Milk in the New England and Other Marketing Areas; Amplified Decision

7 CFR part Marketing area AO Nos.

------------------------------------------------------------------------

1001.............. New England..................... AO-14-A64

1002.............. New York-New Jersey............. AO-71-A79

1004.............. Middle Atlantic................. AO-160-A67

1005.............. Carolina........................ AO-388-A3

1006.............. Upper Florida................... AO-356-A29

1007.............. Georgia......................... AO-366-A33

1011.............. Tennessee Valley................ AO-251-A35

1012.............. Tampa Bay....................... AO-347-A32

1013.............. Southeastern Florida............ AO-286-A39

1030.............. Chicago Regional................ AO-361-A28

1032.............. Southern Illinois-Eastern AO-313-A39

Missouri.

1033.............. Ohio Valley..................... AO-166-A60

1036.............. Eastern Ohio-Western AO-179-A55

Pennsylvania.

1040.............. Southern Michigan............... AO-225-A42

1044.............. Michigan Upper Peninsula........ AO-299-A26

1046.............. Louisville-Lexington-Evansville. AO-123-A62

1049.............. Indiana......................... AO-319-A38

1050.............. Central Illinois................ AO-355-A27

1064.............. Greater Kansas City............. AO-23-A60

1065.............. Nebraska-Western Iowa........... AO-86-A47

1068.............. Upper Midwest................... AO-178-A45

1075.............. Black Hills, South Dakota....... AO-248-A21

1076.............. Eastern South Dakota............ AO-260-A30

1079.............. Iowa............................ AO-295-A41

1093.............. Alabama-West Florida............ AO-386-A11

1094.............. New Orleans-Mississippi......... AO-103-A53

1096.............. Greater Louisiana............... AO-257-A40

1097\1\........... Memphis, Tennessee.............. AO-219-A46

1098\1\........... Nashville, Tennessee............ AO-184-A55

1099.............. Paducah, Kentucky............... AO-183-A45

1106.............. Southwest Plains................ AO-210-A52

1108.............. Central Arkansas................ AO-243-A43

1124.............. Pacific Northwest............... AO-368-A19

1126.............. Texas........................... AO-231-A60

1131.............. Central Arizona................. AO-271-A29

1134.............. Western Colorado................ AO-301-A22

1135.............. Southwestern Idaho-Eastern AO-380-A9

Oregon.

1137.............. Eastern Colorado................ AO-326-A26

1138\2\........... New Mexico-West Texas........... AO-335-A36

1139.............. Great Basin..................... AO-309-A30

------------------------------------------------------------------------

\1\The Memphis, Tennessee and Nashville, Tennessee, Orders were

terminated effective July 31, 1993.

\2\The Lubbock-Plainview, Texas Panhandle and Rio Grande Valley Orders

were merged to form the New Mexico-West Texas order, effective

December 1, 1991.

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Amplified Decision.

-----------------------------------------------------------------------

SUMMARY: On April 14, 1994, the United States District Court for the

District of Minnesota issued a memorandum opinion and order that, in

part, directed the Secretary of Agriculture to issue an amplified

decision that more fully explains the conclusions reached in a final

decision published in the Federal Register on March 5, 1993. This

amplified decision responds to that order and supplements and clarifies

the findings and conclusions of the final decision.

FOR FURTHER INFORMATION CONTACT: John F. Borovies, Chief, Order

Formulation Branch, USDA/AMS/Dairy Division, Room 2968, South Building,

P.O. Box 96456, Washington, DC 20090-6456, (202) 720-6274.

SUPPLEMENTARY INFORMATION: This administrative action is governed by

the provisions of 5 U.S.C. 556 and 557 and therefore is excluded from

the requirements of Executive Order 12866.

The Regulatory Flexibility Act (5 U.S.C. 601-612) requires the

Agency to examine the impact of a final rule on small entities.

Pursuant to 5 U.S.C. 605(b), the Administrator of the Agricultural

Marketing Service has certified that this action will not have a

significant economic impact on a substantial number of small entities.

Each order, as amended, will promote more orderly marketing of milk by

producers and regulated handlers.

This final rule has been reviewed under Executive Order 12778,

Civil Justice Reform. This action is not intended to have a retroactive

effect. This action will not preempt any state or local laws,

regulations, or policies, unless they present an irreconcilable

conflict with the 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 file with

the Secretary a petition stating that the order, any provisions of the

order, or any obligation imposed in connection with the order is not in

accordance with law and requesting a modification of the order or to be

exempted from the order. A handler is afforded the opportunity for a

hearing on the petition. After a hearing the Secretary would rule on

the petition. The 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 to review the

Secretary's ruling on the petition, provided a complaint is filed not

later than 20 days after the date of the entry of the ruling.

When the administrative proceeding in this matter was initiated,

the Notice of Hearing listed separately the Lubbock-Plainview, Texas

(Part 1120); the Texas Panhandle (Part 1132); and Rio Grande Valley

(Part 1138) orders. A hearing on a merger of these three orders was

held in December 1989. As a result of that hearing, the three orders

were merged effective December 1, 1991, under the name of the New

Mexico-West Texas order, which is 7 CFR Part 1138. Therefore, all

proposed order language in connection with this proceeding is in terms

of the merged order. In this and future documents in this proceeding,

the New Mexico-West Texas order will replace the three orders named

above.

Prior Documents in This Proceeding

Advance Notice of Proposed Rulemaking: Issued March 29, 1990;

published April 3, 1990 (55 FR 12369).

Notice of Hearing: Issued July 11, 1990; published July 17, 1990

(55 FR 29034).

Extension of Time for Filing Briefs and Reply Briefs: Issued March

28, 1991; published April 3, 1991 (56 FR 13603).

Recommended Decision: Issued November 6, 1991; published November

22, 1991 (56 FR 58972).

Extension of Time for Filing Exceptions: Issued December 24, 1991;

published January 6, 1992 (57 FR 383).

Final Decision: Issued February 5, 1993; published March 5, 1993

(58 FR 12634).

Proposed Termination of Order: Issued April 20, 1993; published

April 27, 1993 (58 FR 25577).

Final Rule and Order: Issued April 20, 1993; published May 11, 1993

(58 FR 27774).

Referendum Order: Issued June 25, 1993; published July 1, 1993 (58

FR 35362).

Final Rule and Withdrawal: Issued August 9, 1993; published August

17, 1993 (58 FR 43518).

Correction of Final Rule: Issued November 29, 1993; published

December 6, 1993 (58 FR 64110).

Preliminary Statement

A public hearing was held upon proposed amendments to the marketing

agreements and the orders regulating the handling of milk in the New

England and other marketing areas. The hearing was held, pursuant to

the provisions of the AMAA and the applicable rules of practice (7 CFR

Part 900), at Eau Claire, Wisconsin; Minneapolis, Minnesota; St. Cloud,

Minnesota; Syracuse, New York; Tallahassee, Florida; and Irving, Texas,

on September 5, 1990, through November 20, 1990. Notice of such hearing

was issued on July 11, 1990, and published July 17, 1990 (55 FR 29034).

Upon the basis of the evidence introduced at the hearing and the

record thereof, the Administrator, on November 6, 1991, issued his

recommended decision containing notice of the opportunity to file

written exceptions thereto. Following the submission of exceptions and

comments on the recommended decision, a final decision was issued on

February 5, 1993.

General Basis for This Amplified Decision

On April 14, 1994, the United States District Court for the

District of Minnesota issued a memorandum opinion and order. The Court

held that the Secretary of Agriculture's final decision for the ``1990

National Hearing'' on amending Federal milk orders was deficient in

part. The Court found that the Secretary's decision to retain the

existing Class I pricing structure was tantamount to a finding that the

structure continued to satisfy the requirements of the AMAA as set out

in section 608c(18). The Court stated that this conclusion might or

might not be supported by the substantial evidence from the 1990

National Hearing, but since the explicit findings and explanations

relative to the Sec. 608c(18) factors were not issued, the Court was

unable to make that determination. The final decision was remanded to

the Secretary for 120 days for filing of an amplified decision.

This amplified decision provides additional findings and

conclusions that address the material issue on the record of the 1990

National Hearing concerning Class I milk pricing and related issues.

This document provides an amplified explanation of why the Secretary

decided to not change the Class I pricing structure of Federal milk

marketing orders and that such determination is consistent with the

pricing requirements of section 608c(18) of the AMAA.

Findings, Explanations, and Conclusions

The following findings, explanations, and conclusions on the

material issues are based on evidence presented at the hearing and the

record thereof:

Statutory Price Factors

7 U.S.C. 608c(18) states:

Whenever the Secretary finds, upon the basis of the evidence

adduced at the hearing required by section 608b of this title or

this section, as the case may be, that the parity prices of such

commodities are not reasonable in view of the price of feeds, the

available supplies of feeds, and other economic conditions which

affect market supply and demand for milk and its products in the

marketing area to which the contemplated agreement, order, or

amendment relates, he shall fix such prices as he finds will reflect

such factors, insure a sufficient quantity of pure and wholesome

milk to meet current needs and further to assure a level of farm

income adequate to maintain productive capacity sufficient to meet

anticipated future needs, and be in the public interest.

The statute mandates a two-step analysis for determining the

appropriate level of prices under Federal milk market orders. The first

step involves ascertainment of parity prices. If the Secretary finds

that the parity price levels are not reasonable, then the second step

requires investigation of appropriate price levels. Both pricing

standards require recognition of explicit statutory factors, namely the

price of feeds, the available supplies of feeds, and other economic

conditions which affect market supply and demand.

Parity prices are, and have been, at a level that is significantly

higher than the prices applicable in competitive milk markets. At the

administrative hearing, official notice was requested and granted for a

regular publication of the United States Department of Agriculture

titled ``Dairy Situation and Outlook Yearbook'', DS-426, Economic

Research Service, August 1990. On page 10, Table 1.--United States

dairy situation at a glance, annual average numbers are listed for

prices received by farmers (all-milk price for milk sold to plants) and

how this price level relates to the parity price measure. The

statistics reveal that over the 7-year period from 1983 through 1989,

the simple average all-milk price was approximately 55 percent of the

value of the calculated parity price level. These statistics show that

the calculated parity price levels relative to the all-milk price would

be excessively high because more than ample supplies of milk were

available for all uses at prices far below the parity price level, and

thus, the parity price is not reasonable. This finding was set forth in

the final decision at 58 FR 12675. Accordingly, the second step of the

section 608c(18) analysis was undertaken. The second step of price

determination requires a more in-depth analysis of dairy market

structure. The statute allows the Secretary to decide the price levels

that will achieve articulated market performance goals: the chosen

prices must ensure a sufficient supply of pure and wholesome milk to

meet current and future market needs and be in the public interest. As

outlined below, the Secretary conducted an extensive analysis of each

individual marketing order in light of the statutorily-required dairy

market performance goals.

As required by 7 U.S.C. 608c(18), any administratively recognized

price level must reflect the price of feeds, the available supplies of

feeds, and other economic conditions that affect market supply and

demand. The key economic concept focuses on supply and demand. Milk

markets consist of both buyers and sellers, the buyer representing a

demand for what the seller can supply. Each side could be studied

independently. However, it is the simultaneous consideration of all

sides of the market that the Secretary must address when regulating

dairy markets and in determining reasonable price levels.

To this end, federal order markets utilize an unregulated and

competitive market equilibrium price that measures all economic factors

affecting the supply of and demand for milk and its products that

captures all of the pricing criteria established by section 608c(18).

As discussed below, this price is embodied in the Minnesota-Wisconsin

(M-W) price. This price indicates the price-quantity relationship that

buyers and sellers arrive at in a market where transactions are free of

government intervention, the competition for milk is the most

competitive, and milk products produced compete in a national market.

The M-W price automatically adjusts to prevailing market supply and

demand conditions.

The Minnesota-Wisconsin (M-W) Price

Prior to adoption of the M-W price, federal milk orders relied upon

various procedures to establish a basic milk price. Using different

measures, each of these procedures attempted to identify the

competitive value of milk used for manufacturing purposes. For example,

certain orders variously based class prices on prices paid by specific

manufacturing plants, such as the Midwestern Condensary Series; on

local plant averages; on a three-product U.S. manufacturing price; or

on product formulae, such as the butter/powder or butter/cheese

formulae.

One major problem with these pricing methods was the difficulty in

keeping the pricing methods up-to-date with changes taking place within

the dairy industry. For example, varying local needs required that some

milk be shipped from plants to meet fluid demands and thus skewed

plant-based formulae by affecting yields and prices of manufactured

products produced from reserve milk. Moreover, cost factors, which do

not lend themselves to accurate evaluation or precise and timely

measurement, also complicated efforts to utilize efficiently these

various formulae. Changes in labor costs and technology similarly could

not be reflected in these product price formulae in a timely fashion.

Thus, there was growing recognition that a competitive pay price

which would automatically adjust to prevailing supply and demand

conditions (including feed cost and availability) would provide the

most practical and reasonable answer to shortcomings in the then-

existing pricing methods. The superiority of using a competitive pay

price rests upon the economic principle that dairy processors in a

highly competitive economy will tend to purchase milk at prices close

to the price an efficient processor could pay for that product.

Increasing labor and other costs tend to reduce prices that processors

are willing to pay for milk. On the other hand, new assembling,

processing, packaging and marketing techniques that reduce costs or

increase product returns tend to increase the prices processors are

willing to pay producers for milk. As these factors fluctuate, shifts

occur in the prices that different processors may be able to pay

producers. Other groups of processors must meet or approximate these

prices or risk losing their supplies of milk. Similarly, various

economic factors affecting producers (i.e., taxes, inflation, feed

costs, capital assets costs, salaries, etc.) are automatically

reflected in the competitive price that producers are willing and able

to charge for their milk. Therefore, a competitive pay price was and is

viewed as an excellent and superior indicator of the upward and

downward adjustments in costs which are automatically reflected in

market prices paid to producers for their milk.

The M-W price is a competitive equilibrium market price that

represents an estimate of the average of prices paid to dairy farmers

for Grade B milk in Minnesota and Wisconsin by plants producing

manufactured dairy products such as butter, nonfat dry milk and cheese.

The M-W price was first adopted in 1961 as the basis for setting all

minimum classified milk prices in the Chicago Regional marketing area.

By 1975, the M-W price had been adopted by all federal milk orders.

Both the industry and the Secretary view the M-W price as an accurate

indicator of the value of milk in large part because the price reflects

all of the supply and demand conditions that must be considered under

section 608c(18).

Manufactured dairy products (cheese, butter, and nonfat dry milk)

can be made from Grade B or Grade A milk. Because manufactured dairy

products are eight to ten times less bulky than raw farm milk and can

be stored for much longer periods of time than raw farm milk, these

manufactured products are less expensive to move and market than raw

farm milk on a per pound basis. As a result, manufactured dairy

products can and do compete on a national market basis while

competition for raw and packaged fluid milk occurs on a more local or

regional level.

Accordingly, since manufacture dairy products (unlike fluid milk)

compete in a national market, there is a relationship between the M-W

price for Grade B milk and the price of surplus Grade A milk, which,

like Grade B milk, is used to produce manufactured dairy products. The

M-W price reflects a competitive free market price for raw farm milk

and the explicit link between Grade B and Grade A surplus milk prices.

Thus, the M-W price automatically incorporates the effects of

innumerable economic factors which have an impact on both buyers and

sellers including the relative price and availability of feed for dairy

cows. Month-to-month changes in the unregulated free market M-W price

(i.e., the price of Grade B milk) reflect changes in the overall supply

and demand conditions for milk and its products nationally.

Concern for the need to ensure competitive equity among handlers

and the existence of basic price differences between adjacent marketing

areas also led to the universal adoption of the M-W price in all

federal milk orders. Marketing areas which relied on the other basic

pricing formulae noted above often resulted in producer prices that

were too low compared to those received by Midwestern producers. This

situation created a competitive disadvantage for Midwestern processors

with respect to sales of such manufactured dairy products as butter,

nonfat dry milk and cheese because these products, which compete on a

national rather than ``local'' market, were more expensive relative to

similar products manufactured elsewhere. Consequently, it became clear

that a competitive pay price would most accurately indicate the basic

value of milk on a national level. Use of the M-W price which, as noted

above, is a competitive pay price, automatically indicates the basic

value of milk and eliminates the need for making possibly inaccurate

judgments concerning particular products, prices, yield factors and

manufacturing allowances which otherwise would be used to calculate

product price formulae.

In short, the M-W price provides automatic adjustments concerning

all of the factors affecting the supply of and demand for milk and its

products. Thus, the M-W price has been adopted in all federal milk

orders as the ``mover'' of all Class I and Class II prices and is the

Class III price (subject to certain minor adjustments). Using the M-W

as the Class III price maintains price coordination between Grade B and

surplus Grade A milk supplies used for manufacturing purposes.

Price and Supplies of Feed

Agricultural commodities typically follow cyclical price-quantity

patterns. Given fixed levels of demand, as supplies become plentiful,

price for feed trends downward. When supplies become scarce, price for

feed trends upward. The market signals incorporated into the M-W price

indicate price movements up and down and elicit either more or less

commodity production. This coupling pattern between feed supplies and

feed prices allows market analysts to focus on either factor and

implicitly know what the other is doing.

The cost of feed is a significant factor involved in milk

production. Officially noticed documents that are part of the record of

the administrative hearing outline cash feed expenses as they relate to

the total economic costs of producing milk. (``Economic Indicators of

the Farm Sector: Costs of Production, Economic Research Service'',

ECIFS 3-1, 1983; ECIFS 6-1, 1986; and ECIFS 9-1, 1989.) For the period

1981 through 1989, data describing the annual average cost of producing

one hundred pounds of milk were reviewed. Statistics for six individual

regions plus the entire United States were examined. Information for

one additional region was available for the 1987, 1988, and 1989 years.

Annual regional and total United States summary statistics for a

nine-year period from 1981 through 1989 were reviewed. The review of

these statistics revealed that the total cash feed expenses as a

percentage of the total economic costs of production, on a per

hundredweight (cwt.) basis, ranged from 30 percent to 58 percent from

year-to-year. This percentage measures the relative significance of

cash feed expenses for each region and the United States relative to

the estimated total cost of milk production for the respective regions

and the United States.

Although the availability and cost of feed are primary factors

involved in farm level milk production, there is a limit to how much

milk output can be obtained from a given quantity of feed input. This

is a physical milk production constraint. It relates to the biological

limits of the cow and the economics of milk production decisions made

by individual farmers. In general, given a specified level of feed

costs, a dairy farmer decides to purchase and/or grow a quantity of

feed and forage. This in turn determines the amount of feed that may be

made available to cows for milk production and has a direct impact on

the aggregate level of milk that may be produced in absence of any

consideration being given to the price that can be obtained for the

milk that is produced.

Such analysis of the availability and costs of feed provides only

one dimension, albeit an important dimension, of the factors the

Secretary must consider in establishing a price for milk. These

important statutory pricing factors, however, are automatically

embodied in the M-W price. The M-W is a superior basic price indicator

for milk because it reflects all of the economic factors that affect

the supply of milk as well as all of the factors that affect the demand

for the products of milk.

In summary, the rulemaking record contains ample evidence regarding

the price and availability of feeds which the agency reviewed when

making its decision. However, these factors, as well as all other

supply and demand factors, continued to be automatically reflected in

the M-W price, which has long been the moving factor in the Class I

(and also Class II and III) prices.

The Class I Price and Class I Differential

The Class I price in each order contains two components. The

largest component is the M-W price, which applies in all orders. The

smaller component is a Class I differential that is specific to each

order. Consequently, through the M-W component the Class I price in

each order automatically reflects the price and availability of

supplies of feed and all other economic factors that affect the supply

and demand for milk and dairy products.

Raw milk is a bulky product and is more expensive to transport than

the equivalent amount of milk used to produce concentrated manufactured

dairy products. There is a direct link between weight and the cost of

moving milk across geographic areas.

The Class I differential part of the Class I price is intended to

partially reflect the cost of transporting milk. The differential

portion serves as a price incentive to draw milk from supply areas

toward metropolitan demand centers. One of the statutory objectives of

the Federal milk order program is to provide a sufficient amount of

fluid milk for consumers. The differential serves as an incentive to

move milk from supply areas to demand centers.

In economic terms, a spatial pricing structure for milk evolves

when it traverses geographic space. The structure is characterized by a

price at the area of supply. Such price increases proportionally as the

distance to the area of demand increases. It is noted that there does

not need to be a single defined supply area. Furthermore, it is not

necessary that prices be identical at all recognized supply areas. Many

different supply areas could be considered. However, distance and the

cost of transportation implicitly and efficiently link demand areas to

the nearest and/or least cost area of supply. The spatial Class I milk

pricing structure recognizes these economic relationships.

The Court's opinion appears to misconstrue the Secretary's

description regarding the Class I differential and transportation cost.

The Court observed that:

[T]he Secretary expressly states in his final decision that the

differentials are no longer meant to reflect the cost of

transportation * * * (Opinion, p.7).

In fact, the final decision pointed out that ``the Class I pricing

structure does not cover the total cost of moving bulk fluid milk from

one area to another.'' (58 FR 12648, emphasis added).

In short, the relevant factor that establishes a limit for Class I

differentials is the cost of transportation. Class I differentials

partially reflect the cost of transportation at a level that will

insure an adequate supply of milk pursuant to statutory objectives.

Because some milk is produced just about everywhere, the mix of milk

produced near consumption centers with milk shipped from distant areas

varies among orders. If no nearby milk is produced for a particular

consumption center, the Class I differential would have to more fully

reflect the cost of transporting milk from the nearest alternative

surplus milk-producing area. However, because some milk is produced

just about everywhere, the Class I differential in any particular

marketing area merely has to be high enough to bring forth adequate

supplies of locally produced milk together with supplemental supplies

from other areas.

As the mobility of milk increased, a transition necessarily

occurred from considering only isolated local markets to considering a

system of regional markets that are linked through class price

coordination. Individual markets that previously set class prices based

on local supply-demand conditions now are part of larger regional

markets whose prices are coordinated through the M-W price as the price

mover in federal milk marketing orders. Once the M-W price was adopted,

there was a common mechanism for coordinating market price movements.

From the regulatory perspective, the statutory goal of providing an

adequate milk supply for each market is furthered by coordinating milk

prices among the system of orders. Based upon the cost of moving milk,

Class I differentials are established so that the price of milk at any

plant location does not exceed the cost of transporting milk from

supply areas. Proper alignment of milk prices between nearby adjacent

markets is necessary so that handlers located in more deficit milk

producing areas can attract a supply of milk.

The Blend Price

Handlers in each order account for milk in Class I, Class II, and

Class III uses at the minimum respective class price established under

each order. The blend price that applies to producers is calculated by

dividing the total pounds of producer milk into the total value of all

milk at class prices used by handlers regulated under an order.

Accordingly, the blend price is a weighted average price that, because

all milk of an order is part of the price calculation, assures that

each producer shares in both the benefits of supplying the fluid milk

market and the burden of the reserve or surplus milk supplies

associated with each order. Thus, the blend price incorporates regional

and national measures: it is a measure of supply and demand conditions

in each order as well as a measure of national supply and demand

conditions that are reflected in the class prices that are based on the

M-W price. Blend prices increase or decrease as class prices increase

or decrease in response to changes in national supply and demand

conditions. Also, the blend price in each market increases or decreases

as the Class III use in each market decreases or increases. Thus, blend

prices reflect all of the economic factors that affect the supply of

and demand for milk and dairy products that are required to be

considered under the pricing criteria of the AMAA.

Producers make their production and marketing adjustments on the

basis of changes in blend prices and differences in blend prices among

orders. It is not uncommon for supply areas of individual orders to

expand or contract in response to blend price changes over time. Also,

because milk is free to move to handlers regulated under different

orders, it is not uncommon for milk to shift from one order to another

in response to blend price differences that result from changes in

supply and demand conditions under different orders.

USDA's Supply-Demand Analysis

A supply and demand analysis was conducted by USDA to consider the

Class I differential portion of the Class I prices. This analysis was

based on the hearing record, exceptions, and comments, and was a proper

and sufficient economic review of dairy market performance. By focusing

on milk market performance measures, USDA's analysis directly addressed

the statutory goal of ensuring adequate milk supplies to meet the needs

of each federal milk marketing area.

The examination conducted by USDA reviewed the level of Class III

utilization for each market area. This market performance measure is

appropriate because of the basic underlying accounting definitions and

regulations in all federal milk orders.

In general, each marketing order defines producer milk receipts as

all Grade A milk that is associated with (i.e., used in) the particular

order market. The producer receipts may be from dairy farms in or close

to the defined ``marketing area'', or it may come from dairy farms that

are located hundreds of miles away. The key identifying factor is that

the milk is associated with the market as evidenced by its receipt by

handlers regulated under that particular order.

Specific market definitions also describe milk used for Class I,

Class II, and Class III uses based on the end products made from such

milk. The standard accounting identity applicable for all federal milk

market orders requires that the total amount of milk used in Class I,

Class II, and Class III products equals the total amount of producer

milk receipts associated with each market order. The class utilization

percentages are determined by dividing the amount of milk used in each

respective class by the amount of producer receipts for the market. In

this manner, the class utilization percentage represents how much milk

is being used in each class of product relative to the total volume of

milk associated with a specifically defined geographic Federal milk

marketing area.

Markets generally function by serving Class I demand first, then

meeting Class II demands, and finally utilizing the residual volume of

producer receipts as Class III. In this manner, the volume of milk

utilized in Class III is an indication of the surplus, or reserve, milk

level available to meet any supplemental needs of the Class I and Class

II market. During certain periods of the year, the level of milk

production is low while the demand for Class I and Class II milk is

high. In these deficit periods, it may be necessary to use all milk

regularly associated with the market to meet the Class I demand. A

certain portion of the milk supply in most markets also is needed to

meet regular Class II milk demands; consequently, a reserve milk supply

of 30 to 35 percent (i.e., Class III percent utilization) is not

excessive to ensure that sufficient milk is available in the market at

all times to satisfy Class I and II demand.

The Court's opinion suggests that the Secretary's reliance on

producer milk in his analysis of whether Class I prices meet the

statutory price considerations required by Section 608c(18) does not

consider milk supplies available outside the marketing area (Opinion,

p.20). In fact, producer milk and, more specifically, Class III

utilization does incorporate the availability of milk supplies from

outside a marketing area because, regardless of its origin, any milk

received by a regulated handler in a marketing area is, by definition,

producer milk. Thus, the Class III utilization of producer milk is an

important indicator of federal order supply and demand conditions.

The opinion also focuses on the following statement in the final

decision (58 FR 12648):

* * * There is no national supply and demand standard for the

order program as a whole. This is not to say that a regulated market

cannot rely on milk supplies from another area, as is often the

case. Nevertheless, viewed on an individual market basis, we

reaffirm our conclusion that milk supplies available for Class I and

Class II uses are adequate, but not excessive in most markets.

The above finding is in the first of three paragraphs that respond

to an exception filed by the Upper Midwest Federal Order Coalition

(UMFOC) that maintained the Secretary used too high a measure of what

should be considered a reasonable reserve. The Secretary indicated that

there was a range of views expressed concerning reserve supplies needed

to serve Class I needs on a year-round basis. (58 FR 12646) When both

Class I and Class II needs are considered, the Secretary indicated that

this analysis of supply and demand for milk on the various markets and

regions was valid.

As noted above, the M-W is a measure of supply and demand factors

throughout the country. However, there is no single national standard

for determining how much reserve milk should be, or needs to be,

associated with each marketing order. The amount of reserve milk varies

among orders as a result of different circumstances that affect

production and marketing practices and conditions. Some regions are

affected more than others from year to year by variations in weather

conditions that have an impact on milk production and reserve milk

supplies. Also, some areas are more heavily involved in manufacturing

than others. The amount of involvement has an impact on the amount of

reserve milk that is historically associated with certain federal order

markets relative to others. Moreover, since the blend price drives

producers' production and marketing decisions, milk is shifted to

alternative outlets and orders to take advantage of higher prices. This

shifting of milk supplies impacts on the amount of reserve milk

associated with different orders. Also, milk may be alternatively

associated or disassociated from orders altogether depending on the

blend price level of a federal milk order relative to returns from

unregulated manufacturing plants. Consequently, Class III milk

utilization is an important indicator of a market's performance and its

ability to meet Class I needs. For these reasons, the Secretary's

reliance on producer milk and Class III utilization is appropriate and

automatically considers the availability of milk supplies from outside

a marketing area.

As detailed in the final decision, the supply-demand analysis

conducted by the Secretary considered the level of Class III milk

utilization relative to the established Class I price differential.

Most markets appeared to have a relative balance between supply and

demand, while some markets were deficit and others were surplus. On a

system-wide basis considering all of the testimony from the hearing,

comments, and exceptions, the Secretary properly determined that the

current Class I differentials were meeting the statutorily described

market performance measures.

General Findings

The findings and determinations set forth herein have been issued

in response to a memorandum opinion and order of the United States

District Court, District of Minnesota, Fourth Division, issued on April

14, 1994. The findings and determinations supplement those that were

previously set forth in the final decision issued on February 5, 1993,

and published in the Federal Register on March 5, 1993, with respect to

the New England and other Marketing Area orders. No additional

regulatory changes are necessary as a result of this amplified

decision.

List of Subjects in 7 CFR Parts 1001, 1002, 1004, 1005, 1006, 1007,

1011, 1012, 1013, 1030, 1032, 1033, 1036, 1040, 1044, 1046, 1049, 1050,

1064, 1065, 1068, 1075, 1076, 1079, 1093, 1094, 1096, 1099, 1106, 1108,

1124, 1126, 1131, 1134, 1135, 1137, 1138, 1139

Milk marketing orders.

Dated: August 10, 1994.

Mike Espy,

Secretary.

[FR Doc. 94-19982 Filed 8-16-94; 8:45 am]

BILLING CODE 3410-02-P