[Federal Register Volume 60, Number 160 (Friday, August 18, 1995)]
[Proposed Rules]
[Pages 43066-43089]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-20347]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 60, No. 160 / Friday, August 18, 1995 /
Proposed Rules
[[Page 43066]]
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; Decision on
Proposed Amendments to Marketing Agreement and to Order
AGENCY: Agricultural Marketing Service, USDA.
ACTION: Proposed rule.
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SUMMARY: This final decision adopts a multiple component pricing (MCP)
plan 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 also
adopts changes in qualifying shipments from pool supply plants and
gives the market administrator the authority to adjust the monthly
shipping percentage requirements for both proprietary and cooperative
supply plants or units of supply plants. In addition, the maximum
allowable administrative and marketing service assessment rates are
increased to 4 and 7 cents, respectively. The amendments are based on
industry proposals considered at public hearings held during February
1993 and March 1994 in Novi, Michigan, and in Grand Rapids, Michigan,
respectively.
FOR FURTHER INFORMATION CONTACT: Constance M. Brenner, Marketing
Specialist, USDA/AMS/Dairy Division, Order Formulation Branch, Room
2968, 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 rule will not have a
significant economic impact on a substantial number of small entities.
The amended order will promote more orderly marketing of milk by
producers and regulated handlers.
These proposed amendments have been reviewed under Executive Order
12778, Civil Justice Reform. This rule is not intended to have a
retroactive effect. If adopted, this proposed rule will not preempt any
state or local laws, regulations, or policies, unless they present an
irreconcilable conflict with this rule.
The Agricultural Marketing Agreement Act of 1937, as amended (7
U.S.C. 601-674), provides that administrative proceedings must be
exhausted before parties may file suit in court. Under section
608c(15)(A) of the Act, any handler subject to an order may 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).
Revised Recommended Decision: Issued December 2, 1994; published
December 14, 1994 (59 FR 64464).
Extension of Time for Filing Exceptions: Issued January 18, 1995;
published January 24, 1995 (60 FR 4571).
Preliminary Statement
Public hearings were held upon proposed amendments to the marketing
agreement and the order regulating the handling of milk in the Southern
Michigan marketing area. The hearings were held, pursuant to the
provisions of the Agricultural Marketing Agreement Act of 1937, as
amended (7 U.S.C. 601-674), and the applicable rules of practice (7 CFR
Part 900), at Novi, Michigan, on February 17-18, 1993, and at Grand
Rapids, Michigan, on March 1, 1994. 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, 1994 (59 FR 8874).
Upon the basis of the evidence introduced at the February 1993
hearing and the record thereof, the Administrator, on November 29,
1993, issued a recommended decision containing notice of the
opportunity to file written exceptions thereto. The proceeding was
reopened; an emergency decision and final rule pertaining to the
``lock-in'' provision (Issues 7 and 8) were published on May 23, 1994
(59 FR 26603) and June 29, 1994 (59 FR 33418), respectively. On
December 2, 1994, the Administrator issued a revised recommended
decision containing notice of the opportunity to file written
exceptions thereto.
The material issues, findings and conclusions, rulings, and general
findings of the recommended decision are hereby approved and adopted
and are set forth in full herein, subject to the following
modifications:
1. Under Issue 2, one sentence is added in paragraph 1, one
paragraph is added after paragraph 7, paragraph 13 is revised, and one
paragraph is added after paragraph 13.
[[Page 43067]]
2. Under Issue 3, two sentences are added to paragraph 2, two
paragraphs are added after paragraph 46, the fourth sentence of
paragraph 47 is revised, one paragraph is added after paragraph 47, one
paragraph is added after paragraph 56, one paragraph is added after
paragraph 69, one sentence is added after the third sentence of
paragraph 70, the last sentence of paragraph 70 is revised, one
paragraph is added after paragraph 71, two paragraphs are added after
paragraph 72, one paragraph is added after paragraph 74, one paragraph
is added after paragraph 78, one sentence is added after the first
sentence of paragraph 87, one sentence is added at the end of paragraph
89, and three sentences are added at the end of paragraph 90.
3. Under Issue 4, paragraph 1 is revised, the third sentence of
paragraph 3 is revised, the first sentence of paragraph 33 is modified,
ten paragraphs are added after paragraph 41, the second sentence of
paragraph 42 is deleted, three paragraphs are added after paragraph 42,
paragraph 45 is revised, one paragraph is added after paragraph 45, one
paragraph is added after paragraph 50, four paragraphs are added after
the table following paragraph 50, paragraphs 51, 52, 53, and 54 are
deleted, paragraph 58 is revised, and one paragraph is added after
paragraph 58.
4. Under Issue 9, paragraph 1 is revised, two paragraphs are added
after paragraph 1, the second sentence of paragraph 3 is revised, five
paragraphs are added after paragraph 3, paragraph 4 is deleted,
paragraph 5 is revised, and one paragraph is added after paragraph 5.
5. Throughout this proposed rule, non-substantive changes to the
revised recommended decision, such as referring to Michigan Milk
Producers Associations as MMPA, were made to increase consistency.
The material issues on the record of the hearing 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.
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
(Issues 1, 5, and 6, respectively) that were considered at the initial
1993 hearing. Therefore, this decision contains no changes regarding
those issues from the decisions published December 6, 1993 (58 FR
64176), and December 14, 1994 (59 FR 64464).
Issues 2, 3, 4, and 9 were addressed in the reopened hearing on
March 1, 1994, and discussed in the revised recommended decision.
Comments on the revised recommended decision were received regarding
modification of the pool supply plant shipping standard, multiple
component pricing, and somatic cell adjustment (Issues 2, 3, and 4,
respectively). The comments are summarized and addressed under the
appropriate issue. The discussion of Issue 3, multiple component
pricing, is revised to reflect comments received and responses to those
comments. The conclusions of Issue 3 remain as recommended in the
revised decision. Based on comments received and reexamination of the
hearing record, Issues 2 and 4 are revised in this final decision.
Issue 9, conforming changes, has been revised to reflect changes in the
decision regarding Issues 2 and 4.
Issues 7 and 8 were addressed 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).
Findings and Conclusions
The following findings and conclusions on the material issues are
based on evidence presented at the hearing and the record thereof:
1. 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. A post-hearing brief filed by
National Farmers Organization (NFO) 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.
This decision extends the market administrator's discretionary
authority to include proprietary supply plants. 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
[[Page 43068]]
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 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.
Dean Foods Company's (Dean Foods) exception to the revised
recommended decision agreed that this proposal's adoption would allow
for greater flexibility than currently exists. However, Dean Foods
contended that by not extending authority for the market administrator
to modify shipping standards for proprietary supply plants, the revised
recommended decision excludes proprietary and favors cooperative supply
plants. The exception noted that market conditions would affect
proprietary and cooperative supply plants similarly; hence, the
flexibility of standards should be available to all supply plants.
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.
Testimony by proponent at the hearing stated that because
proprietary supply plants have different qualifying standards than
cooperative supply plants, the proposal did not need to be applied to
proprietary supply plants. Proprietary plants have a fixed
qualification percentage of 30 percent of the total quantity of Grade A
milk received at the plant each month. The order allows both
proprietary and cooperative supply plants to qualify automatically
during the months of March through August based on performance during
the previous September through February.
The proposal published in this proceeding's hearing notice did not
limit the scope of the market administrator's authority to adjust
shipping percentages to cooperative-operated supply plants only. Though
no testimony was offered to include proprietary supply plants, it is
reasonable to extend the market administrator's authority to adjust the
shipping percentages for either or both cooperative- or proprietary-
operated pool supply plants. Market conditions affect all plants, no
matter whether operated by cooperatives or proprietors, and the
recommended decision would have been unnecessarily restrictive.
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 (MCP)
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 (Leprino) and
supported by MMPA, Independent Cooperative Milk Producers Association
(ICMPA), and several other dairy
[[Page 43069]]
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. The protein price paid by handlers for Class II
and Class III milk will be adjusted based on the somatic cell content
of the milk. This somatic cell adjustment is discussed fully under
Issue 4.
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 (USDA), by 0.138 and subtracting the
Minnesota-Wisconsin price (the M-W) at test, also as reported by USDA,
multiplied by 0.0028.
The initial hearing in this proceeding was held February 17 and 18,
1993. MMPA and ICMPA, the two original proponents of multiple component
pricing under the order, requested reopening the February 1993
proceeding to consider proposals to modify the MCP plan recommended by
the 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 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.
[[Page 43070]]
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 NCE 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
[[Page 43071]]
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.
NAJ 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 (WPC) 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 (Tri-State), 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-
[[Page 43072]]
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.
After issuance of the revised recommended decision, comments that
specifically pertained to multiple component pricing generally
supported its adoption in the Southern Michigan marketing area. Of the
comments received by hearing participants, Leprino and NCI supported
the recommended ``Leprino Plan.''
Several exceptions to the revised recommended decision advocated
consistency of multiple component pricing plans across orders. NCI
advocated the importance of consistent plans in those orders with a
significant quantity of manufacturing milk and production of a
significant quantity of cheese. A joint exception filed on behalf of
Country Fresh, Inc. (Country Fresh) and Parmalat USA Corporation
(Parmalat) advocated consistency of plans across orders, and commented
that component pricing plans implemented within the Federal milk order
system have become more complex. NAJ and Tri-State also commented on
the lack of uniformity between the recommended multiple component
pricing plans for this Southern Michigan proceeding and the proceeding
involving five midwest markets (DA-92-27).
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
Class II and Class III 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.
Dean Foods and several other fluid milk processors concurred with
the revised recommended decision that multiple component pricing should
apply to Class II and Class III milk only, while Class I milk should
continue to be priced on a butterfat-skim volume basis. Numerous
comments filed regarding the proposed somatic cell adjustment on Class
I milk also stated that MCP should not be applied to Class I. This
decision has neither recommended nor adopted provisions that would
price Class I milk on its protein and fluid carrier residual
components.
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
[[Page 43073]]
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 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.
The variety of multiple component pricing plans in Federal milk
orders reflect different industry proposals, different hearing records,
different marketing conditions, a continual refinement in multiple
component pricing plans, and an attempt to acknowledge and lend
uniformity to what is occurring in the marketplace. It seems reasonable
to believe that multiple component pricing plans will improve as the
industry develops more experience with them.
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 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 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
[[Page 43074]]
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.
In comments filed in response to the revised recommended decision,
NAJ and Tri-State supported the use of the NCE 40-pound block cheese
price to calculate the protein price and adjust the protein price for
somatic cell count level. However, Dean Foods, Farmers Dairies, Inc.,
Anderson-Erickson Dairy Company (Anderson-Erickson), and Southern Food
Groups, Inc., took exception to using the 40-pound block Cheddar cheese
price in determining the protein value and the somatic cell adjustment,
and instead supported using the barrel Cheddar cheese price. The
exceptions stated that prices in the Federal order program are based on
a concept of minimum prices and the barrel Cheddar cheese price would
better approximate a minimum price.
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 block
Cheddar cheese price has been determined to be the appropriate price to
be used in determining the protein value and adjust for somatic cell
count in a separate proceeding involving five midwest markets. 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; and in California's
4b 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.
In pure economic terms the price of a product represents the supply
and demand for that product as affected by place, form, and time. The
problem with determining a price for protein contained in milk is that
the protein is not marketed as a separate unique product, but is
marketed as an integral part of both fluid and manufactured dairy
products. Therefore, in determining an appropriate protein price, the
value of protein in dairy products is determined by using the value of
a product whose yield is a function of the protein content of the milk.
At this point in time no attempt is made to reflect the protein content
of milk in the value of milk used for fluid use. For this reason, the
component pricing plan recommended in this decision does not apply to
milk used for Class I purposes.
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.
Dean Foods concurred with the revised recommended decision that the
value of protein in whey should not be included in the protein price
calculation.
NAJ and Tri-State excepted to the calculation of the protein price
in the revised recommended decision, advocating instead their proposal
from the reopened hearing. The groups disagreed with the revised
recommended decision's conclusion that because whey processing
facilities do not currently exist in the Southern Michigan marketing
area, whey should not be included in the protein price calculation. The
groups also contended that the NAJ plan would allow for more uniform
gross margins for all component levels than would the Leprino plan. The
exception questioned whether the Department was more interested in
providing returns to producers or manufacturers.
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, 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.
The principal issues that must be addressed in determining the
computation of the protein price are the factors that must be included
to arrive at a price that most accurately reflects the value of protein
in milk. Analysis of the data in this decision shows that using the
block cheese price results in a protein price that accomplishes three
goals: 1) components will be priced at levels that reflect their value
in the market place, 2) components will be priced at levels that inform
producers about which component has the greatest
[[Page 43075]]
value and that make it worthwhile to produce that component, and 3)
components will be priced at a level that will return a positive result
to the manufacturing industry. All three of these goals are constrained
by the requirement that the total value of the component prices must be
equal to the M-W price.
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 M-W 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.
NAJ and Tri-State took exception to the revised recommended
decision's placement of the residual value of the M-W price, after
butterfat and protein are accounted for, on a fluid carrier component.
These two groups advocated the position contained in their proposal
that the residual value should be placed on other nonfat nonprotein
solids. The groups contended that the solids in milk have value, allow
manufactured products to hold water, and thus should be included in the
MCP plan. They argued that the fluid carrier residual would not provide
the correct incentive for producers.
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. 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
[[Page 43076]]
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 difference in the somatic cell
adjustment on the value of protein in Class II and Class III and on
producers' value of protein also will be absorbed in 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. In comments filed after the revised recommended decision,
Leprino encouraged the Department to develop information concerning the
testing for true protein in the future.
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. When (or if) the
industry does move to testing for true protein, this decision should
not be viewed as a hindrance to that conversion. In no way does this
decision mandate a specific testing procedure. At such time as a change
to testing for true protein may occur, a change in the 1.32 factor may
be necessary.
4. Somatic cell adjustment. The value of milk should reflect the
level of somatic cells contained in that milk. The adjustment in value
should be made by adjusting the protein price paid by handlers for
Class II and Class III milk, and the protein price paid to producers,
for the somatic cell count (SCC) of the milk. This decision modifies
the revised recommended decision, in which a somatic cell count
adjustment would have been made 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, briefs filed after the reopened hearing, and exceptions to
the revised recommended decision. 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 MMPA 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-
[[Page 43077]]
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, 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
[[Page 43078]]
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, 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 Foods 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 discernable 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 Foods supports the
[[Page 43079]]
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 to the original recommended decision
reiterated arguments made by Country Fresh and MIF. Additionally, Dean
Foods' 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 Foods 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 the transfer and 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.
Although there was little opposition to the incorporation of some
form of somatic cell adjustment, a number of exceptions were filed in
response to the revised recommended decision on this issue. The
exceptions focused primarily on the effect the proposed somatic cell
adjustment would have on fluid milk handlers. None of the comments
filed in response to the revised recommended decision supported a
somatic cell adjustment on Class I milk.
Dean Foods, NCI, Prairie Farms Dairy, Inc., and Kroger each opposed
including any somatic cell adjustment within the Federal milk order
program. Dean Foods contended that the quality of milk and milk
products has been and should continue to be tested and enforced by
other agencies through the PMO. However, Dean Foods did not oppose an
adjustment on Class III milk, stating that if any segment of the dairy
industry is able to promote a component in milk or enhance quality that
will increase
[[Page 43080]]
profitability, that component or quality factor should be included in
Federal milk orders.
Thirty of the 31 exceptions received to the revised recommended
decision commented on the proposed somatic cell adjustment to protein
prices paid to producers for all classes of milk. Six of the exceptors
had participated in either or both of the hearings in this proceeding:
Country Fresh and Parmalat (joint brief), Dean Foods, Kroger, Leprino,
MIF, and NCI. Of the other 24 exceptions received, only one handler is
located physically in the Southern Michigan marketing area. Most
exceptions primarily addressed the issue of a proposed somatic cell
adjustment on Class I milk.
Most exceptions regarding a somatic cell adjustment repeated
opposition to a somatic cell adjustment on Class I milk as set forth by
MIF in testimony, post-hearing brief, and exceptions to the revised
recommended decision. The exceptors all gave the same six reasons for
their opposition: 1) there was not enough scientific evidence at the
hearing to support a somatic cell adjustment on Class I milk, 2)
somatic cells are not the only quality factors that should be included,
3) a somatic cell adjustment on Class I milk would cause disruptive and
inequitable marketing conditions for fluid handlers, both between and
within marketing areas, 4) fluid handlers cannot recover the added cost
of the somatic cell adjustment from the market place, 5) a somatic cell
adjustment would eliminate advance Class I pricing, and 6) Federal
orders should not be involved in quality issues.
Dean Foods' exception contended that placing a somatic cell
adjustment on Class I milk does not conform to the Agricultural
Marketing Agreement Act of 1937 because the price will not be ``uniform
as to all handlers.'' Dean Foods claimed that including a somatic cell
adjustment on all classes of milk would add to the profitability of
manufacturing handlers but result in a loss of profitability to fluid
milk handlers. This would occur, according to the exception, because
while both types of handlers would be charged more for low SCC milk,
the manufacturing handlers would be able to recover the cost (through
increased yields) while the fluid milk handlers would not.
Regarding arguments that the advance nature of Class I price
announcements would be eliminated, Dean Foods' exception disputed the
revised recommended decision's comment that any change would be
expected to be minimal. Dean Foods contended that any change that is
unknown is not ``minimal'' when bidding for contracts.
Dean Foods' exception also contended that basing the somatic cell
adjustment formula on cheese yields proves that fluid milk does not
gain a quantifiable economic benefit from milk with low somatic cells.
Country Fresh and Parmalat's joint exception noted that under the
revised recommended decision, the somatic cell adjustment on Class I
milk would benefit producers by rewarding lower herd SCC. The brief
contended that the somatic cell adjustment would give Class I handlers
an incentive to procure lower quality, thus less costly, milk.
Sani-Dairy filed an exception to the somatic cell adjustment
included in the revised recommended decision. This handler, partially
regulated under the Eastern Ohio-Western Pennsylvania Federal milk
order (Order 36), which adjusts the protein price for the somatic cell
count in Class II and Class III milk, claimed that the somatic cell
adjustment on Class II milk has increased Sani-Dairy's costs. The
exception contended increased costs have occurred because 1) SCC levels
in milk are improving due to higher milk standards, 2) the calculation
tables for Order 36 are set to higher counts than the milkshed average,
and 3) difficulty exists in recouping extra costs, particularly from
cottage cheese, in a plant with mixed utilization of milk.
In addition to opposing a somatic cell adjustment on Class I milk,
Anderson-Erickson also opposed a somatic cell adjustment on specific
Class II products (dairy desserts and ice cream).
A somatic cell count adjustment should be adopted because it
reflects the value of the level of somatic cells contained in 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 recommended decision proposed that the adjustment be applied to
protein prices received by producers for all producer milk, regardless
of the class in which it is used. Such an application would have
avoided including the difference between the handler and producer
somatic cell adjustments in the computation of the producer price
differential; a procedure that, during some months, could result in a
significant adjustment in the producer price differential per
hundredweight. The recommended application also would have assured that
all handlers' obligations would reflect the quality of the milk they
receive.
Although many of the objections to a somatic cell adjustment on all
milk are not persuasive, as noted in the revised recommended decision,
this decision has been changed to include an adjustment to the value of
milk based on the level of somatic cells contained in all producer milk
and in Class II and Class III. As a result, the somatic cell adjustment
will be included in the pool computation, so handlers will have to
report producer somatic cell count information for all producers with
their reports of receipts and utilization.
The decision to omit application of a somatic cell adjustment on
milk used in Class I is based on several factors. As observed by
exceptors, the hearing record contained little if any testimony or
evidence to quantify the economic effect of varying somatic cell levels
on Class I milk, although there was considerable testimony as to the
effect somatic cells have on shelf life, off flavors and rancidity in
fluid milk products. Because no specific data about the value of using
high-quality milk in fluid products was presented and opposition to the
application of a somatic cell adjustment on Class I milk was so strong,
the somatic cell adjustment will not be applied to milk used in Class I
as a result of this proceeding.
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
[[Page 43081]]
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 handlers' values of protein in Classes II and III and
the protein prices paid to individual producers. The somatic cell
adjustment to handlers' value of milk will be computed by multiplying
the appropriate constant for each handler's weighted average 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 applied to the protein in milk
used in Class II and Class III will be combined with plus and minus
somatic cell adjustments to the protein in producer milk. Because of
the necessity of pooling the somatic cell adjustments in order to avoid
affecting the Class I price of milk to handlers, it will be necessary
for the somatic cell information for all producer milk to be reported
with handlers' reports of receipts and utilization.
The inclusion of this somatic cell adjustment will tend to
effectuate the declared policy of the Act by encouraging orderly
marketing through the standardization of the basis for payment on the
level of somatic cells in the milk and the standardization and checking
of the testing and test procedures used for determining the somatic
cell counts. Even though testimony indicated that there are other
quality factors that are important in overall milk quality, there was
no determination of their effect on milk quality or any attempt to
compute a relevant associated value. Therefore, somatic cell count will
be used as the quality adjustment factor in this decision.
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
multiplying the cheese price by a factor that varies with the somatic
cell level and dividing the result 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.
As an example, using the 1993 average 40-pound NCE block cheese
price of $1.2857 per pound, the adjustment results in an estimated
range of 20 cents per pound of protein (or 64 cents per hundredweight
of 3.2 percent protein milk). The range of the adjustment is from a
somatic cell count of fewer than 50,000 (plus 10 cents per pound of
protein) to a somatic cell count of 750,000 or above (minus 10 cents
per pound of protein).
Table 1.--Factors and Constants To Be Used in Computing the Somatic Cell
Adjustment
------------------------------------------------------------------------
Constants
for
computing
Somatic cell counts Factors the 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
[[Page 43082]]
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
------------------------------------------------------------------------
Monitoring by the market administrator of somatic cell testing,
which already clearly affects the payments made to most of the
producers pooled under the Southern Michigan order, will assure as much
uniformity and accuracy as possible in the testing procedures. Also,
because over 50 percent of the milk pooled under this order is used in
Classes II and III, application of a somatic cell adjustment to that
proportion of the milk used by handlers will doubtless result in a
favorable effect on the general quality of the milk in the marketing
area.
The hearing evidence indicates that low SCC levels contribute to
both increased yields of manufactured products and quality
characteristics (taste and keeping) for milk and dairy products. In
terms of yield, the economic benefits from low SCC levels are more
tangible and measurable to manufacturing handlers than to fluid milk
handlers. Placing a somatic cell adjustment on Class II and Class III
milk is reasonable because milk quality will be reflected in product
yields and manufacturing handlers will be better able to recover their
costs than would fluid milk handlers.
The PMO states, ``Regulatory requirements have a fundamental
purpose, protection of public health, and are not intended to and do
not address microbiologic issues that relate to economic factors and
consumer preference or acceptance of products such as cheese.'' The
intent of placing an adjustment for somatic cell count under Federal
milk order provisions is not to set standards for milk. Instead the
intent is to recognize that the quality of milk, as measured by the
SCC, is a factor in improving yields of cheese and other manufactured
products and therefore is an indication of the economic value of the
milk.
It should be remembered that as milk from farms is commingled, the
SCC of the entire load will tend toward the average for the market.
Over the course of a month, it is unlikely that the average producer
milk receipts will vary more than 100,000 SCCs from the average for the
market, even for handlers who make a concerted effort to attract a
high-quality milk supply. The primary impact of the SCC adjustment
would be felt by producers.
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 of 1937 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 psychotrophic 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 suggestion for individual handler SCC payment plans
was made in a brief filed after the reopened hearing rather than being
included in the notice for either the initial or the reopened hearing,
interested persons had no opportunity for cross-examination. Therefore,
the concept cannot be considered as an alternative to the proposed SCC
adjustment schedule, as it is beyond the scope of the proceeding. It
should be noted that adjusting the minimum producer milk price for SCC
does not preclude other premiums paid by a handler.
In addition, although the Agricultural Marketing Agreement Act of
1937 in 7 U.S.C. 608c(5) does allow for adjustments to minimum pay
prices on the basis of quality, such adjustments should be at a uniform
rate for all producers in the market. Allowing each handler to have its
own payment schedule as suggested by NCI would defeat the concept of
uniform pricing to producers, eliminate the purpose of allowing quality
adjustments under the order, and lead to disorderly marketing.
Producers with identical milk shipping to different handlers within the
same market could, and probably would, have different minimum order pay
prices if each handler had its own quality or somatic cell payment
plan.
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
[[Page 43083]]
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, MMPA 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
[[Page 43084]]
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. The Class III-A differential price should be
defined as the difference between the current month's Class III-A price
and the current month's Class III price.
These differential prices should not be confused with the fixed
values that are added to the M-W price for the second preceding month
to arrive at the Class I and Class II prices for the current month. It
should also be pointed out that these differential prices may be
negative, which currently happens when the M-W price is greater than
any of these prices.
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, rounded to the nearest full cent. Prices for
butterfat, protein, and fluid carrier residual were defined previously
within this decision.
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
differential, 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 and somatic cell information. 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.
Handlers purchasing milk from cooperative pool plants will have
their obligations for Class I milk computed at the Class I differential
price plus the pounds of skim milk in Class I at the skim milk price
plus the pounds of butterfat at the butterfat price; for Class II and
Class III-A milk at the Class II and Class III-A differential prices,
respectively, plus the pounds of protein at the protein price adjusted
for somatic cell count, plus the hundredweight of fluid carrier at the
fluid carrier price, plus the pounds of butterfat at the butterfat
price; and for Class III milk the protein pounds times the protein
price adjusted for somatic cell count, plus the hundredweight of fluid
carrier at the fluid carrier price, plus the pounds of butterfat at the
butterfat price. Payment for 9(c) milk will be based on the producer
price differential adjusted for location at the plant of receipt plus
the value of protein adjusted for somatic cell count, fluid carrier,
and butterfat contained in the milk.
Because producers will be receiving payments based on the component
levels of their milk, the payroll reports that handlers supply to
producers must reflect the basis for such payment. Therefore the
handler will be required to supply the producer not only with the
information currently supplied, but also with: (a) the pounds of
butterfat, the pounds of protein, and the hundredweight of fluid
carrier contained in the producer's milk, as well as the producer's
average somatic cell count, and (b) the minimum rate that is required
for payment for each pricing factor and, if a different rate is paid,
the effective rate also.
A handler's value of milk will be determined by combining: (a) the
pounds of producer milk in Class I times the Class I differential
price, (b) the pounds of producer milk in Class II times the Class II
differential price, (c) the value of overage, (d) the value of
inventory reclassification, (e) the value, at the Class I minus Class
III price difference, of other source receipts and receipts from
unregulated supply plants allocated to Class I, (f) the value of
handler location adjustments, (g) Class III-A credits, (h) the pounds
of skim milk in Class I times the skim milk price, (i) the pounds of
protein in Class II and Class III times the protein price adjusted for
the average somatic cell count of the handler's producer milk receipts,
and (j) the hundredweight of fluid carrier in Class II and Class III
times the fluid carrier price.
The pounds of protein in Class II and Class III will be determined
by multiplying the percent protein in the skim milk of the total
producer milk received by the handler times the pounds of skim milk
allocated to Class II and Class III. The hundredweight of fluid carrier
in Class II and Class III will be determined by subtracting from the
pounds of skim milk allocated to Class II and Class III the pounds of
protein in Class II and Class III.
Handlers' obligations to the producer settlement fund will be
determined by subtracting from the handler's value of milk the
following: (a) the total pounds of each handler's producer milk times
the producer price differential adjusted for location, (b) the total
pounds of protein contained in the producer milk times the protein
price, plus or minus the net somatic cell adjustment of producer milk
received by the handler, (c) the total hundredweight of fluid carrier
contained in the producer milk times the fluid carrier price, and (d)
the value of other source milk at the producer price differential with
any applicable location adjustment at the plant from which the milk was
shipped deducted from the handler's value of milk.
The amendments to order language accompanying this decision are
based on the current language of the Southern Michigan order, which
includes any changes to the orders made necessary by the two national
amendatory proceedings (Class II pricing and the M-W replacement) that
were completed in March and April 1995.
NCI's exception requested that sufficient time be allowed following
issuance of the final decision to implement the MCP plan. Although a
similar request in the five midwest markets multiple component
proceeding was responded to favorably, that request was made by a
number of producer groups and handlers in those marketing areas. There
were no Southern Michigan handlers or producer groups who indicated any
need for a delay in the
[[Page 43085]]
implementation of the provisions proposed in this decision. Therefore,
such a delay is not warranted in this proceeding.
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.
Rulings on Exceptions
In arriving at the findings and conclusions, and the regulatory
provisions of this decision, each of the exceptions received was
carefully and fully considered in conjunction with the record evidence.
To the extent that the findings and conclusions and the regulatory
provisions of this decision are at variance with any of the exceptions,
such exceptions are hereby overruled for the reasons previously stated
in this decision.
Marketing Agreement and Order
Annexed hereto and made a part hereof are two documents, a
Marketing Agreement regulating the handling of milk, and an Order
amending the order regulating the handling of milk in the Southern
Michigan marketing area, which have been decided upon as the detailed
and appropriate means of effectuating the foregoing conclusions.
It is hereby ordered that this entire decision and the two
documents annexed hereto be published in the Federal Register.
Determination of Producer Approval and Representative Period
May 1995 is hereby determined to be the representative period for
the purpose of ascertaining whether the issuance of the order, as
amended and as hereby proposed to be amended, regulating the handling
of milk in the Southern Michigan marketing area is approved or favored
by producers, as defined under the terms of the order as amended and as
hereby proposed to be amended, who during such representative period
were engaged in the production of milk for sale within the aforesaid
marketing area.
List of Subjects in 7 CFR Part 1040
Milk marketing orders.
Dated: August 11, 1995.
Patricia Jensen,
Acting Assistant Secretary, Marketing and Regulatory Programs.
Order Amending the Order Regulating the Handling of Milk in the
Southern Michigan Marketing Area
This order shall not become effective unless and until the
requirements of Sec. 900.14 of the rules of practice and procedure
governing proceedings to formulate marketing agreements and marketing
orders have been met.
Findings and Determinations
The findings and determinations hereinafter set forth supplement
those that were made when the 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) Findings. A public hearing was held upon certain proposed
amendments to the tentative marketing agreement and to the order
regulating the handling of milk in the Southern Michigan marketing
area. The hearing was held pursuant to the provisions of the
Agricultural Marketing Agreement Act of 1937, as amended (7 U.S.C. 601-
674), and the applicable rules of practice and procedure (7 CFR Part
900).
Upon the basis of the evidence introduced at such hearing and the
record thereof, it is found that:
(1) The said order as hereby amended, and all of the terms and
conditions thereof, will tend to effectuate the declared policy of the
Act;
(2) The parity prices of milk, as determined pursuant to section 2
of the Act, are not reasonable in view of the price of feeds, available
supplies of feeds, and other economic conditions which affect market
supply and demand for milk in the aforesaid marketing area. The minimum
prices specified in the order as hereby 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;
(3) The said order as hereby amended regulates the handling of milk
in the same manner as, and is applicable only to persons in the
respective classes of industrial or commercial activity specified in, a
marketing agreement upon which a hearing has been held; and
(4) 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, of 4 cents per hundredweight or such lesser amount as the
Secretary may prescribe, with respect to milk specified in
Sec. 1040.85.
Order Relative to Handling
It is therefore ordered, that on and after the effective date
hereof, the handling of milk in the Southern Michigan marketing area
shall be in conformity to and in compliance with the terms and
conditions of the order, as amended, and as hereby amended, as follows:
[[Page 43086]]
The provisions of the proposed marketing agreement and order
amending the order contained in the revised recommended decision issued
by the Administrator, Agricultural Marketing Service, on December 2,
1994, and published in the Federal Register on December 14, 1994 (59 FR
64464), shall be and are the terms and provisions of this order,
amending the order, and are set forth in full herein, subject to the
following modifications:
a. A change in the application of the market administrator's
discretion to modify supply plant shipping percentages has been made to
Sec. 1040.7(b) by removing (6)(iii) and adding (7).
b. Changes in the treatment of the somatic cell adjustment require
modification of reporting requirements in Sec. 1040.30(a).
c. Additional changes due to the treatment of the somatic cell
adjustment have been made by adding Sec. 1040.50(l), deleting
Sec. 1040.64, and modifying Sec. 1040.60(a)(5).
d. Changes for the purpose of more easily accommodating Class III-A
provisions have been made by adding Secs. 1040.50(g) and 1040.60(a)(3)
and deleting Sec. 1040.61(a)(3).
e. A change for the purpose of conforming with amendments resulting
from the Class II pricing proceeding has been made in Sec. 1040.53(b).
f. Changes for the purpose of conforming with amendments resulting
from the M-W replacement proceeding have been made in Sec. 1040.74.
g. Changes for the purpose of correcting or clarifying order
language have been made in the introductory text and paragraph (k)
(formerly (j)) of Sec. 1040.50, Sec. 1040.60(a)(6), Sec. 1040.61(a)(4)
and (5), Sec. 1040.62(e), Sec. 1040.63(a), (c), and (d),
Sec. 1040.71(a)(2)(ii) and (a)(2)(iv), Sec. 1040.73(b)(1)(ii) and (c),
and Sec. 1040.75(a)(1).
Accordingly, this decision proposes 7 CFR Chapter X 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: 7 U.S.C. 601-674.
2. Section 1040.7 is amended by adding paragraphs (b)(5)(iii) and
(b)(7) to read as follows:
Sec. 1040.7 Pool Plant.
* * * * *
(b) * * *
(5) * * *
(iii) Partially regulated distributing plants that are neither
other order plants, producer-handler plants, nor exempt plants and from
which there is route disposition in consumer-type packages or dispenser
units in the marketing area during the month.
* * * * *
(7) The shipping percentages determined pursuant to paragraphs
(b)(1) or (b)(6) 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) and (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, pounds of protein, and the
value of the somatic cell adjustment contained in or represented by:
(i) Receipts of producer milk, including producer milk diverted by
the handler, and
(ii) Receipts of milk from handlers described in Sec. 1040.9(c).
(2) Product pounds and pounds of butterfat contained in:
(i) Receipts by transfer or diversion of bulk fluid milk products;
(ii) Receipts of fluid milk products not included in (a)(1) or
(a)(2)(i) of this section and bulk fluid cream products from any
source;
(iii) Receipts of other source milk; and
(iv) Inventories at the beginning and end of the month of fluid
milk products and products specified in Sec. 1040.40(b)(1).
(3) The utilization or disposition of all milk, filled milk, and
milk products required to be reported pursuant to this paragraph.
(4) Such other information with respect to the receipts and
utilization of skim milk, butterfat, milk protein, and somatic cell
information, as the market administrator may prescribe.
* * * * *
(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
(l), 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
[[Page 43087]]
and the component prices per hundredweight or per pound 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) Class III-A differential price. The Class III-A differential
price shall be the difference between the current month's Class III-A
and Class III price (this price may be negative).
(h) 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.
(i) 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.
(j) 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.
(k) Fluid carrier price. The fluid carrier price per hundredweight,
rounded to the nearest whole cent, shall be the basic formula price at
test less the average butterfat test of the basic formula price as
reported by the Department times the butterfat price, less the average
protein test of the basic formula price as reported by the Department
for the month times the protein price (this price may be negative).
(l) Somatic cell adjustment. 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 following table 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.
------------------------------------------------------------------------
Constants
for
computing
Somatic cell counts the somatic
cell
adjustment
------------------------------------------------------------------------
1 to 50,000............................................... .078125
51,000 to 100,000......................................... .062500
101,000 to 150,000........................................ .046875
151,000 to 200,000........................................ .031250
201,000 to 250,000........................................ .015625
251,000 to 300,000........................................ .0078125
301,000 to 350,000........................................ .000000
351,000 to 400,000........................................ .000000
401,000 to 450,000........................................ -.0078125
451,000 to 500,000........................................ -.015625
501,000 to 550,000........................................ -.0234375
551,000 to 600,000........................................ -.031250
601,000 to 650,000........................................ -.0390625
651,000 to 700,000........................................ -.046875
701,000 to 750,000........................................ -.062500
751,000 and above......................................... -.078125
------------------------------------------------------------------------
7. Section 1040.53 is revised to read as follows:
Sec. 1040.53 Announcement of class and component prices.
On or before the 5th day of the month, the market administrator
shall announce the following prices and any other price information
deemed appropriate:
(a) The Class I price for the following month;
(b) The Class II price for the following month;
(c) The Class III price for the preceding month;
(d) The Class III-A price for the preceding month;
(e) The skim milk price for the preceding month;
(f) The butterfat price for the preceding month;
(g) The protein price for the preceding month;
(h) The fluid carrier price for the preceding month;
(i) The butterfat differential for the preceding month;
8. The section heading in Sec. 1040.60 and the undesignated
centerheading 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 the handler's 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 total hundredweight
of producer milk eligible to be priced as Class III-A by the Class III-
A differential price for the month;
(4) 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;
(5) 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 for the month computed pursuant to Sec. 1040.50(j) and adjusted
pursuant to Sec. 1040.50(l) for the weighted average somatic cell
content of the handler's receipts of milk; and
(6) Add a fluid carrier value calculated as follows: Subtract from
the pounds of skim milk allocated to Class II and Class III pursuant to
Sec. 1040.44(a) the protein pounds contained therein, determined by
multiplying the pounds of skim milk in Class II and Class III by the
average protein content of producer skim milk received by the handler;
then multiply the resulting pounds (in 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, including the section heading, is revised to
read as follows:
[[Page 43088]]
Sec. 1040.61 Producer price differential.
For each month the market administrator shall compute a producer
price differential per hundredweight of milk received from producers as
follows:
(a) Combine into one total for all handlers:
(1) The values computed pursuant to Sec. 1040.60(a)(1), (a)(2),
(a)(3) 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)(4), (a)(5),
and (a)(6); 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) Add an amount equal to the total value of the applicable
location adjustments computed pursuant to Sec. 1040.75(a)(1); and
(4) 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 butterfat content and 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 is added under the undesignated
centerheading ``Producer Price Differential'' 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 for location 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(i),
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(j),
adjusted for somatic cell count pursuant to Sec. 1040.50(l), 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(k),
multiplied by the total hundredweight of fluid carrier contained in the
producer milk received from the producer.
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 adjusted pursuant to
Sec. 1040.50(l) for the weighted average somatic cell content of the
handler's receipts of milk;
(iii) An amount obtained by multiplying the total hundredweight 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
the producer price differential.
* * * * *
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, and
total pounds of fluid carrier contained in the producer's milk, and the
average somatic cell count of the producer's milk;
* * * * *
(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 the handler 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 pursuant to
Sec. 1040.63.
* * * * *
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 current month's butter price less 0.0028 times
the preceding month's average pay price per hundredweight, at test, for
manufacturing grade milk in Minnesota and Wisconsin, using the ``base
month'' series, adjusted pursuant to Sec. 1040.51(a) through (e), as
reported by the Department. The butter price means the simple average
for the month of the Chicago Mercantile Exchange, Grade A butter price
as reported by the Department.
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 from 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
[[Page 43089]]
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''.
Note: This marketing agreement will not appear in the Code of
Federal Regulations.
Marketing Agreement Regulating the Handling of Milk in Certain
Marketing Areas
The parties hereto, in order to effectuate the declared policy
of the Act, and in accordance with the rules of practice and
procedure effective thereunder (7 CFR Part 900), desire to enter
into this marketing agreement and do hereby agree that the
provisions referred to in paragraph I hereof as augmented by the
provisions specified in paragraph II hereof, shall be and are the
provisions of this marketing agreement as if set out in full herein.
I. The findings and determinations, order relative to handling,
and the provisions of Secs. 1040.1 to 1040.86, all inclusive, of the
order regulating the handling of milk in the Southern Michigan
marketing area (7 CFR PART 1040) which is annexed hereto; and
II. The following provisions: Sec. 1040.87 Record of milk
handled and authorization to correct typographical errors.
(a) Record of milk handled. The undersigned certifies that he/
she handled during the month of May 1995, ____________ hundredweight
of milk covered by this marketing agreement.
(b) Authorization to correct typographical errors. The
undersigned hereby authorizes the Director, or Acting Director,
Dairy Division, Agricultural Marketing Service, to correct any
typographical errors which may have been made in this marketing
agreement.
Sec. 1040.88 Effective date. This marketing agreement shall
become effective upon the execution of a counterpart hereof by the
Secretary in accordance with Section 900.14(a) of the aforesaid
rules of practice and procedure.
In Witness Whereof, The contracting handlers, acting under the
provisions of the Act, for the purposes and subject to the
limitations herein contained and not otherwise, have hereunto set
their respective hands and seals.
Signature
By (Name)--------------------------------------------------------------
(Title)----------------------------------------------------------------
(Address)--------------------------------------------------------------
(Seal)
Attest
[FR Doc. 95-20347 Filed 8-17-95; 8:45 am]
BILLING CODE 3410-02-P
