketing service assessment provisions
that were considered at the initial 1993 hearing. Therefore, this
revised recommended decision contains no changes regarding those issues
from the decision published December 6, 1993 (58 FR 64176).
1. Pool Supply Plant Definition
A witness for Michigan Milk Producers Association (MMPA) testified
during the initial hearing in support of the cooperative's proposal
which would amend the pool supply plant definition to include as
qualifying shipments transfers of milk to a partially regulated
distributing plant. The witness testified that MMPA supplies bulk milk
to a local partially regulated distributing plant that has substantial
Class I and Class II utilization but receives no credit for such sales
toward fulfilling the pool supply plant shipping requirement. The
witness explained that the shipment is a bulk transfer from the
cooperative (MMPA) to the nonpool plant, with its classification
determined during the pooling process. MMPA's post-hearing brief
contended that adoption of the proposed amendment would eliminate the
inequity caused by such transfers.
According to the cooperative's brief, the current month's
marketwide Class I utilization percentage, which includes the portion
of the transfer classified as Class I, determines the minimum
qualifying shipping requirement for the same month of the following
year but does not contribute to the cooperative's Class I use in
determining whether pooling standards have been met.
The MMPA witness testified that the partially regulated plant
historically had been a pool distributing plant but recently had become
involved in the production of extended-life Class II products. As a
result, he stated, the plant now has Class I utilization of
approximately 40 percent. According to the witness, the partially
regulated plant to which MMPA transfers milk is the only such plant to
which the proposed amendment would apply. NFO's post-hearing brief
supported adoption of the proposed amendment. There was no opposition
to the proposal.
Testimony in the record illustrates that the partially regulated
distributing plant is indeed satisfying Class I needs in the
marketplace through the use of pooled milk, thereby benefitting the
pool. Therefore, the proposal to include shipments of producer milk to
a partially regulated distributing plant when determining the
qualifications of pool supply plants should be adopted.
2. Modification of Pool Supply Plant Shipping Standard by Market
Administrator
A proposal to give the market administrator the discretionary
authority to administratively change the shipping percentages upward or
downward for a supply plant or a unit of supply plants being qualified
by a cooperative association should be adopted. The proposed provisions
would operate similarly to ``call'' provisions in other order markets
where the market administrator, upon request or upon recognizing a
potential problem, notifies the handlers in the order that action may
be taken to change the shipping percentage requirements. The percentage
change required would be based upon the evidence that the market
administrator receives and/or the supply and use data for the market.
The order currently provides that for a cooperative's balancing
plant or unit of such plants, the minimum qualifying percentage for
each month is established according to the amount of producer milk used
in Class I as a percent of total producer milk within the order for the
same month of the previous year. The order currently does not provide
for any sort of discretionary authority to change pool supply plant
shipping requirements. To adjust the shipping percentage requirements,
either the requirements must be suspended or permanent changes must be
sought through amendments to the order.
The director of bulk milk sales for Michigan Milk Producers
Association (MMPA) testified in support of the cooperative's proposal
at the reopened hearing. The proponent's intent is to allow for the
adjustment of these requirements on a more timely basis than can be
done under the current provisions.
The MMPA witness testified that the current order provision is
designed to establish a performance standard that reflects the Class I
needs of the local market and assures fluid processors that their
requirements will be fulfilled. He stated that the provision contains a
self-adjusting mechanism because the current month's shipping
requirements are based on the market requirements from the previous
year. He further stated that the provision normally works well. The
witness testified, however, that occasions exist in which the market
conditions have changed to such an extent that necessary corrections to
the self-adjusting mechanism cannot be made on a timely basis.
As an example, the MMPA witness stated that because the minimum
shipping percentages are determined by the percentage of producer milk
utilized in Class I, the percentage can be influenced by changes in the
monthly producer receipts. The witness stated that if milk that
normally would be pooled is not, producer receipts and the Class I
utilization percentage for the order would change, in turn affecting
the following year's shipping requirement. The witness also stated that
combining this possible decrease in pool receipts with an increase in
bulk milk sales to other markets also may impact the following year's
shipping requirements. He said that the shipping percentages
established may not reflect the following year's actual fluid
requirements from the local and distant markets.
The witness noted that two current options to adjust the shipping
percentage requirements, suspension or permanent amendment to the order
provisions, are time-consuming and may require unwarranted drastic
action.
In a post-hearing brief, MMPA reiterated support for the proposal.
No other support or opposition was expressed at the hearing or in
briefs.
The record evidence indicates that empowering the market
administrator with the authority to adjust the pool supply plant
shipping requirements should result in more timely changes in
comparison to current procedures. A more flexible and efficient process
would result by authorizing the market administrator to adjust the
requirements to either encourage shipments or discourage uneconomic
movements of milk as a result of changes in marketing conditions.
It appears that there is a need to provide flexibility of supply
plant performance standards when market conditions change from one year
to the next. Under such conditions, which could occur at any time, the
normal mechanism for change in the order program, which is the hearing
process, would not provide a timely response.
Thus, the proposal to give the market administrator discretionary
authority to revise the supply plant shipping standards should be
adopted. Doing so will provide a means of making appropriate
adjustments in this pooling provision as market conditions indicate a
need for adjustments. It must be recognized that a more timely response
to changed conditions can be provided under such a provision.
There is no apparent reason why restrictions should be imposed to
limit the market administrator's authority to change the pooling
provisions. It is intended and expected that this authority will be
exercised with impartiality and integrity. Moreover, without
restrictions more appropriate responses over a broader range of changed
conditions may be obtained. Limitations on the authority to revise
shipping percentages could result in the market administrator being
unable to either increase or decrease the requirements to the full
extent necessary in a given situation.
It should be noted that, to the extent appropriate shipping
requirements for supply plants can be determined in advance, it would
be desirable for the market administrator to revise the requirements
for several months at a time, if necessary. If conditions subsequently
changed, the market administrator would again review the situation and
make further adjustments as necessary. It is hoped that such an
arrangement will serve the market well and provide less uncertainty as
to what the requirements will be.
There are proprietary supply plants, apparently with no history of
pooling problems, thus no need exists to have this type of proposed
provision applicable to these plants. Proprietary plants have a fixed
qualification percentage of 30 percent each month, with a provision to
automatically qualify during the months of March through August based
on performance from the previous September through February.
Whenever the market administrator believes that a change in the
shipping standards may be needed, whether by request or on his own
initiative, he will give written notice that such a change is being
considered and invite interested persons to comment. This procedure
will assure that all potentially affected persons can have their views
and other pertinent information fully considered by the market
administrator before a decision is made and announced. Such a procedure
now is followed under other orders when a ``call'' for additional
shipments by supply plants is contemplated and also is an appropriate
requirement for the new authority provided herein.
3. Multiple Component Pricing
A multiple component pricing plan should be adopted in the Southern
Michigan Federal milk marketing order. The pricing plan would be
patterned after the multiple component pricing plan initially proposed
by Leprino Foods Company and supported by Michigan Milk Producers
Association, Independent Cooperative Milk Producers Association, and
several other dairy organizations. Producers would be paid on the basis
of three components in the milk: butterfat, protein, and the remaining
fluid portion that is the ``fluid carrier'' of the butterfat and
protein ingredients. Producers would also share in the value of the
pool's Class I and Class II uses. A somatic cell adjustment would apply
to the protein prices paid to all producers no matter how the milk was
used.
Regulated handlers would pay for the milk they receive on the basis
of total butterfat, the protein and fluid carrier used in Classes II
and III, skim milk used in Class I, and the hundredweight of milk used
in Classes I and II.
At the present time, milk received by handlers is priced according
to the pounds of producer milk allocated to each class of use
multiplied by the prices per hundredweight of milk testing 3.5 percent
butterfat, as determined under the order for each class of use.
Adjustments for such items as overage, reclassified inventory,
location, and other source milk allocated to Class I are added to or
subtracted from the classified use value of the milk. The resulting
amount is divided by the total producer milk in the pool to calculate a
price per hundredweight for milk testing 3.5 percent butterfat to be
paid to producers for the milk they have delivered to handlers. The
price paid to each producer is then adjusted according to the specific
butterfat test of the producer's milk by means of a butterfat
differential. The butterfat differential is computed by multiplying the
wholesale selling price of Grade A (92-score) bulk butter per pound on
the Chicago Mercantile Exchange, as reported for the month by the U.S.
Department of Agriculture, by 0.138 and subtracting the Minnesota-
Wisconsin price (the M-W) at test, also as reported by the U.S.
Department of Agriculture, multiplied by 0.0028.
The initial hearing in this proceeding was held February 17 and 18,
1993. Michigan Milk Producers Association (MMPA) and Independent
Cooperative Milk Producers Association (ICMPA), the two original
proponents of multiple component pricing (MCP) under the order,
requested reopening the February 1993 proceeding to consider proposals
to modify the MCP plan recommended by the U.S. Department of
Agriculture (USDA) for the Southern Michigan Order in a decision issued
November 29, 1993 (58 FR 64176). MMPA and ICMPA represent approximately
80 percent of producer milk in the Order.
The November 1993 recommended decision included a thorough analysis
and discussion of the need for MCP pricing and the desirability of
including protein as a pricing component based on the record of the
proceeding initiated on February 17, 1993. This revised recommended
decision includes some of the discussion and basis for adoption of MCP
contained in the initial recommended decision, but is based on the
entire record of the proceeding which includes the reopened hearing
held March 1, 1994.
The MCP plan in the original recommended decision would have priced
milk on the basis of its protein and butterfat components. The
recommended MCP plan generally was patterned after the plan adopted for
the Ohio Valley, Eastern Ohio-Western Pennsylvania, and Indiana orders.
Producers would have been paid on the basis of the pounds of milkfat
and protein contained in their milk and would have shared in the value
of the pool's Class I and Class II uses on a per hundredweight basis.
The butterfat price would have been based on the market value of
butter, while the protein price would have been computed by attributing
all of the residual value of the M-W, after its butterfat value had
been subtracted, to protein. Regulated handlers would have paid for the
milk they received on the basis of total milkfat, the protein used in
Classes II and III, the skim milk used in Class I, and the
hundredweight of total product used in Classes I and II. Protein prices
paid to producers on all producer milk would have been adjusted by the
somatic cell count of the milk.
MMPA and ICMPA endorsed the recommendation to adopt MCP, but
proposed a specific change to the recommended MCP plan. The MMPA and
ICMPA (proponent) witness stated in testimony at the reopened hearing
that the cooperatives remain committed to the adoption of a MCP plan
administered through the Federal order system. Proponents' witness
testified that the adopted plan should be equitable to both producers
and processors and should send the correct economic signals from the
marketplace to the farmer. The witness testified that when the
proponents initially proposed a multiple component pricing plan for the
Southern Michigan order, their intent was not to create conflicting
economic signals for farmers and processors. Proponents' witness stated
that the recommended MCP plan could send conflicting signals to
handlers and producers by overstating the value of protein in producer
milk. The witness stated that such overstatement would create an
incentive for processors to purchase low-protein milk while at the same
time would encourage farmers to produce high-protein milk.
In the reopened hearing, MMPA and ICMPA specifically requested
further consideration of the MCP approach proposed by Leprino Foods
Company (Leprino) in the original proceeding. Because other hearing
participants had been given insufficient advance notice of Leprino's
pricing plan to adequately evaluate the proposal and cross-examine the
Leprino witnesses, the Leprino proposal was not considered as a viable
alternative in the recommended decision. After having an opportunity
for extensive review of the Leprino proposal after the initial hearing,
the proponents concluded that the Leprino alternative was a better
alternative than the one in the recommended decision.
The Leprino proposal is a three-component pricing system, with the
butterfat and protein component prices based on market values for
butter and cheese, and a ``fluid carrier'' component representing the
residual value of the M-W price after the protein and butterfat values
are subtracted. Proponents' witness testified that because butterfat
and protein values can be determined by the butter and cheese markets,
respectively, they are reflective of economic conditions with a known
degree of precision. Proponents' witness agreed with the original
Leprino proposal that the balance of the M-W value should be attributed
to a fluid residual price applied to milk volume after the butterfat
and protein portions of the M-W price have been accounted for, stating
that it is not feasible to assign as precise a value to the other
nonfat nonprotein solids in milk as can be assigned to the butterfat
and protein components.
Proponents' witness gave two reasons for wanting to consider the
Leprino proposal instead of supporting the recommended MCP plan. The
first reason involves the method of determining the value of protein.
The witness stated that the recommended decision equates the protein
value to the skim residual of the M-W price, while the Leprino proposal
values protein on the basis of its cheese yield potential.
The proponents' witness stated that the Leprino proposal uses a
current market value for cheese and a modified version of the Van Slyke
formula, which relates changing protein levels in milk to changes in
cheese yield, to calculate the value of protein. The witness stated
that the protein price determined through the Van Slyke formula
accurately reflects the incremental value of protein in milk and would
result in a fair measure of protein value to the dairy producer and
handler.
The proponents' witness suggested that the protein price should be
derived from the National Cheese Exchange (NCE) price for 40-pound
blocks of Cheddar cheese as representing the current market value for
cheese. The witness stated that the block cheese price is the most
commonly used base price for cheese and is a standard that many cheese
manufacturers recognize in pricing their product. The witness testified
that the block price better reflects the Southern Michigan commercial
market for cheese than the barrel cheese price. He contended that a
barrel cheese price would reflect a surplus commodity price, a
situation that does not exist in this order.
The second reason that proponents' witness gave for supporting the
Leprino proposal is that this plan moderates the impact that component
pricing would have on processors of dairy products that have not been
scientifically shown to have as direct a relationship between yield and
protein content as does cheese. For example, the witness testified, in
some instances processors may be unable to recover the same value for
protein from products such as packaged fluid cream, condensed milk, and
powder in comparison to the value from cheese manufacture.
MMPA's post-hearing brief asserted that under Leprino's proposal,
the cost and value of protein is neither too low nor too high. The
brief contended that the current butterfat/skim pricing system, in
which only the value of butterfat is specifically recognized, places no
value on protein. The brief further contended that the recommended
decision, in which the entire value of the skim portion of milk is
assigned to protein, places too much value on protein, for the true
economic value of protein to dairy product processors may bear little
resemblance to the skim residual.
A Leprino witness testified again at the reopened hearing in
support of Leprino's proposal. Leprino operates two manufacturing
plants in the Southern Michigan marketing area that process over 40
percent of the Class III milk and approximately 16 percent of all milk
marketed in the Southern Michigan order area. Leprino also manufactures
and distributes mozzarella cheese to the food service industry
throughout the country.
In testimony at the reopened hearing, the Leprino witness supported
the pooling and producer pay price proposals suggested by MMPA and
ICMPA. The witness reiterated the characteristics and merits of
Leprino's three-component proposal submitted at the original hearing.
The Leprino witness argued at the reopened hearing that one of the
major inadequacies of the current butterfat/skim pricing system is that
skim is priced without any consideration to the components in this skim
milk. The witness said that under the current pricing provisions, the
skim value of milk accounts for almost 79 percent of the total Class
III (M-W) price; however, the protein or solids-not-fat components
included in the skim are not valued. The witness said that producers
and handlers receive or pay the same price for milk containing lower or
higher levels of protein.
The Leprino witness stated that the original recommended decision
in the proceeding would have replaced this current system with another
system that inequitably allocates almost 79 percent of the M-W price to
only the protein component of skim milk. The witness testified that
allocating all of the skim value of milk to the protein component
creates a residual protein value which reflects more than the true
value of protein to manufacturers. The witness stated that the
recommended decision ignores the value and importance of milk
components other than butterfat and protein and places a value on
protein that cannot be recovered from the marketplace by most
manufacturers of butter, nonfat dry milk, or cheese.
The Leprino witness stated that encouragement needs to be given to
producers to produce milk with higher protein content and to
manufacturers to utilize these higher levels of protein. He stated that
the intent of Leprino's proposal is to send an economic message to
producers to produce higher-protein milk while allowing handlers to
recover the cost of milk components from the market and cover operating
costs. The witness asserted that the concepts offered in its proposal
are economically sound, fair to handlers and producers, and in the best
interest of long-term stability in milk pricing.
Leprino's post-hearing brief stated that under the original
recommended decision, a Cheddar cheese manufacturer's gross margin may
decline when paying more for milk with a higher protein content. The
brief described Leprino's proposal as achieving the economic balance
necessary for processors to pay producers for milk with higher protein
levels without reducing processors' profit margins. Leprino's brief
stated that consumers also would benefit by receiving dairy products
with potentially higher-protein contents without unwarranted
inflationary price increases.
The Leprino witness stated that pricing the butterfat component
provides producers with an economic incentive to produce the butterfat
in raw milk. The witness asserted that a related revenue value for
processors exists for butterfat in finished products such as butter,
fluid milk, cheese, and other products.
As in the case of butterfat, the witness stated, pricing the
protein component gives producers an economic incentive to increase the
protein content of their milk. The Leprino witness stated that the
protein component's value and related revenue to processors is based on
its market value in cheese, with the formula for the protein price
based on recognized Cheddar cheese yields using the modified Van Slyke
formula.
The Leprino witness suggested that the National Cheese Exchange
price reflects the market value of cheese and that the NCE price
multiplied by a representative yield factor (calculated via the Van
Slyke formula) would establish the value of a pound of protein to a
cheese manufacturer. He stated that either the block or the barrel
price could be used to represent the Cheddar cheese market price, and
stated a preference for the barrel price.
Leprino's exception to the original recommended decision and
testimony in the reopened hearing noted that a single component such as
protein is not an appropriate means of accounting for all of the value
of the skim portion of milk to a handler. Instead, the exception and
witness suggested, the value of the protein component should be based
on the value of protein in cheese, and the fluid carrier should be used
to carry the residual M-W value (M-W price less fat and protein values)
which currently cannot be tied specifically to an individual component
of milk or derived from a market value for individual components of
milk.
A witness for the National Cheese Institute (NCI), the national
trade association for manufacturers, processors, and marketers of all
varieties of cheese, stated that NCI did not testify at this
proceeding's initial hearing because at that time a NCI task force made
up of cheese manufacturers and processors was studying the MCP issue.
The witness testified that NCI supports the adoption of a single
uniform three-component pricing system in all orders where a
significant amount of cheese is produced. At the reopened hearing, the
NCI witness supported MCP on Class III milk but had no position
regarding Class II milk. In a post-hearing brief, NCI asserted that
applying MCP to Class I milk would be inappropriate because there
exists no measurable or discernable advantage to varying protein levels
for milk used as a fluid beverage.
The pricing plan supported by NCI is identical to the proposal
advanced by Leprino, MMPA, and ICMPA. NCI's post-hearing brief noted
that its proposal (the Leprino plan) allows cheesemakers to break even
from processing milk with higher protein contents by seeking out and
rewarding producers with higher-protein milk. The NCI witness asserted
that any formula which prices protein higher than its value in
producing cheese will cut into processor margins and cause cheese
manufacturers to seek out lower-protein milk.
As an industry-wide consensus resulting from the NCI task force,
the NCI witness suggested that the NCE barrel price should be used to
represent the market value of cheese. The witness stated that Cheddar
cheese is recognized as an industry standard, and the barrel price was
chosen because a significant amount of barrel cheese is traded on the
National Cheese Exchange.
Kraft General Foods (Kraft) testified at the initial hearing in
this proceeding but not at the reopened hearing. A post-hearing brief
filed on behalf of Kraft supported the Leprino proposal. The brief
supported using a barrel cheese price to derive a value for protein in
milk. The brief also supported maintaining the quality/somatic cell
count adjustment included in the recommended decision.
The Kraft brief asserted that the Leprino plan would avoid
establishing conflicting economic signals from a protein price which is
so high that manufacturers are encouraged to procure low-protein milk.
As such, according to the brief, the Leprino proposal represents a
positive refinement in the evolution of MCP plans under the Federal
order system. The brief stated that the Leprino proposal's protein
price tracks the added value of extra protein in added cheese yield and
is more closely aligned to the competitive value of milk protein as
reflected in many existing industry-sponsored MCP plans than is the
plan contained in the recommended decision.
The Kraft brief stated that no proposal at the reopened hearing
accounted for handler manufacturing costs when protein is converted
from producer milk to finished products. Therefore, the brief noted,
all proposals overstate the protein component in raw producer milk.
The Kraft brief noted that the absence of a make allowance causes
exaggeration of the component value of protein in raw producer milk and
that using the barrel price will tend to moderate any overstatement of
the protein value. The brief argued that the price difference between
the barrel and the block prices of cheese is due primarily to packaging
costs, not milk or cheese value, and concluded that use of the block
price instead of the barrel price to calculate a protein price would
effectively assign some finished product packaging value to milk
protein.
In opposition to one feature of the Leprino plan, a witness for
National All-Jersey, Incorporated, (NAJ) argued at the reopened hearing
that attributing the residual M-W value to volume does not recognize
the value of solids in milk other than protein and fat. The witness
asserted that MCP plans that price a portion of the skim milk value on
a volume basis would only partially correct the current provisions
because all of the solids in skim milk should be priced. The witness
stated that increasing returns for milk on a volume basis relative to
the price of protein would tend to reduce the producer's incentive to
employ feeding, genetics, and management practices to increase protein.
National All-Jersey, Incorporated, is a national dairy farmer
organization that assists members in marketing their milk. The NAJ
witness testified that NAJ's primary mission since 1976 has been the
promotion of multiple component pricing with the goal of implementing a
uniform MCP plan throughout the Federal order system.
In the reopened hearing, the NAJ witness supported the proposal
submitted by MMPA and ICMPA, with two modifications. The witness stated
that under the NAJ proposal, the protein price is calculated using a
different formula than in the proponents' proposal, and the protein
price includes a market value for whey. The NAJ witness also stated
that the NAJ proposal, after pricing the butterfat and protein
components, places the residual value on other nonfat nonprotein
solids.
The NAJ witness stated that the major objective of any MCP plan is
to provide dairy producers with an economic incentive to produce
protein, the most valuable component in milk. The witness stated that
because a direct relationship exists between product yields and the
level of protein and other solids contained in milk, Class II and III
handlers are able to pay for milk in more direct relation to its
economic value. The witness stated that an economically and justifiably
high protein price is needed to encourage producers to increase the
ratio of protein to fat in their milk production.
The NAJ proposal was characterized by the witness as a total solids
plan which prices all components in milk. The witness stated that
pricing all components in skim milk corrects the inadequacy of the
current butterfat/skim pricing system in which a pound of water
receives the same price as does a pound of protein or nonfat solids in
the skim portion of producer milk. The witness asserted that the NAJ
proposal allows handlers to purchase milk more in accordance with its
economic return and still gives handlers the incentive to procure and
producers to produce higher-protein milk. The NAJ witness supported
calculating the same protein and other solids price for both handlers
and producers.
The NAJ witness stated that the NAJ proposal includes whey in its
protein price calculation in an effort to account for all of the value
in milk protein, and described the whey protein concentrate price as
the best indicator of the market value of protein in whey. The witness
contended that the protein price computed under the NAJ proposal
provides more equitable returns to both handlers and producers in
comparison to the other proposals presented at the reopened hearing.
NAJ's brief asserted that under its proposal, as high a percentage of
skim value is allocated to protein as can be economically justified.
NAJ maintained that whether or not a cheese plant processes whey should
have no bearing on the inclusion of whey in the pricing formula.
For the protein calculation, the NAJ witness said that the NAJ
proposal uses the NCE block price for Cheddar cheese because this price
is used more widely than other announced cheese prices. Also, the
witness stated that the NCE block price is used as a base for pricing
other cheeses more than any other cheese price.
The witness stated that the residual under the NAJ proposal
represents both the value of other milk solids besides protein and the
difference between the value determined by product prices and the
competitive M-W price. The NAJ witness testified that the purpose of
placing the residual value on other solids is to provide farmers with
an incentive to produce something in milk other than water.
Also supporting NAJ's proposal is Tri-State Milk Producers
Cooperative, a qualified cooperative with about 640 members marketing
milk in several orders, including the Southern Michigan order.
Several participants in the proceeding expressed opposition to
portions of the NAJ plan during the hearing and in post-hearing briefs.
MMPA's post-hearing brief asserted that placing market values on whey
protein and non-fat non-protein solids (principally lactose) assigns
values to these solids that are not present in the marketplace.
The Leprino witness opposed including whey in the computation of
the protein price for the following reasons: (1) the value of whey is
not based on the inherent value of protein or other solids in raw milk;
(2) investment in a whey operation is based on a return calculated from
the value-added nature of the process and/or the cost of other disposal
options rather than the raw ingredient cost; (3) raw unprocessed whey
recovered from the cheese making process has no inherent value in the
United States; (4) unprocessed whey cannot be sold beyond the factory;
(5) raw unprocessed whey is a disposal problem for many cheese
operations; and (6) whey returns are excluded from calculation of the
cheese support price.
Leprino's brief asserted that the main interest of NAJ is to
maximize producer returns for high protein milk and that the NAJ plan
achieves this objective by providing for a higher protein component
price than can be justified in the marketplace. NCI's brief gave
reasons similar to Leprino's for excluding whey in a MCP plan.
The Leprino witness stated that use of a residual solids approach
requires a total solids test on milk in addition to a protein test. The
witness stated that using a residual fluid approach ascribes all the
remaining value to volume, eliminating the need for additional testing,
and thus is easier and less costly to administer.
At the initial hearing session, two witnesses testified that
protein testing is already widespread in the Southern Michigan market
and that testing methods are reliable and accurate. A witness employed
in the field of dairy chemistry testified on behalf of MMPA that in the
case of protein, the infra-red milk analyzer calibrated with reference
to the Kjeldahl test is the method most used by the industry. This
method is approved by the Association of Official Analytical Chemists,
and the repeatability and accuracy of this method is much better than
those of the Babcock test for butterfat.
A MMPA quality control witness testified that protein tests on
producer milk in Order 40 are conducted on infra-red test instruments.
The witness emphasized that all cooperatives in Order 40 have infra-red
instruments and currently are testing producer milk for protein a
minimum of five times a month. Therefore, he stated, the inclusion of
protein testing would not result in increased cost. The proponent's
witness recommended that if the proposal is adopted, the payment to
producers should be based on an average of a minimum of five fresh
tests per month for both protein and somatic cell count.
The Southern Michigan order should be amended to include multiple
component pricing. On the basis of both the initial and reopened
records of this proceeding, the proposed multiple component pricing
plan would entail pricing milk used in Class II and Class III on the
basis of protein and a fluid carrier residual. The Class I and Class II
differential prices would be applied to milk used in Classes I and II,
and Class I milk would continue to be priced on the basis of volume.
Handlers would pay all producers for butterfat directly and would
adjust protein prices paid to producers for the somatic cell count of
producers' milk. Because milk used for Class III-A purposes is
allocated on a pro rata basis with total receipts of Class III milk,
MCP is applicable to milk used in Class III-A in this recommended
pricing plan.
The record indicates that a large percentage of the producers
pooled under the Southern Michigan order are already eligible for or
receive some form of multiple component pricing and that nearly all of
these component pricing plans use protein as a pricing component. The
record also shows that the diverse component pricing programs that
currently exist promote disorderly and inefficient marketing conditions
in the procurement of milk supplies by competing handlers. The
different programs cause non-uniform bases of payments to producers.
The adoption of multiple component pricing will allow the Order to
recognize the additional value in milk with a higher than-average
protein content. At the same time, by establishing a residual value
based on milk volume, the protein component will not be over-valued, as
proponents argue would be the case under the original recommended
decision.
Attributing at least a portion of the value of milk to protein in a
market such as Southern Michigan, where most of the milk not used for
bottling purposes is processed into cheese, is appropriate. Record
evidence in this proceeding clearly shows that demand for protein is
higher than for other components of milk because of its functional,
nutritional, and economic value in the marketplace. The functional
characteristics of protein allow it to form the matrix in the
production of cheese and yogurt. Protein is also important to the air
formation in the manufacture of certain products and provides some
required nutrients in the human diet.
Milk containing a higher percentage of protein will result in
greater yields of most manufactured products than milk with a lower
protein test. Additionally, handlers receiving milk that results in
greater volumes of finished products such as cheese and cottage cheese
than an equivalent volume of milk testing lower in protein should be
required to pay more for the higher-testing milk. At the same time, the
dairy farmer producing milk that yields greater amounts of finished
products deserves to be paid more for it than a dairy farmer producing
the same volume of milk that results in less product yield. Thus,
sending an economic signal to dairy farmers will encourage them to
maximize the production of those components which have the greatest
demand in the marketplace.
Pricing milk on the basis of its protein content also meets the
criteria of measurability, intrinsic value, and variability. The
evidence in the record shows that protein can be easily measured and,
in fact, that the variability in measurement may be less than the
variability in butterfat testing because protein does not separate as
does butterfat. The record evidence shows that protein has value to the
manufacturing sector in the form of improved product yield and product
structure. The value to the fluid sector was not quantified in the
hearing record; however, testimony indicated some benefit to the fluid
sector from higher-protein milk, resulting in a more wholesome and
nutritional product. The criterion of variability is necessary to
justify pricing a component separately from the product in which it is
contained. In the case of protein in milk the record indicates that the
level of protein varies from season to season, region to region, and
farm to farm. In view of its functional, nutritional, and economic
value in dairy products, its widespread use as a pricing component in
the Southern Michigan market, and its qualification under the three
criteria above, protein appears to be an appropriate component for
pricing milk in Federal Order 40.
Hearing evidence from all parties indicates that pricing milk in
Order 40 on either the current butterfat/skim basis or the basis of two
components--butterfat and either protein or nonfat solids--will not
adequately describe, accurately value, or be a sufficiently precise
method for classifying and pricing milk used for manufactured products.
As proposed, prices for butterfat and protein should be market-
driven. Deriving butterfat and protein values from finished product
prices will send the appropriate economic signals to producers and
handlers by indicating current market supply and demand conditions for
dairy products containing these components of milk.
At issue is the specific design for the revised recommended MCP
plan. Two basic MCP plans were proposed in the reopened hearing: The
plan proposed by proponents MMPA and ICMPA and supported by Leprino,
NCI, and Kraft (the Leprino plan) and the plan proposed by NAJ and
supported by Tri-State Milk Producers Cooperative and the American
Jersey Cattle Club (the NAJ plan).
The Leprino plan derives a protein price from either the NCE block
or barrel cheese price and assigns the residual skim value of the M-W
price to a ``fluid carrier'' component of milk. The NAJ plan derives a
protein price from the NCE block cheese and whey protein concentrate
prices and assigns the residual skim value of the M-W price to the
remaining nonfat nonprotein solids. Each component of the multiple
component pricing plan recommended for adoption will be discussed
separately.
Butterfat. The value of butterfat in the amended order will be the
same as under the current order. There was no proposal or testimony to
change the way butterfat currently is valued.
This decision continues the historical relationship of the values
of butterfat and butter. Currently the value of butterfat is expressed
as a differential; that is, the difference in value between 0.1 pound
of butterfat and 0.1 pound of skim milk. The amended order will express
the value of butterfat on the basis of a price per pound. Whichever
method is used, the value of butterfat in milk is the same. However, by
expressing the value on a per pound basis instead of a differential,
the objective of demonstrating clearly to producers the value of fat in
milk is easily achieved.
As proposed, the butterfat price per pound in the amended order
will be determined by multiplying the butterfat differential by 965 and
adding the Class III price. The resulting price per hundredweight would
then be divided by 100 to give a price per pound of butterfat.
Protein. The protein price for milk pooled under the Southern
Michigan Federal milk order should be calculated by multiplying the
monthly average of 40-pound block cheese prices on the National Cheese
Exchange (NCE) at Green Bay, WI, by 1.32, without including a value for
whey protein.
No opposition was expressed at the hearing to pricing protein on
the basis of its value in the manufacture of cheese. The differences
between participants came in determining the appropriate level of the
protein price.
The original Leprino proposal would calculate the protein price by
multiplying the monthly average of 40-pound block cheese prices on the
NCE by 1.32. Leprino's formula would have resulted in average protein
prices, per pound, of $1.6925 in 1992 and $1.6971 in 1993.
The NCI proposal supported by Kraft (modifying the Leprino plan),
would calculate the protein price by multiplying the monthly average
NCE Cheddar barrel price by 1.32. NCI's formula would have resulted in
average protein prices, per pound, of $1.6408 in 1992 and $1.6475 in
1993.
NAJ uses a ``justifiably higher protein value'' established from
block Cheddar (normally higher than barrel) and adds a whey protein
concentrate (WPC) price in order to account for all milk protein and to
give farmers an incentive to produce protein rather than to reflect the
additional value manufacturers realize from increased protein. The NAJ
proposal would calculate the protein price in two parts: (1) multiply
the NCE monthly average 40-pound block cheese price by 1.32, and (2)
add the monthly average WPC price multiplied by a yield factor of
0.735. The sum of these two values would equal the protein price. NAJ's
formula would have resulted in average protein prices, per pound, of
$2.0738 in 1992 and $2.1664 in 1993.
Each of the proposals would result in a lower protein value than in
the recommended decision or in orders containing MCP plans, such as the
Indiana, Ohio Valley, and Eastern Ohio-Western Pennsylvania Federal
orders. The handler protein price per pound for these orders would have
averaged $2.77 and $2.82 in 1992 and 1993, respectively.
Because the percent of the skim milk value allocated to protein
differs under the two proposed plans, the protein price also differs.
Under the original recommended MCP plan, 79 percent of the total milk
price would be allocated to protein on the basis of 1993 prices. For
1993, the NAJ proposal would allocate 59 percent to protein, and the
Leprino proposal would allocate 46 percent of the total M-W price to
protein. The Leprino plan assigns less value to protein than the NAJ
plan because this plan does not value the protein in whey.
Undisputed by hearing participants was the 1.32 factor, which
represents the pounds of 38 percent moisture Cheddar cheese obtained
from one pound of protein with 75 percent of the protein going into the
cheese as calculated by the modified Van Slyke cheese yield formula.
The hearing record indicates that the modified Van Slyke formula
accurately measures incremental changes in protein. This accuracy
supports the concept that cheese plants would be able to maintain
consistent margins from the processing of small increases of protein
content in milk. Assuming butterfat is constant, a change of protein by
one pound in this formula will change cheese yield by 1.32 pounds.
Therefore, the 1.32 factor is appropriate for determining an order
protein price based on a market-determined cheese price.
Use of a Cheddar cheese price as a basis for valuation recognizes
that, for Cheddar cheese: (1) a well-established national market price
exists; (2) standards for manufacture and grading are accepted widely
on a national basis; (3) the Van Slyke formula calculates yields that
are well-known and verifiable; (4) a majority of other cheese
manufactured in the U.S. is traded in relation to Cheddar values with
economic differences in costs of manufacturing being reflected in the
marketplace; and (5) using Cheddar as a standard significantly
simplifies the process.
The question of which cheese price to use in the market protein
value calculation, either the NCE block or barrel price, will determine
the degree to which the value of the skim portion of milk will be
assigned or allocated to protein. For the purpose of reflecting changes
in Cheddar cheese market prices (as opposed to the level of such
prices), it makes little difference whether the barrel or block price
is used because the prices move very similarly, with the barrel price
approximately 3 to 4 cents per pound lower than the block price during
1991-93. The difference between the average block and barrel prices
from 1992 to 1993 was $0.0383 per pound. Multiplying this difference by
the 1.32 factor results in an average difference of $0.0506 per pound
of protein between the prices derived from the barrel and the block
cheese prices.
The monthly average price for 40-pound block Cheddar cheese on the
NCE is the appropriate price to use for determining the protein price.
Use of the block price results in producers receiving a higher price
for protein than if the barrel price were used, without handlers
incurring any significantly higher cost for milk. Use of the block
price is also consistent with the Eastern Ohio-Western Pennsylvania,
Ohio Valley, and Indiana Federal orders, where the block price is used
to adjust the producer pay price for somatic cell count. The Cheddar
cheese block price is used as a standard by many cheese manufacturers
to price different types of cheese; used in the Coffee, Sugar, and
Cocoa Exchange futures price of cheese; in the Class II price
calculation; and in California's 4a price.
The price difference between block and barrel cheese may be due to
packaging and other nonmilk factors. However, the protein price must be
established at a level that best meets the needs of all concerned. The
block cheese price should be more effective than the barrel price in
establishing a sufficiently high protein price to accomplish the goal
of encouraging producers to produce protein without having a
detrimental impact on handlers.
The protein formula proposed by NAJ also would include the value of
whey protein in the protein price so that all of the protein in the
milk would be accounted for. NAJ's inclusion of whey value would
increase the protein price computed from the NCE block price by an
average of $0.3813 and $0.4690 per pound in 1992 and 1993,
respectively.
The whey protein factor should not be included in the computation
of the protein price. Hearing evidence shows that the whey protein
portion of the NAJ protein price is not necessarily based on a value
that a manufacturer can recover from a whey operation. Use of the
market price for whey protein concentrate (WPC), the highest-priced
whey product, ignores the diversity of whey handling operations and
practices that exist throughout the dairy industry.
Whey protein concentrate manufacturing involves sophisticated and
expensive technology used by very few manufacturers, and apparently by
none in Michigan. Until recently, the dairy industry has treated whey
as having negative value, and the production of whey in connection with
cheese manufacturing represented a disposal problem involving costs
rather than a byproduct opportunity. Inclusion of a whey value in the
protein price at this point in the development of whey disposal
technology would result in including the potential revenue associated
with whey, but none of its actual cost.
Fluid Carrier. The balance of the M-W price, after the values of
protein and butterfat are removed, should be priced on the basis of a
``fluid carrier'' residual. The fluid carrier price per hundredweight
will be computed by subtracting from the Class III price the sum of the
butterfat price times 3.5 and the protein price times the month's
average protein test of the Minnesota-Wisconsin price survey milk.
Because the computation of the fluid carrier price is based on a
residual value, the fluid carrier price could be negative. In this
instance, the fluid carrier price would remain negative, instead of
adjusting either the butterfat or protein prices.
Because the M-W price is a competitive pay price rather than a
price determined from calculating each component's value, the M-W price
reflects factors such as volume premiums, cheese yield premiums,
solids-not-fat premiums, butterfat values offered by some manufacturers
that exceed the butterfat differential, and pure competition for
supply. The fluid carrier residual helps to place a value on these
factors that is not accounted for elsewhere. Also, the standards for
all finished products require inclusion of some fluid from raw milk;
for example, skim milk powder has approximately 4 percent moisture, and
Cheddar cheese has a 38-percent moisture standard. Therefore, the water
in producer milk has some value in manufactured products, resulting in
revenue to the processor as that fluid is captured in products such as
butter, yogurt, cheeses, and nonfat dry milk.
MMPA, ICMPA, Leprino, NCI, and Kraft all supported a fluid carrier
component to represent the residual value of the hundredweight of
producer milk in Class II and Class III. Each party supported a formula
identical to that which is recommended for adoption. The fluid carrier
residual would have provided an average value, per hundredweight, of
$3.39 in 1992 and $3.68 in 1993.
An alternative residual price was proposed by NAJ, which would
price the residual value of the M-W price after the removal of the
butterfat and protein values on the basis of ``other nonfat solids.''
The other solids price would be calculated by subtracting from the M-W
price the sum of the value of 3.5 pounds of butterfat and the average
protein content of milk included in the M-W price survey times the
protein price. The result would be divided by the M-W other solids
content (M-W nonfat solids minus M-W protein) to obtain the other
solids price per pound. This proposed residual would have provided
average values, per pound, of $0.40 and $0.41 in 1992 and 1993,
respectively.
There is no readily available measure of the market value of the
other nonfat solids. The nonfat nonprotein solids component principally
consists of lactose. The other solids price would represent not only
the value of the lactose and ash, but would include an adjustor between
the butterfat and protein component values of milk, which are
determined by the market value of those components in dairy products,
with a competitively set producer pay price (the M-W). While there is a
value to lactose, attributing the entire residual value of milk to the
nonfat nonprotein component would overstate the true economic value of
lactose after accounting for processing costs and ignore the value of
water in milk. It would be inequitable and uneconomical to place the
residual value of milk on lactose instead of on the residual fluid
volume. The other solids price may send a signal to producers to
produce higher solids while sending a conflicting signal to
manufacturers.
Because the M-W price is a basic price for milk, at least one of
the components in the payment plan must represent the difference
between a competitively-set pay price (the M-W) and the product-derived
component prices. The fluid carrier is this component.
In addition, if the other solids price had a negative value, either
the protein or butterfat price would need to be adjusted in order for
the other solids price to retain at least a value of zero. If this
situation were to arise, the adjusted protein price, for example, would
no longer represent the true market value associated with protein.
Consequently, producers and handlers would receive an inappropriate
economic signal from the adjusted price.
The residual skim value of the M-W, after accounting for protein,
should be placed on the fluid carrier component. Hearing record
evidence indicates that the M-W price represents various factors that
may not have a known market value, such as various premiums or pure
competition for milk supply. The fluid carrier value would represent
these factors. The hearing record also shows that moisture standards
exist for all dairy products. The fluid carrier component recognizes
the fact that the water in milk does hold value for the processor and
the producer. Lastly, the correct economic signals relating to
butterfat and protein will be sent to both producers and processors if
the residual calculation is negative. The function of the residual is
to connect the value of milk components in manufactured dairy products
with a market-determined price for milk used in those products.
Miscellaneous. The butterfat and protein component prices will be
expressed on a per-pound basis to the nearest one-hundredth cent.
Analysis has shown that by expressing these prices to the nearest one-
hundredth of a cent, the accuracy of the prices is enhanced
significantly over expressing the prices to the nearest cent.
Additionally, the difference between what is paid into the producer-
settlement fund and what is drawn from the producer-settlement fund is
much closer to zero than when prices are rounded to the nearest full
cent. The fluid carrier price will be expressed on a per hundredweight
basis, rounded to the nearest whole cent.
For the purpose of allocating protein and fluid carrier to the
classes of use, the assumption will be made that the protein and fluid
carrier cannot easily be separated. The protein and fluid carrier will
therefore be allocated proportionately based on the percentage of
protein and fluid carrier in the skim milk received from producers.
In contrast to other orders that have multiple component pricing
provisions, this decision incorporates only one protein price. The
pooling of the components to include the Class I skim portion is
incorporated within the computation of the producer price differential.
This feature of the pricing plan allows for the elimination of separate
handler and producer protein prices, and resulting confusion over which
price, handler or producer, should be used in different situations. In
addition, a handler's per-pound price for protein is the same whether
the handler is buying milk from producers or from other handlers.
The producer price differential, which represents the additional
value of Class I and Class II milk in the pool and any positive or
negative effect of Class III-A, will be determined by computing for
each handler, and then accumulating for all handlers, the differential
value (from Class III) of the Class I, Class II, and Class III-A
product pounds. The differential value is adjusted, when appropriate,
for shrinkage and overage, inventory reclassification, receipts of
other source milk allocated to Class I, receipts from unregulated
supply plants, and location adjustments.
For the purpose of eliminating differences between handler and
producer component values, the value of the Class I skim milk and the
values of the protein and fluid carrier contained in the skim milk
allocated to Class II and Class III will be added to, and the values of
the protein and fluid carrier contained in all producer milk subtracted
from, the differential pool. The accumulated total for all handlers
then will be adjusted by total producer location adjustments and one-
half the unobligated balance in the producer-settlement fund. The
resulting value then will be divided by the total pounds of producer
milk in the pool, with an amount not less than six cents or more than
seven cents per hundredweight deducted. The result is the producer
price differential to be paid to producers on a per hundredweight
basis.
It is possible for the producer price differential to be negative.
A negative producer price differential can result for two reasons. Any
one or more of the Class I, II, or III-A differential prices may be
negative and/or the minus adjustments may be large enough to offset any
positive contribution from the differential prices. A negative producer
price differential would be equivalent to a uniform price less than the
Class III price.
The Leprino panel testifying at the initial hearing session
suggested that payment for protein be based on true protein rather than
total Kjeldahl nitrogen because only true protein has real value to
processors.
Testing for true protein may have considerable merit. However, the
hearing record lacks sufficient discussion of the benefits of
specifying testing for true protein versus total protein. Approved
testing methods currently vary among states, and the orders at this
time should not mandate specific protein tests. If more and more states
begin to mandate specific types of protein testing, it may become
necessary to specify such testing in the orders.
4. Somatic Cell Adjustment
This decision continues to recommend a somatic cell count (SCC)
adjustment to protein prices paid to producers for all classes of milk.
The somatic cell adjustment recommended is derived from the reduction
in cheese yield as the somatic cell level goes from zero to 1,000,000,
converted to a value per pound of protein.
Adjusting protein prices paid to producers by SCC was proposed
during the initial hearing as part of a multiple component pricing
system and was included in the recommended decision. Three fluid milk
processors and a trade association for fluid milk processors filed
exceptions to the recommended decision. Although this specific issue
was outside the scope of the reopened hearing notice, two witnesses at
the reopened hearing session testified against inclusion of a somatic
cell adjustment in addition to filing exceptions to the recommended
decision and briefs after the reopened hearing.
Each of these four parties opposed the recommended application of
an SCC adjustment on milk used in Class I. Support for the SCC
adjustment on Class I milk was stated in MMPA's post-hearing brief.
Following is a summary of the initial hearing somatic cell testimony,
exceptions to the original recommended decision, reopened hearing
testimony, and briefs filed after the reopened hearing. Most of the
exceptions, reopened hearing testimony, and briefs reiterated what was
presented during the initial hearing and in post-hearing briefs. Unless
specified, the following evidence was given at the initial hearing.
The director of milk sales for Michigan Milk Producers Association
stated that the functional value of protein in the production of
manufactured dairy products and its role in providing wholesome flavor
and nutritional value in fluid milk products is affected by the SCC
level of the raw milk supply. Therefore, the witness asserted, elevated
SCC levels and raw bacteria counts diminish the functional value of all
milk. According to the witness, the damage is irreversible and cannot
be restored by a mechanical process at a dairy plant.
The MMPA witness testified that high SCC levels are accompanied by
an increase in the amount of undesirable enzymes in milk as well as an
increased susceptibility of the fat component to attack by these
enzymes. The witness explained that the undesirable enzymes attack the
fat in milk and release free fatty acids. The witness stressed that
even at very low concentrations, free fatty acids are responsible for
producing off-flavors in any dairy product that contains milkfat. The
MMPA witness noted that research has shown that the free fatty acid
content of raw milk with high SCCs is higher than that of raw milk with
low SCCs. The witness also pointed out that the enzymes are able to
survive normal pasteurization and continue the process of deterioration
of the flavor of finished fluid products, thus reducing shelf life.
Therefore, he testified, protein payments to producers should reflect
the influence of somatic cells on the quality of all milk.
The director of member services and quality control for MMPA
testified that mastitis, an inflammation of the mammary gland, is a
reaction to a cow's immune system fighting off invading bacteria. The
witness explained that white blood cells and epithelial cells known as
somatic cells are secreted during the process to destroy the invading
bacteria. The witness stated that the level of somatic cells indicates,
and is proportionate to, the infection level of a cow's udder.
Another witness testified for MMPA that somatic cells seem to have
an impact on milk quality through their ability to cause changes in the
enzymatic characteristics of milk. The witness explained that the
enzymes generated by somatic cells degrade the casein and change its
functional attributes. He pointed out that some changes include higher
losses in cheese yield, differences in flavor characteristics, and
changes in other functional characteristics that may weaken the
structure of curd in a curd formation when making a product. The
witness stated that high SCCs in milk cause an increased rate of rancid
off-flavors, which produce a flavor that would be noticeable to a
consumer. The witness explained that free fatty acids are one component
that determines the shelf life of a fluid product and correlates to
rancid off-flavors.
MMPA's witness went on to say that the enzyme which causes the
damage is always present in an inactive form in milk. The active form
of the enzyme, once it is produced in milk, is heat-stable and
therefore unaffected by pasteurization or ultra-high temperature
processing. The witness explained that most of the damage to protein
occurs while milk is in the udder of the cow. However, if milk is
cooled quickly and held at refrigeration temperature, further damage is
minimized. The witness explained that producers can reduce the average
somatic cell count of their milk through better management and proper
adjustment and maintenance of milking equipment.
The MMPA quality control employee stated that SCC standards were
adopted as a measure of milk quality and are included in the
Pasteurized Milk Ordinance (PMO) because of the recognition of their
public health significance in the milk supply. The witness explained
that the condition of mastitis and the subsequent increase of somatic
cell levels decrease the quality of milk by reducing the levels of
butterfat, lactose, total casein and total solids in milk and
increasing whey protein, chloride, and sodium levels.
The MMPA witness noted that SCCs have been included as a criterion
within quality premium programs throughout the United States, including
Michigan, for several years. The witness testified that all milk
marketing cooperatives in Michigan use the Optical Somatic Cell Count
(OSCC), an electronic method, for measuring levels of somatic cells.
According to the witness, the OSCC method is the most accurate method
available for testing somatic cells and is a method approved by the
Association of Official Analytical Chemists (AOAC). Another MMPA
witness stated that instruments are available and currently are being
used to test a large number of samples on a reliable basis for both
protein and somatic cell count.
The MMPA witness noted that the SCC standards under the PMO would
be lowered from 1,000,000 to 750,000 on July 1, 1993. The witness
pointed out that under the PMO, all Grade A producers are required to
be tested a minimum of four times in six months for somatic cells. He
explained that most producers whose milk is pooled under Federal Order
40 have been tested five times a month for the past several months,
with test results reported to the producers. The witness stated that
MMPA's average SCC for 1992 was 308,000, according to record data.
However, he stated, this average is based upon one SCC test per farm
per month. The witness explained that in comparing data collected for
the past six months, one test per month versus five tests per month,
the cooperative's average SCC could increase by as much as 50,000.
Another MMPA representative testified that the proposed neutral zone
had been reduced from the initial proposal to between 300,000 and
450,000 to better reflect current data with regard to average SCCs in
Order 40.
According to an MMPA witness, an adequate number of times per month
to test a herd for SCC would be the number of times currently used for
butterfat, four or five times. The witness stated that the functional
value of milk changes as soon as the SCC exceeds about 100,000. He
stated that one of his research studies, which was conducted under
ideal conditions, indicated that as SCCs change from zero to 1,300,000,
cheese yields decline an additional two to three percent. The witness
also stated that there is a maximum yield loss of about two percent
when SCCs change from 100,000 to 750,000.
MMPA supported the SCC adjustment on all milk in a brief filed
after the reopened hearing. The brief asserted that the recommended
decision recognizes the impact that SCC levels have on the functional
value of milk for both fluid and manufacturing processors. The brief
noted that the difference in the Class I differentials between the Ohio
and Indiana orders greatly exceed the four to six cents per
hundredweight identified as the potential effect on a Class I handler's
price resulting from the somatic cell adjustment.
The regional dairy director for National Farmers Organization (NFO)
testified in opposition to the inclusion of a somatic cell adjustment.
The witness stated that uniformity in the pricing provisions of Orders
40, 33, 36, and 49 is of overriding importance and urged the Secretary
to adopt the same MCP programs for all orders. The witness argued that
because of the degree of overlap in milksheds and sales between these
orders, differences in order provisions will cause confusion and
disorderly marketing conditions.
The NFO witness observed that SCC is only one of several factors in
NFO's and other quality programs. The witness stated that the
incorporation of an SCC adjustment would destroy the flexibility of
voluntary quality programs. The NFO witness stated that adoption of an
SCC adjustment would overstate the importance of SCC among other
factors used in determining milk quality and elevate SCCs to a
disproportionate role in determining the value of milk. He argued that
this disproportionate emphasis on SCCs is exacerbated by the inherent
vagaries of testing for SCCs.
The NFO representative stated that somatic cell count is one of the
more volatile variables in the measurement of milk quality and can vary
significantly within the same herd. The witness noted that a MMPA
witness testified at the multiple component pricing hearing for Orders
33, 36, and 49 that tests for SCC are much less precise than tests for
butterfat or protein. The NFO witness explained that the variations in
SCC tests within a herd during a month are much greater than for
butterfat or protein.
A Kraft witness stated at the initial hearing that Kraft supports
the inclusion of somatic cell adjustments in any component pricing
plan. The witness noted that testimony and evidence in previous
hearings, as well as in this hearing, reveal that there is a reduction
in cheese yield as somatic cell levels increase, thus lowering the
value of protein in milk.
During the initial hearing, the witness for Country Fresh, Inc.
(Country Fresh), a fluid milk and Class II processor in Order 40,
supported an SCC adjustment on all classes of milk, but recommended
that the size of the proposed adjustment be reduced substantially.
Under his recommended changes to the proposal, the witness stated that
based on the peak cheese prices during 1992, the maximum plus and minus
somatic cell adjustments would have been 15 cents a hundredweight. He
argued that combined, this would create a range of about 30 cents, as
the most the market can bear without creating a disincentive against
receiving high-quality milk.
The witness noted that effective July 1, 1993, the cap on the SCC
for Grade A milk will be 750,000. The witness and Country Fresh's brief
argued that the proposed neutral zone of 300,001 to 500,000 and MMPA's
modified proposed neutral zone of 300,001 to 450,000 are too high. The
witness testified that the average somatic cell count in the Southern
Michigan marketing area is approximately 340,000, according to the
market's largest cooperative. Therefore, the witness suggested that the
appropriate neutral zone be 300,000 to 399,999 and the highest bracket
700,000 and up.
The witness continued by stating that if the somatic cell program
is modified as suggested, Country Fresh could support its inclusion in
the Southern Michigan order. He testified that Country Fresh urges that
the somatic cell program be tried in a moderate rather than a radical
manner. Otherwise, the witness claimed, chaotic marketing conditions
could be created which would result in a new hearing being held in the
not-too-distant future to amend the order. Country Fresh's brief
further noted testimony of MMPA, Leprino, and NFO which asserted that
there are other factors involved in high quality milk besides SCC.
In an exception to the recommended decision, in testimony during
the reopened hearing, and in a post-hearing brief, Country Fresh
changed its position and expressed opposition to an SCC adjustment to
milk used in Class I. During the reopened hearing and in a post-hearing
brief, Country Fresh proposed to modify the recommended Southern
Michigan somatic cell adjustment to be similar to the SCC adjustment on
Class II, III, and producer milk adopted in the Ohio Valley, Eastern
Ohio-Western Pennsylvania, and Indiana marketing orders. Country
Fresh's brief filed after the reopened hearing stated that the handler
currently does not adjust for SCC on the milk it purchases.
The Country Fresh witness testified that uniformity of pricing
provisions across Federal orders is important because a substantial
overlap in Class I sales and raw milk procurement exists between
Indiana, Ohio, and Michigan. The witness stated that the SCC adjustment
on Class I milk in the recommended decision does not apply in either
the Indiana or the Ohio Valley Federal orders.
Country Fresh's brief asserted that implementing an SCC adjustment
on Class I milk in Southern Michigan but not the surrounding areas
would change the Class I price relationship between these orders. The
brief stated that disruptive and inequitable marketing conditions would
result for handlers regulated under the Southern Michigan order
relative to handlers regulated under orders in which no SCC adjustment
is made. The brief contended that evidence presented at either the
initial or reopened hearing did not justify an increase in the cost of
Class I milk in Southern Michigan relative to neighboring orders.
The Country Fresh witness estimated that on a total milk supply
basis, the SCC adjustment for each Class I handler could potentially
affect the Class I price from four to six cents per hundredweight. The
witness stated that the impact of SCC has not been this great in the
Indiana Federal order, where the adjustment is not based on the total
milk supply as was recommended in Southern Michigan.
Country Fresh's exception and brief agreed that lower SCC levels
have some value to fluid milk processors. However, both the exception
and brief argued that no difference exists whether milk is processed in
Michigan or in Indiana; thus no distinction should be made between
these markets based on SCC pricing. In addition, the witness stated
that it is not possible to relate somatic cell levels to a value on
Class I milk or to the specific value adjustments recommended in the
decision.
Witnesses for, and briefs and exceptions filed by, the Kroger
Company (Kroger), Dean Foods Company (Dean), and the Milk Industry
Foundation (MIF) opposed the inclusion of somatic cell counts as part
of the pricing structure as it would relate to Class I fluid handlers.
Kroger operates a pool distributing plant regulated under Order 40.
Dean has been marketing milk in the Southern Michigan market for over
30 years and operates a bottling plant known as Liberty Dairy in Evert,
Michigan. MIF is a national trade association with 215 member companies
located in all 50 states that process nearly 80 percent of all fluid
milk products nationwide.
The division manager of milk procurement for Kroger argued that
there is no economic justification to include a somatic cell adjustment
on Class I sales or any Class II and III products such as raw fluid
milk inventory, half and half, eggnog, Class III shrinkage, and sales
of surplus cream. According to the witness, the price or product yields
of these items are not influenced by the amount of protein in the raw
milk used in their manufacture. Additionally, the witness argued,
adoption of the MMPA proposal would make it impossible for processors
to recover the cost of these products and would create inequitable and
uncompetitive Class II and Class III market conditions for Order 40
processors compared to their competitors regulated under other orders.
The Kroger representative continued by stating that Kroger is not
opposed to a proposal which introduces multiple component pricing with
protein pricing and a somatic cell adjustment for milk processed in
Class II and III used-to-produce products. The witness stated that if
the MMPA proposal is modified accordingly the MCP plan combined with a
somatic cell count adjustment would have a potential benefit to
producers and processors. Kroger's opposition to an SCC adjustment on
Class I milk was reiterated in an exception to the recommended
decision.
The Kroger witness and MIF's brief argued that adoption of an SCC
adjustment on milk used in Class I would result in disruptive and
inequitable marketing conditions for Order 40 handlers versus their
competitors in other markets where the provision does not exist. The
Kroger witness and MIF noted that a somatic cell count adjustment would
eliminate the advance knowledge fluid milk processors currently have of
the Class I price and force handlers to estimate the value of somatic
cells for the current month's price. The Kroger representative claimed
that the proposal would influence the value of Class I milk based on
the SCC level in raw milk.
MIF expressed concern that milk processors would incur increased
costs from milk with low SCCs that they would be unable to recover from
product sales because consumers are unable to differentiate between low
and high SCC milk. MIF's exception also contended that increased costs
from both procuring low SCC milk and more frequent product testing
would lead to higher retail prices for milk and a decrease in fluid
milk sales. Exceptions to the recommended decision, testimony during
the reopened hearing, and post-hearing briefs filed by MIF reiterated
these arguments opposing an SCC adjustment on Class I milk.
According to MIF's brief, there is no quantifiable scientific
evidence that the level of somatic cells results in any appreciable
difference in the attributes of fluid milk, particularly attributes
which would be discernible by consumers. MIF described the testimony of
MMPA as failing to make an absolute statement regarding quantifiable
economic benefits to fluid milk use resulting from lower somatic cell
counts. MIF stressed that there is no need to pay a premium for reduced
SCCs when the permissible count is being reduced by regulations. In
briefs, MIF and NFO questioned whether it is appropriate for the
Federal order system to adopt a policy and administer practices which
allocate economic advantages and disadvantages among certain segments
of the dairy industry.
The witness for Dean Foods stated that there is no scientific
evidence which shows that handlers or consumers benefit from lower
somatic cell counts and that the inclusion of SCC adjustments in the
pricing structure of producer milk within the Federal order system
would ultimately be borne by the consumer. However, the witness stated,
Dean supports the inclusion of SCC premiums in Class II or Class III
producer milk where there is evidence of improved yields due to reduced
levels of somatic cells.
Dean Foods' exception reiterated arguments made by Country Fresh
and MIF. Additionally, Dean's exception noted that a six cent per
hundredweight adjustment in the Class I price would equal 0.005 cents
per gallon and would amount to additional costs between $180,000 and
$200,000 per year for the Liberty Dairy bottling plant. The exception
stated that the plant, at which 85 to 90 percent of receipts are used
in Class I, currently has a premium program which includes an SCC
adjustment as one of the factors in pricing milk. Dean noted, however,
that SCC alone is not considered to be a quality enhancer for Class I
products.
The Leprino panel that testified in the original hearing stated
that Leprino supports the inclusion of SCC adjustments to value protein
properly as long as other basic milk quality criteria are achieved,
notably low psychrotrophic bacteria count and low raw bacteria count.
Additionally, the panel also testified that Leprino opposes quality
adjustments for Class I milk unless it can be clearly demonstrated that
there is a discernable benefit to the Class I handler. The panel
recommended that yield factors used to value somatic cell counts should
be conservative, given the conflicting scientific evidence, and should
be uniform across Federal orders.
According to testimony at the original hearing by the Leprino
production manager, Leprino participates in milk quality programs based
on several parameters, providing incentives for producers with high-
quality milk and disincentives for inferior-quality milk. The witness
noted that in the MCP hearing for Orders 33, 36, and 49, three studies
were introduced into evidence and referenced in the recommended
decision to justify adjusting the protein payment by SCCs. However, the
witness argued that each study shows different yield impacts at
different SCC levels in raw milk. The witness also noted a study which
indicates that SCCs may affect yields, but day-to-day changes in milk
composition obscure the effect. The witness pointed out that a study by
one of the MMPA witnesses states that payment for milk quality should
not rest solely on somatic cell counts.
The Leprino witness testified that scientific evidence indicates
that the greatest yield benefits are at a level of 100,000 to 200,000
and greatest yield losses are above 500,000. The witness noted that the
SCC limit under the PMO soon will be adjusted to 750,000. He stated
that Leprino's proposal offers an adjustment of plus 20 cents to minus
20 cents for legal Grade A milk and includes a prerequisite of other
milk quality conditions that can affect cheese yield. The witness
recommended that USDA use a conservative approach given the
Department's limited experience with mandated milk quality criteria for
payment purposes. The witness urged that the adjustments be uniform
between all Federal orders to ensure orderly marketing.
The Leprino quality assurance director testified that the two
methods for testing for the level of SCC are direct microscopic cell
count (DMSCC) and optical somatic cell count (OSCC). She stated that
the DMSCC is a tedious method which takes extensive training and
precision to perform and is used to calibrate electronic methods. She
estimated that equipment for performing SCC tests by the DMSCC method
costs about $4,000. According to the witness, the OSCC methods are
easily performed, generally more precise, and are less labor intensive
than the DMSCC. The witness stated that the unit cost for equipment is
between $40,000 and $100,000 and, when combined with infra-red
component testing systems, could range from $150,000 to $200,000.
The Leprino quality witness expressed opposition to the proposed
order amendment which would allow no adjustment to a producer's protein
price if an average SCC was not available for the month. The witness
claimed that processors would not be able to reduce payments on high
SCC milk if testing is not mandated. Therefore, the witness urged that
testing be conducted no less than five times per month with at least
one test per week. Furthermore, the witness recommended that if no
tests are available, the handler should assume the milk falls in the
highest adjustment category of 750,000 SCC per milliliter.
The quality witness for Leprino testified that in addition to SCC,
raw bacterial count (SPC) and psychrotrophic bacteria also have a
direct influence on milk quality and hence its value to a processor.
The witness stated that SPC gives an indication of sanitary practices
around milking, and transferring and the storage of milk. The witness
claimed that SPC has been recognized and widely used as a basis for
valuing milk. She added that psychrotrophic bacteria are those bacteria
capable of appreciable growth under commercial refrigeration,
regardless of the optimal growth temperature of the organisms.
According to the witness, such bacteria degrade protein and fats,
causing off-flavors, odors, slime formation, and reduction in cheese
yields.
Leprino's exception to the recommended decision stated that the
adoption of one quality attribute (SCC) as a requirement for milk
payment purposes without consideration of the other raw milk quality
attributes opposes all the market practices currently operating in the
Southern Michigan order. The exception urged that if milk quality is to
be regulated under the order, the adopted model should be similar to
those currently used by almost all of the handlers. The exception
asserted that this program would include multiple minimum raw milk
quality attributes such as raw bacteria counts and psychrotrophic
bacteria counts.
In a brief filed after the reopened hearing, NCI contended that a
specific schedule of SCC adjustments, such as was included in the
recommended decision, should not be included as part of the order. The
brief suggested that the order provisions should include authority for
handlers to submit individual plans for market administrator approval
to pay premiums or make deductions based on SCC as long as the total
payment to all producers reflects the monthly minimum pay price under
the order. The brief contended that this system would permit individual
handlers the option to use adjustments that reflect the effect of low
or high SCC milk on manufactured product production without requiring a
rigid schedule of order-specified adjustments in milk costs based on
various levels of SCC.
A somatic cell count adjustment should be adopted because it
reflects the value of the level of somatic cells contained in milk. The
adjustment will be on protein prices received by producers for all
producer milk. There was significant testimony during the initial
hearing that elevated levels of somatic cells diminish the functional
value of milk in all uses. A reduction in the yield of cheese and other
curd-based manufactured products, an increased rate of off-flavors, and
a reduction in the shelf-life of fluid products all result from
elevated levels of somatic cells.
The proponents' proposed neutral zone of 300,000 to 450,000 has
been reduced to between 301,000 and 400,000 to better reflect the
market's average somatic cell count and to correspond more closely with
the multiple component pricing plan adopted for Orders 33, 36 and 49.
Although increments of 100,000 were proposed, this decision breaks down
somatic cell adjustments into increments of 50,000. Increments of
50,000 assure producers that if slight testing inaccuracies (which may
be greater in the case of somatic cells than for butterfat or protein)
cause their protein price to be adjusted to the next level, that
adjustment will not represent the entire value of a 100,000 increment
of SCC.
In addition, because of the reduction in the maximum permissible
SCC, 750,000 and over will become the maximum increment for which
protein prices will be adjusted for somatic cell content. It is
possible that some Grade A producers may have an average SCC of 750,000
or more for a month without losing Grade A status because of
differences between the market administrators and health departments in
the number of leucocyte (somatic cell) tests taken in a given period of
time. In cases where a handler has not determined a monthly average SCC
for a producer, it will be determined by the market administrator.
Because the value of milk has been shown to be affected by the
level of somatic cells, appropriate adjustments must be determined to
apply to the various levels of somatic cells. These adjustments will be
used to adjust the protein prices paid to individual producers. The
somatic cell adjustment to producer protein prices will be computed by
multiplying the appropriate constant for increment of somatic cell
count by the monthly average 40-pound block cheese price at the
National Cheese Exchange as published monthly by the Dairy Division.
The resulting somatic cell adjustment will be added to or subtracted
from the protein price paid to producers.
The somatic cell adjustment to be used in determining protein
prices paid to producers is derived from the reduction in cheese yield
as the somatic cell level goes from zero to 1,000,000, converted to a
value per pound of protein. The evidence contained in the hearing
record shows that there is a one percent reduction in cheese yields as
somatic cells increase to 100,000, and cheese yields decline an
additional two to three percent as somatic cells increase from 100,000
to 1,000,000. There is also a maximum yield loss of about two percent
as SCCs increase from 100,000 to 750,000. This decision reflects the
proportional change in cheese yields as the SCC level changes.
The constant to be used for calculating somatic cell adjustments
was computed by dividing the change in cheese yields attributable to
changes in somatic cell counts by a representative protein test of
producer milk (3.2 percent). As proposed, the adjustment to the
producer protein price for somatic cell content would be computed by
dividing the product of the cheese price and a factor that varies with
the somatic cell level by the representative protein percent used in
calculating the handler protein price.
MMPA's proposed factors varied from .20 for a somatic cell count
below 100,001 to -.20 for a somatic cell count above 750,000. Leprino's
proposed factors varied from .20 to -.25, and Country Fresh proposed
factors varied from .128 to -.128. This decision includes factors that
vary from .25 to -.25 and are based on the reduction in cheese yield
associated with varying somatic cell counts. Although .20 was the
maximum positive factor proposed, .25 should not overcompensate
producers for producing the highest quality milk.
The factors adopted in this decision are similar to the ones
proposed, with the largest difference occurring at SCC levels below
151,000 and above 500,000. Record testimony reveals that milk
containing between 100,000 and 200,000 SCC yields the greatest benefits
and milk containing more than 500,000 SCC yields the greatest losses in
cheese production. Evidence also reveals that SCC per milliliter of
milk typically ranges between 200,000 and 400,000. Therefore, it is
logical to assume that the majority of Order 40 producers' SCCs will
fall within the 200,000 to 400,000 range.
As shown in Table 1, the factors to be used in adjusting handler
and producer protein prices for somatic cell content do not reflect a
linear relationship between cheese yields and somatic cells because the
relationship between these factors is not linear. Dividing these
factors by a standard protein content of 3.2 yields the constants shown
in Table 1 to be used for computing the somatic cell adjustment. Use of
a constant substantially simplifies the computation of the somatic cell
adjustment without changing the corresponding value. This result occurs
because the protein percentage must change by a considerable amount
before the adjustment will change. Therefore, the somatic cell
adjustment will be calculated by multiplying the constant corresponding
to each somatic cell count interval by the average price of 40-pound
block cheese at the National Cheese Exchange as reported monthly by the
Dairy Division.
Table 1.--Factors and Constants To Be Used in Computing the Somatic Cell
Adjustment
------------------------------------------------------------------------
Constants for
computing the
Somatic cell counts Factors somatic cell
adjustment
------------------------------------------------------------------------
1 to 50,000................................ .250 .078125
51,000 to 100,000.......................... .200 .062500
101,000 to 150,000......................... .150 .046875
151,000 to 200,000......................... .100 .031250
201,000 to 250,000......................... .050 .015625
251,000 to 300,000......................... .025 .0078125
301,000 to 350,000......................... .000 .0000000
351,000 to 400,000......................... .000 .0000000
401,000 to 450,000......................... -.025 -.0078125
451,000 to 500,000......................... -.050 -.015625
501,000 to 550,000......................... -.075 -.0234375
551,000 to 600,000......................... -.100 -.031250
601,000 to 650,000......................... -.125 -.0390625
651,000 to 700,000......................... -.150 -.046875
701,000 to 750,000......................... -.200 -.062500
751,000 to above........................... -.250 -.078125
------------------------------------------------------------------------
Several hearing participants indicated that there is a great deal
of overlap in milk procurement and Class I sales between Order 40 and
Orders 33, 36, and 49 and stressed the importance of uniformity between
the orders. This decision differs from the MCP plan adopted for Orders
33, 36, and 49 because it recommends a somatic cell adjustment on all
producer milk, as proposed. There is no reason to believe that the
resulting difference between the orders will have an adverse effect by
allowing Order 40 handlers a competitive advantage over Orders 33, 36,
and 49, or vice versa.
Although there is considerable overlap in the production areas of
these four markets, significant differences currently exist in the
prices paid to producers located in the same production areas but
pooled under different orders. It is not likely that the considerably
smaller differences in somatic cell adjustments to producer protein
prices will cause marketing disorders in milk procurement arrangements
between the four marketing areas.
Regarding assertions that somatic cell adjustments would increase
Class I handlers' cost of milk significantly, it is unlikely that any
handler's total milk receipts would vary greatly from the market's
average SCC. Even handlers with a somatic cell average in the 201,000-
250,000 range will pay an SCC adjustment of no more than about 6 cents
per hundredweight, which would still result in a lower Class I price
than is effective in any of the other three marketing areas. It is also
probable that application of somatic cell adjustments to milk used in
Classes II and III, but not in Class I, would result in Class I
handlers receiving lower-quality milk from suppliers without the
payment of additional premium.
The effect of somatic cell adjustments on the advance nature of
Class I prices should be expected to be minimal. The somatic cell
adjustments are a very small portion of the cheese price and any
changes from month to month would be correspondingly small in relation
to changes in the cheese price. In addition, the biggest factor in
Class I price movements is the amount of change in the M-W price, which
can be expected, on average, to represent ten times the change in the
cheese price.
The argument that somatic cell counts have wider fluctuations than
butterfat or protein tests is apparently valid. However, the hearing
record does not contain evidence that any problems resulting from
variability in testing outweighs the benefits of including SCC
adjustments in the MCP plan. As specified in the Agricultural Marketing
Agreement Act of 1937, one of the functions of the market administrator
is ``Providing * * * for the verification of weights, sampling and
testing of milk purchased from producers.'' 7 U.S.C. 608c(5)(E).
Because the market administrator will now be verifying the sampling and
testing of milk for somatic cells, the variation in somatic cell levels
due to testing should be minimized much as the differences in butterfat
tests due to testing variations were minimized when the Federal milk
order program was first instituted.
The Agricultural Marketing Agreement Act in 7 U.S.C. Sec. 608c(5)
authorizes the Secretary to adjust minimum prices paid to producers
based upon the quality of the milk purchased. Therefore, the argument
that somatic cells cannot be used as a criterion for adjusting a
producer's pay price is invalid. Furthermore, the hearing record shows
that the level and presence of somatic cells directly affect the
quality and grade of milk in that SCCs above a certain level result in
the loss of a producer's Grade A permit.
Record evidence indicates that SCC is only one of the factors that
affect milk quality. However, there is not enough substantial evidence
to include other factors, such as psychrotrophic and raw bacteria
count, as criteria used to determine milk quality for payment purposes.
Testimony indicates that there may be merit in including other quality
factors besides SCC in Federal milk order pricing, but further study of
the role of such other factors in affecting the value of milk is
needed. In any case, the inclusion of other quality factors in this
proceeding goes beyond the scope of the hearing notice.
Because the NCI proposal for individual handler SCC plans was not
included in the notice for either the initial or the reopened hearing,
thus precluding an opportunity for cross-examination, it cannot be
considered as an alternative to the proposed or recommended SCC
adjustment schedule. It should be noted that adjusting the minimum
producer milk price for SCC does not preclude other premiums paid by
the handler.
5. Administrative Assessment
The maximum allowable rate of assessment to be paid by handlers to
cover the cost of administering the Southern Michigan order should be
increased to 4 cents per hundredweight. The assessment would continue
to be applied to the same milk to which the present assessment applies.
The Act specifies that persons who are regulated shall pay the cost of
operating the program through an assessment on the milk handled by
regulated persons who are defined as handlers under the order. The
present 2-cent per hundredweight maximum allowable rate of assessment
has been provided for the administration of Order 40 since the order
became effective on December 1, 1960.
The 2-cent increase in the maximum allowable rate was proposed by
MMPA. During the initial hearing, a witness for the cooperative
association testified that the present ceiling on the deduction rate
for administrative services does not adequately compensate the market
administrator for all services rendered. In a post-hearing brief, MMPA
stated that the market administrator should have the authority to
collect revenue necessary to perform the duties required by
regulations. There was no other testimony on this proposal at the
hearing. NFO's brief expressed support for MMPA's proposal.
The Ohio Valley, Eastern Ohio-Western Pennsylvania, Southern
Michigan and Michigan Upper Peninsula orders (Orders 33, 36, 40 and 44)
are administered under the supervision of a single market
administrator, headquartered in Cleveland, Ohio. Prior to 1992, Federal
Orders 33 and 36 were administered by another market administrator.
The Balance Sheets and Income and Expense Statements for the
Administrative Fund are compiled by the market administrator and
reported annually to regulated handlers as well as to other interested
parties. Record data for the years 1990 and 1991 show that the
administrative expenses associated with the operation of Orders 40 and
44 exceeded the income the market administrator received from
assessments by $80,000. However, when the four markets were
consolidated in 1992, income exceeded expenses by $400,000. The change
indicates that Orders 33 and 36 are bearing some of the financial
responsibilities of Orders 40 and 44.
The witness for MMPA stated that the current rates of assessment
for Federal Orders 33 and 36 are higher than for Orders 40 and 44.
Furthermore, the witness noted, the recent recommended decision for
Orders 33 and 36 sets the maximum allowable deduction rate for
administrative services at 4 cents per hundredweight.
Handlers and producers serving the market have jointly asked that a
new multiple component pricing program be provided to adjust the value
of milk used by regulated handlers and payments to producers. The
implementation and administration of that pricing plan for Order 40 may
require the purchase of some new laboratory equipment and the
performance of additional administrative duties. Many of the testing
expenses associated with the multiple component pricing plan would be
paid for with money from the marketing service fund. However, because
the value of milk used by handlers in Classes I, II and III would be
established on the basis of the milk's butterfat, protein, fluid
carrier, and somatic cell content, some of the expenses related to
establishing the level of these factors in producer milk likely would
be paid for with money from the administrative fund. Thus, there is no
reason to expect the expenses of administering the order to decline.
Providing a higher maximum rate of assessment in the order does not
mean that the higher rate will apply automatically when the amended
order becomes effective. The amendment gives the market administrator
the discretionary authority to set the rate at any level up to the
maximum specified in the order. When the amended order becomes
effective, the market administrator may decide that no change in the
effective assessment rate is necessary or that some increase to a level
less than the maximum allowed is warranted. Further, an increase in the
maximum rate will assure that Order 40 will bear, with Orders 33 and
36, an equitable share of the cost of operating the market
administrator's office.
6. Marketing Service Assessment
The maximum rate of deduction from payments to nonmember producers
for the cost of providing marketing services such as butterfat,
protein, somatic cell testing, and market information for nonmember
producers should be increased to 7 cents per hundredweight under the
Southern Michigan order. The increase is needed to assure sufficient
revenue to cover the expenses incurred by the market administrator in
providing such services to producers who are not members of a qualified
cooperative association. Currently, the maximum allowable deduction for
such services is 5 cents per hundredweight. Like the administrative
assessment, this maximum rate has been effective since December 1,
1960.
During the initial hearing, Michigan Milk Producers Association
proposed that the maximum allowable assessment rate for marketing
services be increased to 7 cents per hundredweight. The MMPA
representative testified that the market administrator provides
services which involve verification of weights, samples and tests of
milk received from producers, as well as providing market information
to producers who are not members of a cooperative association. The
witness and MMPA's post-hearing brief stated that in order for the
market administrator to adequately perform the duties required by the
order, he must be allowed to have the authority to collect the revenue
necessary to provide those services. A post-hearing brief filed on
behalf of NFO supported MMPA's proposal. There was no opposition to the
proposal.
The Ohio Valley, Eastern Ohio-Western Pennsylvania, Southern
Michigan and Michigan Upper Peninsula orders (Orders 33, 36, 40 and 44)
are administered under the supervision of a single market
administrator, headquartered in Cleveland, Ohio. Prior to 1992, Federal
Orders 33 and 36 were administered by another market administrator.
The Balance Sheets and Income and Expense Statements for the
Marketing Service Fund are compiled by the market administrator and
reported annually to nonmember producers as well as to other interested
parties. Record data for the years 1990 and 1991 show that the expenses
incurred by the market administrator in providing marketing services
exceeded income by about $54,000. In 1992, when the statements for the
four markets were combined, expenses exceeded income by approximately
$116,000.
It is evident from the foregoing that the 5-cent deduction from
producer payments for marketing services in the Southern Michigan order
has been inadequate to cover the costs incurred in the performance of
such duties by the market administrator. It also shows that the
financial situation worsened when the statements were combined in 1992.
The increase will align the maximum marketing service assessment rate
of Order 40 with that recently adopted for Orders 33 and 36. In
addition, the multiple component pricing plan recommended in this
decision will require additional testing activities. Because not all
handlers are equipped to make all of the determinations that will be
required under the amended order, many of these duties will have to be
performed by the market administrator responsible for administering the
order.
The 7-cent maximum rate of deduction for marketing services
proposed by MMPA should be provided in Order 40. The higher rate should
give the market administrator the necessary flexibility to conduct
effective marketing service programs, including any additional duties
relating to the implementation and administration of the new pricing
program that will be incorporated in the order.
Provision of a 7-cent maximum rate does not mean that the 7-cent
rate will become effective automatically. Maximum rather than fixed
rates of deduction are specified in the orders because the relationship
between income and expenses for the fund is subject to many variables.
Changes in the pounds of nonmember milk marketed and the rate assessed
on these marketings increase or decrease the income of the marketing
service fund, while changes in order requirements and the expenses of
providing marketing services result in changes in total outlays.
An increase in the maximum allowable assessment will give the
market administrator the discretionary authority to set the rates of
deduction for marketing services at levels necessary to cover the
expense of providing marketing services. The market administrator may
use his discretionary authority to determine if rates below the upper
limits adopted in the amended order will provide sufficient funding to
conduct an adequate program for nonmember producers.
9. Conforming Changes
To accommodate multiple component pricing, a number of changes need
to be made in the current order provisions of the Southern Michigan
order. To compute a handler's obligation and the producer price
differential, several prices need to be defined. The Class I
differential price should be defined as the difference between the
current month's Class I price and the current month's Class III price.
The Class II differential price should be defined as the difference
between the current month's Class II price and the current month's
Class III price. These differential values should not be confused with
the fixed value that is added to the Minnesota-Wisconsin price for the
second preceding month to arrive at the Class I price for the current
month or the computed value that is used in the computation of the
Class II price. It should also be pointed out that these differential
prices may be negative, which currently happens when the Minnesota-
Wisconsin price is greater than the Class I or Class II price. The skim
milk price will be calculated by subtracting from the Class III price
the value determined by multiplying the butterfat differential by 35.
The skim milk price will be expressed on a per hundredweight basis.
Because producer location adjustments are not changed in this
decision, the application of such adjustments to the producer price
differential remains unchanged.
To enable the market administrator to compute the producer price
differentials, handlers will need to supply additional information on
their monthly reports of receipts and utilization. In addition to the
product pounds and butterfat currently reported, handlers will be
required to report pounds of protein. This information will be required
from each handler for all producer receipts, including milk diverted by
the handler, receipts from cooperatives as 9(c) handlers, and receipts
of bulk milk received by transfer or diversion.
Somatic cell adjustments to protein prices will be made when
handlers pay producers for their milk. Somatic cell counts, therefore,
must be reported with other producer payroll information. As in the
case of payments to producers for butterfat, somatic cell adjustments
do not have to be included in pool obligations or credits for payments
to producers. The handlers receiving producer milk will pay for the
protein in the milk based on its somatic cell count because they are
the parties directly affected by the quality of milk they receive.
The amendments to order language accompanying this revised
recommended decision are based on the current language of the Southern
Michigan order. There are two national amendatory proceedings in
process (the M-W replacement and Class II pricing) that may result in
changes to some of the provisions that will also be changed by this
proceeding. No attempt has been made in drafting the order language
amendments accompanying this decision to accommodate any of the changes
that may result from the other two proceedings. Any adjustments needed
will be made on the basis of the order language in effect at the time a
final decision is issued.
Rulings on Proposed Findings and Conclusions
Briefs and proposed findings and conclusions were filed on behalf
of certain interested parties. These briefs, proposed findings and
conclusions, and the evidence in the record were considered in making
the findings and conclusions set forth above. To the extent that the
suggested findings and conclusions filed by interested parties are
inconsistent with the findings and conclusions set forth herein, the
requests to make such findings or reach such conclusions are denied for
the reasons previously stated in this decision.
General Findings
The findings and determinations hereinafter set forth supplement
those that were made when the Southern Michigan order was first issued
and when it was amended. The previous findings and determinations are
hereby ratified and confirmed, except where they may conflict with
those set forth herein.
(a) The tentative marketing agreement and the order, as hereby
proposed to be amended, and all of the terms and conditions thereof,
will tend to effectuate the declared policy of the Act;
(b) The parity prices of milk as determined pursuant to section 2
of the Act are not reasonable in view of the price of feeds, available
supplies of feeds, and other economic conditions which affect market
supply and demand for milk in the marketing area, and the minimum
prices specified in the tentative marketing agreement and the order, as
hereby proposed to be amended, are such prices as will reflect the
aforesaid factors, insure a sufficient quantity of pure and wholesome
milk, and be in the public interest;
(c) The tentative marketing agreement and the order, as hereby
proposed to be amended, will regulate the handling of milk in the same
manner as, and will be applicable only to persons in the respective
classes of industrial and commercial activity specified in, a marketing
agreement upon which a hearing has been held; and
(d) It is hereby found that the necessary expense of the market
administrator for the maintenance and functioning of such agency will
require the payment by each handler, as his pro rata share of such
expense, 4 cents per hundredweight or such lesser amount as the
Secretary may prescribe, with respect to milk specified in Sec. 1040.85
of the aforesaid tentative marketing agreement and the order as
proposed to be amended.
Recommended Marketing Agreement and Order Amending the Order
The recommended marketing agreement is not included in this
decision because the regulatory provisions thereof would be the same as
those contained in the order, as hereby proposed to be amended. The
following order amending the order, as amended, regulating the handling
of milk in the Southern Michigan marketing area is recommended as the
detailed and appropriate means by which the foregoing conclusions may
be carried out.
List of Subjects in 7 CFR Part 1040
Milk marketing orders.
For the reasons set forth in the preamble, the following provisions
in Title 7, Part 1040, are proposed to be amended as follows:
PART 1040--MILK IN THE SOUTHERN MICHIGAN MARKETING AREA
1. The authority citation for 7 CFR Part 1040 continues to read as
follows:
Authority: Secs. 1-19, 48 Stat. 31, as amended; 7 U.S.C. 601-
674.
2. Section 1040.7 is amended by adding paragraphs (b)(5)(iii) and
(b)(6)(iii) to read as follows:
Sec. 1040.7 Pool Plant.
* * * * *
(b) * * *
(5) * * *
(iii) A partially regulated distributing plant that is neither an
other order plant, producer-handler plant, nor an exempt plant and from
which there is route disposition in consumer-type packages or dispenser
units in the marketing area during the month.
(6) * * *
(iii) The shipping percentages determined pursuant to paragraph
(b)(6)(ii) of this section may be increased or decreased by the market
administrator if the market administrator finds that such revision is
necessary to encourage needed shipments or to prevent uneconomic
shipments. Before making such a finding, the market administrator shall
investigate the need for revision either on the market administrator's
own initiative or at the request of interested parties. If the
investigation shows that a revision of the shipping requirements might
be appropriate, the market administrator shall issue a notice stating
that the revision is being considered and invite data, views, and
arguments. Any request for revision of shipping percentages shall be
filed with the market administrator no later than the 15th day of the
month prior to the month for which the requested revision is desired to
be effective.
* * * * *
3. Section 1040.30 is amended by revising paragraphs (a)
introductory text, (a)(1), (a)(2) and (a)(3), and paragraph (c), and
removing paragraph (d), to read as follows:
Sec. 1040.30 Reports of receipts and utilization.
* * * * *
(a) Each handler described in Sec. 1040.9 (a), (b), and (c) shall
report for each of its operations the following information:
(1) Product pounds, pounds of butterfat, and pounds of protein
contained in:
(i) Receipts of producer milk, including producer milk diverted by
the handler;
(ii) Receipts of milk from handlers described in Sec. 1040.9(c);
and
(iii) Receipts by transfer or diversion of bulk fluid milk
products.
(2) Product pounds and pounds of butterfat contained in:
(i) Receipts of fluid milk products not included in (a)(1) above
and bulk fluid cream products from any source;
(ii) Receipts of other source milk;
(iii) Inventories at the beginning and end of the month of fluid
milk products and products specified in Sec. 1040.40(b)(1); and
(3) The utilization or disposition of all milk, filled milk, and
milk products required to be reported pursuant to this paragraph.
* * * * *
(c) Each handler not specified in paragraphs (a) and (b) of this
section shall report with respect to its receipts and utilization of
milk, filled milk, and milk products in such manner as the market
administrator may prescribe.
4. Section 1040.31 is amended by revising paragraph (a) to read as
follows:
Sec. 1040.31 Payroll reports.
(a) On or before the 20th day after the end of each month, each
handler described in Sec. 1040.9 (a), (b), and (c) shall report to the
market administrator its producer payroll for such month, in the detail
prescribed by the market administrator, showing for each producer:
(1) The producer's name and address;
(2) The total pounds of milk received from such producer, with its
protein and butterfat percentage;
(3) The total pounds of butterfat contained in the producer's milk;
(4) The total pounds of protein contained in the producer's milk;
(5) The somatic cell count of the producer's milk;
(6) The amount, or the rate per hundredweight, or rate per pound of
component, the somatic cell adjustment to the protein price, the gross
amount due, the amount and nature of any deductions, and the net amount
paid.
* * * * *
5. Section 1040.41 is amended by revising the second sentence of
paragraph (c) to read as follows:
Sec. 1040.41 Shrinkage.
* * * * *
(c) * * *If the operator of the plant to which the milk is
delivered purchases such milk on the basis of weights determined by
farm bulk tank calibration, with protein and butterfat tests and
somatic cell counts determined from farm bulk tank samples, the
applicable percentage for the cooperative association shall be zero.
6. Section 1040.50 is amended by revising the section heading,
introductory text and paragraph (a), and adding paragraphs (e) through
(j), to read as follows:
Sec. 1040.50 Class and component prices.
Subject to the provisions of Sec. 1040.52, the class prices per
hundredweight of milk containing 3.5 percent butterfat and the
component prices for the month shall be as follows:
(a) Class I price. The Class I price shall be the basic formula
price for the second preceding month plus $1.75.
* * * * *
(e) Class I differential price. The Class I differential price
shall be the difference between the current month's Class I and Class
III price (this price may be negative).
(f) Class II differential price. The Class II differential price
shall be the difference between the current month's Class II and Class
III price (this price may be negative).
(g) Skim milk price. The skim milk price per hundredweight, rounded
to the nearest cent, shall be the Class III price less an amount
computed by multiplying the butterfat differential by 35.
(h) Butterfat price. The butterfat price per pound, rounded to the
nearest one-hundredth cent, shall be the Class III price plus an amount
computed by multiplying the butterfat differential by 965 and dividing
the resulting amount by one hundred.
(i) Protein price. The protein price per pound, rounded to the
nearest one-hundredth cent, shall be 1.32 times the average monthly
price per pound for 40-pound block Cheddar cheese on the National
Cheese Exchange as reported by the Department.
(j) Fluid carrier price. The fluid carrier price per hundredweight,
rounded to the nearest whole cent, shall be the Class III price, less
the sum of the butterfat price times 3.5 and the protein price times
the average protein test of the basic formula price as reported by the
Department for the month (this price may be negative).
7. Section 1040.53 is revised to read as follows:
Sec. 1040.53 Announcement of class and component prices.
(a) On or before the 5th day of the month, the market administrator
shall announce the following prices and any other price information
deemed appropriate:
(1) The Class I price for the following month;
(2) The Class III price for the preceding month;
(3) The Class III-A price for the preceding month;
(4) The skim milk price for the preceding month;
(5) The butterfat price for the preceding month;
(6) The protein price for the preceding month;
(7) The fluid carrier price for the preceding month;
(8) The butterfat differential for the preceding month.
(b) On or before the 15th day of the month, the market
administrator shall announce the Class II price for the following month
computed pursuant to Sec. 1040.50(b).
8. The section heading in Sec. 1040.60 and the undesignated center
heading preceding it, the introductory text, and paragraphs (a) and (f)
are revised to read as follows:
Producer Price Differential
Sec. 1040.60 Handler's value of milk.
For the purpose of computing a handler's obligation for producer
milk, the market administrator shall determine for each month the value
of milk of each handler with respect to each of his pool plants and of
each handler described in Sec. 1040.9 (b) and (c), as follows:
(a) Calculate the following values:
(1) Multiply the total hundredweight of producer milk in Class I as
determined pursuant to Sec. 1040.44(c) by the Class I differential
price for the month;
(2) Add an amount obtained by multiplying the total hundredweight
of producer milk in Class II as determined pursuant to Sec. 1040.44(c)
by the Class II differential price for the month;
(3) Add an amount obtained by multiplying the hundredweight of skim
milk in Class I as determined pursuant to Sec. 1040.44(a) by the skim
milk price;
(4) Add an amount obtained by multiplying the pounds of skim milk
in Class II and Class III as determined pursuant to Sec. 1040.44(a) by
the average protein content of producer skim milk received by the
handler and multiplying the resulting pounds of protein by the protein
price; and
(5) Add an amount obtained by subtracting from the hundredweight of
skim milk in Class II and Class III as determined pursuant to
Sec. 1040.44(a), an amount determined by multiplying that hundredweight
of skim milk by the average protein content of producer skim milk
received by the handler and multiplying the resulting hundredweight of
fluid carrier by the fluid carrier price.
* * * * *
(f) Add an amount obtained from multiplying the Class I
differential price applicable at the location of the nearest
unregulated supply plants from which an equivalent volume was received
by the pounds of skim milk and butterfat in receipts of concentrated
fluid milk products assigned to Class I pursuant to Sec. 1040.43(e) and
Sec. 1040.44(a)(7)(i) and the pounds of skim milk and butterfat
subtracted from Class I pursuant to Sec. 1040.44(a)(11) and the
corresponding steps of Sec. 1040.44(b), excluding such skim milk and
butterfat in receipts of bulk 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;
* * * * *
9. Section 1040.61 is revised to read as follows:
Sec. 1040.61 Producer price differential.
For each month the market administrator shall compute a producer
price differential per hundredweight of milk as follows:
(a) Combine into one total for all handlers:
(1) The values computed pursuant to Sec. 1040.60 (a)(1), (a)(2) and
(b) through (i) for all handlers who made reports pursuant to
Sec. 1040.30 for the month and who made payments pursuant to
Sec. 1040.71 for the preceding month;
(2) Add the values computed pursuant to Sec. 1040.60 (a)(3),
(a)(4), and (a)(5) and subtract the values obtained by multiplying the
handlers' total pounds of protein and total hundredweight of fluid
carrier contained in such milk by their respective prices;
(3) Subtract the value obtained by multiplying the difference
between the Class III price and the Class III-A price times the pounds
of product determined pursuant to Sec. 1040.43(f);
(4) Add an amount equal to the total value of the minus location
adjustments computed pursuant to Sec. 1040.75 (a) and (b);
(5) Subtract an amount equal to the total value of the plus
location differentials computed pursuant to Sec. 1040.75 (a) and (b);
and
(6) Add an amount equal to not less than one-half of the
unobligated balance in the producer-settlement fund.
(b) Divide the aggregate value computed pursuant to paragraph (a)
of this section by the sum of the following:
(1) The total hundredweight of producer milk; and
(2) The total hundredweight for which a value is computed pursuant
to Sec. 1040.60(f).
(c) Subtract not less than 6 cents nor more than 7 cents per
hundredweight. The result shall be the ``producer price differential.''
10. Section 1040.62 is revised to read as follows:
Sec. 1040.62 Announcement of producer prices.
On or before the 11th day after the end of each month, the market
administrator shall announce the following prices and information:
(a) The producer price differential;
(b) The protein price;
(c) The fluid carrier price;
(d) The butterfat price;
(e) The average protein content of producer milk; and
(f) The statistical uniform price for milk containing 3.5 percent
butterfat, computed by combining the Class III price and the producer
price differential.
11. A new section 1040.63 with an undesignated centerheading
preceding it and a new section 1040.64 are added to read as follows:
Producer Price Differential
Sec. 1040.63 Value of producer milk.
The value of producer milk shall be the sum of:
(a) The producer price differential computed pursuant to
Sec. 1040.61 and adjusted pursuant to Sec. 1040.75, multiplied by the
total hundredweight of producer milk received from the producer;
(b) The butterfat price computed pursuant to Sec. 1040.50(h),
multiplied by the total pounds of butterfat contained in the producer
milk received from the producer;
(c) The protein price computed pursuant to Sec. 1040.50(i) and
adjusted pursuant to Sec. 1040.64, multiplied by the total pounds of
protein contained in the producer milk received from the producer; and
(d) The fluid carrier price computed pursuant to Sec. 1040.50(j),
multiplied by the total pounds of fluid carrier contained in the
producer milk received from the producer.
Sec. 1040.64 Computation of somatic cell adjustment.
(a) For each producer, an adjustment to the protein price for the
somatic cell count of the producer's milk shall be determined by
multiplying the constant associated with the appropriate somatic cell
count interval in the table in paragraph (b) of this section by the
simple average price for the month of 40-pound blocks of Cheddar cheese
at the National Cheese Exchange as reported by the Department. If a
handler has not determined a monthly average somatic cell count, it
will be determined by the market administrator.
(b) The following table shows the factors and constants to be used
in computing the somatic cell adjustment:
------------------------------------------------------------------------
Constants for
computing the
Somatic cell counts Factors somatic cell
adjustment
------------------------------------------------------------------------
1 to 50,000................................ .250 .078125
51,000 to 100,000.......................... .200 .062500
101,000 to 150,000......................... .150 .046875
151,000 to 200,000......................... .100 .031250
201,000 to 250,000......................... .050 .015625
251,000 to 300,000......................... .025 .078125
301,000 to 350,000......................... .000 .000000
351,000 to 400,000......................... .000 .000000
401,000 to 450,000......................... -.025 -.0078125
451,000 to 500,000......................... -.050 -.015625
501,000 to 550,000......................... -.075 -.0234375
551,000 to 600,000......................... -.100 -.031250
601,000 to 650,000......................... -.125 -.0390625
651,000 to 700,000......................... -.150 -.046875
701,000 to 750,000......................... -.200 -.062500
751,000 and above.......................... -.250 -.078125
------------------------------------------------------------------------
12. Section 1040.71 is amended by revising paragraphs (a)(1) and
(a)(2) to read as follows:
Sec. 1040.71 Payments to the producer-settlement fund.
(a) * * *
(1) The total value of milk of the handler for such month as
determined pursuant to Sec. 1040.60.
(2) The sum of:
(i) An amount obtained by multiplying the total hundredweight of
producer milk as determined pursuant to Sec. 1040.44(c) by the producer
price differential, excluding any applicable location adjustment
pursuant to Sec. 1040.75(a)(3);
(ii) An amount obtained by multiplying the total pounds of protein
contained in producer milk by the protein price;
(iii) An amount obtained by multiplying the total pounds of fluid
carrier contained in producer milk by the fluid carrier price; and
(iv) An amount obtained by multiplying the pounds of skim milk and
butterfat for which a value was computed pursuant to Sec. 1040.60(f) by
a price computed as follows: the statistical uniform price as adjusted
for location pursuant to Sec. 1040.52 less 3.5 times the butterfat
differential pursuant to Sec. 1040.74.
* * * * *
13. Section 1040.73 is amended by revising the first sentence of
paragraph (a), paragraph (b)(1)(ii), and paragraph (c), to read as
follows:
Sec. 1040.73 Payments to producers and to cooperative associations.
(a) Except as provided by paragraph (b) of this section, on or
before the 15th day of each month, each handler (except a cooperative
association) shall pay each producer for milk received from the
producer during the preceding month, not less than the value determined
pursuant to Sec. 1040.63 adjusted by the location differential pursuant
to Sec. 1040.75, less the payment made pursuant to paragraph (d) of
this section. * * *
(b) * * *
(1) * * *
(ii) The total pounds of butterfat, total pounds of protein
contained, and total pounds of fluid carrier in such milk, and the
average somatic cell count;
* * * * *
(c) On or before the 13th day after the end of each month, each
handler shall pay a cooperative association, which is a handler with
respect to milk received by him from a pool plant operated by such
cooperative association, or by bulk tank delivery pursuant to
Sec. 1040.9(c), not less than an amount computed by:
(1) The hundredweight of Class I milk received times the Class I
differential price for the month plus the pounds of Class I skim milk
times the skim milk price for the month;
(2) The hundredweight of Class II milk received times the Class II
differential price for the month,
(3) The pounds of butterfat received times the butterfat price for
the month;
(4) The pounds of protein received in Class II and Class III times
the protein price for the month;
(5) The pounds of fluid carrier received in Class II and Class III
times the fluid carrier price for the month;
(6) The somatic cell adjustment to the protein price, as computed
pursuant to Sec. 1040.63(c); and
(7) Less any payment made pursuant to paragraph (d) of this
section.
* * * * *
14. Section 1040.74 is revised to read as follows:
Sec. 1040.74 Butterfat differential.
The butterfat differential, rounded to the nearest one-tenth cent,
shall be 0.138 times the butter price less 0.0028 times the average
price per hundredweight, at test, for manufacturing grade milk, f.o.b.
plants in Minnesota and Wisconsin, as reported by the Department for
the month. The butter price means the simple average for the month of
the daily prices per pound of Grade A (92 score) butter. The prices
used shall be those of the Chicago Mercantile Exchange as reported and
published weekly by the Dairy Division, Agricultural Marketing Service.
The average shall be computed by the Director of the Dairy Division
using the price reported each week as the daily price for that day and
for each following day until the next price is reported.
15. Section 1040.75 is amended by revising paragraphs (a)(1) and
(c), to read as follows:
Sec. 1040.75 Plant location adjustments for producers and on nonpool
milk.
(a) * * *
(1) May deduct for milk to be paid for at the producer price
differential the rate per hundredweight applicable pursuant to
Sec. 1040.52(a) (1) or (2) for the location of the plant at which the
milk was first physically received.
* * * * *
(c) For purposes of computation pursuant to Secs. 1040.71 and
1040.72, the statistical uniform price shall be adjusted at the rates
set forth in Sec. 1040.52 applicable at the location of the nonpool
plant from which the other source milk was received except that the
statistical uniform price, so adjusted, shall not be less than the
Class III price.
16. Section 1040.76 is amended by revising paragraph (a)(4) and the
third sentence of paragraph (b)(1)(ii), to read as follows:
Sec. 1040.76 Payments by handler operating a partially regulated
distributing plant.
* * * * *
(a) * * *
(4) Multiply the remaining pounds by the amount by which the Class
I differential price exceeds the producer price differential, both
prices to be applicable at the location of the partially regulated
distributing plant (but not to be less than the Class III price); and
* * * * *
(b) * * *
(1) * * *
(ii) * * * Any such transfers remaining after the above allocation
which are classified in Class I and for which a value is computed for
the handler operating the partially regulated distributing plant
pursuant to Sec. 1040.60 shall be priced at the statistical uniform
price (or at the weighted average price if such is provided) of the
respective order regulating the handling of milk at the transferee-
plant, with such statistical uniform price adjusted to the location of
the nonpool plant (but not to be less than the lowest class price of
the respective order), except that transfers of reconstituted skim milk
in filled milk shall be priced at the lowest class price of the
respective order; and
* * * * *
Sec. 1040.85 [Amended]
17. In Section 1040.85 the introductory text is amended by removing
the words ``2 cents'' and adding in their place the words ``4 cents.''
Sec. 1040.86 [Amended]
18. In Section 1040.86 paragraph (a) is amended by removing the
words ``5 cents'' and adding in their place the words ``7 cents''.
Dated: December 2, 1994.
Kenneth C. Clayton,
Acting Administrator.
[FR Doc. 94-30417 Filed 12-13-94; 8:45 am]
BILLING CODE 3410-02-P
