# Milk in the Northeast and Other Marketing Areas; Proposed Amendments to Marketing Agreements and Orders > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2024-14769 ## Record - **Collection:** Federal Register - **Document type:** Proposed Rule - **Published:** July 15, 2024 - **Citation:** 89 FR 57580 ## Text DEPARTMENT OF AGRICULTURE Agricultural Marketing Service 7 CFR Parts 1000, 1001, 1005, 1006, 1007, 1030, 1032, 1033, 1051, 1124, 1126, and 1131 [Doc. No. AMS-DA-23-0031] Milk in the Northeast and Other Marketing Areas; Proposed Amendments to Marketing Agreements and Orders AGENCY: Agricultural Marketing Service, USDA. ACTION: Proposed rule. SUMMARY: This decision proposes to amend the pricing provisions in the 11 Federal Milk Marketing Orders (FMMOs). DATES: Written exceptions and comments to this proposed rule must be submitted on or before September 13, 2024. ADDRESSES: Written exceptions should be filed with the Office of the Hearing Clerk, U.S. Department of Agriculture, 1400 Independence Ave. SW, Stop 9203, Room 1031, Washington, DC 20250-9203; Fax: (844) 325-6940 or via the internet at https://www.regulations.gov. All comments should reference the docket number and the date and page number of this issue of the Federal Register . Comments will be made available for public inspection in the Office of the Hearing Clerk during regular business hours or can be viewed at https://www.regulations.gov. A plain-language summary of this proposed rule is available at https://www.regulations.gov in the docket for this rulemaking. FOR FURTHER INFORMATION CONTACT: Erin Taylor, USDA/AMS/Dairy Programs, Order Formulation and Enforcement Branch, STOP 0231-Room 2530, 1400 Independence Avenue SW, Washington, DC 20250-0231, Telephone: (202) 720-7183, Email address: Erin.Taylor@usda.gov. SUPPLEMENTARY INFORMATION: This recommended decision proposes amendments to five categories of milk pricing: 1. Milk Composition Factors. Update the factors to 3.3 percent true protein, 6 percent other solids, and 9.3 percent nonfat solids. 2. Surveyed Commodity Products. Remove 500-pound barrel cheddar cheese prices from the Dairy Products Mandatory Reporting Program (DPMRP) survey and rely solely on the 40-pound block cheddar cheese price to determine the monthly average cheese price used in the formulas. 3. C lass III and Class IV Formula Factors . Update the manufacturing allowances to: Cheese: $0.2504; Butter: $0.2257; Nonfat Dry Milk (NFDM): $0.2268; and Dry Whey: $0.2653. This decision also proposes updating the butterfat recovery factor to 91 percent. 4. Base Class I Skim Milk Price. Update the formula as follows: the base Class I skim milk price would be the higher-of the advanced Class III or Class IV skim milk prices for the month. In addition, adopt a Class I extended shelf life (ESL) adjustment equating to a Class I price for all ESL products equal to the average-of mover, plus a 24-month rolling average adjuster with a 12-month lag. 5. Class I and Class II differentials. Keep the $1.60 base differential and adopt modified location specific Class I differential values. In conjunction with this Recommended Decision, the Agricultural Marketing Service (AMS) conducted a Regulatory Economic Impact Analysis to determine the potential impact of amending FMMO pricing formulas on producer revenue and marketwide pool values. AMS used a static analysis incorporating actual data reported from January 2019 to December 2023 to determine the estimated price impacts of the package of amendments included in this Recommended Decision. The full text of the Regulatory Economic Impact Analysis may be accessed at https://www.regulations.gov or https://www.ams.usda.gov/rules-regulations/moa/dairy/hearings/national-fmmo-pricing-hearing. Prior Documents in This Proceeding Notice of Hearing: Published July 24, 2023 (88 FR 47396). Notice of Reconvened Hearing: Published November 6, 2023 (88 FR 76143). Notice of Reconvened Hearing: Published December 29, 2023 (88 FR 90134). This administrative action is governed by sections 556 and 557 of title 5 of the United States Code and, therefore, is excluded from the requirements of Executive Orders 12866, 13563, and 13175. The amendments to the rules proposed herein have been reviewed under Executive Order 12988, Civil Justice Reform. They are not intended to have a retroactive effect. If adopted, the proposed amendments would not preempt any state or local laws, regulations, or policies, unless they present an irreconcilable conflict with this rule. The Agricultural Marketing Agreement Act of 1937, as amended (7 U.S.C. 601-674) (AMAA), provides that administrative proceedings must be exhausted before parties may file suit in court. Under section 608c(15)(A) of the AMAA, any handler subject to an order may request modification or exemption from such order by filing a petition with the USDA stating that the order, any provision of the order, or any obligation imposed in connection with the order is not in accordance with the law. A handler is afforded the opportunity for a hearing on the petition. After a hearing, USDA would rule on the petition. The AMAA 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 USDA'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. Civil Rights Impact Analysis AMS has reviewed this rulemaking in accordance with USDA Departmental Regulation 4300-004, Civil Rights Impact Analysis, to identify any major civil rights impacts the rule might have on FMMO participants on the basis of race, color, national origin, disability, sex, gender identity, political beliefs, age, marital, family/parental status, religion, sexual orientation, reprisal, or because of an individuals' income is derived from any public assistance program. Based on the review and analysis of the rule and all available data, issuance of this proposed rule is not likely to negatively impact low and moderate-income populations, minority populations, women, Tribes or persons with disabilities, by virtue of their age, race, color, national origin, sex, disability, or marital or familial status. No major civil rights impact is likely to result from this proposed rule. Regulatory Flexibility Act and Paperwork Reduction Act In accordance with the Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq. ), the AMS has considered the economic impact of this action on small entities. Accordingly, AMS has prepared this initial regulatory flexibility analysis. The purpose of the RFA is to fit regulatory actions to the scale of businesses subject to such actions so that small businesses will not be unduly or disproportionately burdened. Marketing orders and amendments thereto are unique in that they are normally brought about through group action of essentially small entities for their own benefit. A small dairy farm as defined by the Small Business Administration (SBA) (13 CFR 121.201) is one that has an annual gross revenue of $3.75 million or less, and a small dairy products manufacturer is one that has no more than the number of employees listed in the chart below: NAICS code NAICS U.S. industry title Size standards in number of employees 311511 Fluid Milk Manufacturing 1,150 311512 Creamery Butter Manufacturing 750 311513 Cheese Manufacturing 1,250 311514 Dry, Condensed, and Evaporated Dairy Product Manufacturing 1,000 To determine which dairy farms are “small businesses,” the $3.75 million per year income limit was used to establish an annual milk marketing threshold of 18.3 million pounds. Although this threshold does not factor in additional monies that may be received by dairy producers, it should be an accurate standard for most “small” dairy farmers. Based on the U.S. 2023 average yield per cow and 2023 NASS average All-Milk price, a dairy farm with approximately 780 cows or fewer would meet the definition of small business. In 2022, the most recent year with statistics available, there were 24,470 dairy farms with milk sales, of which approximately 19,576 had milk regulated on an FMMO for at least one month of the year. Based on the 2022 Census of Agriculture, Milk Cow Herd Size by Inventory and Sales, an estimated 89 percent of operations with milk sales are likely to be small businesses. To determine a handler's size, if the plant is part of a larger company operating multiple plants that collectively exceed the 750-employee limit for creamery butter manufacturing; the 1,000-employee limit for dry, condensed, and evaporated dairy product manufacturing; the 1,150-employee limit for fluid milk manufacturing; or the 1,250-employee limit for cheese manufacturing; the plant was considered a large business even if the local plant does not exceed the 750, 1,000, 1,150, or 1,250-employee limit, respectively. In 2022, the following number of plants were regulated for at least one month of the year in each FMMO: 66 plants on the Northeast, 19 plants on the Appalachian, 9 plants on the Florida, 20 plants on the Southeast, 58 plants on the Upper Midwest, 32 plants on the Central, 43 plants on the Mideast, 24 plants on California, 17 plants on the Pacific Northwest, 26 plants on the Southwest, and 8 plants on Arizona. According to the 2022 Census of Agriculture, approximately 86 percent of fluid milk manufacturing plants, approximately 96 percent of cheese plants, approximately 82 percent of dry products plants, and approximately 78 percent of butter plants met the SBA definition of small businesses. How FMMO Pricing Provisions Currently Operate The amendments recommended for adoption in this decision cover five milk pricing subject areas: Milk Composition Factors, Surveyed Commodity Products, Class III and Class IV Formula Factors, base Class I skim milk price (Class I mover), and Class I and II Differentials. This decision proposes to amend provisions in all five pricing subject areas. The amendments are intended to update formulas and factors in response to industry changes over time, many of which have not been updated since the provisions were adopted on January 1, 2000, to ensure USDA is carrying out the purposes of the AMAA. Milk Composition Factors. FMMO milk prices are based on three primary components—protein, other solids, and nonfat solids. Skim milk composition factors in the current price formulas codified in the FMMO regulations were adopted in 2000: 3.1 percent protein, 5.9 percent other solids, and 9 percent nonfat solids. The proposed amendments would increase milk composition factors to 3.3 percent protein, 6.0 percent other solids, and 9.3 percent nonfat solids. Actual component tests of skim milk have increased since 2000, with more significant increases beginning in 2016. The amendments are intended to more accurately represent component levels in milk produced. Surveyed Commodity Products. Milk prices under FMMOs are related to wholesale prices for butter, cheese, nonfat dry milk, and dry whey. The formulas use USDA-surveyed average wholesale prices to calculate milk component prices (butterfat, protein, nonfat solids, and other solids) that are converted to Class III and IV milk prices. The protein value in cheese is a component of the Class III price. Currently, the prices of commodity cheddar cheese packaged in 40-lb blocks (“blocks”) and 500-lb barrels (“barrels”) are collected weekly by AMS through the DPMRP survey. A monthly average of those prices is used to represent commodity cheese in the Class III price formula. The butterfat value in commodity salted butter is the driver of the butterfat price used in all classified prices. The proposed amendments would eliminate 500-lb barrels from the DPMRP survey and rely solely on the monthly average survey price for 40-lb cheddar blocks. The amendment is intended to provide for more orderly marketing through a survey of only one product. Class III and IV Formulas Factors. Make allowances are a factor in the FMMO pricing formulas representing the cost of converting raw milk into the four manufactured dairy products surveyed by USDA (butter, cheese, nonfat dry milk, and dry whey). Make allowances were last updated in 2008 following a rulemaking proceeding in 2007. The proposed amendments would update the make allowances in the FMMO Class III and IV formulas to the following: $0.2504 for cheese; $0.2257 for butter; $0.2268 for NFDM; and $0.2653 for dry whey. The proposed amendments would also update the butterfat recovery factor in the Class III formula to 91 percent. The amendments are intended to update the formula factors to be more representative of current costs and butterfat recovery observed in dairy product manufacturing. Class I mover . The Class I mover is the base price for the skim milk portion of raw milk used in the production of Class I products. The Agriculture Improvement Act of 2018 (2018 Farm Bill) amended the Class I skim milk price mover from the “higher of” Class III or Class IV skim prices to a simple average of the two classes plus $0.74, referred to as the “average of” mover. The proposed amendments would return the base Class I skim milk price calculation to the higher-of Class III or Class IV skim prices. The proposed amendments would also adopt a rolling monthly Class I ESL adjustment equating to a Class I price for all ESL products equal to the average-of the Class III and Class IV advance prices, plus a 24-month rolling average adjuster, with a 12-month lag. The monthly Class I ESL adjustment would be calculated as the average of the differences between the higher-of and the average-of calculations for the prior 13 to 36 months. The amendments are intended to provide for more orderly marketing by returning to the higher-of mover; while the Class I ESL adjustment would provide better price equity for ESL products whose marketing characteristics are distinct from other Class I products. Class I and II Differentials. FMMO Class I prices are calculated as the average of the advanced Class III and Class IV prices, plus $0.74, plus a location-specific differential referred to as a Class I differential. As the value of milk varies by location, Class I differentials have been determined for every county in the continental U.S. Current Class I differential levels were implemented January 1, 2000, with updates to the differentials in the three southeastern orders taking effect May 1, 2008. The proposed amendments would retain the $1.60 base differential and adopt modified location-specific Class I differential values. The amendments are intended to recognize the evolution of the dairy industry since 2000 and the increased cost of servicing the Class I market given current transportation costs and plant and producer locations. This decision finds these amendments are necessary. The evidentiary record reflected testimony from a broad range of stakeholder views that updates are necessary in all five pricing subject areas to reflect current market conditions. Impact on Small Businesses An economic analysis has been performed on impacts the proposed amendments will have on industry participants, including producers and handlers. It can be found on the AMS website at https://www.ams.usda.gov/rules-regulations/moa/dairy/hearings/national-fmmo-pricing-hearing. The proposed amendments would be applied identically to all proprietary and cooperative handlers regulated by FMMOs, regardless of their size. The proposed amendments would implement prices that more accurately reflect current market conditions, providing for more orderly marketing for both small and large producers and handlers. AMS considered alternatives to each of the recommended amendments. Over 49 days of hearing, dozens of witnesses from 9 industry stakeholder groups presented testimony and evidence on 21 proposals in the 5 pricing subject areas. AMS considered all evidence and testimony, including alternative proposals presented, in making its recommendations. A review of reporting requirements was completed under the Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35). It was determined that these proposed amendments would have no impact on reporting, recordkeeping, or other compliance requirements because they would remain identical to the current requirements. No new forms are proposed, and no additional reporting requirements would be necessary. This proposed rule does not require additional information collection that requires clearance by the Office of Management and Budget (OMB) beyond currently approved information collection. The primary sources of data used to complete the forms are routinely used in most business transactions. Forms require only a minimal amount of information which can be supplied without data processing equipment or a trained statistical staff. Thus, since the information is already provided, no new information collection requirements are needed, and the current information collection and reporting burden is relatively small. Requiring the same reports for all handlers does not significantly disadvantage any handler that is smaller than the industry average. AMS is committed to complying with the E-Government Act, to promote the use of the internet and other information technologies to provide increased opportunities for citizen access to Government information and services, and for other purposes. No other burdens are expected to fall on the dairy industry as a result of this rulemaking. This rulemaking does not duplicate, overlap, or conflict with any existing Federal rules. Preliminary Statement A public hearing was held upon proposed amendments to the marketing agreement and the orders regulating the handling of milk in all 11 Federal milk marketing areas. The hearing was held pursuant to the provisions of the AMAA, as amended (7 U.S.C. 601-674), and the applicable rules of practice and procedure governing the formulation of marketing agreements and marketing orders (7 CFR part 900). The proposed amendments set forth below are based on the record of a public hearing held in Carmel, IN, from August 23-October 11, 2023, November 27-December 8, 2023, January 16-19, 2024, and January 29-31, 2024, pursuant to a notice of hearing published July 24, 2023 (88 FR 47396), a notice of reconvened hearing published November 6, 2023 (88 FR 76143), and a second notice of reconvened hearing, published December 29, 2023 (88 FR 90134). The hearing was held to receive evidence on 21 proposals submitted by dairy farmers, handlers, and other interested parties. A total of 165 witnesses testified over the course of the 49-day hearing. Witnesses provided an overview of the complexity of the U.S. dairy industry and submitted 511 exhibits containing supporting data, analyses, and historical information. The material issues, related to FMMO pricing formulas, presented on the record of hearing are as follows: 1. Milk Composition Factors 2. Surveyed Commodity Products 3. Class III and Class IV Formula Factors 4. Base Class I Skim Milk Price 5. Class I and Class II differentials Summary of Testimony Milk Composition Two proposals seeking to amend the milk composition standards are being considered in this rulemaking. Proposal 1, submitted by the National Milk Producers Federation (NMPF) seeks to increase the skim component factors, with a 12-month implementation lag. The proposed standards are as follows: increase the nonfat solids assumption from 9.0 to 9.41 per hundredweight (cwt) of Class IV skim milk; increase the protein assumption from 3.1 to 3.39 per cwt of Class III skim milk; and increase the other solids assumption from 5.9 to 6.02 per cwt of Class III skim milk. Proposal 1 also contains an updating methodology that would automatically update the standards no more than once every three years once the nonfat solids component for the prior three years changes by at least .07 percentage points. Proposal 2, submitted on behalf of National All-Jersey (NAJ), is identical to Proposal 1, except for the automatic update methodology. The proposal would update the standards annually using the previous year's weighted averages, with a 12-month implementation lag. A witness from NMPF, a trade association representing dairy farmer-owned cooperative marketing associations throughout the United States, testified in support of updating the skim milk price milk component factors, as contained in Proposal 1. The witness explained how the U.S. dairy industry has undergone dynamic structural change since 2000, while FMMO product price formulas have generally remained static. The witness stated dairy farmers have responded to component pricing by significantly increasing the butterfat, protein, and other solid levels in their milking herds. According to the USDA's National Agricultural Statistics Service (NASS), said the witness, average butterfat tests have increased 10.9 percent from 2000 to 2022, and USDA's Economic Research Service (ERS) reported average skim milk solids content of U.S. milk production increased 0.31 percent during the same period. The witness said 2022 FMMO average protein, other solids, and nonfat solids (NFS) in pooled milk were 3.39 percent, 6.02 percent, and 9.41 percent, respectively. The NMPF witness asserted the static component levels contained in the formulas result in underpayments to producers in all FMMO's for the value of their Class I skim milk. Therefore, NMPF proposes to increase the milk composition factors in skim milk to 2022 levels. The NMPF witness analyzed 2013-2022 FMMO product prices and concluded adoption of Proposal 1 would have increased the Class III skim price by $0.80 per cwt and the Class IV skim milk price by $0.41 per cwt. An increase from the 2022-based skim milk component factors by the proposed 0.07 percentage point threshold level, the witness added, would have increased the Class III and Class IV prices by $0.14 and $0.07 per cwt, respectively. Another NMPF witness testified the announced FMMO Class III and Class IV skim milk values do not reflect the current component levels of producer milk, resulting in announced prices being lower than actual market values. The witness said this leads to a misalignment of fluid and manufacturing milk, possibly leading to disorderly marketing conditions. This occurs because the Class I Mover skim milk price is calculated based on skim milk component levels based on 2000 levels, narrowing the difference between Class I prices and manufacturing milk prices (Classes III and IV) and resulting in more instances of price inversions and depooling. Several NMPF dairy farmer witnesses testified in support of Proposal 1. The witnesses stated improved genetics and feed quality have caused component levels in the milk they market to increase. The witnesses stated component levels in the pricing formulas should be updated to reflect the additional protein produced. An NMPF witness testified regarding their work as a business consultant with dairy farmers. The witness said dairy farming costs have been consistently increasing due to higher feed prices, overall inflation, interest rate increases, and rising costs associated with labor and environmental regulations. The witness estimated the average margin per cwt of milk produced over the past decade was less than $1, or approximately 4 to 7 percent of the average milk price. It was the witness's opinion that financially sustainable margins are necessary to avoid further consolidation in the industry. An NMPF dairy farmer witness testified that monthly pay price volatility has increased since 2000. According to the witness, in 2000 their pay price varied $0.52, from a high of $12.95 to a low of $12.43. In the 12 months prior to August 2023, the witness said the variance was $7.46, ranging from $22.50 to $15.04, while costs continued to rise, including the price of corn and soybean meal more than doubling. The witness said that during the same 12-month period their milk output rose over 10,000 pounds. The witness attributed improvements in cow comfort, genetics, and feed quality to the increases in milk output and component levels but opined low component standards were depressing producer price differentials (PPDs) and discouraging milk from supplying the Class I market. NMPF, in their post-hearing brief, offered additional support for Proposal 1. The brief credited significant advances related to animal genetics, farm management, and cow nutrition as contributing to rising skim milk component levels. NMPF reiterated hearing testimony regarding the static component levels in the formulas leading to a narrowing of the difference between Class I and manufacturing milk prices resulting in more price inversions, larger volumes of depooled milk, and resulting in disorderly marketing. NMPF stated higher skim milk component levels have value in the competitive manufacturing dairy market, which is the basis for determining Class I values. NMPF stated that increasing the skim milk components in the formulas to reflect current levels would recognize the current average value of producer milk used for manufacturing dairy products and result in a Class I price that properly reflects base milk values. Additionally, NMPF argued delayed implementation of updated component level factors is necessary because of dairy farmers' use of risk management programs. Such a delay would allow for the completion of most transactions placed prior to announcement of the change. A Dairy Farmers of America, Inc. (DFA) witness, appearing on behalf of NMPF, testified the failure to delay an update in skim component standards would cause financial harm to dairy farmers, milk plants, end users, and others who entered into risk-management transactions. DFA is a dairy farmer cooperative and owns and operates 14 manufacturing plants which produce liquid whey, Italian cheese, skim milk powder, whole milk powder, American-style cheese, condensed milk, cream, nonfat dry milk, milk protein concentrate (MPC), sweetened condensed milk, and dry whey. The witness testified that failure to delay implementation would affect the basis, or the profit margin for milk being hedged. The witness testified that 35 to 45 percent of the U.S. milk supply was hedged by dairy farmers and there is a growing demand for risk management services among larger-sized dairies. A witness representing the American Farm Bureau Federation (AFBF), a farmer advocacy organization with approximately 6 million members throughout the U.S., testified in support of Proposal 1. The witness estimated that raising the skim component standards would increase the Class I price by an average of $0.70 per cwt, based on 2022 data. Consequently, raising the skim component standards would help bring the Class I, III, and IV prices in alignment, reduce the frequency of negative PPDs, and reduce the incentives for depooling, which the witness said undermines orderly marketing. The witness stated that raising the value of the skim milk in the manufacturing classes for the skim and butterfat markets would reduce the incentive of manufacturing plants in the multiple component pricing (MCP) orders to pool milk, which would lower the producer's price and discourage milk from entering a milk deficit region. The witness testified that updating component standards would address some price misalignment issues and is preferred to prevent handlers from depooling. AFBF offered support in their post-hearing brief stating Proposal 1 would more accurately define the market value of skim milk pooled on FMMOs. The brief asserted the resulting increase in Class I prices would reduce the incidences of price misalignment with Class III and IV prices, reduce the size and frequency of negative PPDs, and reduce depooling incentives. AFBF supported periodic adjustments to component levels, as contained in Proposal 1, to account for the continuing increases in the component levels, but specified these levels should only be changed in the positive direction. In AFBF's opinion, more frequent updates, as contained in Proposal 2, would be disruptive. A witness representing NAJ, an organization representing the interests of Jersey cattle breeders, testified in support of Proposal 2, which proposes the same milk composition levels as Proposal 1, with automatic annual updates. The witness said many factors have contributed to increased component levels, including improved genomics, increased use of gender-selected semen, and volume-based programs such as base/excess programs. The witness testified an annual update would provide improved accuracy because of the recently accelerated pace of component increases and would have better alignment with pricing between butterfat/skim and multiple component pricing FMMOs. Additionally, the witness stated a 1-year lag on implementing these updates would allow for greater risk management which is becoming increasingly more important to producers and processors. NAJ's post-hearing brief reiterated their support for Proposal 2, arguing record evidence shows protein and other solids levels in producer milk have progressively and significantly increased since FMMO reform in the late 1990s. NAJ stated the trend of higher solids components in skim milk was expected to continue due to economic signals to producers from component values and improved production techniques. NAJ argued amendments of standard skim milk composition factors is necessary to help avoid periods of price inversions, depooling, undervaluing Class I milk, milk supply inefficiency, and disincentives to supply milk for Class I use. NAJ stated a change to the skim milk component levels should be announced at least 11 months in advance of implementation due to risk management practices used by producers and processors. NAJ argued annual updates better serve risk management practices because it would lead to smaller incremental changes and less adverse impact on risk management contracts with more than 12-months open interest at the time component changes are announced. A witness representing Edge Dairy Farmer Cooperative (Edge), a Wisconsin-based dairy milk test verification cooperative, testified in support of Proposals 1 and 2. The witness recommended increasing the implementation lag to 15.5 months to support longer contract hedging. The witness was of the opinion the standard butterfat test also should be updated from 3.5 percent to 4.06 percent, the 2022 average butterfat for all markets combined as published by the USDA's AMS. According to the witness, this would more accurately reflect current butterfat levels and better align the butterfat to protein ratio used in the formula, ensuring more effective risk management tools, as farmers' ability to manage their gross pay price risk would improve. Edge, in their post-hearing brief, reiterated hearing testimony that failure to adjust the butterfat level when updating skim component levels would cause disorderly milk marketing, as it undermines effective risk-management tools for dairy farmers. Edge argued that without the corresponding change, producers hedging milk revenue using risk management products based on Class III milk or Class IV milk prices, will tend to be under protected against the decline in butterfat prices. Edge added that changing the butterfat level would not affect handler obligations to the producer settlement fund, PPDs, or uniform producer prices. A witness representing the International Dairy Foods Association (IDFA) testified in opposition to Proposals 1 and 2, stating that updating the component standards would increase the Class I skim price by $0.60 per cwt, a value that cannot be recovered in the marketplace. IDFA is a trade organization representing dairy manufacturers of milk, cheese, ice cream, yogurt, cultured products, and dairy ingredients. The IDFA witness testified consumers choose finished Class I products based on desired fat level, freshness, and price, not higher nonfat solids levels. The witness estimated that updating component levels in the formulas would result in manufacturing handlers in butterfat/skim FMMOs paying an additional $0.40 to $0.80 per cwt, even though the component levels of milk delivered to those plants was less than those proposed. The witness cited National Dairy Herd Information Association (DHI) data showing 2020 to 2022 average skim protein levels in butterfat/skim FMMOs below the levels contained in Proposals 1 and 2. The witness attributed the lower observed component levels to the fact that producer payments in these orders are made on the basis of the fat and skim content of their milk, leaving no financial incentive to produce higher component milk. A witness from Saputo Cheese USA (Saputo), appearing on behalf of IDFA, also testified in opposition of Proposals 1 and 2. Saputo is a dairy processor and manufacturer operating 29 plants throughout the U.S. The witness said Saputo operates three plants located in the skim/fat orders, and in 2022 the average NFS level of milk received at those plants was 9.1070 percent, which is less than what is proposed in Proposals 1 and 2. The witness explained Saputo purchases skim solids to add to its skim milk in order to ensure the Class II products it manufactures contain the skim solids necessary to meet standard of identity requirements for those products. Updating the component levels in the formula would only result in Saputo paying for skim solids not received, but it would not lower the amount of skim solids Saputo must purchase, explained the witness. A post-hearing brief submitted by IDFA reiterated its opposition to Proposals 1 and 2, arguing that increased component levels have no financial benefit or economic value to Class I handlers who would be the primary entities impacted by adoption of these proposals. IDFA stated the current FMMO system of pricing Class I milk on a skim/fat basis versus Classes II, III, and IV milk on a component basis does not create disorderly marketing. The Milk Innovation Group (MIG) is a group of fluid milk processors and producers that market value added dairy based products. MIG's members include Anderson Erickson Dairy (AE), Aurora Organic Dairy (Aurora), Crystal Creamery, Danone North America (Danone), fairlife, HP Hood LLC (HP Hood), Organic Valley/CROPP Cooperative (Organic Valley), Shamrock Foods Company (Shamrock), Shehadey Family Foods LLC (Shehadey), and Turner Dairy Farms (Turner Dairy). Crystal Creamery is a California fluid milk processor producing Class I, II, and IV conventional and organic milk products. Danone is a food and beverage company operating seven plants in the U.S. Fairlife is a fluid milk processor of ultra-filtered lactose free milk, and other high protein products. Organic Valley is a dairy farmer-owned organic cooperative producing more than 30 percent of the organic milk sold in the U.S. Seven witnesses representing MIG, including witnesses from HP Hood, Shehadey, Saputo, Shamrock, AE, Turner Dairy, and Aurora, testified in opposition to Proposals 1 and 2. HP Hood is a fluid milk processor operating five ESL plants and four high-temperature, short-time (HTST) plants in the Northeast and California. Shehadey operates four manufacturing plants in California, Nevada, and Oregon, producing Class I and Class II products. Shamrock is a fluid milk processor of HTST and ESL products with processing facilities in Arizona and Virginia, and a 20,000-head dairy farm located in Arizona. AE is an Iowa fluid milk processor producing both Class I and II products. Aurora is a vertically integrated organic milk supplier with four organic dairy farms located in Colorado and Texas. Turner Dairy is a small fluid milk processor with full or partial ownership of two fluid milk plants, as well as a standalone Class II plant, all located in western Pennsylvania. Six witnesses testified their plants regularly receive milk with components below the proposed levels. One witness offered that component levels received ranged from 3.09 to 3.63 percent protein, 5.83 to 6.10 percent other solids, and 8.92 to 9.65 percent NFS. MIG members testified that increasing the component levels in the formulas would increase their raw milk costs, requiring them to pay for milk components not received. One witness stated that adoption of Proposals 1 and 2 would increase costs between $0.60 and $0.75 per cwt. All MIG witnesses claimed that fluid milk processors, even if they did receive higher component milk, are unable to convert those higher components into additional market revenue as Class I products are sold on a volume, not component basis. Another MIG witness testified on a survey conducted of MIG members plus two additional large grocery retailers who own their own fluid milk processing plants. According to the witness, using component data from 32 out of the 36 plants surveyed, these plants frequently received milk with components below the proposed levels. As data was confidential, no specific data was provided. The witness also noted the data showed component levels changed due to seasonality and geographics, demonstrating inconsistent levels received by plants. The witness testified the adoption of Proposals 1 or 2 would raise Class I prices and make it more challenging for these plants to recover costs. Should USDA decide to change the standard component levels in the pricing formulas, the witness testified component minimums should be used instead of averages because FMMOs are meant to provide minimum prices. A post-hearing brief filed on behalf of MIG argued it would be disorderly for Class I fluid milk processors, the only mandatory participant of FMMOs, to be forced to pay for component levels regardless of what is actually received. MIG opined consumers do not value additional skim component levels in fluid milk products, therefore Class I processors are unable to recoup additional revenue out of the market. MIG was of the opinion no record evidence was provided at the hearing that the current skim component formula factors are causing disorderly marketing and added that although they oppose Proposals 1 and 2, if any part of these proposals are adopted there should be a 12-month implementation delay. A witness representing the CME Group (CME) testified to explain various dairy risk management tools offered through the exchange, including futures and options contracts. The witness explained the CME is a derivatives marketplace offering a range of futures exchanges to meet private risk management needs. The witness explained a futures contract is a legally binding agreement to buy or sell a standardized asset on a specific date or during a specific month. An option on a futures contract is the right, but not the obligation, to buy or sell the underlying futures contract at a predetermined price on or before a given date in the future. The witness stated 97.43 percent of contracts in the futures and options market are for 12-month periods, and in a previous change to futures contracts there was an 18-month lag on implementation to be beyond open interest. The witness testified that Dairy Revenue Protection (DRP) is one of many programs that rely on CME markets and advocated USDA to consider futures and options markets when establishing implementation plans. In its post-hearing brief, CME reiterated its neutrality on all proposals under consideration. They stated any change modifying the current Class III and Class IV formulas would be considered a material change affecting current contracts. CME stressed the importance of sufficient and transparent notice of any changes. A post-hearing brief was submitted on behalf of Select Milk Producers (Select), a dairy-farmer owned cooperative which owns and operates eight processing plants in Texas, New Mexico, and Michigan, manufacturing ESL fluid milk products and a variety of cheese, butter, and NFDM products. Select offered support for Proposal 1 and took exception to the assertion there is no value in higher protein levels in Class I products, as it is belied by the success of specialty fluid milk products such as fairlife, and the higher milk solids required for California fluid milk. Although Select supported adoption of Proposal 1, they do not support a delay in implementation, nor the annual update as contained in Proposal 2. Lamers Dairy Inc. (Lamers), a Wisconsin based HTST fluid milk processor, submitted a post-hearing brief in opposition to Proposals 1 and 2. Lamers stated component levels can vary both regionally and from farm to farm. Lamers opined that USDA is statutorily required to conduct a study of component levels before any change could be made and argued adoption of Proposals 1 and 2 should not be considered. New Dairy OPCO LLC (New Dairy), a fluid milk processor operating four fully regulated distributing plants (three of which are located in the southeastern U.S.), submitted a post-hearing brief in opposition to Proposals 1 and 2. New Dairy offered support for arguments made by IDFA and MIG that fluid milk processors would be unable to recoup the additional cost of components should Proposals 1 or 2 be adopted. They purport that charging fluid milk processors for components not actually received would be disorderly. New Dairy said raising component levels in the formulas would harm its southeastern plants as they pay on a skim/fat basis which provides no incentive to producer to increase components to match the national average. In its post-hearing brief, NMPF opposed the annual updating feature contained in Proposal 2. NMPF stated that by limiting changes to the standard component levels to a periodic basis and relying on 3-year weighted average, Proposal 1 is more likely to produce accurate component values and avoid disruption from more frequent changes. Surveyed Commodity Products This rulemaking proceeding considers four proposals, and a modified proposal submitted during the hearing, that would add or remove a variety of products in the DPMRP survey, which are then reported in the National Dairy Product Sales Report (NDPSR) and used to establish FMMO classified prices. The proposals are as follows: Proposal 3, submitted by NMPF, seeks to eliminate the Cheddar cheese barrel price from the cheese price formula. Proposal 4, submitted by AFBF, seeks to add Cheddar cheese 640-pound block price series to the cheese price formula. Proposal 5, submitted by AFBF, seeks to add unsalted butter to the butterfat and cheese price formulas. Proposal 6, submitted by the California Dairy Campaign (CDC), seeks to add a price series for mozzarella to the cheese price formula. Edge offered a proposal modification during the hearing to adopt different weighting methodology which would reweigh 40-pound blocks and 500-pound barrels in the DPMRP survey by all U.S. cheddar block and barrel production volumes. NMPF witnesses from Foremost Farms USA (Foremost), Ellsworth Cooperative Creamery (Ellsworth), Land O'Lakes (LOL), and DFA testified in support of Proposal 3. Foremost is a cooperative with 850 members located in Wisconsin, Michigan, Iowa, Minnesota, Indiana, Ohio, and Illinois, and operating eight manufacturing plants producing cheese and butter. Ellsworth is a Wisconsin-based cheese manufacturer producing a significant volume of barrel cheese and a variety of specialized cheeses and cheese curds from 250 dairy-farmer members. LOL is a dairy farmer-owned cooperative with more than 1,000 dairy farmer members, primarily producing butter and cheese. The witnesses explained the current cheese price formula includes both block and barrel cheese in the computation. They asserted the cheese price formula provides for orderly marketing if the difference, known as the “spread,” in the respective market prices of blocks and barrels remains close to the assumed $0.03 per pound cost difference, which occurred from 2000 to 2016. However, since 2017 the spread between the block and barrel prices has been volatile. One witness stated the weighted average spread published in the weekly NDPSR during January 2017 through July 2023 was $0.120 per pound, with a much wider and more volatile range per pound. The LOL witness opined that the DPMRP survey could continue to include and publish prices of 500-pound barrel cheese without necessitating its inclusion in the Class III protein price calculation. An NMPF witness testified the CME block cheddar price is used as a pricing index for most cheese produced in the U.S., including cheddar, 40-pound block, 640-pound block, mozzarella, other American-type cheese, and other cheese including cream cheese, and Hispanic cheese. They estimated 90 percent of natural cheese produced in the U.S. is sold using the CME 40-pound block cheddar price as a pricing index. The witness estimated the CME barrel cheese price is used to price only about 9 percent of total domestically produced natural cheeses, including barrels themselves. They said DPMRP survey volumes of barrel cheese between 2013 and 2022 ranged from 44 to 52 percent, resulting in an overrepresentation of 500-pound barrels compared to the actual volume of cheese that is priced off of barrels. The witness testified that since 2017, the significantly wider and increasingly volatile block-barrel spread has caused instability in the cheese market. Consequently, the witness said, dairy farmer revenue has been reduced as the over representation of 500-pound barrels lowered the Class III price. The Foremost witness estimated the undervaluation represented $2 billion since 2017, opining the value would have been greater if not for the large volume of Class III milk not pooled in 2020 and 2021. The NMPF witness testified eliminating 500-pound barrel prices from the Class III price would create more orderly marketing in FMMOs by reducing the financial uncertainty for dairy producers and manufacturers and ensuring the cheese price in the protein component formula represents the single commodity cheddar cheese product. The witness described how barrel cheese manufacturers are harmed when they must account to the pool at an FMMO cheese price higher than the revenue generated from barrel cheese product. The witness said eliminating the 500-pound barrels would have increased the Class III price by $0.41 per cwt, using average product prices for 2017 to 2022. An NMPF witness testified that removing 500-pound barrels had been addressed in prior rulemakings, but denied by USDA in the rulemaking. However, current market conditions have significantly changed, necessitating a re-evaluation. The witness attributed the increased volatility in the block-barrel price spread since 2017 to a variety of factors, including increased 500-pound barrel production capacity that may be due to increasing values of its white whey by-product. NMPF witnesses testified eliminating 500-pound barrel cheese from the protein component price (PCP) formula would still provide adequate volume of cheddar cheese for price discovery purposes as 40-pound block cheese surveyed represents approximately 16 percent of total U.S. natural cheddar cheese production. The witness also said this methodology change would bring the cheese price into conformity with the price for butter, NFDM, and dry whey, which utilize only one surveyed product for price discovery purposes. The witness testifying on behalf of Ellsworth stated 40-pound blocks and 500-pound barrels are not interchangeable products. The witness said while 40-pound block cheddar has many markets and uses, 500-pound barrel cheddar is used for processed cheese, a market driven by few processors and purchasers. As a result, the witness said, surveying barrel cheese prices skews the FMMO cheese price towards a smaller market which is not representative of the rest of the cheese market. The witness estimated the volatility in the block-barrel spread since 2017 cost Ellsworth producers $0.84 per cwt. The witness said barrel cheese manufacturers would adjust to the elimination of barrel prices from the survey and eventually transition to prices based on the 40-pound block cheese price. Witnesses representing IDFA, Leprino Foods Company (Leprino), and Associated Milk Producers, Inc. (AMPI) testified in opposition to Proposal 3. Leprino operates nine plants in the U.S., manufacturing mozzarella cheese, whey products, and NFDM. AMPI owns and operates eight manufacturing plants processing cheese, butter and powdered dairy products from member farms in Wisconsin, Minnesota, Iowa, Nebraska, South Dakota, and North Dakota. The witnesses said sales of both block and barrel cheddar cheese are robust and each play a significant role in setting the market value of cheddar cheese. They argued eliminating 500-pound barrels would reduce by more than half the cheese market price contained in the survey and would result in a distorted picture of the total commodity cheddar market. The witness said opposition to removing barrels was not related to the presumed effect on the Class III price as the NDPSR weighted average cheese price (reflecting block and barrel cheese) was higher than the 40-pound block price in 9 of 14 years from 2009 to 2022. One witness opined additional cheddar block plant capacity is coming on-line in the next couple of years, increasing 40-pound block volumes, and would reduce the block-barrel spread to historical levels under normal supply-demand behavior. The IDFA witness speculated cheddar barrel manufacturers may opt not to pool milk if the barrel price is no longer surveyed because they would be unable to garner sufficient market revenue in order to account to the pool and the Class III price. Two Leprino witnesses testified eliminating 500-pound barrels from the Class III price formula removes the product most closely reflecting the supply and demand balance. They were of the opinion that removing 500-pound barrels would both shrink the survey volume and likely result in greater production of cheddar blocks as a way to clear the market. The witnesses testified this would add volatility to the block market, cause unnecessary stress to the U.S. marketplace, and make U.S. cheese a less attractive option for global buyers. The Leprino witnesses said dropping 500-pound barrels from the survey would create a presumption within the Class III formula that all cheese, including barrels, would then be priced off blocks. The witnesses asserted barrels and blocks have different supply and demand functions, and eliminating barrels from the Class III formulas would force barrels to be priced off blocks, adding dysfunction to the barrel market. The witnesses were of the opinion barrels are the market-clearing cheese, and instead 40-pound blocks should be eliminated from the price formula to be more consistent with the minimum pricing provisions. In its post-hearing brief, NMPF reiterated testimony regarding price differences between 40-pound blocks and 500-pound barrels becoming more volatile since 2017. Historically, NMPF wrote, using both block and barrel prices in the Class III pricing formula increased the volume of cheddar cheese reported in the NDPSR. However, the increased price spread has caused instability in the cheese market and reduced revenue for dairy farmers as the barrel price is a disproportionately large share when compared to its volume in the cheese market. NMPF estimated 90 percent of the natural cheese produced in the U.S. is priced using the CME 40-pound block price, while the remaining is priced off of the CME barrel cheese price. As a result, NMPF wrote, the Class III milk price has been undervalued and lowered producer revenue. Leprino submitted a post-hearing brief reiterating the important balancing function barrels provide and opined removing them would push 40-pound blocks into the balancing role and would increase price volatility for cheddar blocks. Select submitted a post-hearing brief in support of Proposal 3, arguing 500-pound barrels no longer represent the commodity cheddar market and 40-pound blocks are an appropriate commodity to establish the protein price. According to Select's brief, current formulas dramatically over weights the price of barrels relative to the markets actual use barrels and the cheese priced off of them. The AFBF submitted a post-hearing brief in support of Proposal 3 reiterating hearing testimony that barrels represent roughly 50 percent of the NDPSR volume but is used to set prices for only 10 percent of the cheese in the U.S. market. The AFBF stressed use of barrels in the cheddar cheese price formula creates a price not representative of the value of 90 percent of cheddar cheese produced. IDFA, in their post-hearing brief, opposed Proposal 3 as they argued its adoption would make 500-pound barrel production uneconomical, resulting in barrel makers going out of business or switching to block production which would destabilize the block market. IDFA wrote that 40-pound blocks and 500-pound barrels serve materially different functions in the market and the failure to include both in the survey would distort the commodity cheddar cheese market. NAJ submitted a post-hearing brief in opposition to Proposal 3. NAJ cited hearing evidence showing the market price of block and barrel cheese has diverged significantly since 2017, with barrel cheese priced about $0.11 per pound less than block cheese from 2017-2022. NAJ stated blocks and barrels have different uses, different buyer markets, and limited substitutability. With an expected increase in block production in the coming years, NAJ wrote, there may be many months in which barrels are more per pound and should remain part of the cheese price formula. A witness representing the AFBF testified in support of adding 640-pound cheddar blocks to the Class III formula, as contained in Proposal 4. The witness said adding 640-pound blocks would expand the volume of cheese surveyed and better reflect U.S. block and barrel production volumes. The witness was of the opinion there has been a pronounced production shift from 40-pound blocks to 640-pound blocks and adding 640-pound blocks would provide more survey volume to avoid future rulemaking to address the dwindling 40-pound block survey volume. The witness testified that 40-pound and 640-pound blocks are largely interchangeable in price, use, and storage, and therefore it is appropriate those prices be reflected in the Class III price. A witness representing IDFA testified in opposition to Proposal 4. The witness said the DPMRP cheese survey encompassed more than 1.34 billion pounds of sales in 2022, divided almost evenly between 40-pound blocks and 500-pound barrels. The witness testified the data set is sufficient to determine prices in the market and, since 640-pound blocks typically trade off the 40-pound block price, its addition would provide little additional price discovery information. The witness opined that only a small percentage of the 640-pound block market would meet survey specifications because of the nature of how the product is manufactured and sold. The two Leprino witnesses argued it would be inappropriate to add 640-pound blocks as the market is largely make-to-order and the lack of equipment to handle 640-pound blocks limits sales to a narrow group of buyers. The witnesses noted the 640-pound block market is balanced through the cutting down of 640-pound blocks into 40-pound blocks, so the 40-pound block cheddar market is already reflected in its pricing. A witness representing Glanbia PLC (Glanbia), testified in opposition to Proposal 4. Glanbia owns four dairy plants in Idaho and partially owns two joint venture plants in New Mexico and Michigan, processing 34 million pounds of milk daily into barrel cheese, block cheese, whey protein concentrates, proprietary protein blends, and lactose. The witness testified Glanbia plants manufacture 40-pound and 640-pound-blocks, both priced off the CME 40-pound block price and opined that adding 640-pound blocks would not add new information to the survey. A witness representing the Wisconsin Cheese Makers Association (WCMA), whose 81 members include cheese manufacturers making 40-pound blocks, 640-pound blocks, and 500-pound barrels, testified in opposition to Proposal 4. The witness testified the industry uses the 40-pound block price to price 640-pound blocks, and since 40-pounds blocks are already used in the protein formula, adding 640-pound blocks would add no new price information. A DFA witness representing NMPF, testifying in opposition to Proposal 4, said the 40-pound block volume provides an adequate dataset and the sole inclusion of 40-pound blocks is sufficient for cheese price discovery, making adoption of Proposal 4 unnecessary. The witness stated the daily CME cash block cheese market is widely recognized by market participants as heavily influencing the price of cheese. The witness concluded that because annual CME block cheese traded volumes are not as large as NDPSR block survey volumes, the volume of 40-pound blocks reported in the NDPSR is more than adequate to determine the FMMO cheese price. The witness testified that incorporating 640-pound blocks into the NDPSR data set could promote the same disorderly market conditions currently observed with the inclusion of 500-pound barrels. The AFBF reiterated their support of Proposal 4 in their post-hearing brief. The AFBF indicated 640-pound blocks are priced identically, or nearly identically, to 40-pound blocks, and are a standardized commodity cheddar cheese product. Including the 640-pound blocks in the NDPSR survey, they argued, would help make the survey more robust. Select, in their post-hearing brief, expressed support for Proposal 4 agreeing with proponents that its inclusion would increase DPMRP survey volume. Select mentioned that with new cheese processing capacity starting in upcoming years in Minnesota, New Mexico, Michigan, and Texas, 640-pound blocks would become a larger proportion of the commodity cheddar market and it would be prudent to incorporate their prices and volume in the survey. IDFA reiterated opposition to Proposal 4 in its post-hearing brief. IDFA highlighted evidence describing how 640-pound blocks are typically made to customer order as there is only a small number of cheese buyers who are able to purchase and process them. Since manufacturers of 640-pound blocks often balance the 640-pound block market by cutting them down to 40-pound blocks, IDFA said no new price information would be gained from including 640-pound blocks in the survey. WCMA also expressed opposition to Proposal 4 in their post-hearing brief and wrote that because 640-pound blocks do not have a unique price discovery mechanism, they would add no new price information to the formulas. A witness representing the AFBF testified in support of Proposal 5, seeking to add unsalted butter to the DPMRP butter survey. The witness said because of the growing volume of unsalted butter production and use in the U.S., the DPMRP salted-only butter price collection increasingly underrepresents the value of U.S. butter. According to the witness, the amount of butter captured by the NDPSR as a percentage of total butter production has been declining, from 16 percent in 1999 to 9.4 percent in 2022. The witness expected this trend to continue without the addition of unsalted butter. Citing USDA voluntarily graded salted and unsalted butter volumes, the AFBF witness said one reason for declining butter survey volumes is the increase in U.S. unsalted butter production. The AFBF witness testified the exclusion of unsalted butter is unnecessarily restrictive for the purposes of the DPMRP survey. The witness cited U.S. butter export data showing 2,000 metric tons exported in 2000, to over 65,000 metric tons in 2022, estimating almost all the exports were unsalted. The witness said incorporating unsalted butter prices into the FMMO butterfat formula would make the survey more representative of the evolving butter market, allow for better market transparency, and provide for more orderly marketing of butter and milk. The witness claimed salted and unsalted butter are production substitutes, as the same production line can be used for both without substantial interruption. The witness clarified Proposal 5 is not intended to change the current 80 percent butterfat reporting standard for butter, and therefore exported unsalted butter at 82 percent butterfat would continue to be excluded. A witness representing CDC expressed support for Proposal 5, without additional testimony. The CDC represents dairy farmers throughout California and is a state chapter of the National Farmers Union. A witness representing IDFA testified in opposition to Proposal 5. The witness testified there is no uniform specification for unsalted butter, so it is impossible to derive a uniform price for purposes of an FMMO pricing formula. The witness explained unsalted butter does not store as well compared to salted butter, rendering unsalted butter less capable of providing useful uniform price information. The witness also testified unsalted butter tends to be priced off the CME Grade AA salted butter price, and therefore does not bring any new pricing information. As substantial quantities of unsalted butter are exported through premium-assisted sales, which would not be included in the DPMRP survey, emphasizing unsalted butter should not be relied on for determining the market price of butter. Moreover, the witness considered the current volume of salted butter reported in the DPMRP to be a robust quantity of butter sales. A witness representing the Dairy Institute of California (DIC) testified in opposition to Proposal 5. The DIC is a trade association, representing fluid milk and dairy product processing plants in California. The witness asserted most unsalted butter is 82 percent butterfat and exported and should be considered substantively different from domestically consumed butter which contains 80 percent butterfat. The witness referenced a lack of clarity on how subsidies on exported butter would be handled in the product price reporting as another reason for their opposition. A California Dairies, Inc. (CDI) witness, representing NMPF, testified in opposition to Proposal 5. CDI is a California dairy farmer-owned cooperative with 258 members producing and marketing 41 percent of California's total milk production and operating six butter and milk powder manufacturing facilities in the state. The witness disagreed with the assertion that salted butter at 80 percent butterfat no longer represents an adequate survey volume. The witness testified CDI manufactures both types of butter, and unlike salted butter, unsalted butter is manufactured exclusively for customer order. The witness argued sales of the two types of butter are not interchangeable. The witness stressed the addition of salt allows salted butter to be stored for long periods, making it a market clearing product, whereas the nature of unsalted butter requires it to be sold and consumed in a significantly shorter period of time. The witness was of the opinion introducing unsalted butter into the survey may result in volatility in the relationship between salted and unsalted butter similar to the current volatile relationship between 40-pound block and 500-pound cheddar barrels. The witness said it was preferable to have one product generate the singular commodity reference price for purposes of calculating the minimum FMMO prices. In post-hearing briefs, the AFBF offered additional support for Proposal 5, stating the growing volume of unsalted butter production and use in the U.S. markets results in a salted-only butter price collection in the NDPSR survey which increasingly underrepresents the value of U.S. butter. The AFBF argued the declining trend in butter survey volume as a percent of actual production would continue, as butter survey volume has fallen from 16 percent of total production in the 1999 to 9.4 percent in 2022. Select expressed opposition to Proposal 5 in its post-hearing brief. Select argued that despite the growth of unsalted butter products, it should not be included in the survey because it lacks a uniform specification, is typically produced for special orders, has no active commodity market, is often made with 82 percent butterfat versus 80 percent, and is viewed as a higher-value product. IDFA's post-hearing brief reiterated their opposition to Proposal 5 stating the Grade AA salted butter survey volume is robust and the product is traded on the CME. IDFA wrote that a majority of unsalted butter is exported through government or private assisted sales, such as Dairy Export Incentive Program or Cooperatives Working Together, which would disqualify such sales from being reported. IDFA also stated unsalted butter does not store as well as salted butter, making it more likely to be made to order to a particular buyer's specifications. A witness representing the CDC testified in support of adding mozzarella prices to the FMMO cheese price, as contained in Proposal 6. The witness was of the opinion adding mozzarella would make the FMMO Class III price more reflective of all U.S. cheese production. The witness asserted that because the volume of mozzarella production significantly exceeds cheddar production it should be reflected in the FMMO cheese price to improve price transparency and increase dairy farmer revenue. The CDC witness also stated mozzarella production is the largest category of cheese produced today and deserves a standard specification determined by the volume of mozzarella produced today. The CDC witness proposed adding mozzarella to the FMMO protein price based on the Van Slyke cheese yield formula, a formula for predicting cheddar cheese yields from milk on the basis of its fat and casein content. The witness submitted numerous USDA Specifications of Mozzarella Cheese for the Department to consider when determining an acceptable moisture and fat content of mozzarella cheese to be surveyed. The specification detailed requirements for six variations of mozzarella types in four forms (loaf, sliced, shredded, or diced). The witness testified that 5 to 6-pound loaves of mozzarella would be representative of a wholesale commodity mozzarella product and reasonable for inclusion in the survey. A California dairy farmer testified in support of Proposal 6. The witness said including mozzarella in the survey would create a Class III price that more accurately reflects the value of the current cheese market. The witness attributed the ongoing decline in the number of California dairy farms to negative margins and price volatility and stressed the urgency in capturing the additional value of mozzarella. A Wisconsin dairy farmer also supported inclusion of mozzarella for similar reasons. A witness representing IDFA testified in opposition to Proposal 6. The witness described the difficulty in selecting appropriate mozzarella product specifications, yield assumptions, and manufacturing costs to include in the formulas whose factors currently reflect only cheddar production. The witness also testified the commercial mozzarella cheese market contains wide product variability, including varying fat and moisture parameters demanded by mozzarella customers. The witness testified that unlike bulk cheddar products, mozzarella is not a market-clearing product, is often sold to meet the customer specifications, is not traded on the CME, and is not storable for extended periods. Witnesses from Leprino and Glanbia testified in opposition to Proposal 6, asserting the proposal lacked critical details making it difficult to interpret and evaluate. The witnesses explained the equipment, production, and yield difference between mozzarella and commodity cheddar. The witnesses said Proposal 6 does not define the type of mozzarella to be surveyed or how USDA should address the diversity of mozzarella cheese types and packages. The witnesses stated significant volumes of mozzarella are manufactured into value-added forms, whether as shred, string, or smaller retail or foodservice loaves by the primary manufacturer. The witnesses also noted most mozzarella is not market-clearing and is stored in refrigerated form with limited shelf life reducing its role as a market clearing product. The witnesses added that the volume of mozzarella production sold by the primary manufacturer in bulk format is comparatively small, in contrast to cheddar, in which most shredding, processing into consumer packaging, and conversion to other forms is performed by different companies rather than the original manufacturer. The witnesses opined cheddar remains the most appropriate Class III cheese product. Leprino reiterated their opposition to Proposal 6 in their post-hearing brief. Leprino argued mozzarella cheese is a grouping or collection of similar products with diverse specifications, and that the assumption mozzarella production volume represents a single defined bulk product is incorrect. Leprino further stated mozzarella has different manufacturing processes, costs, and product yields. Therefore, if mozzarella was added to the Class III pricing formula, the formula would become substantially more complicated with little incremental benefit. A Foremost witness, testifying on behalf of NMPF, testified in opposition to Proposal 6, urging USDA to only utilize one commodity price series to represent each of the four dairy prices: cheese, butter, NFDM, and dry whey, to ensure orderly marketing. The witness noted the many mozzarella composition types, and purported deriving a 40-pound block cheddar equivalent price would be difficult. The witness added mozzarella manufacturing costs are different and no data exists to determine how those costs should be reflected in the cheese make allowance. The witness said including mozzarella pricing into the protein price calculation would not enhance price discovery as mozzarella prices already move with the 40-pound cheddar market. Other NMPF witnesses testified to the appropriateness of limiting the cheese price to one survey product, cheddar. Witnesses representing the AFBF and WCMA opposed the inclusion of mozzarella due to the lack of standard format that could be surveyed. Select's post-hearing brief opposed Proposal 6 because no workable framework for incorporating mozzarella into the price formula was provided on the record. IDFA's post-hearing brief reiterated their opposition of Proposal 6 as mozzarella lacks uniformity in compositional specifications and yields and is not traded on the CME. IDFA wrote the U.S. Food and Drug Administration (FDA) Standards of Identity provide four different variants of mozzarella cheese, with a wide variety of fat and moisture levels. IDFA also stated that while proponents advocated use of the Van Slyke formula to determine yields, the record lacked evidence as to how the formula should be revised to incorporate mozzarella cheese. WCMA opposed Proposal 6 in their post-hearing brief. WCMA members argued that there is no FDA Standard of Identity for mozzarella and are concerned over the vast variety of forms and functionality of each mozzarella manufacturer. A witness testifying on behalf of the CME offered information regarding its dairy futures and options markets which utilize FMMO prices. The witness did not appear in support or in opposition to any proposal under consideration. The witness testified that the CME dairy product portfolio, which began in 1996, includes Class III and Class IV milk futures and options, cash-settled cheese, 40-pound block cheese, cash-settled butter, NFDM, and dry whey. The witness said the relationship between Class III and Class IV milk futures can serve as a mechanism to manage both input and output costs and provide the dairy trading community with an opportunity to provide liquidity to the market while managing risk. The witness testified any changes to FMMO formulas, or underlying DPMRP survey methodology could result in a material change to the valuation of the contracts. A post-hearing brief filed by CME reiterated its hearing testimony and stressed that the Department consider the impact to futures and options markets when determining the implementation timeframe for any FMMO price formula changes. A witness representing Edge offered the modified proposal that would reweight 40-pound blocks and 500-pound barrels by U.S. production volumes, not DPMRP survey volumes. The witness said this alternative weighting methodology would reduce the weight of barrel cheese as most cheddar cheese is manufactured into blocks. The witness explained that since a significant volume of block cheddar cheese does not qualify for inclusion in the NDPSR, barrels have a weight disproportionate to their true market share of the cheddar market. The witness was of the opinion the protein price should primarily reflect the block cheddar cheese market as it is estimated 70 to 75 percent of all cheddar cheese is produced into 40-pound or 640-pound blocks. The Edge witness predicted that the block-barrel spread could invert in 2025 due to the growth of block cheese production. The witness expects cheese manufacturers who can make either blocks or barrels will react to profitable opportunities, thus reducing the spread between block and barrel prices by altering their production schedules. The witness argued that, given the anticipated trends over the next 3 to 5 years, it would be more prudent to reduce the weight of barrels today and revisit the topic of removing barrels in 5 years. Edge reiterated their support for the weighting methodology in its post-hearing brief, as an alternative to eliminating barrel cheese or adding 640-pound blocks to the survey. Edge explained that, in practice, the Department would survey all barrel cheese production volume on an annual basis, including forward contracted cheese volumes, to determine the percentage of barrel cheese produced in relation to the NASS total U.S. cheddar cheese production estimates. Edge proposed the percentage be rounded to the nearest 5 percent, and the inverse would be assumed to represent block production. This calculated weight would be announced by September 15 and be applicable for the following calendar year. Survey prices would then be weighted by these percentages to determine weighted average cheese prices. IDFA, in their post-hearing brief, opposed Edge's modified proposal, arguing that it ignores market clearing, minimum pricing principles. IDFA opposed the idea of Class III prices being predominantly determined through a 40-pound block cheddar price. A post-hearing brief submitted by NMPF opposed Proposals 4, 5, 6, and Edge's modified proposal on the grounds the proposals perpetuate the problem Proposal 3 seeks to fix, which is to have only one product surveyed to determine a wholesale commodity price. Class III and Class IV Formula Factors a. Make Allowances Proponents submitted three proposals to amend the make allowances in the Class III and IV formulas. Proposal 7, submitted by NMPF, seeks to update make allowances to the following: cheese, $0.2400; dry whey, $0.2300; NFDM, $0.2100; butter, $0.0210. WCMA and IDFA submitted Proposal 8 and identical Proposal 9, respectively, to update make allowances as described in the below table. The proposals contain a four-year implementation schedule with 50 percent of the increase implemented in year 1 and the remaining 50 percent implemented evenly across the remaining 3 years. IDFA/WCMA Proposed Make Allowances Product Year 1 Year 2 Year 3 Year 4 Cheese $0.2422 $0.2561 $0.2701 $0.2840 Dry Whey 0.2582 0.2778 0.2976 0.3172 NFDM 0.2198 0.2370 0.2544 0.2716 Butter 0.2251 0.2428 0.2607 0.2785 A former University of Wisconsin economics professor testified regarding separate manufacturing cost surveys they conducted on behalf of USDA and IDFA in 2021 and 2023, respectively. Each survey collected data submitted voluntarily from plants producing commodity cheddar cheese, dry whey, butter, and NFDM. The witness previously conducted similar surveys used by the Department in determining make allowance levels. The witness did not testify in support or opposition to any manufacturing allowance proposals under consideration. The witness explained that only plants manufacturing commodity products meeting DPMRP product specifications were eligible to participate. As plant participation was voluntary, the sample of plants and respective volumes varied by product and between surveys, with increasing cost variation between plants over time. The witness noted more observed cost variation across plants can occur due to newer automation technology employed in some plants, varying utility costs over time, and economies of scale achieved by some plants who negotiate input costs. The witness explained that dairy-based raw product costs, such as raw milk or purchased cream, are excluded, while costs of non-dairy ingredients needed to transform the raw milk into a manufactured product, such as salt and enzymes, are collected and included in the survey results. The witness said costs, such as labor and utility, through the product-packaging stage are incorporated, but post-packaging costs, such as long-term storage or distribution and sales costs, are not. The witness explained an economic depreciation factor, not consistent with taxable depreciation, is incorporated to cover consumed capital, and the asset's return on investment is included to capture opportunity costs. The witness explained two different methodologies used for allocating costs in multi-product plants that could not be associated with a specific product (unallocated costs). The witness said the 2021 survey utilized a degree-of-transformation factor to allocate costs based on degree of transformation raw milk must undergo in order to be manufactured into the wholesale product. Transformation factors were assigned subjectively, based on knowledge of manufacturing processes. As a result, the witness said, unallocated costs were weighted towards heavily transformed products, such as NFDM, while products undergoing less transformation, for example, butter, were assigned a lower portion of the unallocated costs. Due to questions from the industry regarding this methodology, the witness said the 2023 survey reverted to allocating costs on a solids basis, a methodology more familiar to industry stakeholders. The witness said the 2021 survey showed more variation of costs when compared to current make allowance levels, ranging from an 18 percent decrease in butter costs to a 75 percent increase in NFDM costs. The 2023 survey results revealed a more consistent cost change when compared to current FMMO levels, ranging from a 65 percent increase in NFDM costs to a 72 percent increase in butter costs. The witness attributed much of the survey result differences to the plant samples. For NFDM, the 2021 survey had 27 participating plants, whereas the 2023 survey had 15, with larger average volume per plant, according to the witness. For cheese, the 2023 survey included 18 cheddar cheese plants compared to 10 in the 2021 survey, and the witness elaborated that the cheese plants surveyed were much larger on average and represented a significant proportion of the NDPSR volume when compared to the 2021 survey. The witness testified the data on butter highlighted the importance of sample composition. Both surveys sampled a similar numbers of butter plants, 13 in 2023 and 12 in 2021, and represented roughly the same total volume. However, the witness stated the 2023 survey had more variation in production volumes whereas in the 2021 survey, butter plants were more similarly sized. Finally, the witness testified the dry whey surveys had similar numbers of participating plants, 9 in 2023 and 8 in 2021, but the surveyed volume in the 2023 survey was nearly 50 percent more than that contained in the 2021 survey. NMPF offered Proposal 7 as one option for amending FMMO make allowance levels. Eleven NMPF witnesses, representing the manufacturing interests of cooperatives, testified in support of Proposal 7. The witnesses testified the current FMMO make allowances do not resemble manufacturing costs currently experienced in their plants. The witnesses provided detailed testimony on the impact of inadequate make allowances, which consisted of similar themes. First, they were of the opinion inadequate make allowances cause the FMMOs to overvalue raw milk. Consequently, the witnesses said many cooperatives have reblended cooperative revenues to members as a way of recouping manufacturing costs not covered by current FMMO make allowances. Second, the witnesses said insufficient make allowances disincentivize plant investment, whether it be in current or potential new plants. The NMPF witnesses testified the industry lacks consensus on reliable data to determine make allowances due to inconsistencies in cost allocation and reporting across operations. The witnesses were of the opinion the available manufacturing cost surveys are not comprehensive or reliable enough to justify large make allowance increases. The witnesses all stressed increasing make allowances to levels above actual costs could cause untenable financial harm to producers, putting many out of business and jeopardizing the milk supply. One NMPF witness described how an informal manufacturing cost survey of some NMPF members was used in the development of Proposal 7. A CDI witness testified regarding the impact insufficient make allowances have had on their member farms and six butter and milk powder manufacturing facilities. The CDI witness testified the NFDM and butter make allowances in Proposal 7 are transformations of the 2021 survey results, using the combined costs and yields of the two products. An LOL witness testified inadequate make allowances have led to disorderly market conditions, including lack of investment in manufacturing plants to process and balance milk supplies and inequitable producer pay prices between producers of different cooperatives and between cooperative and nonmember producers. An Agri-Mark witness said current make allowances overvalue producer milk and make it difficult for cooperatives with manufacturing facilities to remain profitable and pay the FMMO blend price. Consequently, the witness said, cooperatives must re-blend proceeds in order to recoup manufacturing costs, resulting in producer pay prices often less than FMMO blend prices. Agri-Mark is a dairy farmer-owned cooperative located in the Northeastern U.S. with over 550 members, 3 cheese manufacturing plants and 1 butter-powder plant in the region. A Foremost witness attributed higher operating costs seen in their plants to inflation since 2008, adding that in the last 2 years, they have experienced particularly acute price increases in all categories. A witness representing FarmFirst Dairy Cooperative (FarmFirst), a cooperative operating in the Upper Midwest with 2,600 dairy farmer members, testified negotiated over-order premiums have diminished by 24 percent since 2020 due to their processor's compressed margins, partly a result of inadequate make allowance levels. In addition to reducing premiums, the FarmFirst witness attested the current make allowances overvalue producer milk and have contributed to an oversupply of milk in the Upper Midwest, resulting in milk dumping, negative PPDs, depooling, and milk selling at below Class III prices. A Northwest Dairy Association (NDA) witness testified in support of Proposal 7. NDA is a dairy farmer-owned cooperative located in the Pacific Northwest with approximately 295 members, whose subsidiary (Darigold) operates 5 fluid milk bottling plants and 7 manufacturing plants making butter, cheese, dry whey, and dry milk products. The witness testified Darigold's manufacturing costs increased 80 percent between 2008 and 2022. The witness said inadequate or delayed investment in manufacturing plant capacity increases transportation costs, which are borne by producers, since milk must be shipped farther distances to find an available manufacturing market. A witness representing Maryland and Virginia Milk Producers Cooperative, Inc. (MDVA), a dairy farmer-owned cooperative located in the Mid-Atlantic that operates three pool distributing plants and two pool supply plants manufacturing bulk butter and NFDM, testified costs had increased compared to 2008 levels, with NFDM conversion costs increasing 64 percent over the period. According to the MDVA witness, Proposal 7 would reduce, but not eliminate, the manufacturing losses incurred in balancing their milk supply. A witness representing Lone Star Milk Producers (Lone Star), a dairy-farmer owned cooperative marketing milk on the Appalachian, Southeast, Central, and Southwest FMMOs, testified that manufacturing costs at their butter and NFDM plant have risen since commencing operation in 2017. A witness representing Ellsworth testified to the increasing costs of production at their cheese and dry whey operation. Lastly, a DFA witness testified in support of Proposal 7 and provided dairy farm cost of production data, arguing this data should be considered when determining make allowances. A dairy economist from the University of Missouri, appearing on behalf of NMPF, testified on the estimated economic impact of Proposal 7. Using an econometric model, the witness estimated the proposed make allowances would lead to a $0.30 decline in the All-Milk Price and a 200-million-pound milk production decline in the first year of implementation, with a further milk production decline of 400 million pounds in the second year. In the long run, the witness forecasted the decline in the All-Milk Price would moderate to $0.04 as markets adjusted to lowered milk production. A dairy farm accountant, testifying on behalf of NMPF, presented various statistics related to their dairy farmer clientele. The witness testified average total income from their clients' operations was $5.50 per cwt in 2022, with a break-even milk price of $19.78 per cwt. The witness said the average net income from 2006 to 2023 was $1.23 per cwt, on an average milk production of 995,115 cwt, yielding an average net income of approximately $1.2 million. The witness later stated that a 3,300-milking cow herd would require an investment of approximately $40 million. An economist from Cornell University, testifying on behalf of NMPF, testified on the topics of dairy farm profitability, cost of production measures, and farm data from the Cornell Dairy Farm Business Summary, Michigan State University, and the University of Wisconsin. The witness warned that setting make allowances “too high” would lead to unwarranted investments in processing facilities while setting make allowances “too low” would lead to insufficient plant investments and cooperative deductions on member milk checks. Numerous dairy farmers testified in support of Proposal 7, recognizing the need for increased make allowances despite what they acknowledge would be a decrease in FMMO producer prices. These witnesses testified to recent decreased farm margins due to a declining All-Milk Price, falling net pay prices, higher feed costs, and increased production costs, leading to near negative operating incomes. The witnesses said that while make allowance increases would hasten this trend, Proposal 7 accounts for these factors, balancing producer and processor needs. Multiple witnesses expressed doubt in the available manufacturing cost survey data due to its voluntary and unaudited nature, as well as observations of cheese manufacturing profitability and continued investment. Dairy farmer witnesses testified that inadequate make allowances have disadvantaged dairy farmer-members of cooperatives who own manufacturing plants compared to dairy farmer-members of cooperatives who own no plants. Several dairy farmer witnesses said that the prevalence of market adjustment deductions from their member milk check signifies negative returns on the cooperatives manufacturing assets due to inadequate make allowances. Another dairy farmer testified processing costs for Agri-Mark's four manufacturing plants producing cheese, butter, NFDM, and whey have increased by an average of 20 percent since 2008, and insufficient make allowances have resulted in deductions to member milk checks to cover processing costs. According to the Agri-Mark witness, this has led to disorderly market conditions, which impair plant investment and disadvantage cooperative members. A CDI dairy farmer witness testified to the financial difficulties of operating CDI's balancing plants given current make allowance levels. A witness representing the Milk Producers Council (MPC), an organization representing California dairy farms, testified Proposal 7's proposed make allowances balance producer and processor needs. The witness said the cost survey information entered into evidence is of limited value due to its voluntary, unaudited nature and the lack of transparency in cost allocation for multi-product plants. The witness argued differences between the All-Milk Price and the Mailbox Price indicates a need for increased make allowances and a guideline to the resulting impact on producer pay prices, currently estimated at $0.75 per cwt. In its post-hearing brief, NMPF reiterated its arguments for adopting the make allowance levels contained in Proposal 7, writing it is the only option accounting for an increased cost in manufacturing while protecting producer pay prices. NMPF stated there has never been a make allowance adjustment greater than $0.35 per cwt, and the changes contained in Proposal 7 would decrease farmer milk prices by approximately $0.50 per cwt. NMPF presented in its brief the aggregated costs cooperatives with manufacturing capacity shared on the record, to emphasize the increases across cost categories since make allowances were last updated. While the need to update make allowances to reflect higher costs is necessary, NMPF stated the data on the record is not sufficiently comprehensive, verifiable, or unambiguous to determine make allowances above those offered in Proposal 7. In its post-hearing brief, Agri-Mark reiterated support for Proposal 7 as the most balanced approach to updating make allowances, despite acknowledging the proposed levels are not sufficient to cover all manufacturing costs. Opponents to Proposal 7, primarily representatives for IDFA or WCMA, echoed similar concerns from cooperative manufacturers regarding inadequate make allowances, claiming the inability to recover manufacturing costs on wholesale commodity products has led to a lack of investment in manufacturing capacity. These witnesses testified on the importance of make allowances fully covering manufacturing costs, rather than a portion of costs as proposed in Proposal 7. Witnesses testified that continued capital investment in plant yield and efficiency gains have not fully countered the effects of insufficient make allowances as costs have continued to increase. Without make allowances accurately reflecting costs, the witness said, manufacturers receive inaccurate financial signals, which impact investments, capital distribution, and FMMO pooling decisions. Additionally, they said the competitive advantage gained by manufacturing plants not regulated by an FMMO lead to more investments into operations unaffiliated with the FMMO system. Only an increase in make allowances reasonably covering commodity product manufacturing costs, according to these witnesses, can counteract these effects. In its post-hearing brief, IDFA reiterated opposition for Proposal 7, writing that the proposed make allowance levels are inadequate and not grounded in observed data. IDFA stressed that make allowances are defined as covering the entire cost of converting raw milk to a given dairy product, not a portion. In its brief, IDFA pointed to NMPF's recognition that Proposal 7's make allowances do not fully cover actual costs but instead represent a balance dairy farmers can withstand. IDFA objected to the consideration of farm production costs when determining make allowance levels. IDFA reiterated FMMOs are not a price support or income support program, and the prices must reflect the market price of end-dairy products. IDFA explained manufacturers cannot raise the prices of commodity dairy products to offset higher manufacturing costs because the wholesale prices are captured in the NDPSR and would raise the reference price by the same amount. AMPI reiterated in its post-hearing brief opposition for Proposal 7 as failing to reflect 2022 manufacturing costs. AMPI argued that USDA should not delay increasing make allowances on the possibility that legislation will give USDA the authority to conduct a mandatory audited survey. A witness from DIC testified in support of Proposals 8 and 9. The witness testified that setting minimum prices too high incentivizes excess milk production, while a low minimum price through higher make allowances allows for over-order premiums to set a competitive market price. The witness argued Class III and IV prices should allow manufacturing plants to clear the market and operate profitably. The DIC witness entered data concerning its 2022 California dairy manufacturing cost forecast (2022 CA Forecast). The witness testified the 2022 CA Forecast used a combination of 2003-2016 California Department of Food and Agriculture (CDFA) data, state and national indices, and market developments to measure how changes in labor, utility, and other costs historically moved the actual CDFA cost data. The model then used that information to forecast California-specific 2017-2022 manufacturing costs, according to the witness. The witness said while the model forecasts costs, the range of actual costs around those forecasts could be relatively wide given the relatively few observations (14 years) used to estimate the model. For example, the expert witness elaborated that CDFA only collected dry whey costs until 2006, when they surveyed fewer than three dry whey plants, which is why the CA analysis did not forecast dry whey costs. The DIC witness opined the best approach to determine manufacturing allowance levels is using observed cost data but offered the 2022 CA Forecast as another methodology for use with the other cost surveys and testimony presented. An IDFA witness testified in support of Proposals 8 and 9, stating make allowances should be updated to reflect increased costs in manufacturing dairy products. The witness said that while end-product-prices change monthly to reflect the current market, make allowances are fixed at 2006 cost levels, forcing dairy manufacturers to lose money or stop production. The witness stressed the need for relief from the current inadequate make allowances that do not reflect rising industry costs, adding losses are not sustainable for plants or dairy farmers who depend on these manufacturing outlets for their milk. The witness explained IDFA's proposed make allowances are simple averages of the 2023 survey and 2022 CA Forecast plus a $0.0015 marketing cost. The IDFA and WCMA witnesses asserted accurate make allowances need to be adopted quickly as current make allowances are based on 2005/2006 cost data. The IDFA witness clarified their staggered implementation proposal, which would implement proposed year 1 levels shortly after the final decision is published. Both IDFA and WCMA witnesses said the staggered implementation is designed to recognize the impact significant make allowance increases would have on producer prices. However, if there is any delay in implementing changes, both witnesses stressed the staggered implementation approach should be abandoned and the proposed year 4 levels should be implemented. The WCMA witness stated the use of audited California manufacturing cost data in the 2022 CA Forecast should alleviate any data validity concerns and the 2023 survey methodology follows precedent used to determine the current make allowance levels. The witness noted the risk of using a simple average of the 2022 CA Forecast and the 2023 survey to determine proposed make allowances is the potential of the result being skewed towards California costs, since California plants are represented in both surveys. A dairy farmer witness, who is a member of AMPI, testified on behalf of IDFA and expressed support of Proposals 8 and 9. The witness testified that AMPI, who participated in the 2023 survey, experienced cheese manufacturing costs close to the study average despite plant sizes that were smaller than the survey average plant size. The witness said their manufacturing costs of bulk cheese products are 47 percent higher and general plant expenses are up 62 percent in 2022, compared to 2008. Several dairy manufacturer witnesses representing Hilmar Cheese Company (Hilmar), Glanbia, Saputo, and Leprino testified in support of Proposals 8 and 9. Hilmar is a cheese and whey manufacturer with processing locations in California and Texas. These witnesses testified dairy processing costs have increased, particularly of late because of inflation, noting Hilmar's natural gas costs were 45.1 percent above the 20-year average. The Saputo witness echoed testimony on increasing costs, citing the St. Louis Federal Reserve data series for labor, energy, packaging, and maintenance costs. The witness said these costs, comprising 20 percent of the total cost to manufacture a finished cheese product, rose 60 percent, on average since 2006. According to the witness, Saputo's manufacturing costs align with the 2021 and 2023 survey results. The Hilmar witness testified their manufacturing cost increases correlate with the results of the 2022 CA Forecast. The Leprino witness stated the 2021 survey and 2023 survey had robust participation, and the 2022 CA Forecast, which used CDFA audited mandatory data, leveraged a widely accepted statistical modeling approach. All four witnesses stressed the urgency of updating make allowances. The manufacturer witnesses generally agreed that inaccurate make allowances distort pricing signals for farmers, processors, and ultimately consumers. Witnesses representing Nasonville Dairy and Cedar Grove Cheese, two proprietary specialty and commodity cheese manufacturer members of WCMA, testified to rising manufacturing costs by outlining costs in a similar manner to the 2021 and 2023 surveys. According to the witnesses, their costs have risen $0.3226 and $0.77 per pound, respectively, far beyond the fully implemented Proposal 8 levels. The witnesses testified that insufficient make allowances negatively impact cheese processing investments and increase the production of higher-cost specialty products unable to play the same balancing or foodservice roles as commodity products. They added current make allowance levels impair the ability of proprietary manufacturers to participate in the FMMO pool and deprives producers the benefits of having their milk pooled. In their post-hearing briefs, WCMA and IDFA reiterated their support for Proposals 8 and 9. IDFA wrote that USDA has consistently set make allowances to reflect the most recent and reliable actual cost data, using multiple surveys, as in Proposals 8 and 9. Further, IDFA stressed in its brief the 2023 survey is the most robust of all of the author's previous surveys used to set make allowances. IDFA refuted the notion the 2022 CA Forecast is inappropriate to use for determining make allowances, explaining the underlying data is robust audited California manufacturing data and the econometric techniques are widely accepted. IDFA contended that the 2022 CA Forecast and 2023 survey averages are lower than the cooperative manufacturing costs shared on the record. Even if inflation has subsided since 2022, IDFA added in its brief, there would have to be deflation to arrive below pre-2022 levels. IDFA clarified in its brief the proposed schedule for phasing in make allowance changes, which is designed to accommodate farmers. When addressing implementation timing, IDFA refuted the CME's points about incorporating risk management in the timing of implementation, arguing that CME's interests do not necessarily align with those of the broader dairy industry because of the fee revenue they generate. In its brief, IDFA emphasized the destabilizing effect of current make allowances on processors and farmers. IDFA shared charts from the hearing, showing how the Mailbox Price is in close proximity to FMMO blend price, which it says indicates FMMO prices are too high. IDFA refuted NMPF's argument that Proposals 8 and 9 will result in a $1.42 per cwt decrease in the All-Milk Price because FMMO prices are minimum prices and don't reflect premiums received. Further, IDFA wrote in its brief that dairy farmers whose cooperatives own processing facilities are receiving depressed prices when make allowances are too low. IDFA said the best method to update make allowances is through a mandatory and audited USDA survey; however, USDA does not currently have the authority and IDFA estimates it would take approximately five years before new make allowances could be adopted once the authority was granted. IDFA reiterated arguments that make allowances under-representing actual costs harm both dairy farmers and manufacturers. In its post-hearing brief, AMPI reiterated support for the make allowance levels in Proposals 8 and 9, contending they accurately reflect the changes in costs. AMPI added it supports immediate implementation, rather than the phased 4-year approach. AMPI wrote the 2023 survey had the largest product volumes of any previous surveys and highlighted other manufacturing cooperative testimony describing increased manufacturing costs. AMPI opined continued high manufacturing costs and farm bill delays have made make allowance updates more urgent. Leprino's post-hearing brief reiterated its support of Proposals 8 and 9, emphasizing the importance of implementing make allowance changes immediately. Leprino stressed 2023 cost levels have continued to climb and offered its own updated cost increases, compared to 2022: 11 percent for labor, 17 percent for property insurance, and 9 percent for liability insurance. A witness representing the AFBF testified in opposition to Proposals 8 and 9, opining the 2021 and 2023 survey data may be biased due to its unaudited nature and the known potential to be used for rulemaking, stating the incentive to overestimate reported costs for commodity goods disqualifies this voluntary data. The witness testified only the 2016 CDFA survey results can be verified as accurate enough to be used for determining make allowances. According to the witness, the relatively complicated 2022 CA Forecast model using a small number of observations (14 years) to forecast 2022 costs (6 years out from the actual data) could be overfitted to the 2000-2016 data and unreliable to predict future costs. Numerous dairy farmer witnesses testified in opposition to Proposals 8 and 9, focusing on the negative effect significant make allowance increases would have on producer pay prices. A DFA farmer witness from New Mexico testified the make allowance increases contained in Proposals 8 and 9 would result in negative operating income over the next 10 years, making continued operation of their farm unsustainable. The witness said any make allowance increases would severely and disproportionally impact producers in the southwest due to the share of milk going into manufacturing products. A LOL dairy farmer testified significant increases in make allowances would be difficult for farms in California to absorb, where water scarcity has led to high forage costs. According to the witness, large make allowance increases would put adequate milk supply at risk, all the while guaranteeing profit for commodity manufacturers and leading to over production of manufactured dairy products. Two dairy farmer witnesses, a member of the CDC and a small Maryland dairy farmer, testified against increases in make allowances due to the impact on producer pay prices and lack of accounting for dairy farm production costs. According to the witnesses, while processors can pass on costs to customers up the supply chain, producer margins are too thin to sustain substantial price decreases from increased make allowances. The witnesses testified that further declines to producer margins will cause more producer exits and disruption to the milk supply. A dairy farmer representing Edge testified any change in make allowances should require a 15.5-month delay, be restrained by the impact on producer pay prices, and cover only the most efficient plants. In its post-hearing brief, NMPF reiterated its arguments in opposition to Proposals 8 and 9. NMPF argued that these proposed changes would decrease dairy farmer milk prices by approximately $1.45 per cwt, further narrowing producer margins and causing disorderly marketing. NMPF cited ongoing plant investment as an indication current make allowances are not too low as portrayed by proprietary manufacturers. NMPF emphasized proprietary manufacturers are not required to be regulated and, thus, can choose not to participate in the FMMO and avoid paying minimum prices they contend are too high because of inadequate make allowance levels. NMPF opined about the lack of evidence to merit raising make allowances to levels contained in Proposals 8 and 9. In its brief, NMPF refuted the studies used as a basis for Proposals 8 and 9. NMPF cited hearing testimony regarding the insufficiency of some plant sample sizes in the 2023 survey. Further, NMPF argued the 2023 survey does not capture how manufacturing costs are skewed by plants that serve a balancing role. NMPF stated if make allowances are set too high, balancing plants would be incentivized to run at maximum capacity, rather than running at less than full capacity to provide critical balancing services to the market. NMPF voiced concerns with the 2022 CA Forecast, noting the proposed make allowances in Proposals 8 and 9 are duplicative since the 2023 survey included California data. Further, NMPF opined that the 2022 CA Forecast is of little utility as it did not account for basic changes to the California dairy manufacturing sector since 2016, such as plant openings and closings and productivity improvements. In its post-hearing brief, Select also opposed Proposals 8 and 9, on the basis of the 2022 CA Forecast being inappropriate to use in determining make allowances. Select echoed NMPF's argument that use of the forecast would be duplicative of California data. Further, Select argued indexing does not account for improvements to plant efficiencies and the Department has not previously used indexing to determine make allowances. In its brief, the AFBF opposed any increase to make allowances, instead advocating they only be increased once a mandatory, audited cost survey was administered by the Department. The AFBF opined that both the 2021 and 2023 surveys were biased because there was a clear intention the surveys would be used in a rulemaking proceeding. The AFBF opposed the use of indexing to set make allowances, as was done in the 2022 CA Forecast, because it fails to recognize productivity improvements over time. The AFBF echoed other brief arguments that continued processor investment is evidence that make allowances are not too low. The Midwest Dairy Coalition (MDC), an alliance of six dairy farmer-owned cooperatives operating in the Midwest, filed a post-hearing brief stating make allowance updates are long overdue, but took the position the Department should be granted legislative authority to conduct a mandatory and audited cost survey. MDC did not offer support or opposition to any make allowance related proposals. In its post-hearing brief, Edge also did not support or oppose any make allowance related proposals but cautioned against setting make allowances too high. Until there is a mandatory and audited USDA-administered survey, Edge stated, the Department should err on the side of caution to not subsidize commodity manufacturing. In its post-hearing brief, Select offered an alternative methodology for determining the make allowance levels using what Select argued was the most reliable record data. Select suggested taking the average of the 2021 survey and 2023 survey, subtracting the current make allowance level, and taking half that difference to add to current make allowance levels. As a result, Select proposed the following: cheddar cheese, $0.2281; butter, $0.2004; NFDM, $02260; and dry whey, $0.2498. In its post-hearing brief, CME noted any make allowance changes would be considered material changes, and USDA should consider an implementation timeframe that mitigates risks to those involved in futures and options trading. b. Yield Factors Submitted by Select, Proposal 10 seeks to amend the cheese price formula by increasing the butterfat recovery rate in the cheese yield, from 90 to 93 percent. A Select witness testified in support of Proposal 10 and clarified a butterfat recovery rate of 93 percent would also necessitate an increase in the butterfat yield factor in the protein price formula from 1.572 to 1.624. According to the witness, these changes would result in a modest increase in the Class III price, estimated at $0.04 per cwt. The witness stressed USDA should not be guided by price impacts but rather by achieving formulas to better reflect manufacturing realities and the actual value of raw milk. Select reiterated support for this proposal in its post-hearing brief. An independent expert witness, retained by Select, testified advancements in vat technology, coagulants, and curd handling have enabled manufacturers to achieve recovery rates higher than the currently assumed 90 percent. The witness described how modern, horizontal vats attain butterfat recoveries far exceeding both open and enclosed horizontal vats, and how most commodity cheddar manufacturers use advancements in coagulants and curd handling to attain greater than 93 percent butterfat recovery. Additionally, the witness said, whey cream can be reintroduced into the cheesemaking vat to increase cheese yield and revenue, ultimately increasing butterfat recovery. The AFBF wrote in its brief that it also supports Proposal 10 to increase the butterfat recovery factor. The AFBF pointed to evidence on the record of increasing plant efficiencies, justifying updating the butterfat recovery factor to the level in Proposal 10. Six witnesses, representing Glanbia, Leprino, IDFA, CDI, DIC, and MPC, testified in opposition to Proposal 10. The Glanbia witness described a broad range of industry fat recovery based on plant age and processing techniques, and acknowledged many modern plants, including Glanbia plants, can achieve 93 percent cheddar fat recovery. The witness testified Proposal 10 is being offered to enhance prices while ignoring other parts of the formula that overvalue milk. The witness contended lost solids within the manufacturing plant and the discounted price of whey cream, should they be considered, outweigh the effects of Proposal 10 on milk prices. The Leprino witness testified any changes to the yield factor should only occur after a comprehensive review of all yield assumptions. The witness agreed 93 percent butterfat retention is achievable in some plants but does not believe it is possible across the entire industry. The IDFA witness contended Proposal 10 takes a piecemeal approach to changes in the yield formula and selectively focuses on dairy farmer revenue enhancements only. The witness opined whey cream is overvalued in the current formula, as butterfat not going into cheese is currently valued as Grade AA butter despite regulation that whey cream cannot be used in Grade AA butter. The witness claimed whey cream is discounted 20 percent or more compared to fresh cream. In addition, the witness said in-plant milkfat losses are not recognized in the current formula, something that should be considered when evaluating yield factor changes. The witness testified any decreases in the Class III prices that result from accurately accounting for both processing losses and whey cream values would more than offset the increases in Class III prices proposed by Select. A witness from the Center for Dairy Research (CDR), appearing on behalf of IDFA, testified to observing improvements in butterfat retentions over the past 40 years, mostly due to improved vat design and technology. The CDR, with a dairy plant on the University of Wisconsin-Madison campus, supports the U.S. dairy industry with expertise in cheese, dairy ingredients, cultured products, dairy beverages, quality/safety, and dairy processing. The witness noted a range of butterfat losses at the cutting stage including 9 to 10 percent fat loss in open vats, 7 percent fat loss in Double O vats, 6 percent fat loss in horizontal vats, and 5 percent fat loss in modern vats. The witness testified that while large modern plants are installing newer, more efficient vats, old, less efficient vats are not leaving production, and are being repurposed and installed in medium and small plants throughout the country. The witness noted there is still a large variety of vats being using in the industry, and stressed the latest vat design does not ensure optimal butterfat retention, as the experience of the cheesemaker and product handling practices could also lower butterfat recovery. Based on current observations and work within the industry, the CDR witness provided best estimates for fat recoveries in cheddar cheesemaking as 91 to 93 percent retention in well-run factories with modern vats, 90 to 92 percent retention in well-run factories with vertical Double O vats, and 88 to 91 percent retention in factories with open vats. The witness said, based on their experience, 91 percent could be considered the industry average butterfat recovery for cheddar cheese plants. A CDI witness, appearing on behalf of NMPF, testified to the lack of yield data available to support the proposed recovery rate contained in Proposal 10. The witness supported a tempered update to the cheese make allowance that does not include an update to the yield factor. A witness representing DIC testified the current 90 percent butterfat recovery rate is reasonable because, despite some newer, more efficient plants achieving higher fat recovery, older plants may not be able to achieve the higher rates. The DIC witness stated fat recovery data is lacking across the industry and further asserted the current 90 percent butterfat recovery should be retained. The witness representing MPC testified the current formula should remain in place until the industry tackles the mechanics of the Class III formula, and the big issue is how butterfat not being retained in the cheesemaking process is valued. A witness representing AMPI provided testimony supporting the improvement seen in butterfat recovery due to new vat technology. The witness said AMPI installed cheesemaking equipment that facilitates the recovery of fat; however, they did not provide specific data. Submitted by Select, Proposal 11 seeks to eliminate farm-to-plant shrinkage from the yield factors in the FMMO Class III and IV price formulas. A witness appearing on behalf of Select testified USDA's decision to include shrinkage in the formula was premised on the concept that such losses were not in the handler's control and are unavoidable and common. The Select witness was of the opinion producers, cooperatives, and handlers do have the ability to address and stem losses in the transportation of milk from the farm to the plant. The witness said historically, as the number of farms on a milk route increased, the probability for discrepancies between farm weights and plant weights also increased, as each stop offered potential for spillage, loss within piping, and errors in measurement. The witness shared statistics on the increasing size of U.S. dairy farms, stating that in 2016, three-quarters of all U.S. milk production came from farms that could fill a full tanker, whereas in 2000, less than half of U.S. production came from farms filling a full tanker. The witness estimated 80 percent of the current milk volume in the U.S. comes from farms able to fill full tankers on every-other-day pickup schedules. Consequently, said the witness, the occurrence of shrinkage is decreasing. As an example, explained the witness, Select's members are large enough to ship full tanker loads of milk, meaning Select does not experience the same risks of milk loss which occur on multi-stop routes. Other than milk losses occurring with hoses, the Select witness was unaware of any inherent, unavoidable, farm-to-plant losses that could occur within the pick-up process. The witness said even farms without the ability to fill a tanker can adopt farm scales, flow measurement, and other technologies to minimize imprecision and inaccuracy. The witness testified the cost of implementing these improvements would be offset by the anticipated price impacts of adopting Proposal 11, which the witness estimated to be $0.07 per cwt. A second Select witness presented an analysis of Select plant data from August 2022 to July 2023, representing 171,240 milk shipments and a total of 9.8 billion pounds. The witness stated approximately half of their customers do not report plant weights back to Select. For those plants who do report, the witness said reported plant weights exceeded farm weights about half of the time. The witness stated non-shrink factors, such as scale calibration or weather, typically cause the large discrepancy between farm and plant weights. The witness concluded that for the subset of loads where differences occurred between farm and plant weights, the net variance across all loads was less than 0.1 percent. A witness testifying on behalf of Continental Dairy Facilities (CDF) and Continental Dairy Facilities Southwest (CDF SW), two wholly owned subsidiary plants of Select in Michigan and Texas, manufacturing NFDM, butter, and buttermilk powder, presented farm-to-plant loss data to support Proposal 11. The witness analyzed farm-to-plant losses in milk deliveries to the two CDF facilities from August 2022 through July 2023, comprised of both single and multi-farm pickups. The witness stated in total, plant weights averaged 0.15 percent lower than farm weights for CDF and 0.10 percent lower for CDF SW. The discrepancies ranged from a negative 0.32 percent (plant weights were 0.32 percent lower than farm weights) to 0.67 percent (plants weights were 0.67 percent lower than farm weights). Since many of the non-Select shipments to CDF are multi-farm pickups, the witness said management for farm-to-plant shrink is not unique to Select or larger farms, generally. The witness described improperly calibrated scales, input or transposition errors by milk haulers, changes in equipment or personnel when weighing loads, or snow settled on scales or tanks when weighing, as reasons for weight discrepancies. The witness testified these variances are not inherent and that they can be addressed. Select reiterated its arguments supporting Proposal 11 in its post-hearing brief. The AFBF expressed support for Proposal 11 in its post-hearing brief. The AFBF contended that data on farm-to-plant shrinkage contained in evidence is similar to what was used to determine the original farm-to-plant shrinkage factor. The AFBF argued that this issue does not merit a formal data collection, but a one-time adjustment t [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2024-14769. Public record. Not legal advice.