94-30417. 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  

  • [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
    
    
    

Document Information

Published:
12/14/1994
Department:
Agricultural Marketing Service
Entry Type:
Uncategorized Document
Action:
Proposed rule.
Document Number:
94-30417
Dates:
Comments are due on or before January 13, 1995.
Pages:
0-0 (1 pages)
Docket Numbers:
Federal Register: December 14, 1994, Docket No. AO-225-A45-R01, DA-92-10
CFR: (22)
7 CFR 1040.44(a)
7 CFR 1040.52(a)
7 CFR 1040.44(a)(7)(i)
7 CFR 1040.9(c)
7 CFR 1040.7
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