Milk in the Southern Michigan Marketing Area; Revised Recommended Decision and Opportunity to File Written Exceptions on Proposed Amendments to Tentative Marketing Agreement and to Order

SUMMARY: This document recommends incorporating a multiple component

pricing system in the Southern Michigan Federal Milk Order. The three

components to be priced are butterfat, protein, and a ``fluid carrier''

residual. The proposed plan includes adjustments to the producer

protein price based on the somatic cell count of producer milk. The

decision recommends changes in qualifying shipments from pool supply

plants and would give the market administrator the authority to adjust

the monthly shipping percentage requirements for a cooperative supply

plant or unit of supply plants. In addition, the maximum allowable

administrative and marketing service assessment rates would be

increased to 4 and 7 cents, respectively.

DATES: Comments are due on or before January 13, 1995.

ADDRESSES: Comments (six copies) should be filed with the Hearing

Clerk, room 1083, South Building, United States Department of

Agriculture, Washington, DC 20250.

FOR FURTHER INFORMATION CONTACT: Constance M. Brenner, Marketing

Specialist, USDA/AMS/Dairy Division, Order Formulation Branch, room

2971, South Building, P.O. Box 96456, Washington, DC 20090-6456, (202)

720-7183.

SUPPLEMENTARY INFORMATION: This administrative action is governed by

the provisions of Sections 556 and 557 of Title 5 of the United States

Code and, therefore, is excluded from the requirements of Executive

Order 12866.

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

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

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

Marketing Service has certified that this proposed rule will not have a

significant economic impact on a substantial number of small entities.

The amendments would promote orderly marketing of milk by producers and

regulated handlers.

The amendments to the rules proposed herein have been reviewed

under Executive Order 12778, Civil Justice Reform. They are not

intended to have a retroactive effect. If adopted, the proposed

amendments would not preempt any state or local laws, regulations, or

policies, unless they present an irreconcilable conflict with this

rule.

The Agricultural Marketing Agreement Act of 1937, as amended (7

U.S.C. 601-674), provides that administrative proceedings must be

exhausted before parties may file suit in court. Under section

608c(15)(A) of the Act, any handler subject to an order may file with

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

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

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

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

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

the petition. The Act provides that the district court of the United

States in any district in which the handler is an inhabitant, or has

its principal place of business, has jurisdiction in equity to review

the Secretary's ruling on the petition, provided a bill in equity is

filed not later than 20 days after the date of the entry of the ruling.

Prior documents in this proceeding:

Notice of Hearing: Issued December 3, 1992; published December 10,

1992 (57 FR 58418).

Supplemental Notice of Hearing: Issued January 19, 1993; published

January 29, 1993 (58 FR 6447).

Recommended Decision: Issued November 29, 1993; published December

6, 1993 (58 FR 64176).

Notice of Reopened Hearing: Issued February 18, 1994; published

February 24, 1994 (59 FR 8874).

Extension of Time for Filing Briefs: Issued April 6, 1994;

published April 13, 1994 (59 FR 17497).

Emergency Partial Final Decision: Issued May 12, 1994; published

May 23, 1994 (59 FR 26603).

Final Rule: Issued June 22, 1994; published June 29, 1994 (59 FR

33418).

Preliminary Statement

Notice is hereby given of the filing with the Hearing Clerk of this

revised recommended decision with respect to proposed amendments to the

tentative marketing agreement and the order regulating the handling of

milk in the Southern Michigan marketing area. This notice is issued

pursuant to the provisions of the Agricultural Marketing Agreement Act

and the applicable rules of practice and procedure governing the

formulation of marketing agreements and marketing orders (7 CFR Part

900).

Interested parties may file written exceptions to this decision

with the Hearing Clerk, U.S. Department of Agriculture, Washington, DC

20250, by the 30th day after publication of this decision in the

Federal Register. Six copies of the exceptions should be filed. All

written submissions made pursuant to this notice will be made available

for public inspection at the office of the Hearing Clerk during regular

business hours (7 CFR 1.27(b)).

The proposed amendments set forth below are based on the record of

public hearings on February 17-18, 1993, at Novi, Michigan, and on

March 1, 1994, at Grand Rapids, Michigan. The February 1993 hearing was

held pursuant to a notice of hearing issued December 3, 1992 (57 FR

58418), and a supplemental notice of hearing issued January 19, 1993

(58 FR 6447). The March 1994 reopened hearing was held pursuant to a

notice of hearing issued February 18, 1993 (59 FR 8874).

The material issues on the record of the hearings relate to:

1. Pool supply plant definition.

2. Modification of cooperative pool supply plant shipping

requirement by market administrator.

3. Multiple component pricing.

4. Somatic cell adjustment.

5. Administrative assessment.

6. Marketing service assessment.

7. Pool distributing plant definition (UHT plant ``lock-in'').

8. Emergency action with respect to issue 7.

9. Conforming changes.

Issues 1, 5, and 6 were discussed in the initial recommended

decision issued in November 1993 and were not addressed in the reopened

hearing. No changes have been made in the discussion of these issues in

this revised recommended decision.

Issues 7 and 8 were dealt with in an emergency partial final

decision issued May 12, 1994, and the resulting final order amendments

were made effective for June 1994. The amendments were issued June 22,

1994, and published June 29, 1994 (59 FR 33418).

Issues 2, 3, 4, and 9 were addressed in the reopened hearing on

March 1, 1994, and the discussion of Issues 3 and 4 in this revised

recommended decision has been revised to reflect the record of that

hearing session. Issues 2 and 9 are additions to the original

recommended decision.

Findings and Conclusions

The following findings and conclusions on the material issues are

based on evidence presented at the hearings and the record thereof:

Background Statement

A public hearing was held February 17-18, 1993, to consider the

implementation of multiple component pricing in the Southern Michigan

marketing area. On November 29, 1993, the Department issued a

recommended decision in this proceeding. The decision proposed a

multiple component pricing plan for Order 40. The hearing was reopened

at the request of proponents on March 1, 1994, to consider

modifications to the pricing plan recommended for the order. An

additional proposal considered during the reopened hearing would

authorize the market administrator to adjust pool supply plant shipping

standards to reflect changes in marketing conditions. A third proposal,

to ``lock-in'' to regulation under the Southern Michigan order a

distributing plant processing ultra-high temperature milk, was

considered on an emergency basis. The decision and final rule

pertaining to the ``lock-in'' were published on May 23, 1994 (59 FR

26603) and June 29, 1994 (59 FR 33418), respectively.

This recommended decision is revised with respect to the portions

dealing with the multiple component pricing issue and somatic cell

adjustments (Issues 3 and 4). Portions of the decision dealing with

adjustment of cooperative pool supply plant shipping requirements by

the market administrator and conforming changes have been added in this

revised recommended decision (Issues 2 and 9).

No comments were received in response to the November 1993

recommended decision regarding the pool supply plant definition,

administrative assessment, and marketing service assessment provisions

that were considered at the initial 1993 hearing. Therefore, this

revised recommended decision contains no changes regarding those issues

from the decision published December 6, 1993 (58 FR 64176).

1. Pool Supply Plant Definition

A witness for Michigan Milk Producers Association (MMPA) testified

during the initial hearing in support of the cooperative's proposal

which would amend the pool supply plant definition to include as

qualifying shipments transfers of milk to a partially regulated

distributing plant. The witness testified that MMPA supplies bulk milk

to a local partially regulated distributing plant that has substantial

Class I and Class II utilization but receives no credit for such sales

toward fulfilling the pool supply plant shipping requirement. The

witness explained that the shipment is a bulk transfer from the

cooperative (MMPA) to the nonpool plant, with its classification

determined during the pooling process. MMPA's post-hearing brief

contended that adoption of the proposed amendment would eliminate the

inequity caused by such transfers.

According to the cooperative's brief, the current month's

marketwide Class I utilization percentage, which includes the portion

of the transfer classified as Class I, determines the minimum

qualifying shipping requirement for the same month of the following

year but does not contribute to the cooperative's Class I use in

determining whether pooling standards have been met.

The MMPA witness testified that the partially regulated plant

historically had been a pool distributing plant but recently had become

involved in the production of extended-life Class II products. As a

result, he stated, the plant now has Class I utilization of

approximately 40 percent. According to the witness, the partially

regulated plant to which MMPA transfers milk is the only such plant to

which the proposed amendment would apply. NFO's post-hearing brief

supported adoption of the proposed amendment. There was no opposition

to the proposal.

Testimony in the record illustrates that the partially regulated

distributing plant is indeed satisfying Class I needs in the

marketplace through the use of pooled milk, thereby benefitting the

pool. Therefore, the proposal to include shipments of producer milk to

a partially regulated distributing plant when determining the

qualifications of pool supply plants should be adopted.

2. Modification of Pool Supply Plant Shipping Standard by Market

Administrator

A proposal to give the market administrator the discretionary

authority to administratively change the shipping percentages upward or

downward for a supply plant or a unit of supply plants being qualified

by a cooperative association should be adopted. The proposed provisions

would operate similarly to ``call'' provisions in other order markets

where the market administrator, upon request or upon recognizing a

potential problem, notifies the handlers in the order that action may

be taken to change the shipping percentage requirements. The percentage

change required would be based upon the evidence that the market

administrator receives and/or the supply and use data for the market.

The order currently provides that for a cooperative's balancing

plant or unit of such plants, the minimum qualifying percentage for

each month is established according to the amount of producer milk used

in Class I as a percent of total producer milk within the order for the

same month of the previous year. The order currently does not provide

for any sort of discretionary authority to change pool supply plant

shipping requirements. To adjust the shipping percentage requirements,

either the requirements must be suspended or permanent changes must be

sought through amendments to the order.

The director of bulk milk sales for Michigan Milk Producers

Association (MMPA) testified in support of the cooperative's proposal

at the reopened hearing. The proponent's intent is to allow for the

adjustment of these requirements on a more timely basis than can be

done under the current provisions.

The MMPA witness testified that the current order provision is

designed to establish a performance standard that reflects the Class I

needs of the local market and assures fluid processors that their

requirements will be fulfilled. He stated that the provision contains a

self-adjusting mechanism because the current month's shipping

requirements are based on the market requirements from the previous

year. He further stated that the provision normally works well. The

witness testified, however, that occasions exist in which the market

conditions have changed to such an extent that necessary corrections to

the self-adjusting mechanism cannot be made on a timely basis.

As an example, the MMPA witness stated that because the minimum

shipping percentages are determined by the percentage of producer milk

utilized in Class I, the percentage can be influenced by changes in the

monthly producer receipts. The witness stated that if milk that

normally would be pooled is not, producer receipts and the Class I

utilization percentage for the order would change, in turn affecting

the following year's shipping requirement. The witness also stated that

combining this possible decrease in pool receipts with an increase in

bulk milk sales to other markets also may impact the following year's

shipping requirements. He said that the shipping percentages

established may not reflect the following year's actual fluid

requirements from the local and distant markets.

The witness noted that two current options to adjust the shipping

percentage requirements, suspension or permanent amendment to the order

provisions, are time-consuming and may require unwarranted drastic

action.

In a post-hearing brief, MMPA reiterated support for the proposal.

No other support or opposition was expressed at the hearing or in

briefs.

The record evidence indicates that empowering the market

administrator with the authority to adjust the pool supply plant

shipping requirements should result in more timely changes in

comparison to current procedures. A more flexible and efficient process

would result by authorizing the market administrator to adjust the

requirements to either encourage shipments or discourage uneconomic

movements of milk as a result of changes in marketing conditions.

It appears that there is a need to provide flexibility of supply

plant performance standards when market conditions change from one year

to the next. Under such conditions, which could occur at any time, the

normal mechanism for change in the order program, which is the hearing

process, would not provide a timely response.

Thus, the proposal to give the market administrator discretionary

authority to revise the supply plant shipping standards should be

adopted. Doing so will provide a means of making appropriate

adjustments in this pooling provision as market conditions indicate a

need for adjustments. It must be recognized that a more timely response

to changed conditions can be provided under such a provision.

There is no apparent reason why restrictions should be imposed to

limit the market administrator's authority to change the pooling

provisions. It is intended and expected that this authority will be

exercised with impartiality and integrity. Moreover, without

restrictions more appropriate responses over a broader range of changed

conditions may be obtained. Limitations on the authority to revise

shipping percentages could result in the market administrator being

unable to either increase or decrease the requirements to the full

extent necessary in a given situation.

It should be noted that, to the extent appropriate shipping

requirements for supply plants can be determined in advance, it would

be desirable for the market administrator to revise the requirements

for several months at a time, if necessary. If conditions subsequently

changed, the market administrator would again review the situation and

make further adjustments as necessary. It is hoped that such an

arrangement will serve the market well and provide less uncertainty as

to what the requirements will be.

There are proprietary supply plants, apparently with no history of

pooling problems, thus no need exists to have this type of proposed

provision applicable to these plants. Proprietary plants have a fixed

qualification percentage of 30 percent each month, with a provision to

automatically qualify during the months of March through August based

on performance from the previous September through February.

Whenever the market administrator believes that a change in the

shipping standards may be needed, whether by request or on his own

initiative, he will give written notice that such a change is being

considered and invite interested persons to comment. This procedure

will assure that all potentially affected persons can have their views

and other pertinent information fully considered by the market

administrator before a decision is made and announced. Such a procedure

now is followed under other orders when a ``call'' for additional

shipments by supply plants is contemplated and also is an appropriate

requirement for the new authority provided herein.

3. Multiple Component Pricing

A multiple component pricing plan should be adopted in the Southern

Michigan Federal milk marketing order. The pricing plan would be

patterned after the multiple component pricing plan initially proposed

by Leprino Foods Company and supported by Michigan Milk Producers

Association, Independent Cooperative Milk Producers Association, and

several other dairy organizations. Producers would be paid on the basis

of three components in the milk: butterfat, protein, and the remaining

fluid portion that is the ``fluid carrier'' of the butterfat and

protein ingredients. Producers would also share in the value of the

pool's Class I and Class II uses. A somatic cell adjustment would apply

to the protein prices paid to all producers no matter how the milk was

used.

Regulated handlers would pay for the milk they receive on the basis

of total butterfat, the protein and fluid carrier used in Classes II

and III, skim milk used in Class I, and the hundredweight of milk used

in Classes I and II.

At the present time, milk received by handlers is priced according

to the pounds of producer milk allocated to each class of use

multiplied by the prices per hundredweight of milk testing 3.5 percent

butterfat, as determined under the order for each class of use.

Adjustments for such items as overage, reclassified inventory,

location, and other source milk allocated to Class I are added to or

subtracted from the classified use value of the milk. The resulting

amount is divided by the total producer milk in the pool to calculate a

price per hundredweight for milk testing 3.5 percent butterfat to be

paid to producers for the milk they have delivered to handlers. The

price paid to each producer is then adjusted according to the specific

butterfat test of the producer's milk by means of a butterfat

differential. The butterfat differential is computed by multiplying the

wholesale selling price of Grade A (92-score) bulk butter per pound on

the Chicago Mercantile Exchange, as reported for the month by the U.S.

Department of Agriculture, by 0.138 and subtracting the Minnesota-

Wisconsin price (the M-W) at test, also as reported by the U.S.

Department of Agriculture, multiplied by 0.0028.

The initial hearing in this proceeding was held February 17 and 18,

1993. Michigan Milk Producers Association (MMPA) and Independent

Cooperative Milk Producers Association (ICMPA), the two original

proponents of multiple component pricing (MCP) under the order,

requested reopening the February 1993 proceeding to consider proposals

to modify the MCP plan recommended by the U.S. Department of

Agriculture (USDA) for the Southern Michigan Order in a decision issued

November 29, 1993 (58 FR 64176). MMPA and ICMPA represent approximately

80 percent of producer milk in the Order.

The November 1993 recommended decision included a thorough analysis

and discussion of the need for MCP pricing and the desirability of

including protein as a pricing component based on the record of the

proceeding initiated on February 17, 1993. This revised recommended

decision includes some of the discussion and basis for adoption of MCP

contained in the initial recommended decision, but is based on the

entire record of the proceeding which includes the reopened hearing

held March 1, 1994.

The MCP plan in the original recommended decision would have priced

milk on the basis of its protein and butterfat components. The

recommended MCP plan generally was patterned after the plan adopted for

the Ohio Valley, Eastern Ohio-Western Pennsylvania, and Indiana orders.

Producers would have been paid on the basis of the pounds of milkfat

and protein contained in their milk and would have shared in the value

of the pool's Class I and Class II uses on a per hundredweight basis.

The butterfat price would have been based on the market value of

butter, while the protein price would have been computed by attributing

all of the residual value of the M-W, after its butterfat value had

been subtracted, to protein. Regulated handlers would have paid for the

milk they received on the basis of total milkfat, the protein used in

Classes II and III, the skim milk used in Class I, and the

hundredweight of total product used in Classes I and II. Protein prices

paid to producers on all producer milk would have been adjusted by the

somatic cell count of the milk.

MMPA and ICMPA endorsed the recommendation to adopt MCP, but

proposed a specific change to the recommended MCP plan. The MMPA and

ICMPA (proponent) witness stated in testimony at the reopened hearing

that the cooperatives remain committed to the adoption of a MCP plan

administered through the Federal order system. Proponents' witness

testified that the adopted plan should be equitable to both producers

and processors and should send the correct economic signals from the

marketplace to the farmer. The witness testified that when the

proponents initially proposed a multiple component pricing plan for the

Southern Michigan order, their intent was not to create conflicting

economic signals for farmers and processors. Proponents' witness stated

that the recommended MCP plan could send conflicting signals to

handlers and producers by overstating the value of protein in producer

milk. The witness stated that such overstatement would create an

incentive for processors to purchase low-protein milk while at the same

time would encourage farmers to produce high-protein milk.

In the reopened hearing, MMPA and ICMPA specifically requested

further consideration of the MCP approach proposed by Leprino Foods

Company (Leprino) in the original proceeding. Because other hearing

participants had been given insufficient advance notice of Leprino's

pricing plan to adequately evaluate the proposal and cross-examine the

Leprino witnesses, the Leprino proposal was not considered as a viable

alternative in the recommended decision. After having an opportunity

for extensive review of the Leprino proposal after the initial hearing,

the proponents concluded that the Leprino alternative was a better

alternative than the one in the recommended decision.

The Leprino proposal is a three-component pricing system, with the

butterfat and protein component prices based on market values for

butter and cheese, and a ``fluid carrier'' component representing the

residual value of the M-W price after the protein and butterfat values

are subtracted. Proponents' witness testified that because butterfat

and protein values can be determined by the butter and cheese markets,

respectively, they are reflective of economic conditions with a known

degree of precision. Proponents' witness agreed with the original

Leprino proposal that the balance of the M-W value should be attributed

to a fluid residual price applied to milk volume after the butterfat

and protein portions of the M-W price have been accounted for, stating

that it is not feasible to assign as precise a value to the other

nonfat nonprotein solids in milk as can be assigned to the butterfat

and protein components.

Proponents' witness gave two reasons for wanting to consider the

Leprino proposal instead of supporting the recommended MCP plan. The

first reason involves the method of determining the value of protein.

The witness stated that the recommended decision equates the protein

value to the skim residual of the M-W price, while the Leprino proposal

values protein on the basis of its cheese yield potential.

The proponents' witness stated that the Leprino proposal uses a

current market value for cheese and a modified version of the Van Slyke

formula, which relates changing protein levels in milk to changes in

cheese yield, to calculate the value of protein. The witness stated

that the protein price determined through the Van Slyke formula

accurately reflects the incremental value of protein in milk and would

result in a fair measure of protein value to the dairy producer and

handler.

The proponents' witness suggested that the protein price should be

derived from the National Cheese Exchange (NCE) price for 40-pound

blocks of Cheddar cheese as representing the current market value for

cheese. The witness stated that the block cheese price is the most

commonly used base price for cheese and is a standard that many cheese

manufacturers recognize in pricing their product. The witness testified

that the block price better reflects the Southern Michigan commercial

market for cheese than the barrel cheese price. He contended that a

barrel cheese price would reflect a surplus commodity price, a

situation that does not exist in this order.

The second reason that proponents' witness gave for supporting the

Leprino proposal is that this plan moderates the impact that component

pricing would have on processors of dairy products that have not been

scientifically shown to have as direct a relationship between yield and

protein content as does cheese. For example, the witness testified, in

some instances processors may be unable to recover the same value for

protein from products such as packaged fluid cream, condensed milk, and

powder in comparison to the value from cheese manufacture.

MMPA's post-hearing brief asserted that under Leprino's proposal,

the cost and value of protein is neither too low nor too high. The

brief contended that the current butterfat/skim pricing system, in

which only the value of butterfat is specifically recognized, places no

value on protein. The brief further contended that the recommended

decision, in which the entire value of the skim portion of milk is

assigned to protein, places too much value on protein, for the true

economic value of protein to dairy product processors may bear little

resemblance to the skim residual.

A Leprino witness testified again at the reopened hearing in

support of Leprino's proposal. Leprino operates two manufacturing

plants in the Southern Michigan marketing area that process over 40

percent of the Class III milk and approximately 16 percent of all milk

marketed in the Southern Michigan order area. Leprino also manufactures

and distributes mozzarella cheese to the food service industry

throughout the country.

In testimony at the reopened hearing, the Leprino witness supported

the pooling and producer pay price proposals suggested by MMPA and

ICMPA. The witness reiterated the characteristics and merits of

Leprino's three-component proposal submitted at the original hearing.

The Leprino witness argued at the reopened hearing that one of the

major inadequacies of the current butterfat/skim pricing system is that

skim is priced without any consideration to the components in this skim

milk. The witness said that under the current pricing provisions, the

skim value of milk accounts for almost 79 percent of the total Class

III (M-W) price; however, the protein or solids-not-fat components

included in the skim are not valued. The witness said that producers

and handlers receive or pay the same price for milk containing lower or

higher levels of protein.

The Leprino witness stated that the original recommended decision

in the proceeding would have replaced this current system with another

system that inequitably allocates almost 79 percent of the M-W price to

only the protein component of skim milk. The witness testified that

allocating all of the skim value of milk to the protein component

creates a residual protein value which reflects more than the true

value of protein to manufacturers. The witness stated that the

recommended decision ignores the value and importance of milk

components other than butterfat and protein and places a value on

protein that cannot be recovered from the marketplace by most

manufacturers of butter, nonfat dry milk, or cheese.

The Leprino witness stated that encouragement needs to be given to

producers to produce milk with higher protein content and to

manufacturers to utilize these higher levels of protein. He stated that

the intent of Leprino's proposal is to send an economic message to

producers to produce higher-protein milk while allowing handlers to

recover the cost of milk components from the market and cover operating

costs. The witness asserted that the concepts offered in its proposal

are economically sound, fair to handlers and producers, and in the best

interest of long-term stability in milk pricing.

Leprino's post-hearing brief stated that under the original

recommended decision, a Cheddar cheese manufacturer's gross margin may

decline when paying more for milk with a higher protein content. The

brief described Leprino's proposal as achieving the economic balance

necessary for processors to pay producers for milk with higher protein

levels without reducing processors' profit margins. Leprino's brief

stated that consumers also would benefit by receiving dairy products

with potentially higher-protein contents without unwarranted

inflationary price increases.

The Leprino witness stated that pricing the butterfat component

provides producers with an economic incentive to produce the butterfat

in raw milk. The witness asserted that a related revenue value for

processors exists for butterfat in finished products such as butter,

fluid milk, cheese, and other products.

As in the case of butterfat, the witness stated, pricing the

protein component gives producers an economic incentive to increase the

protein content of their milk. The Leprino witness stated that the

protein component's value and related revenue to processors is based on

its market value in cheese, with the formula for the protein price

based on recognized Cheddar cheese yields using the modified Van Slyke

formula.

The Leprino witness suggested that the National Cheese Exchange

price reflects the market value of cheese and that the NCE price

multiplied by a representative yield factor (calculated via the Van

Slyke formula) would establish the value of a pound of protein to a

cheese manufacturer. He stated that either the block or the barrel

price could be used to represent the Cheddar cheese market price, and

stated a preference for the barrel price.

Leprino's exception to the original recommended decision and

testimony in the reopened hearing noted that a single component such as

protein is not an appropriate means of accounting for all of the value

of the skim portion of milk to a handler. Instead, the exception and

witness suggested, the value of the protein component should be based

on the value of protein in cheese, and the fluid carrier should be used

to carry the residual M-W value (M-W price less fat and protein values)

which currently cannot be tied specifically to an individual component

of milk or derived from a market value for individual components of

milk.

A witness for the National Cheese Institute (NCI), the national

trade association for manufacturers, processors, and marketers of all

varieties of cheese, stated that NCI did not testify at this

proceeding's initial hearing because at that time a NCI task force made

up of cheese manufacturers and processors was studying the MCP issue.

The witness testified that NCI supports the adoption of a single

uniform three-component pricing system in all orders where a

significant amount of cheese is produced. At the reopened hearing, the

NCI witness supported MCP on Class III milk but had no position

regarding Class II milk. In a post-hearing brief, NCI asserted that

applying MCP to Class I milk would be inappropriate because there

exists no measurable or discernable advantage to varying protein levels

for milk used as a fluid beverage.

The pricing plan supported by NCI is identical to the proposal

advanced by Leprino, MMPA, and ICMPA. NCI's post-hearing brief noted

that its proposal (the Leprino plan) allows cheesemakers to break even

from processing milk with higher protein contents by seeking out and

rewarding producers with higher-protein milk. The NCI witness asserted

that any formula which prices protein higher than its value in

producing cheese will cut into processor margins and cause cheese

manufacturers to seek out lower-protein milk.

As an industry-wide consensus resulting from the NCI task force,

the NCI witness suggested that the NCE barrel price should be used to

represent the market value of cheese. The witness stated that Cheddar

cheese is recognized as an industry standard, and the barrel price was

chosen because a significant amount of barrel cheese is traded on the

National Cheese Exchange.

Kraft General Foods (Kraft) testified at the initial hearing in

this proceeding but not at the reopened hearing. A post-hearing brief

filed on behalf of Kraft supported the Leprino proposal. The brief

supported using a barrel cheese price to derive a value for protein in

milk. The brief also supported maintaining the quality/somatic cell

count adjustment included in the recommended decision.

The Kraft brief asserted that the Leprino plan would avoid

establishing conflicting economic signals from a protein price which is

so high that manufacturers are encouraged to procure low-protein milk.

As such, according to the brief, the Leprino proposal represents a

positive refinement in the evolution of MCP plans under the Federal

order system. The brief stated that the Leprino proposal's protein

price tracks the added value of extra protein in added cheese yield and

is more closely aligned to the competitive value of milk protein as

reflected in many existing industry-sponsored MCP plans than is the

plan contained in the recommended decision.

The Kraft brief stated that no proposal at the reopened hearing

accounted for handler manufacturing costs when protein is converted

from producer milk to finished products. Therefore, the brief noted,

all proposals overstate the protein component in raw producer milk.

The Kraft brief noted that the absence of a make allowance causes

exaggeration of the component value of protein in raw producer milk and

that using the barrel price will tend to moderate any overstatement of

the protein value. The brief argued that the price difference between

the barrel and the block prices of cheese is due primarily to packaging

costs, not milk or cheese value, and concluded that use of the block

price instead of the barrel price to calculate a protein price would

effectively assign some finished product packaging value to milk

protein.

In opposition to one feature of the Leprino plan, a witness for

National All-Jersey, Incorporated, (NAJ) argued at the reopened hearing

that attributing the residual M-W value to volume does not recognize

the value of solids in milk other than protein and fat. The witness

asserted that MCP plans that price a portion of the skim milk value on

a volume basis would only partially correct the current provisions

because all of the solids in skim milk should be priced. The witness

stated that increasing returns for milk on a volume basis relative to

the price of protein would tend to reduce the producer's incentive to

employ feeding, genetics, and management practices to increase protein.

National All-Jersey, Incorporated, is a national dairy farmer

organization that assists members in marketing their milk. The NAJ

witness testified that NAJ's primary mission since 1976 has been the

promotion of multiple component pricing with the goal of implementing a

uniform MCP plan throughout the Federal order system.

In the reopened hearing, the NAJ witness supported the proposal

submitted by MMPA and ICMPA, with two modifications. The witness stated

that under the NAJ proposal, the protein price is calculated using a

different formula than in the proponents' proposal, and the protein

price includes a market value for whey. The NAJ witness also stated

that the NAJ proposal, after pricing the butterfat and protein

components, places the residual value on other nonfat nonprotein

solids.

The NAJ witness stated that the major objective of any MCP plan is

to provide dairy producers with an economic incentive to produce

protein, the most valuable component in milk. The witness stated that

because a direct relationship exists between product yields and the

level of protein and other solids contained in milk, Class II and III

handlers are able to pay for milk in more direct relation to its

economic value. The witness stated that an economically and justifiably

high protein price is needed to encourage producers to increase the

ratio of protein to fat in their milk production.

The NAJ proposal was characterized by the witness as a total solids

plan which prices all components in milk. The witness stated that

pricing all components in skim milk corrects the inadequacy of the

current butterfat/skim pricing system in which a pound of water

receives the same price as does a pound of protein or nonfat solids in

the skim portion of producer milk. The witness asserted that the NAJ

proposal allows handlers to purchase milk more in accordance with its

economic return and still gives handlers the incentive to procure and

producers to produce higher-protein milk. The NAJ witness supported

calculating the same protein and other solids price for both handlers

and producers.

The NAJ witness stated that the NAJ proposal includes whey in its

protein price calculation in an effort to account for all of the value

in milk protein, and described the whey protein concentrate price as

the best indicator of the market value of protein in whey. The witness

contended that the protein price computed under the NAJ proposal

provides more equitable returns to both handlers and producers in

comparison to the other proposals presented at the reopened hearing.

NAJ's brief asserted that under its proposal, as high a percentage of

skim value is allocated to protein as can be economically justified.

NAJ maintained that whether or not a cheese plant processes whey should

have no bearing on the inclusion of whey in the pricing formula.

For the protein calculation, the NAJ witness said that the NAJ

proposal uses the NCE block price for Cheddar cheese because this price

is used more widely than other announced cheese prices. Also, the

witness stated that the NCE block price is used as a base for pricing

other cheeses more than any other cheese price.

The witness stated that the residual under the NAJ proposal

represents both the value of other milk solids besides protein and the

difference between the value determined by product prices and the

competitive M-W price. The NAJ witness testified that the purpose of

placing the residual value on other solids is to provide farmers with

an incentive to produce something in milk other than water.

Also supporting NAJ's proposal is Tri-State Milk Producers

Cooperative, a qualified cooperative with about 640 members marketing

milk in several orders, including the Southern Michigan order.

Several participants in the proceeding expressed opposition to

portions of the NAJ plan during the hearing and in post-hearing briefs.

MMPA's post-hearing brief asserted that placing market values on whey

protein and non-fat non-protein solids (principally lactose) assigns

values to these solids that are not present in the marketplace.

The Leprino witness opposed including whey in the computation of

the protein price for the following reasons: (1) the value of whey is

not based on the inherent value of protein or other solids in raw milk;

(2) investment in a whey operation is based on a return calculated from

the value-added nature of the process and/or the cost of other disposal

options rather than the raw ingredient cost; (3) raw unprocessed whey

recovered from the cheese making process has no inherent value in the

United States; (4) unprocessed whey cannot be sold beyond the factory;

(5) raw unprocessed whey is a disposal problem for many cheese

operations; and (6) whey returns are excluded from calculation of the

cheese support price.

Leprino's brief asserted that the main interest of NAJ is to

maximize producer returns for high protein milk and that the NAJ plan

achieves this objective by providing for a higher protein component

price than can be justified in the marketplace. NCI's brief gave

reasons similar to Leprino's for excluding whey in a MCP plan.

The Leprino witness stated that use of a residual solids approach

requires a total solids test on milk in addition to a protein test. The

witness stated that using a residual fluid approach ascribes all the

remaining value to volume, eliminating the need for additional testing,

and thus is easier and less costly to administer.

At the initial hearing session, two witnesses testified that

protein testing is already widespread in the Southern Michigan market

and that testing methods are reliable and accurate. A witness employed

in the field of dairy chemistry testified on behalf of MMPA that in the

case of protein, the infra-red milk analyzer calibrated with reference

to the Kjeldahl test is the method most used by the industry. This

method is approved by the Association of Official Analytical Chemists,

and the repeatability and accuracy of this method is much better than

those of the Babcock test for butterfat.

A MMPA quality control witness testified that protein tests on

producer milk in Order 40 are conducted on infra-red test instruments.

The witness emphasized that all cooperatives in Order 40 have infra-red

instruments and currently are testing producer milk for protein a

minimum of five times a month. Therefore, he stated, the inclusion of

protein testing would not result in increased cost. The proponent's

witness recommended that if the proposal is adopted, the payment to

producers should be based on an average of a minimum of five fresh

tests per month for both protein and somatic cell count.

The Southern Michigan order should be amended to include multiple

component pricing. On the basis of both the initial and reopened

records of this proceeding, the proposed multiple component pricing

plan would entail pricing milk used in Class II and Class III on the

basis of protein and a fluid carrier residual. The Class I and Class II

differential prices would be applied to milk used in Classes I and II,

and Class I milk would continue to be priced on the basis of volume.

Handlers would pay all producers for butterfat directly and would

adjust protein prices paid to producers for the somatic cell count of

producers' milk. Because milk used for Class III-A purposes is

allocated on a pro rata basis with total receipts of Class III milk,

MCP is applicable to milk used in Class III-A in this recommended

pricing plan.

The record indicates that a large percentage of the producers

pooled under the Southern Michigan order are already eligible for or

receive some form of multiple component pricing and that nearly all of

these component pricing plans use protein as a pricing component. The

record also shows that the diverse component pricing programs that

currently exist promote disorderly and inefficient marketing conditions

in the procurement of milk supplies by competing handlers. The

different programs cause non-uniform bases of payments to producers.

The adoption of multiple component pricing will allow the Order to

recognize the additional value in milk with a higher than-average

protein content. At the same time, by establishing a residual value

based on milk volume, the protein component will not be over-valued, as

proponents argue would be the case under the original recommended

decision.

Attributing at least a portion of the value of milk to protein in a

market such as Southern Michigan, where most of the milk not used for

bottling purposes is processed into cheese, is appropriate. Record

evidence in this proceeding clearly shows that demand for protein is

higher than for other components of milk because of its functional,

nutritional, and economic value in the marketplace. The functional

characteristics of protein allow it to form the matrix in the

production of cheese and yogurt. Protein is also important to the air

formation in the manufacture of certain products and provides some

required nutrients in the human diet.

Milk containing a higher percentage of protein will result in

greater yields of most manufactured products than milk with a lower

protein test. Additionally, handlers receiving milk that results in

greater volumes of finished products such as cheese and cottage cheese

than an equivalent volume of milk testing lower in protein should be

required to pay more for the higher-testing milk. At the same time, the

dairy farmer producing milk that yields greater amounts of finished

products deserves to be paid more for it than a dairy farmer producing

the same volume of milk that results in less product yield. Thus,

sending an economic signal to dairy farmers will encourage them to

maximize the production of those components which have the greatest

demand in the marketplace.

Pricing milk on the basis of its protein content also meets the

criteria of measurability, intrinsic value, and variability. The

evidence in the record shows that protein can be easily measured and,

in fact, that the variability in measurement may be less than the

variability in butterfat testing because protein does not separate as

does butterfat. The record evidence shows that protein has value to the

manufacturing sector in the form of improved product yield and product

structure. The value to the fluid sector was not quantified in the

hearing record; however, testimony indicated some benefit to the fluid

sector from higher-protein milk, resulting in a more wholesome and

nutritional product. The criterion of variability is necessary to

justify pricing a component separately from the product in which it is

contained. In the case of protein in milk the record indicates that the

level of protein varies from season to season, region to region, and

farm to farm. In view of its functional, nutritional, and economic

value in dairy products, its widespread use as a pricing component in

the Southern Michigan market, and its qualification under the three

criteria above, protein appears to be an appropriate component for

pricing milk in Federal Order 40.

Hearing evidence from all parties indicates that pricing milk in

Order 40 on either the current butterfat/skim basis or the basis of two

components--butterfat and either protein or nonfat solids--will not

adequately describe, accurately value, or be a sufficiently precise

method for classifying and pricing milk used for manufactured products.

As proposed, prices for butterfat and protein should be market-

driven. Deriving butterfat and protein values from finished product

prices will send the appropriate economic signals to producers and

handlers by indicating current market supply and demand conditions for

dairy products containing these components of milk.

At issue is the specific design for the revised recommended MCP

plan. Two basic MCP plans were proposed in the reopened hearing: The

plan proposed by proponents MMPA and ICMPA and supported by Leprino,

NCI, and Kraft (the Leprino plan) and the plan proposed by NAJ and

supported by Tri-State Milk Producers Cooperative and the American

Jersey Cattle Club (the NAJ plan).

The Leprino plan derives a protein price from either the NCE block

or barrel cheese price and assigns the residual skim value of the M-W

price to a ``fluid carrier'' component of milk. The NAJ plan derives a

protein price from the NCE block cheese and whey protein concentrate

prices and assigns the residual skim value of the M-W price to the

remaining nonfat nonprotein solids. Each component of the multiple

component pricing plan recommended for adoption will be discussed

separately.

Butterfat. The value of butterfat in the amended order will be the

same as under the current order. There was no proposal or testimony to

change the way butterfat currently is valued.

This decision continues the historical relationship of the values

of butterfat and butter. Currently the value of butterfat is expressed

as a differential; that is, the difference in value between 0.1 pound

of butterfat and 0.1 pound of skim milk. The amended order will express

the value of butterfat on the basis of a price per pound. Whichever

method is used, the value of butterfat in milk is the same. However, by

expressing the value on a per pound basis instead of a differential,

the objective of demonstrating clearly to producers the value of fat in

milk is easily achieved.

As proposed, the butterfat price per pound in the amended order

will be determined by multiplying the butterfat differential by 965 and

adding the Class III price. The resulting price per hundredweight would

then be divided by 100 to give a price per pound of butterfat.

Protein. The protein price for milk pooled under the Southern

Michigan Federal milk order should be calculated by multiplying the

monthly average of 40-pound block cheese prices on the National Cheese

Exchange (NCE) at Green Bay, WI, by 1.32, without including a value for

whey protein.

No opposition was expressed at the hearing to pricing protein on

the basis of its value in the manufacture of cheese. The differences

between participants came in determining the appropriate level of the

protein price.

The original Leprino proposal would calculate the protein price by

multiplying the monthly average of 40-pound block cheese prices on the

NCE by 1.32. Leprino's formula would have resulted in average protein

prices, per pound, of $1.6925 in 1992 and $1.6971 in 1993.

The NCI proposal supported by Kraft (modifying the Leprino plan),

would calculate the protein price by multiplying the monthly average

NCE Cheddar barrel price by 1.32. NCI's formula would have resulted in

average protein prices, per pound, of $1.6408 in 1992 and $1.6475 in

1993.

NAJ uses a ``justifiably higher protein value'' established from

block Cheddar (normally higher than barrel) and adds a whey protein

concentrate (WPC) price in order to account for all milk protein and to

give farmers an incentive to produce protein rather than to reflect the

additional value manufacturers realize from increased protein. The NAJ

proposal would calculate the protein price in two parts: (1) multiply

the NCE monthly average 40-pound block cheese price by 1.32, and (2)

add the monthly average WPC price multiplied by a yield factor of

0.735. The sum of these two values would equal the protein price. NAJ's

formula would have resulted in average protein prices, per pound, of

$2.0738 in 1992 and $2.1664 in 1993.

Each of the proposals would result in a lower protein value than in

the recommended decision or in orders containing MCP plans, such as the

Indiana, Ohio Valley, and Eastern Ohio-Western Pennsylvania Federal

orders. The handler protein price per pound for these orders would have

averaged $2.77 and $2.82 in 1992 and 1993, respectively.

Because the percent of the skim milk value allocated to protein

differs under the two proposed plans, the protein price also differs.

Under the original recommended MCP plan, 79 percent of the total milk

price would be allocated to protein on the basis of 1993 prices. For

1993, the NAJ proposal would allocate 59 percent to protein, and the

Leprino proposal would allocate 46 percent of the total M-W price to

protein. The Leprino plan assigns less value to protein than the NAJ

plan because this plan does not value the protein in whey.

Undisputed by hearing participants was the 1.32 factor, which

represents the pounds of 38 percent moisture Cheddar cheese obtained

from one pound of protein with 75 percent of the protein going into the

cheese as calculated by the modified Van Slyke cheese yield formula.

The hearing record indicates that the modified Van Slyke formula

accurately measures incremental changes in protein. This accuracy

supports the concept that cheese plants would be able to maintain

consistent margins from the processing of small increases of protein

content in milk. Assuming butterfat is constant, a change of protein by

one pound in this formula will change cheese yield by 1.32 pounds.

Therefore, the 1.32 factor is appropriate for determining an order

protein price based on a market-determined cheese price.

Use of a Cheddar cheese price as a basis for valuation recognizes

that, for Cheddar cheese: (1) a well-established national market price

exists; (2) standards for manufacture and grading are accepted widely

on a national basis; (3) the Van Slyke formula calculates yields that

are well-known and verifiable; (4) a majority of other cheese

manufactured in the U.S. is traded in relation to Cheddar values with

economic differences in costs of manufacturing being reflected in the

marketplace; and (5) using Cheddar as a standard significantly

simplifies the process.

The question of which cheese price to use in the market protein

value calculation, either the NCE block or barrel price, will determine

the degree to which the value of the skim portion of milk will be

assigned or allocated to protein. For the purpose of reflecting changes

in Cheddar cheese market prices (as opposed to the level of such

prices), it makes little difference whether the barrel or block price

is used because the prices move very similarly, with the barrel price

approximately 3 to 4 cents per pound lower than the block price during

1991-93. The difference between the average block and barrel prices

from 1992 to 1993 was $0.0383 per pound. Multiplying this difference by

the 1.32 factor results in an average difference of $0.0506 per pound

of protein between the prices derived from the barrel and the block

cheese prices.

The monthly average price for 40-pound block Cheddar cheese on the

NCE is the appropriate price to use for determining the protein price.

Use of the block price results in producers receiving a higher price

for protein than if the barrel price were used, without handlers

incurring any significantly higher cost for milk. Use of the block

price is also consistent with the Eastern Ohio-Western Pennsylvania,

Ohio Valley, and Indiana Federal orders, where the block price is used

to adjust the producer pay price for somatic cell count. The Cheddar

cheese block price is used as a standard by many cheese manufacturers

to price different types of cheese; used in the Coffee, Sugar, and

Cocoa Exchange futures price of cheese; in the Class II price

calculation; and in California's 4a price.

The price difference between block and barrel cheese may be due to

packaging and other nonmilk factors. However, the protein price must be

established at a level that best meets the needs of all concerned. The

block cheese price should be more effective than the barrel price in

establishing a sufficiently high protein price to accomplish the goal

of encouraging producers to produce protein without having a

detrimental impact on handlers.

The protein formula proposed by NAJ also would include the value of

whey protein in the protein price so that all of the protein in the

milk would be accounted for. NAJ's inclusion of whey value would

increase the protein price computed from the NCE block price by an

average of $0.3813 and $0.4690 per pound in 1992 and 1993,

respectively.

The whey protein factor should not be included in the computation

of the protein price. Hearing evidence shows that the whey protein

portion of the NAJ protein price is not necessarily based on a value

that a manufacturer can recover from a whey operation. Use of the

market price for whey protein concentrate (WPC), the highest-priced

whey product, ignores the diversity of whey handling operations and

practices that exist throughout the dairy industry.

Whey protein concentrate manufacturing involves sophisticated and

expensive technology used by very few manufacturers, and apparently by

none in Michigan. Until recently, the dairy industry has treated whey

as having negative value, and the production of whey in connection with

cheese manufacturing represented a disposal problem involving costs

rather than a byproduct opportunity. Inclusion of a whey value in the

protein price at this point in the development of whey disposal

technology would result in including the potential revenue associated

with whey, but none of its actual cost.

Fluid Carrier. The balance of the M-W price, after the values of

protein and butterfat are removed, should be priced on the basis of a

``fluid carrier'' residual. The fluid carrier price per hundredweight

will be computed by subtracting from the Class III price the sum of the

butterfat price times 3.5 and the protein price times the month's

average protein test of the Minnesota-Wisconsin price survey milk.

Because the computation of the fluid carrier price is based on a

residual value, the fluid carrier price could be negative. In this

instance, the fluid carrier price would remain negative, instead of

adjusting either the butterfat or protein prices.

Because the M-W price is a competitive pay price rather than a

price determined from calculating each component's value, the M-W price

reflects factors such as volume premiums, cheese yield premiums,

solids-not-fat premiums, butterfat values offered by some manufacturers

that exceed the butterfat differential, and pure competition for

supply. The fluid carrier residual helps to place a value on these

factors that is not accounted for elsewhere. Also, the standards for

all finished products require inclusion of some fluid from raw milk;

for example, skim milk powder has approximately 4 percent moisture, and

Cheddar cheese has a 38-percent moisture standard. Therefore, the water

in producer milk has some value in manufactured products, resulting in

revenue to the processor as that fluid is captured in products such as

butter, yogurt, cheeses, and nonfat dry milk.

MMPA, ICMPA, Leprino, NCI, and Kraft all supported a fluid carrier

component to represent the residual value of the hundredweight of

producer milk in Class II and Class III. Each party supported a formula

identical to that which is recommended for adoption. The fluid carrier

residual would have provided an average value, per hundredweight, of

$3.39 in 1992 and $3.68 in 1993.

An alternative residual price was proposed by NAJ, which would

price the residual value of the M-W price after the removal of the

butterfat and protein values on the basis of ``other nonfat solids.''

The other solids price would be calculated by subtracting from the M-W

price the sum of the value of 3.5 pounds of butterfat and the average

protein content of milk included in the M-W price survey times the

protein price. The result would be divided by the M-W other solids

content (M-W nonfat solids minus M-W protein) to obtain the other

solids price per pound. This proposed residual would have provided

average values, per pound, of $0.40 and $0.41 in 1992 and 1993,

respectively.

There is no readily available measure of the market value of the

other nonfat solids. The nonfat nonprotein solids component principally

consists of lactose. The other solids price would represent not only

the value of the lactose and ash, but would include an adjustor between

the butterfat and protein component values of milk, which are

determined by the market value of those components in dairy products,

with a competitively set producer pay price (the M-W). While there is a

value to lactose, attributing the entire residual value of milk to the

nonfat nonprotein component would overstate the true economic value of

lactose after accounting for processing costs and ignore the value of

water in milk. It would be inequitable and uneconomical to place the

residual value of milk on lactose instead of on the residual fluid

volume. The other solids price may send a signal to producers to

produce higher solids while sending a conflicting signal to

manufacturers.

Because the M-W price is a basic price for milk, at least one of

the components in the payment plan must represent the difference

between a competitively-set pay price (the M-W) and the product-derived

component prices. The fluid carrier is this component.

In addition, if the other solids price had a negative value, either

the protein or butterfat price would need to be adjusted in order for

the other solids price to retain at least a value of zero. If this

situation were to arise, the adjusted protein price, for example, would

no longer represent the true market value associated with protein.

Consequently, producers and handlers would receive an inappropriate

economic signal from the adjusted price.

The residual skim value of the M-W, after accounting for protein,

should be placed on the fluid carrier component. Hearing record

evidence indicates that the M-W price represents various factors that

may not have a known market value, such as various premiums or pure

competition for milk supply. The fluid carrier value would represent

these factors. The hearing record also shows that moisture standards

exist for all dairy products. The fluid carrier component recognizes

the fact that the water in milk does hold value for the processor and

the producer. Lastly, the correct economic signals relating to

butterfat and protein will be sent to both producers and processors if

the residual calculation is negative. The function of the residual is

to connect the value of milk components in manufactured dairy products

with a market-determined price for milk used in those products.

Miscellaneous. The butterfat and protein component prices will be

expressed on a per-pound basis to the nearest one-hundredth cent.

Analysis has shown that by expressing these prices to the nearest one-

hundredth of a cent, the accuracy of the prices is enhanced

significantly over expressing the prices to the nearest cent.

Additionally, the difference between what is paid into the producer-

settlement fund and what is drawn from the producer-settlement fund is

much closer to zero than when prices are rounded to the nearest full

cent. The fluid carrier price will be expressed on a per hundredweight

basis, rounded to the nearest whole cent.

For the purpose of allocating protein and fluid carrier to the

classes of use, the assumption will be made that the protein and fluid

carrier cannot easily be separated. The protein and fluid carrier will

therefore be allocated proportionately based on the percentage of

protein and fluid carrier in the skim milk received from producers.

In contrast to other orders that have multiple component pricing

provisions, this decision incorporates only one protein price. The

pooling of the components to include the Class I skim portion is

incorporated within the computation of the producer price differential.

This feature of the pricing plan allows for the elimination of separate

handler and producer protein prices, and resulting confusion over which

price, handler or producer, should be used in different situations. In

addition, a handler's per-pound price for protein is the same whether

the handler is buying milk from producers or from other handlers.

The producer price differential, which represents the additional

value of Class I and Class II milk in the pool and any positive or

negative effect of Class III-A, will be determined by computing for

each handler, and then accumulating for all handlers, the differential

value (from Class III) of the Class I, Class II, and Class III-A

product pounds. The differential value is adjusted, when appropriate,

for shrinkage and overage, inventory reclassification, receipts of

other source milk allocated to Class I, receipts from unregulated

supply plants, and location adjustments.

For the purpose of eliminating differences between handler and

producer component values, the value of the Class I skim milk and the

values of the protein and fluid carrier contained in the skim milk

allocated to Class II and Class III will be added to, and the values of

the protein and fluid carrier contained in all producer milk subtracted

from, the differential pool. The accumulated total for all handlers

then will be adjusted by total producer location adjustments and one-

half the unobligated balance in the producer-settlement fund. The

resulting value then will be divided by the total pounds of producer

milk in the pool, with an amount not less than six cents or more than

seven cents per hundredweight deducted. The result is the producer

price differential to be paid to producers on a per hundredweight

basis.

It is possible for the producer price differential to be negative.

A negative producer price differential can result for two reasons. Any

one or more of the Class I, II, or III-A differential prices may be

negative and/or the minus adjustments may be large enough to offset any

positive contribution from the differential prices. A negative producer

price differential would be equivalent to a uniform price less than the

Class III price.

The Leprino panel testifying at the initial hearing session

suggested that payment for protein be based on true protein rather than

total Kjeldahl nitrogen because only true protein has real value to

processors.

Testing for true protein may have considerable merit. However, the

hearing record lacks sufficient discussion of the benefits of

specifying testing for true protein versus total protein. Approved

testing methods currently vary among states, and the orders at this

time should not mandate specific protein tests. If more and more states

begin to mandate specific types of protein testing, it may become

necessary to specify such testing in the orders.

4. Somatic Cell Adjustment

This decision continues to recommend a somatic cell count (SCC)

adjustment to protein prices paid to producers for all classes of milk.

The somatic cell adjustment recommended is derived from the reduction

in cheese yield as the somatic cell level goes from zero to 1,000,000,

converted to a value per pound of protein.

Adjusting protein prices paid to producers by SCC was proposed

during the initial hearing as part of a multiple component pricing

system and was included in the recommended decision. Three fluid milk

processors and a trade association for fluid milk processors filed

exceptions to the recommended decision. Although this specific issue

was outside the scope of the reopened hearing notice, two witnesses at

the reopened hearing session testified against inclusion of a somatic

cell adjustment in addition to filing exceptions to the recommended

decision and briefs after the reopened hearing.

Each of these four parties opposed the recommended application of

an SCC adjustment on milk used in Class I. Support for the SCC

adjustment on Class I milk was stated in MMPA's post-hearing brief.

Following is a summary of the initial hearing somatic cell testimony,

exceptions to the original recommended decision, reopened hearing

testimony, and briefs filed after the reopened hearing. Most of the

exceptions, reopened hearing testimony, and briefs reiterated what was

presented during the initial hearing and in post-hearing briefs. Unless

specified, the following evidence was given at the initial hearing.

The director of milk sales for Michigan Milk Producers Association

stated that the functional value of protein in the production of

manufactured dairy products and its role in providing wholesome flavor

and nutritional value in fluid milk products is affected by the SCC

level of the raw milk supply. Therefore, the witness asserted, elevated

SCC levels and raw bacteria counts diminish the functional value of all

milk. According to the witness, the damage is irreversible and cannot

be restored by a mechanical process at a dairy plant.

The MMPA witness testified that high SCC levels are accompanied by

an increase in the amount of undesirable enzymes in milk as well as an

increased susceptibility of the fat component to attack by these

enzymes. The witness explained that the undesirable enzymes attack the

fat in milk and release free fatty acids. The witness stressed that

even at very low concentrations, free fatty acids are responsible for

producing off-flavors in any dairy product that contains milkfat. The

MMPA witness noted that research has shown that the free fatty acid

content of raw milk with high SCCs is higher than that of raw milk with

low SCCs. The witness also pointed out that the enzymes are able to

survive normal pasteurization and continue the process of deterioration

of the flavor of finished fluid products, thus reducing shelf life.

Therefore, he testified, protein payments to producers should reflect

the influence of somatic cells on the quality of all milk.

The director of member services and quality control for MMPA

testified that mastitis, an inflammation of the mammary gland, is a

reaction to a cow's immune system fighting off invading bacteria. The

witness explained that white blood cells and epithelial cells known as

somatic cells are secreted during the process to destroy the invading

bacteria. The witness stated that the level of somatic cells indicates,

and is proportionate to, the infection level of a cow's udder.

Another witness testified for MMPA that somatic cells seem to have

an impact on milk quality through their ability to cause changes in the

enzymatic characteristics of milk. The witness explained that the

enzymes generated by somatic cells degrade the casein and change its

functional attributes. He pointed out that some changes include higher

losses in cheese yield, differences in flavor characteristics, and

changes in other functional characteristics that may weaken the

structure of curd in a curd formation when making a product. The

witness stated that high SCCs in milk cause an increased rate of rancid

off-flavors, which produce a flavor that would be noticeable to a

consumer. The witness explained that free fatty acids are one component

that determines the shelf life of a fluid product and correlates to

rancid off-flavors.

MMPA's witness went on to say that the enzyme which causes the

damage is always present in an inactive form in milk. The active form

of the enzyme, once it is produced in milk, is heat-stable and

therefore unaffected by pasteurization or ultra-high temperature

processing. The witness explained that most of the damage to protein

occurs while milk is in the udder of the cow. However, if milk is

cooled quickly and held at refrigeration temperature, further damage is

minimized. The witness explained that producers can reduce the average

somatic cell count of their milk through better management and proper

adjustment and maintenance of milking equipment.

The MMPA quality control employee stated that SCC standards were

adopted as a measure of milk quality and are included in the

Pasteurized Milk Ordinance (PMO) because of the recognition of their

public health significance in the milk supply. The witness explained

that the condition of mastitis and the subsequent increase of somatic

cell levels decrease the quality of milk by reducing the levels of

butterfat, lactose, total casein and total solids in milk and

increasing whey protein, chloride, and sodium levels.

The MMPA witness noted that SCCs have been included as a criterion

within quality premium programs throughout the United States, including

Michigan, for several years. The witness testified that all milk

marketing cooperatives in Michigan use the Optical Somatic Cell Count

(OSCC), an electronic method, for measuring levels of somatic cells.

According to the witness, the OSCC method is the most accurate method

available for testing somatic cells and is a method approved by the

Association of Official Analytical Chemists (AOAC). Another MMPA

witness stated that instruments are available and currently are being

used to test a large number of samples on a reliable basis for both

protein and somatic cell count.

The MMPA witness noted that the SCC standards under the PMO would

be lowered from 1,000,000 to 750,000 on July 1, 1993. The witness

pointed out that under the PMO, all Grade A producers are required to

be tested a minimum of four times in six months for somatic cells. He

explained that most producers whose milk is pooled under Federal Order

40 have been tested five times a month for the past several months,

with test results reported to the producers. The witness stated that

MMPA's average SCC for 1992 was 308,000, according to record data.

However, he stated, this average is based upon one SCC test per farm

per month. The witness explained that in comparing data collected for

the past six months, one test per month versus five tests per month,

the cooperative's average SCC could increase by as much as 50,000.

Another MMPA representative testified that the proposed neutral zone

had been reduced from the initial proposal to between 300,000 and

450,000 to better reflect current data with regard to average SCCs in

Order 40.

According to an MMPA witness, an adequate number of times per month

to test a herd for SCC would be the number of times currently used for

butterfat, four or five times. The witness stated that the functional

value of milk changes as soon as the SCC exceeds about 100,000. He

stated that one of his research studies, which was conducted under

ideal conditions, indicated that as SCCs change from zero to 1,300,000,

cheese yields decline an additional two to three percent. The witness

also stated that there is a maximum yield loss of about two percent

when SCCs change from 100,000 to 750,000.

MMPA supported the SCC adjustment on all milk in a brief filed

after the reopened hearing. The brief asserted that the recommended

decision recognizes the impact that SCC levels have on the functional

value of milk for both fluid and manufacturing processors. The brief

noted that the difference in the Class I differentials between the Ohio

and Indiana orders greatly exceed the four to six cents per

hundredweight identified as the potential effect on a Class I handler's

price resulting from the somatic cell adjustment.

The regional dairy director for National Farmers Organization (NFO)

testified in opposition to the inclusion of a somatic cell adjustment.

The witness stated that uniformity in the pricing provisions of Orders

40, 33, 36, and 49 is of overriding importance and urged the Secretary

to adopt the same MCP programs for all orders. The witness argued that

because of the degree of overlap in milksheds and sales between these

orders, differences in order provisions will cause confusion and

disorderly marketing conditions.

The NFO witness observed that SCC is only one of several factors in

NFO's and other quality programs. The witness stated that the

incorporation of an SCC adjustment would destroy the flexibility of

voluntary quality programs. The NFO witness stated that adoption of an

SCC adjustment would overstate the importance of SCC among other

factors used in determining milk quality and elevate SCCs to a

disproportionate role in determining the value of milk. He argued that

this disproportionate emphasis on SCCs is exacerbated by the inherent

vagaries of testing for SCCs.

The NFO representative stated that somatic cell count is one of the

more volatile variables in the measurement of milk quality and can vary

significantly within the same herd. The witness noted that a MMPA

witness testified at the multiple component pricing hearing for Orders

33, 36, and 49 that tests for SCC are much less precise than tests for

butterfat or protein. The NFO witness explained that the variations in

SCC tests within a herd during a month are much greater than for

butterfat or protein.

A Kraft witness stated at the initial hearing that Kraft supports

the inclusion of somatic cell adjustments in any component pricing

plan. The witness noted that testimony and evidence in previous

hearings, as well as in this hearing, reveal that there is a reduction

in cheese yield as somatic cell levels increase, thus lowering the

value of protein in milk.

During the initial hearing, the witness for Country Fresh, Inc.

(Country Fresh), a fluid milk and Class II processor in Order 40,

supported an SCC adjustment on all classes of milk, but recommended

that the size of the proposed adjustment be reduced substantially.

Under his recommended changes to the proposal, the witness stated that

based on the peak cheese prices during 1992, the maximum plus and minus

somatic cell adjustments would have been 15 cents a hundredweight. He

argued that combined, this would create a range of about 30 cents, as

the most the market can bear without creating a disincentive against

receiving high-quality milk.

The witness noted that effective July 1, 1993, the cap on the SCC

for Grade A milk will be 750,000. The witness and Country Fresh's brief

argued that the proposed neutral zone of 300,001 to 500,000 and MMPA's

modified proposed neutral zone of 300,001 to 450,000 are too high. The

witness testified that the average somatic cell count in the Southern

Michigan marketing area is approximately 340,000, according to the

market's largest cooperative. Therefore, the witness suggested that the

appropriate neutral zone be 300,000 to 399,999 and the highest bracket

700,000 and up.

The witness continued by stating that if the somatic cell program

is modified as suggested, Country Fresh could support its inclusion in

the Southern Michigan order. He testified that Country Fresh urges that

the somatic cell program be tried in a moderate rather than a radical

manner. Otherwise, the witness claimed, chaotic marketing conditions

could be created which would result in a new hearing being held in the

not-too-distant future to amend the order. Country Fresh's brief

further noted testimony of MMPA, Leprino, and NFO which asserted that

there are other factors involved in high quality milk besides SCC.

In an exception to the recommended decision, in testimony during

the reopened hearing, and in a post-hearing brief, Country Fresh

changed its position and expressed opposition to an SCC adjustment to

milk used in Class I. During the reopened hearing and in a post-hearing

brief, Country Fresh proposed to modify the recommended Southern

Michigan somatic cell adjustment to be similar to the SCC adjustment on

Class II, III, and producer milk adopted in the Ohio Valley, Eastern

Ohio-Western Pennsylvania, and Indiana marketing orders. Country

Fresh's brief filed after the reopened hearing stated that the handler

currently does not adjust for SCC on the milk it purchases.

The Country Fresh witness testified that uniformity of pricing

provisions across Federal orders is important because a substantial

overlap in Class I sales and raw milk procurement exists between

Indiana, Ohio, and Michigan. The witness stated that the SCC adjustment

on Class I milk in the recommended decision does not apply in either

the Indiana or the Ohio Valley Federal orders.

Country Fresh's brief asserted that implementing an SCC adjustment

on Class I milk in Southern Michigan but not the surrounding areas

would change the Class I price relationship between these orders. The

brief stated that disruptive and inequitable marketing conditions would

result for handlers regulated under the Southern Michigan order

relative to handlers regulated under orders in which no SCC adjustment

is made. The brief contended that evidence presented at either the

initial or reopened hearing did not justify an increase in the cost of

Class I milk in Southern Michigan relative to neighboring orders.

The Country Fresh witness estimated that on a total milk supply

basis, the SCC adjustment for each Class I handler could potentially

affect the Class I price from four to six cents per hundredweight. The

witness stated that the impact of SCC has not been this great in the

Indiana Federal order, where the adjustment is not based on the total

milk supply as was recommended in Southern Michigan.

Country Fresh's exception and brief agreed that lower SCC levels

have some value to fluid milk processors. However, both the exception

and brief argued that no difference exists whether milk is processed in

Michigan or in Indiana; thus no distinction should be made between

these markets based on SCC pricing. In addition, the witness stated

that it is not possible to relate somatic cell levels to a value on

Class I milk or to the specific value adjustments recommended in the

decision.

Witnesses for, and briefs and exceptions filed by, the Kroger

Company (Kroger), Dean Foods Company (Dean), and the Milk Industry

Foundation (MIF) opposed the inclusion of somatic cell counts as part

of the pricing structure as it would relate to Class I fluid handlers.

Kroger operates a pool distributing plant regulated under Order 40.

Dean has been marketing milk in the Southern Michigan market for over

30 years and operates a bottling plant known as Liberty Dairy in Evert,

Michigan. MIF is a national trade association with 215 member companies

located in all 50 states that process nearly 80 percent of all fluid

milk products nationwide.

The division manager of milk procurement for Kroger argued that

there is no economic justification to include a somatic cell adjustment

on Class I sales or any Class II and III products such as raw fluid

milk inventory, half and half, eggnog, Class III shrinkage, and sales

of surplus cream. According to the witness, the price or product yields

of these items are not influenced by the amount of protein in the raw

milk used in their manufacture. Additionally, the witness argued,

adoption of the MMPA proposal would make it impossible for processors

to recover the cost of these products and would create inequitable and

uncompetitive Class II and Class III market conditions for Order 40

processors compared to their competitors regulated under other orders.

The Kroger representative continued by stating that Kroger is not

opposed to a proposal which introduces multiple component pricing with

protein pricing and a somatic cell adjustment for milk processed in

Class II and III used-to-produce products. The witness stated that if

the MMPA proposal is modified accordingly the MCP plan combined with a

somatic cell count adjustment would have a potential benefit to

producers and processors. Kroger's opposition to an SCC adjustment on

Class I milk was reiterated in an exception to the recommended

decision.

The Kroger witness and MIF's brief argued that adoption of an SCC

adjustment on milk used in Class I would result in disruptive and

inequitable marketing conditions for Order 40 handlers versus their

competitors in other markets where the provision does not exist. The

Kroger witness and MIF noted that a somatic cell count adjustment would

eliminate the advance knowledge fluid milk processors currently have of

the Class I price and force handlers to estimate the value of somatic

cells for the current month's price. The Kroger representative claimed

that the proposal would influence the value of Class I milk based on

the SCC level in raw milk.

MIF expressed concern that milk processors would incur increased

costs from milk with low SCCs that they would be unable to recover from

product sales because consumers are unable to differentiate between low

and high SCC milk. MIF's exception also contended that increased costs

from both procuring low SCC milk and more frequent product testing

would lead to higher retail prices for milk and a decrease in fluid

milk sales. Exceptions to the recommended decision, testimony during

the reopened hearing, and post-hearing briefs filed by MIF reiterated

these arguments opposing an SCC adjustment on Class I milk.

According to MIF's brief, there is no quantifiable scientific

evidence that the level of somatic cells results in any appreciable

difference in the attributes of fluid milk, particularly attributes

which would be discernible by consumers. MIF described the testimony of

MMPA as failing to make an absolute statement regarding quantifiable

economic benefits to fluid milk use resulting from lower somatic cell

counts. MIF stressed that there is no need to pay a premium for reduced

SCCs when the permissible count is being reduced by regulations. In

briefs, MIF and NFO questioned whether it is appropriate for the

Federal order system to adopt a policy and administer practices which

allocate economic advantages and disadvantages among certain segments

of the dairy industry.

The witness for Dean Foods stated that there is no scientific

evidence which shows that handlers or consumers benefit from lower

somatic cell counts and that the inclusion of SCC adjustments in the

pricing structure of producer milk within the Federal order system

would ultimately be borne by the consumer. However, the witness stated,

Dean supports the inclusion of SCC premiums in Class II or Class III

producer milk where there is evidence of improved yields due to reduced

levels of somatic cells.

Dean Foods' exception reiterated arguments made by Country Fresh

and MIF. Additionally, Dean's exception noted that a six cent per

hundredweight adjustment in the Class I price would equal 0.005 cents

per gallon and would amount to additional costs between $180,000 and

$200,000 per year for the Liberty Dairy bottling plant. The exception

stated that the plant, at which 85 to 90 percent of receipts are used

in Class I, currently has a premium program which includes an SCC

adjustment as one of the factors in pricing milk. Dean noted, however,

that SCC alone is not considered to be a quality enhancer for Class I

products.

The Leprino panel that testified in the original hearing stated

that Leprino supports the inclusion of SCC adjustments to value protein

properly as long as other basic milk quality criteria are achieved,

notably low psychrotrophic bacteria count and low raw bacteria count.

Additionally, the panel also testified that Leprino opposes quality

adjustments for Class I milk unless it can be clearly demonstrated that

there is a discernable benefit to the Class I handler. The panel

recommended that yield factors used to value somatic cell counts should

be conservative, given the conflicting scientific evidence, and should

be uniform across Federal orders.

According to testimony at the original hearing by the Leprino

production manager, Leprino participates in milk quality programs based

on several parameters, providing incentives for producers with high-

quality milk and disincentives for inferior-quality milk. The witness

noted that in the MCP hearing for Orders 33, 36, and 49, three studies

were introduced into evidence and referenced in the recommended

decision to justify adjusting the protein payment by SCCs. However, the

witness argued that each study shows different yield impacts at

different SCC levels in raw milk. The witness also noted a study which

indicates that SCCs may affect yields, but day-to-day changes in milk

composition obscure the effect. The witness pointed out that a study by

one of the MMPA witnesses states that payment for milk quality should

not rest solely on somatic cell counts.

The Leprino witness testified that scientific evidence indicates

that the greatest yield benefits are at a level of 100,000 to 200,000

and greatest yield losses are above 500,000. The witness noted that the

SCC limit under the PMO soon will be adjusted to 750,000. He stated

that Leprino's proposal offers an adjustment of plus 20 cents to minus

20 cents for legal Grade A milk and includes a prerequisite of other

milk quality conditions that can affect cheese yield. The witness

recommended that USDA use a conservative approach given the

Department's limited experience with mandated milk quality criteria for

payment purposes. The witness urged that the adjustments be uniform

between all Federal orders to ensure orderly marketing.

The Leprino quality assurance director testified that the two

methods for testing for the level of SCC are direct microscopic cell

count (DMSCC) and optical somatic cell count (OSCC). She stated that

the DMSCC is a tedious method which takes extensive training and

precision to perform and is used to calibrate electronic methods. She

estimated that equipment for performing SCC tests by the DMSCC method

costs about $4,000. According to the witness, the OSCC methods are

easily performed, generally more precise, and are less labor intensive

than the DMSCC. The witness stated that the unit cost for equipment is

between $40,000 and $100,000 and, when combined with infra-red

component testing systems, could range from $150,000 to $200,000.

The Leprino quality witness expressed opposition to the proposed

order amendment which would allow no adjustment to a producer's protein

price if an average SCC was not available for the month. The witness

claimed that processors would not be able to reduce payments on high

SCC milk if testing is not mandated. Therefore, the witness urged that

testing be conducted no less than five times per month with at least

one test per week. Furthermore, the witness recommended that if no

tests are available, the handler should assume the milk falls in the

highest adjustment category of 750,000 SCC per milliliter.

The quality witness for Leprino testified that in addition to SCC,

raw bacterial count (SPC) and psychrotrophic bacteria also have a

direct influence on milk quality and hence its value to a processor.

The witness stated that SPC gives an indication of sanitary practices

around milking, and transferring and the storage of milk. The witness

claimed that SPC has been recognized and widely used as a basis for

valuing milk. She added that psychrotrophic bacteria are those bacteria

capable of appreciable growth under commercial refrigeration,

regardless of the optimal growth temperature of the organisms.

According to the witness, such bacteria degrade protein and fats,

causing off-flavors, odors, slime formation, and reduction in cheese

yields.

Leprino's exception to the recommended decision stated that the

adoption of one quality attribute (SCC) as a requirement for milk

payment purposes without consideration of the other raw milk quality

attributes opposes all the market practices currently operating in the

Southern Michigan order. The exception urged that if milk quality is to

be regulated under the order, the adopted model should be similar to

those currently used by almost all of the handlers. The exception

asserted that this program would include multiple minimum raw milk

quality attributes such as raw bacteria counts and psychrotrophic

bacteria counts.

In a brief filed after the reopened hearing, NCI contended that a

specific schedule of SCC adjustments, such as was included in the

recommended decision, should not be included as part of the order. The

brief suggested that the order provisions should include authority for

handlers to submit individual plans for market administrator approval

to pay premiums or make deductions based on SCC as long as the total

payment to all producers reflects the monthly minimum pay price under

the order. The brief contended that this system would permit individual

handlers the option to use adjustments that reflect the effect of low

or high SCC milk on manufactured product production without requiring a

rigid schedule of order-specified adjustments in milk costs based on

various levels of SCC.

A somatic cell count adjustment should be adopted because it

reflects the value of the level of somatic cells contained in milk. The

adjustment will be on protein prices received by producers for all

producer milk. There was significant testimony during the initial

hearing that elevated levels of somatic cells diminish the functional

value of milk in all uses. A reduction in the yield of cheese and other

curd-based manufactured products, an increased rate of off-flavors, and

a reduction in the shelf-life of fluid products all result from

elevated levels of somatic cells.

The proponents' proposed neutral zone of 300,000 to 450,000 has

been reduced to between 301,000 and 400,000 to better reflect the

market's average somatic cell count and to correspond more closely with

the multiple component pricing plan adopted for Orders 33, 36 and 49.

Although increments of 100,000 were proposed, this decision breaks down

somatic cell adjustments into increments of 50,000. Increments of

50,000 assure producers that if slight testing inaccuracies (which may

be greater in the case of somatic cells than for butterfat or protein)

cause their protein price to be adjusted to the next level, that

adjustment will not represent the entire value of a 100,000 increment

of SCC.

In addition, because of the reduction in the maximum permissible

SCC, 750,000 and over will become the maximum increment for which

protein prices will be adjusted for somatic cell content. It is

possible that some Grade A producers may have an average SCC of 750,000

or more for a month without losing Grade A status because of

differences between the market administrators and health departments in

the number of leucocyte (somatic cell) tests taken in a given period of

time. In cases where a handler has not determined a monthly average SCC

for a producer, it will be determined by the market administrator.

Because the value of milk has been shown to be affected by the

level of somatic cells, appropriate adjustments must be determined to

apply to the various levels of somatic cells. These adjustments will be

used to adjust the protein prices paid to individual producers. The

somatic cell adjustment to producer protein prices will be computed by

multiplying the appropriate constant for increment of somatic cell

count by the monthly average 40-pound block cheese price at the

National Cheese Exchange as published monthly by the Dairy Division.

The resulting somatic cell adjustment will be added to or subtracted

from the protein price paid to producers.

The somatic cell adjustment to be used in determining protein

prices paid to producers is derived from the reduction in cheese yield

as the somatic cell level goes from zero to 1,000,000, converted to a

value per pound of protein. The evidence contained in the hearing

record shows that there is a one percent reduction in cheese yields as

somatic cells increase to 100,000, and cheese yields decline an

additional two to three percent as somatic cells increase from 100,000

to 1,000,000. There is also a maximum yield loss of about two percent

as SCCs increase from 100,000 to 750,000. This decision reflects the

proportional change in cheese yields as the SCC level changes.

The constant to be used for calculating somatic cell adjustments

was computed by dividing the change in cheese yields attributable to

changes in somatic cell counts by a representative protein test of

producer milk (3.2 percent). As proposed, the adjustment to the

producer protein price for somatic cell content would be computed by

dividing the product of the cheese price and a factor that varies with

the somatic cell level by the representative protein percent used in

calculating the handler protein price.

MMPA's proposed factors varied from .20 for a somatic cell count

below 100,001 to -.20 for a somatic cell count above 750,000. Leprino's

proposed factors varied from .20 to -.25, and Country Fresh proposed

factors varied from .128 to -.128. This decision includes factors that

vary from .25 to -.25 and are based on the reduction in cheese yield

associated with varying somatic cell counts. Although .20 was the

maximum positive factor proposed, .25 should not overcompensate

producers for producing the highest quality milk.

The factors adopted in this decision are similar to the ones

proposed, with the largest difference occurring at SCC levels below

151,000 and above 500,000. Record testimony reveals that milk

containing between 100,000 and 200,000 SCC yields the greatest benefits

and milk containing more than 500,000 SCC yields the greatest losses in

cheese production. Evidence also reveals that SCC per milliliter of

milk typically ranges between 200,000 and 400,000. Therefore, it is

logical to assume that the majority of Order 40 producers' SCCs will

fall within the 200,000 to 400,000 range.

As shown in Table 1, the factors to be used in adjusting handler

and producer protein prices for somatic cell content do not reflect a

linear relationship between cheese yields and somatic cells because the

relationship between these factors is not linear. Dividing these

factors by a standard protein content of 3.2 yields the constants shown

in Table 1 to be used for computing the somatic cell adjustment. Use of

a constant substantially simplifies the computation of the somatic cell

adjustment without changing the corresponding value. This result occurs

because the protein percentage must change by a considerable amount

before the adjustment will change. Therefore, the somatic cell

adjustment will be calculated by multiplying the constant corresponding

to each somatic cell count interval by the average price of 40-pound

block cheese at the National Cheese Exchange as reported monthly by the

Dairy Division.

Table 1.--Factors and Constants To Be Used in Computing the Somatic Cell

Adjustment

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

Constants for

computing the

Somatic cell counts Factors somatic cell

adjustment

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

1 to 50,000................................ .250 .078125

51,000 to 100,000.......................... .200 .062500

101,000 to 150,000......................... .150 .046875

151,000 to 200,000......................... .100 .031250

201,000 to 250,000......................... .050 .015625

251,000 to 300,000......................... .025 .0078125

301,000 to 350,000......................... .000 .0000000

351,000 to 400,000......................... .000 .0000000

401,000 to 450,000......................... -.025 -.0078125

451,000 to 500,000......................... -.050 -.015625

501,000 to 550,000......................... -.075 -.0234375

551,000 to 600,000......................... -.100 -.031250

601,000 to 650,000......................... -.125 -.0390625

651,000 to 700,000......................... -.150 -.046875

701,000 to 750,000......................... -.200 -.062500

751,000 to above........................... -.250 -.078125

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

Several hearing participants indicated that there is a great deal

of overlap in milk procurement and Class I sales between Order 40 and

Orders 33, 36, and 49 and stressed the importance of uniformity between

the orders. This decision differs from the MCP plan adopted for Orders

33, 36, and 49 because it recommends a somatic cell adjustment on all

producer milk, as proposed. There is no reason to believe that the

resulting difference between the orders will have an adverse effect by

allowing Order 40 handlers a competitive advantage over Orders 33, 36,

and 49, or vice versa.

Although there is considerable overlap in the production areas of

these four markets, significant differences currently exist in the

prices paid to producers located in the same production areas but

pooled under different orders. It is not likely that the considerably

smaller differences in somatic cell adjustments to producer protein

prices will cause marketing disorders in milk procurement arrangements

between the four marketing areas.

Regarding assertions that somatic cell adjustments would increase

Class I handlers' cost of milk significantly, it is unlikely that any

handler's total milk receipts would vary greatly from the market's

average SCC. Even handlers with a somatic cell average in the 201,000-

250,000 range will pay an SCC adjustment of no more than about 6 cents

per hundredweight, which would still result in a lower Class I price

than is effective in any of the other three marketing areas. It is also

probable that application of somatic cell adjustments to milk used in

Classes II and III, but not in Class I, would result in Class I

handlers receiving lower-quality milk from suppliers without the

payment of additional premium.

The effect of somatic cell adjustments on the advance nature of

Class I prices should be expected to be minimal. The somatic cell

adjustments are a very small portion of the cheese price and any

changes from month to month would be correspondingly small in relation

to changes in the cheese price. In addition, the biggest factor in

Class I price movements is the amount of change in the M-W price, which

can be expected, on average, to represent ten times the change in the

cheese price.

The argument that somatic cell counts have wider fluctuations than

butterfat or protein tests is apparently valid. However, the hearing

record does not contain evidence that any problems resulting from

variability in testing outweighs the benefits of including SCC

adjustments in the MCP plan. As specified in the Agricultural Marketing

Agreement Act of 1937, one of the functions of the market administrator

is ``Providing * * * for the verification of weights, sampling and

testing of milk purchased from producers.'' 7 U.S.C. 608c(5)(E).

Because the market administrator will now be verifying the sampling and

testing of milk for somatic cells, the variation in somatic cell levels

due to testing should be minimized much as the differences in butterfat

tests due to testing variations were minimized when the Federal milk

order program was first instituted.

The Agricultural Marketing Agreement Act in 7 U.S.C. Sec. 608c(5)

authorizes the Secretary to adjust minimum prices paid to producers

based upon the quality of the milk purchased. Therefore, the argument

that somatic cells cannot be used as a criterion for adjusting a

producer's pay price is invalid. Furthermore, the hearing record shows

that the level and presence of somatic cells directly affect the

quality and grade of milk in that SCCs above a certain level result in

the loss of a producer's Grade A permit.

Record evidence indicates that SCC is only one of the factors that

affect milk quality. However, there is not enough substantial evidence

to include other factors, such as psychrotrophic and raw bacteria

count, as criteria used to determine milk quality for payment purposes.

Testimony indicates that there may be merit in including other quality

factors besides SCC in Federal milk order pricing, but further study of

the role of such other factors in affecting the value of milk is

needed. In any case, the inclusion of other quality factors in this

proceeding goes beyond the scope of the hearing notice.

Because the NCI proposal for individual handler SCC plans was not

included in the notice for either the initial or the reopened hearing,

thus precluding an opportunity for cross-examination, it cannot be

considered as an alternative to the proposed or recommended SCC

adjustment schedule. It should be noted that adjusting the minimum

producer milk price for SCC does not preclude other premiums paid by

the handler.

5. Administrative Assessment

The maximum allowable rate of assessment to be paid by handlers to

cover the cost of administering the Southern Michigan order should be

increased to 4 cents per hundredweight. The assessment would continue

to be applied to the same milk to which the present assessment applies.

The Act specifies that persons who are regulated shall pay the cost of

operating the program through an assessment on the milk handled by

regulated persons who are defined as handlers under the order. The

present 2-cent per hundredweight maximum allowable rate of assessment

has been provided for the administration of Order 40 since the order

became effective on December 1, 1960.

The 2-cent increase in the maximum allowable rate was proposed by

MMPA. During the initial hearing, a witness for the cooperative

association testified that the present ceiling on the deduction rate

for administrative services does not adequately compensate the market

administrator for all services rendered. In a post-hearing brief, MMPA

stated that the market administrator should have the authority to

collect revenue necessary to perform the duties required by

regulations. There was no other testimony on this proposal at the

hearing. NFO's brief expressed support for MMPA's proposal.

The Ohio Valley, Eastern Ohio-Western Pennsylvania, Southern

Michigan and Michigan Upper Peninsula orders (Orders 33, 36, 40 and 44)

are administered under the supervision of a single market

administrator, headquartered in Cleveland, Ohio. Prior to 1992, Federal

Orders 33 and 36 were administered by another market administrator.

The Balance Sheets and Income and Expense Statements for the

Administrative Fund are compiled by the market administrator and

reported annually to regulated handlers as well as to other interested

parties. Record data for the years 1990 and 1991 show that the

administrative expenses associated with the operation of Orders 40 and

44 exceeded the income the market administrator received from

assessments by $80,000. However, when the four markets were

consolidated in 1992, income exceeded expenses by $400,000. The change

indicates that Orders 33 and 36 are bearing some of the financial

responsibilities of Orders 40 and 44.

The witness for MMPA stated that the current rates of assessment

for Federal Orders 33 and 36 are higher than for Orders 40 and 44.

Furthermore, the witness noted, the recent recommended decision for

Orders 33 and 36 sets the maximum allowable deduction rate for

administrative services at 4 cents per hundredweight.

Handlers and producers serving the market have jointly asked that a

new multiple component pricing program be provided to adjust the value

of milk used by regulated handlers and payments to producers. The

implementation and administration of that pricing plan for Order 40 may

require the purchase of some new laboratory equipment and the

performance of additional administrative duties. Many of the testing

expenses associated with the multiple component pricing plan would be

paid for with money from the marketing service fund. However, because

the value of milk used by handlers in Classes I, II and III would be

established on the basis of the milk's butterfat, protein, fluid

carrier, and somatic cell content, some of the expenses related to

establishing the level of these factors in producer milk likely would

be paid for with money from the administrative fund. Thus, there is no

reason to expect the expenses of administering the order to decline.

Providing a higher maximum rate of assessment in the order does not

mean that the higher rate will apply automatically when the amended

order becomes effective. The amendment gives the market administrator

the discretionary authority to set the rate at any level up to the

maximum specified in the order. When the amended order becomes

effective, the market administrator may decide that no change in the

effective assessment rate is necessary or that some increase to a level

less than the maximum allowed is warranted. Further, an increase in the

maximum rate will assure that Order 40 will bear, with Orders 33 and

36, an equitable share of the cost of operating the market

administrator's office.

6. Marketing Service Assessment

The maximum rate of deduction from payments to nonmember producers

for the cost of providing marketing services such as butterfat,

protein, somatic cell testing, and market information for nonmember

producers should be increased to 7 cents per hundredweight under the

Southern Michigan order. The increase is needed to assure sufficient

revenue to cover the expenses incurred by the market administrator in

providing such services to producers who are not members of a qualified

cooperative association. Currently, the maximum allowable deduction for

such services is 5 cents per hundredweight. Like the administrative

assessment, this maximum rate has been effective since December 1,

1960.

During the initial hearing, Michigan Milk Producers Association

proposed that the maximum allowable assessment rate for marketing

services be increased to 7 cents per hundredweight. The MMPA

representative testified that the market administrator provides

services which involve verification of weights, samples and tests of

milk received from producers, as well as providing market information

to producers who are not members of a cooperative association. The

witness and MMPA's post-hearing brief stated that in order for the

market administrator to adequately perform the duties required by the

order, he must be allowed to have the authority to collect the revenue

necessary to provide those services. A post-hearing brief filed on

behalf of NFO supported MMPA's proposal. There was no opposition to the

proposal.

The Ohio Valley, Eastern Ohio-Western Pennsylvania, Southern

Michigan and Michigan Upper Peninsula orders (Orders 33, 36, 40 and 44)

are administered under the supervision of a single market

administrator, headquartered in Cleveland, Ohio. Prior to 1992, Federal

Orders 33 and 36 were administered by another market administrator.

The Balance Sheets and Income and Expense Statements for the

Marketing Service Fund are compiled by the market administrator and

reported annually to nonmember producers as well as to other interested

parties. Record data for the years 1990 and 1991 show that the expenses

incurred by the market administrator in providing marketing services

exceeded income by about $54,000. In 1992, when the statements for the

four markets were combined, expenses exceeded income by approximately

$116,000.

It is evident from the foregoing that the 5-cent deduction from

producer payments for marketing services in the Southern Michigan order

has been inadequate to cover the costs incurred in the performance of

such duties by the market administrator. It also shows that the

financial situation worsened when the statements were combined in 1992.

The increase will align the maximum marketing service assessment rate

of Order 40 with that recently adopted for Orders 33 and 36. In

addition, the multiple component pricing plan recommended in this

decision will require additional testing activities. Because not all

handlers are equipped to make all of the determinations that will be

required under the amended order, many of these duties will have to be

performed by the market administrator responsible for administering the

order.

The 7-cent maximum rate of deduction for marketing services

proposed by MMPA should be provided in Order 40. The higher rate should

give the market administrator the necessary flexibility to conduct

effective marketing service programs, including any additional duties

relating to the implementation and administration of the new pricing

program that will be incorporated in the order.

Provision of a 7-cent maximum rate does not mean that the 7-cent

rate will become effective automatically. Maximum rather than fixed

rates of deduction are specified in the orders because the relationship

between income and expenses for the fund is subject to many variables.

Changes in the pounds of nonmember milk marketed and the rate assessed

on these marketings increase or decrease the income of the marketing

service fund, while changes in order requirements and the expenses of

providing marketing services result in changes in total outlays.

An increase in the maximum allowable assessment will give the

market administrator the discretionary authority to set the rates of

deduction for marketing services at levels necessary to cover the

expense of providing marketing services. The market administrator may

use his discretionary authority to determine if rates below the upper

limits adopted in the amended order will provide sufficient funding to

conduct an adequate program for nonmember producers.

9. Conforming Changes

To accommodate multiple component pricing, a number of changes need

to be made in the current order provisions of the Southern Michigan

order. To compute a handler's obligation and the producer price

differential, several prices need to be defined. The Class I

differential price should be defined as the difference between the

current month's Class I price and the current month's Class III price.

The Class II differential price should be defined as the difference

between the current month's Class II price and the current month's

Class III price. These differential values should not be confused with

the fixed value that is added to the Minnesota-Wisconsin price for the

second preceding month to arrive at the Class I price for the current

month or the computed value that is used in the computation of the

Class II price. It should also be pointed out that these differential

prices may be negative, which currently happens when the Minnesota-

Wisconsin price is greater than the Class I or Class II price. The skim

milk price will be calculated by subtracting from the Class III price

the value determined by multiplying the butterfat differential by 35.

The skim milk price will be expressed on a per hundredweight basis.

Because producer location adjustments are not changed in this

decision, the application of such adjustments to the producer price

differential remains unchanged.

To enable the market administrator to compute the producer price

differentials, handlers will need to supply additional information on

their monthly reports of receipts and utilization. In addition to the

product pounds and butterfat currently reported, handlers will be

required to report pounds of protein. This information will be required

from each handler for all producer receipts, including milk diverted by

the handler, receipts from cooperatives as 9(c) handlers, and receipts

of bulk milk received by transfer or diversion.

Somatic cell adjustments to protein prices will be made when

handlers pay producers for their milk. Somatic cell counts, therefore,

must be reported with other producer payroll information. As in the

case of payments to producers for butterfat, somatic cell adjustments

do not have to be included in pool obligations or credits for payments

to producers. The handlers receiving producer milk will pay for the

protein in the milk based on its somatic cell count because they are

the parties directly affected by the quality of milk they receive.

The amendments to order language accompanying this revised

recommended decision are based on the current language of the Southern

Michigan order. There are two national amendatory proceedings in

process (the M-W replacement and Class II pricing) that may result in

changes to some of the provisions that will also be changed by this

proceeding. No attempt has been made in drafting the order language

amendments accompanying this decision to accommodate any of the changes

that may result from the other two proceedings. Any adjustments needed

will be made on the basis of the order language in effect at the time a

final decision is issued.

Rulings on Proposed Findings and Conclusions

Briefs and proposed findings and conclusions were filed on behalf

of certain interested parties. These briefs, proposed findings and

conclusions, and the evidence in the record were considered in making

the findings and conclusions set forth above. To the extent that the

suggested findings and conclusions filed by interested parties are

inconsistent with the findings and conclusions set forth herein, the

requests to make such findings or reach such conclusions are denied for

the reasons previously stated in this decision.

General Findings

The findings and determinations hereinafter set forth supplement

those that were made when the Southern Michigan order was first issued

and when it was amended. The previous findings and determinations are

hereby ratified and confirmed, except where they may conflict with

those set forth herein.

(a) The tentative marketing agreement and the order, as hereby

proposed to be amended, and all of the terms and conditions thereof,

will tend to effectuate the declared policy of the Act;

(b) The parity prices of milk as determined pursuant to section 2

of the Act are not reasonable in view of the price of feeds, available

supplies of feeds, and other economic conditions which affect market

supply and demand for milk in the marketing area, and the minimum

prices specified in the tentative marketing agreement and the order, as

hereby proposed to be amended, are such prices as will reflect the

aforesaid factors, insure a sufficient quantity of pure and wholesome

milk, and be in the public interest;

(c) The tentative marketing agreement and the order, as hereby

proposed to be amended, will regulate the handling of milk in the same

manner as, and will be applicable only to persons in the respective

classes of industrial and commercial activity specified in, a marketing

agreement upon which a hearing has been held; and

(d) It is hereby found that the necessary expense of the market

administrator for the maintenance and functioning of such agency will

require the payment by each handler, as his pro rata share of such

expense, 4 cents per hundredweight or such lesser amount as the

Secretary may prescribe, with respect to milk specified in Sec. 1040.85

of the aforesaid tentative marketing agreement and the order as

proposed to be amended.

Recommended Marketing Agreement and Order Amending the Order

The recommended marketing agreement is not included in this

decision because the regulatory provisions thereof would be the same as

those contained in the order, as hereby proposed to be amended. The

following order amending the order, as amended, regulating the handling

of milk in the Southern Michigan marketing area is recommended as the

detailed and appropriate means by which the foregoing conclusions may

be carried out.

List of Subjects in 7 CFR Part 1040

Milk marketing orders.

For the reasons set forth in the preamble, the following provisions

in Title 7, Part 1040, are proposed to be amended as follows:

PART 1040--MILK IN THE SOUTHERN MICHIGAN MARKETING AREA

1. The authority citation for 7 CFR Part 1040 continues to read as

follows:

Authority: Secs. 1-19, 48 Stat. 31, as amended; 7 U.S.C. 601-

674.

2. Section 1040.7 is amended by adding paragraphs (b)(5)(iii) and

(b)(6)(iii) to read as follows:

Sec. 1040.7 Pool Plant.

* * * * *

(b) * * *

(5) * * *

(iii) A partially regulated distributing plant that is neither an

other order plant, producer-handler plant, nor an exempt plant and from

which there is route disposition in consumer-type packages or dispenser

units in the marketing area during the month.

(6) * * *

(iii) The shipping percentages determined pursuant to paragraph

(b)(6)(ii) of this section may be increased or decreased by the market

administrator if the market administrator finds that such revision is

necessary to encourage needed shipments or to prevent uneconomic

shipments. Before making such a finding, the market administrator shall

investigate the need for revision either on the market administrator's

own initiative or at the request of interested parties. If the

investigation shows that a revision of the shipping requirements might

be appropriate, the market administrator shall issue a notice stating

that the revision is being considered and invite data, views, and

arguments. Any request for revision of shipping percentages shall be

filed with the market administrator no later than the 15th day of the

month prior to the month for which the requested revision is desired to

be effective.

* * * * *

3. Section 1040.30 is amended by revising paragraphs (a)

introductory text, (a)(1), (a)(2) and (a)(3), and paragraph (c), and

removing paragraph (d), to read as follows:

Sec. 1040.30 Reports of receipts and utilization.

* * * * *

(a) Each handler described in Sec. 1040.9 (a), (b), and (c) shall

report for each of its operations the following information:

(1) Product pounds, pounds of butterfat, and pounds of protein

contained in:

(i) Receipts of producer milk, including producer milk diverted by

the handler;

(ii) Receipts of milk from handlers described in Sec. 1040.9(c);

and

(iii) Receipts by transfer or diversion of bulk fluid milk

products.

(2) Product pounds and pounds of butterfat contained in:

(i) Receipts of fluid milk products not included in (a)(1) above

and bulk fluid cream products from any source;

(ii) Receipts of other source milk;

(iii) Inventories at the beginning and end of the month of fluid

milk products and products specified in Sec. 1040.40(b)(1); and

(3) The utilization or disposition of all milk, filled milk, and

milk products required to be reported pursuant to this paragraph.

* * * * *

(c) Each handler not specified in paragraphs (a) and (b) of this

section shall report with respect to its receipts and utilization of

milk, filled milk, and milk products in such manner as the market

administrator may prescribe.

4. Section 1040.31 is amended by revising paragraph (a) to read as

follows:

Sec. 1040.31 Payroll reports.

(a) On or before the 20th day after the end of each month, each

handler described in Sec. 1040.9 (a), (b), and (c) shall report to the

market administrator its producer payroll for such month, in the detail

prescribed by the market administrator, showing for each producer:

(1) The producer's name and address;

(2) The total pounds of milk received from such producer, with its

protein and butterfat percentage;

(3) The total pounds of butterfat contained in the producer's milk;

(4) The total pounds of protein contained in the producer's milk;

(5) The somatic cell count of the producer's milk;

(6) The amount, or the rate per hundredweight, or rate per pound of

component, the somatic cell adjustment to the protein price, the gross

amount due, the amount and nature of any deductions, and the net amount

paid.

* * * * *

5. Section 1040.41 is amended by revising the second sentence of

paragraph (c) to read as follows:

Sec. 1040.41 Shrinkage.

* * * * *

(c) * * *If the operator of the plant to which the milk is

delivered purchases such milk on the basis of weights determined by

farm bulk tank calibration, with protein and butterfat tests and

somatic cell counts determined from farm bulk tank samples, the

applicable percentage for the cooperative association shall be zero.

6. Section 1040.50 is amended by revising the section heading,

introductory text and paragraph (a), and adding paragraphs (e) through

(j), to read as follows:

Sec. 1040.50 Class and component prices.

Subject to the provisions of Sec. 1040.52, the class prices per

hundredweight of milk containing 3.5 percent butterfat and the

component prices for the month shall be as follows:

(a) Class I price. The Class I price shall be the basic formula

price for the second preceding month plus $1.75.

* * * * *

(e) Class I differential price. The Class I differential price

shall be the difference between the current month's Class I and Class

III price (this price may be negative).

(f) Class II differential price. The Class II differential price

shall be the difference between the current month's Class II and Class

III price (this price may be negative).

(g) Skim milk price. The skim milk price per hundredweight, rounded

to the nearest cent, shall be the Class III price less an amount

computed by multiplying the butterfat differential by 35.

(h) Butterfat price. The butterfat price per pound, rounded to the

nearest one-hundredth cent, shall be the Class III price plus an amount

computed by multiplying the butterfat differential by 965 and dividing

the resulting amount by one hundred.

(i) Protein price. The protein price per pound, rounded to the

nearest one-hundredth cent, shall be 1.32 times the average monthly

price per pound for 40-pound block Cheddar cheese on the National

Cheese Exchange as reported by the Department.

(j) Fluid carrier price. The fluid carrier price per hundredweight,

rounded to the nearest whole cent, shall be the Class III price, less

the sum of the butterfat price times 3.5 and the protein price times

the average protein test of the basic formula price as reported by the

Department for the month (this price may be negative).

7. Section 1040.53 is revised to read as follows:

Sec. 1040.53 Announcement of class and component prices.

(a) On or before the 5th day of the month, the market administrator

shall announce the following prices and any other price information

deemed appropriate:

(1) The Class I price for the following month;

(2) The Class III price for the preceding month;

(3) The Class III-A price for the preceding month;

(4) The skim milk price for the preceding month;

(5) The butterfat price for the preceding month;

(6) The protein price for the preceding month;

(7) The fluid carrier price for the preceding month;

(8) The butterfat differential for the preceding month.

(b) On or before the 15th day of the month, the market

administrator shall announce the Class II price for the following month

computed pursuant to Sec. 1040.50(b).

8. The section heading in Sec. 1040.60 and the undesignated center

heading preceding it, the introductory text, and paragraphs (a) and (f)

are revised to read as follows:

Producer Price Differential

Sec. 1040.60 Handler's value of milk.

For the purpose of computing a handler's obligation for producer

milk, the market administrator shall determine for each month the value

of milk of each handler with respect to each of his pool plants and of

each handler described in Sec. 1040.9 (b) and (c), as follows:

(a) Calculate the following values:

(1) Multiply the total hundredweight of producer milk in Class I as

determined pursuant to Sec. 1040.44(c) by the Class I differential

price for the month;

(2) Add an amount obtained by multiplying the total hundredweight

of producer milk in Class II as determined pursuant to Sec. 1040.44(c)

by the Class II differential price for the month;

(3) Add an amount obtained by multiplying the hundredweight of skim

milk in Class I as determined pursuant to Sec. 1040.44(a) by the skim

milk price;

(4) Add an amount obtained by multiplying the pounds of skim milk

in Class II and Class III as determined pursuant to Sec. 1040.44(a) by

the average protein content of producer skim milk received by the

handler and multiplying the resulting pounds of protein by the protein

price; and

(5) Add an amount obtained by subtracting from the hundredweight of

skim milk in Class II and Class III as determined pursuant to

Sec. 1040.44(a), an amount determined by multiplying that hundredweight

of skim milk by the average protein content of producer skim milk

received by the handler and multiplying the resulting hundredweight of

fluid carrier by the fluid carrier price.

* * * * *

(f) Add an amount obtained from multiplying the Class I

differential price applicable at the location of the nearest

unregulated supply plants from which an equivalent volume was received

by the pounds of skim milk and butterfat in receipts of concentrated

fluid milk products assigned to Class I pursuant to Sec. 1040.43(e) and

Sec. 1040.44(a)(7)(i) and the pounds of skim milk and butterfat

subtracted from Class I pursuant to Sec. 1040.44(a)(11) and the

corresponding steps of Sec. 1040.44(b), excluding such skim milk and

butterfat in receipts of bulk fluid milk products from an unregulated

supply plant to the extent that an equivalent amount of skim milk or

butterfat disposed of to such plant by handlers fully regulated under

any Federal milk order is classified and priced as Class I milk and is

not used as an offset for any other payment obligation under any order;

* * * * *

9. Section 1040.61 is revised to read as follows:

Sec. 1040.61 Producer price differential.

For each month the market administrator shall compute a producer

price differential per hundredweight of milk as follows:

(a) Combine into one total for all handlers:

(1) The values computed pursuant to Sec. 1040.60 (a)(1), (a)(2) and

(b) through (i) for all handlers who made reports pursuant to

Sec. 1040.30 for the month and who made payments pursuant to

Sec. 1040.71 for the preceding month;

(2) Add the values computed pursuant to Sec. 1040.60 (a)(3),

(a)(4), and (a)(5) and subtract the values obtained by multiplying the

handlers' total pounds of protein and total hundredweight of fluid

carrier contained in such milk by their respective prices;

(3) Subtract the value obtained by multiplying the difference

between the Class III price and the Class III-A price times the pounds

of product determined pursuant to Sec. 1040.43(f);

(4) Add an amount equal to the total value of the minus location

adjustments computed pursuant to Sec. 1040.75 (a) and (b);

(5) Subtract an amount equal to the total value of the plus

location differentials computed pursuant to Sec. 1040.75 (a) and (b);

and

(6) Add an amount equal to not less than one-half of the

unobligated balance in the producer-settlement fund.

(b) Divide the aggregate value computed pursuant to paragraph (a)

of this section by the sum of the following:

(1) The total hundredweight of producer milk; and

(2) The total hundredweight for which a value is computed pursuant

to Sec. 1040.60(f).

(c) Subtract not less than 6 cents nor more than 7 cents per

hundredweight. The result shall be the ``producer price differential.''

10. Section 1040.62 is revised to read as follows:

Sec. 1040.62 Announcement of producer prices.

On or before the 11th day after the end of each month, the market

administrator shall announce the following prices and information:

(a) The producer price differential;

(b) The protein price;

(c) The fluid carrier price;

(d) The butterfat price;

(e) The average protein content of producer milk; and

(f) The statistical uniform price for milk containing 3.5 percent

butterfat, computed by combining the Class III price and the producer

price differential.

11. A new section 1040.63 with an undesignated centerheading

preceding it and a new section 1040.64 are added to read as follows:

Producer Price Differential

Sec. 1040.63 Value of producer milk.

The value of producer milk shall be the sum of:

(a) The producer price differential computed pursuant to

Sec. 1040.61 and adjusted pursuant to Sec. 1040.75, multiplied by the

total hundredweight of producer milk received from the producer;

(b) The butterfat price computed pursuant to Sec. 1040.50(h),

multiplied by the total pounds of butterfat contained in the producer

milk received from the producer;

(c) The protein price computed pursuant to Sec. 1040.50(i) and

adjusted pursuant to Sec. 1040.64, multiplied by the total pounds of

protein contained in the producer milk received from the producer; and

(d) The fluid carrier price computed pursuant to Sec. 1040.50(j),

multiplied by the total pounds of fluid carrier contained in the

producer milk received from the producer.

Sec. 1040.64 Computation of somatic cell adjustment.

(a) For each producer, an adjustment to the protein price for the

somatic cell count of the producer's milk shall be determined by

multiplying the constant associated with the appropriate somatic cell

count interval in the table in paragraph (b) of this section by the

simple average price for the month of 40-pound blocks of Cheddar cheese

at the National Cheese Exchange as reported by the Department. If a

handler has not determined a monthly average somatic cell count, it

will be determined by the market administrator.

(b) The following table shows the factors and constants to be used

in computing the somatic cell adjustment:

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

Constants for

computing the

Somatic cell counts Factors somatic cell

adjustment

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

1 to 50,000................................ .250 .078125

51,000 to 100,000.......................... .200 .062500

101,000 to 150,000......................... .150 .046875

151,000 to 200,000......................... .100 .031250

201,000 to 250,000......................... .050 .015625

251,000 to 300,000......................... .025 .078125

301,000 to 350,000......................... .000 .000000

351,000 to 400,000......................... .000 .000000

401,000 to 450,000......................... -.025 -.0078125

451,000 to 500,000......................... -.050 -.015625

501,000 to 550,000......................... -.075 -.0234375

551,000 to 600,000......................... -.100 -.031250

601,000 to 650,000......................... -.125 -.0390625

651,000 to 700,000......................... -.150 -.046875

701,000 to 750,000......................... -.200 -.062500

751,000 and above.......................... -.250 -.078125

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

12. Section 1040.71 is amended by revising paragraphs (a)(1) and

(a)(2) to read as follows:

Sec. 1040.71 Payments to the producer-settlement fund.

(a) * * *

(1) The total value of milk of the handler for such month as

determined pursuant to Sec. 1040.60.

(2) The sum of:

(i) An amount obtained by multiplying the total hundredweight of

producer milk as determined pursuant to Sec. 1040.44(c) by the producer

price differential, excluding any applicable location adjustment

pursuant to Sec. 1040.75(a)(3);

(ii) An amount obtained by multiplying the total pounds of protein

contained in producer milk by the protein price;

(iii) An amount obtained by multiplying the total pounds of fluid

carrier contained in producer milk by the fluid carrier price; and

(iv) An amount obtained by multiplying the pounds of skim milk and

butterfat for which a value was computed pursuant to Sec. 1040.60(f) by

a price computed as follows: the statistical uniform price as adjusted

for location pursuant to Sec. 1040.52 less 3.5 times the butterfat

differential pursuant to Sec. 1040.74.

* * * * *

13. Section 1040.73 is amended by revising the first sentence of

paragraph (a), paragraph (b)(1)(ii), and paragraph (c), to read as

follows:

Sec. 1040.73 Payments to producers and to cooperative associations.

(a) Except as provided by paragraph (b) of this section, on or

before the 15th day of each month, each handler (except a cooperative

association) shall pay each producer for milk received from the

producer during the preceding month, not less than the value determined

pursuant to Sec. 1040.63 adjusted by the location differential pursuant

to Sec. 1040.75, less the payment made pursuant to paragraph (d) of

this section. * * *

(b) * * *

(1) * * *

(ii) The total pounds of butterfat, total pounds of protein

contained, and total pounds of fluid carrier in such milk, and the

average somatic cell count;

* * * * *

(c) On or before the 13th day after the end of each month, each

handler shall pay a cooperative association, which is a handler with

respect to milk received by him from a pool plant operated by such

cooperative association, or by bulk tank delivery pursuant to

Sec. 1040.9(c), not less than an amount computed by:

(1) The hundredweight of Class I milk received times the Class I

differential price for the month plus the pounds of Class I skim milk

times the skim milk price for the month;

(2) The hundredweight of Class II milk received times the Class II

differential price for the month,

(3) The pounds of butterfat received times the butterfat price for

the month;

(4) The pounds of protein received in Class II and Class III times

the protein price for the month;

(5) The pounds of fluid carrier received in Class II and Class III

times the fluid carrier price for the month;

(6) The somatic cell adjustment to the protein price, as computed

pursuant to Sec. 1040.63(c); and

(7) Less any payment made pursuant to paragraph (d) of this

section.

* * * * *

14. Section 1040.74 is revised to read as follows:

Sec. 1040.74 Butterfat differential.

The butterfat differential, rounded to the nearest one-tenth cent,

shall be 0.138 times the butter price less 0.0028 times the average

price per hundredweight, at test, for manufacturing grade milk, f.o.b.

plants in Minnesota and Wisconsin, as reported by the Department for

the month. The butter price means the simple average for the month of

the daily prices per pound of Grade A (92 score) butter. The prices

used shall be those of the Chicago Mercantile Exchange as reported and

published weekly by the Dairy Division, Agricultural Marketing Service.

The average shall be computed by the Director of the Dairy Division

using the price reported each week as the daily price for that day and

for each following day until the next price is reported.

15. Section 1040.75 is amended by revising paragraphs (a)(1) and

(c), to read as follows:

Sec. 1040.75 Plant location adjustments for producers and on nonpool

milk.

(a) * * *

(1) May deduct for milk to be paid for at the producer price

differential the rate per hundredweight applicable pursuant to

Sec. 1040.52(a) (1) or (2) for the location of the plant at which the

milk was first physically received.

* * * * *

(c) For purposes of computation pursuant to Secs. 1040.71 and

1040.72, the statistical uniform price shall be adjusted at the rates

set forth in Sec. 1040.52 applicable at the location of the nonpool

plant from which the other source milk was received except that the

statistical uniform price, so adjusted, shall not be less than the

Class III price.

16. Section 1040.76 is amended by revising paragraph (a)(4) and the

third sentence of paragraph (b)(1)(ii), to read as follows:

Sec. 1040.76 Payments by handler operating a partially regulated

distributing plant.

* * * * *

(a) * * *

(4) Multiply the remaining pounds by the amount by which the Class

I differential price exceeds the producer price differential, both

prices to be applicable at the location of the partially regulated

distributing plant (but not to be less than the Class III price); and

* * * * *

(b) * * *

(1) * * *

(ii) * * * Any such transfers remaining after the above allocation

which are classified in Class I and for which a value is computed for

the handler operating the partially regulated distributing plant

pursuant to Sec. 1040.60 shall be priced at the statistical uniform

price (or at the weighted average price if such is provided) of the

respective order regulating the handling of milk at the transferee-

plant, with such statistical uniform price adjusted to the location of

the nonpool plant (but not to be less than the lowest class price of

the respective order), except that transfers of reconstituted skim milk

in filled milk shall be priced at the lowest class price of the

respective order; and

* * * * *

Sec. 1040.85 [Amended]

17. In Section 1040.85 the introductory text is amended by removing

the words ``2 cents'' and adding in their place the words ``4 cents.''

Sec. 1040.86 [Amended]

18. In Section 1040.86 paragraph (a) is amended by removing the

words ``5 cents'' and adding in their place the words ``7 cents''.

Dated: December 2, 1994.

Kenneth C. Clayton,

Acting Administrator.

[FR Doc. 94-30417 Filed 12-13-94; 8:45 am]

BILLING CODE 3410-02-P