Milk in the Georgia and Certain Other Marketing Areas; Decision on Proposed Amendments to Marketing Agreements and to Orders

7 CFR part Marketing area Docket No.

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1007....................... Georgia.................... AO-366-A36

1093....................... Alabama-West Florida....... AO-386-A14

1094....................... New Orleans-Mississippi.... AO-103-A56

1096....................... Greater Louisiana.......... AO-257-A43

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

1108....................... Central Arkansas........... AO-243-A46

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AGENCY: Agricultural Marketing Service, USDA.

ACTION: Proposed rule.

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SUMMARY: This decision combines five Federal milk order marketing areas

with unregulated counties in Arkansas, Georgia, Mississippi, and

Tennessee to form the Southeast marketing area. The decision is based

on industry proposals to merge the individual marketing areas so as to

more equitably divide the markets' proceeds in what essentially has

become a single, large market with significantly overlapping sales and

procurement areas.

FOR FURTHER INFORMATION CONTACT: Nicholas Memoli, Marketing Specialist,

USDA/AMS/Dairy Division, Order Formulation Branch, Room 2971, South

Building, P.O. Box 96456, Washington, DC 20090-6456, (202) 690-1932.

SUPPLEMENTARY INFORMATION: This administrative action is governed by

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

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

Order 12866.

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

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

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

Marketing Service has certified that this rule will not have a

significant economic impact on a substantial number of small entities.

The amendments will promote orderly marketing of milk by producers and

regulated handlers.

The proposed amendments have been reviewed under Executive Order

12778, Civil Justice Reform. They are not intended to have a

retroactive effect. If adopted, the proposed rule will not preempt any

state or local laws, regulations, or policies, unless they present an

irreconcilable conflict with this rule.

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

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

exhausted before parties may file suit in court. Under section

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

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

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

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

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

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

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

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

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

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

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

Prior Documents in This Proceeding

Notice of Hearing: Issued September 3, 1993; published September

10, 1993 (58 FR 47653).

Supplemental Notice of Hearing: Issued October 13, 1993; published

October 15, 1993 (58 FR 53436).

Extension of Time for Filing Briefs: Issued January 24, 1994;

published February 3, 1994 (59 FR 5132).

Recommended Decision: Issued November 21, 1994; published November

29, 1994 (59 FR 61070).

Extension of Time for Filing Exceptions: Issued December 27, 1994;

published January 3, 1995 (60 FR 65).

Preliminary Statement

A public hearing was held to consider proposed amendments to the

marketing agreements and the orders regulating the handling of milk in

the aforesaid marketing areas. The hearing was held pursuant to the

provisions of the Agricultural Marketing Agreement Act of 1937, as

amended (7 U.S.C. 601-674), and the applicable rules of practice (7 CFR

Part 900), in Atlanta, Georgia, on November 1-5, 1993. Notice of such

hearing was issued on September 3, 1993, and published September 10,

1993 (58 FR 47653) and a supplemental notice of hearing was issued

October 13, 1993, and published October 15, 1993 (58 FR 53436).

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

record thereof, the Administrator, on November 21, 1994, issued a

recommended decision containing notice of the opportunity to file

written exceptions thereto.

The material issues, findings and conclusions, rulings, and general

findings of the recommended decision are hereby approved and adopted

and are set forth in full herein, subject to the modifications

contained in this final decision. Certain sections of this final

decision differ from the recommended decision only by discussing

comments that were received, correcting obvious typographical errors,

or adding footnotes to reflect new information, such as a cooperative

merger. These sections include marketing area, unit pooling, producer,

producer-handler, balancing plants, and seasonal adjustment to Class

III and III-A prices. Other sections have been revised substantially

and/or contain actual changes in order provisions. Sections which fall

into this category include producer milk, product prices, Class III

price, Class II price, plant location adjustments, and base-excess

plan. In addition to these changes, the Map of the Southeast marketing

area and the Map Guide (i.e., Table No. 1) have been revised to reflect

the new pricing zones, a clarifying paragraph has been added at the end

of the discussion of lock-in provision, and a discussion has been added

at the end of the findings and conclusions regarding Motions to Reopen

the Hearing.

Findings and Conclusions

The following findings and conclusions on the material issues are

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

1. Interstate commerce, merger of marketing areas under one order,

and expansion of the marketing area.1 The handling of milk in the

proposed merged and expanded marketing area is in the current of

interstate commerce and directly burdens or obstructs interstate

commerce in milk and milk products. Interstate commerce is involved in

both the procurement and sales of fluid milk and dairy products by

handlers operating plants in the proposed marketing area.

\1\The changes to this section include an updated map of the

marketing area and an updated Table 1.

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The record evidence clearly shows the movement of bulk milk from

Georgia to Alabama and Tennessee; from Alabama to Georgia, Mississippi,

Louisiana, and Tennessee; from Louisiana to Texas, Mississippi, and

Alabama; from Texas to Arkansas, Louisiana and Mississippi; from

Tennessee to Georgia, Alabama, [[Page 25015]] Kentucky, and

Mississippi; from Kentucky to Alabama, Mississippi, and Tennessee; and

from Arkansas to Georgia, Tennessee, and Mississippi. In addition, the

record indicates that packaged fluid milk products regularly move

across States into each of the separate marketing areas involved in

this proceeding.

The proposed merged and expanded marketing area, designated as the

``Southeast'' marketing area, is shown on the map entitled ``Southeast

Marketing Area.'' The map has been modified to reflect changes in

pricing zones that are discussed under ``plant location adjustments.''

Table No. 1 is a map guide for the plants that corresponds to the

numbers shown on the map. The table has been modified to delete four

plants: McClendon Cheese (Zone 4), Meadow Gold, Gadsden (Zone 5), Flav-

O-Rich, Montgomery (Zone 8), and Meadow Gold, Nashville (Zone 2). In

addition, one new plant has been added to the table: Publix

Supermarkets, Zone 7, which is scheduled to commence operations this

spring.

The proposed Southeast marketing area includes the present adjacent

marketing areas of Orders 7, 93, 94, and 96; the Central Arkansas

(Order 108) marketing area; the northeastern Georgia county of Rabun;

the northwestern Mississippi counties of Canola, De Soto, Lafayette,

Marshall, Tate, and Tunica; all of the territory within the State of

Tennessee that is not included within the Tennessee Valley Federal

marketing area; and all of the presently unregulated counties in the

State of Arkansas. The proposed merged order would use the part number

for the present Georgia order, part 1007. The amended Part 1007, upon

issuance, would supersede Parts 1093, 1094, 1096, and 1108.

Although the present five orders would no longer exist upon

effectuation of the Southeast order, this merger action is not intended

to preclude the completion of those procedures that would otherwise

have existed under the separate orders with respect to milk handled

prior to the effective date of the merger. Such procedures, which would

need to be carried out after the merger date, include the announcement

of certain class prices, submission of reports, computation of uniform

prices, payment of obligations and verification activities. The

provisions of the merged order would apply only to that milk handled

after the effective date of the merger.

BILLING CODE 3410-02-P

[[Page 25016]]

[GRAPHIC][TIFF OMITTED]TP10MY95.000

BILLING CODE 3410-02-C

[[Page 25017]]

Table No. 1.--Map Guide for the Southeast Marketing Area

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No. Plant name Location Zone

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1............... Foremost Dairy, Inc.. Shreveport, LA...... 8

2............... Borden, Inc.......... Monroe, LA.......... 8

3............... Borden, Inc.......... Lafayette, LA....... 12

4............... Borden, Inc.......... Baton Rouge, LA..... 12

5............... Dairy Fresh of LA.... Baker, LA........... 12

6............... Kleinpeter Farms Baton Rouge, LA..... 12

Dairy.

7............... Mid-America Dairymen, Kentwood, LA........ 11

Inc.

8............... Mid-America Dairymen, Franklinton, LA..... 11

Inc.

9............... Superbrand Dairy Hammond, LA......... 11

Products.

10.............. Barbe's Dairy........ Westwego, LA........ 12

11.............. Schepps-Foremost..... New Orleans, LA..... 12

12.............. Avent's Dairy, Inc... Oxford, MS.......... 5

13.............. Barber Pure Milk Tupelo, MS.......... 5

Company.

14.............. Brookshire Dairy Columbus, MS........ 7

Products.

15.............. LuVel Dairy Products, Kosciusko, MS....... 7

Inc.

16.............. Flav-O-Rich.......... Canton, MS.......... 8

17.............. Borden, Inc.......... Jackson, MS......... 9

18.............. Dairy Fresh Hattiesburg, MS..... 10

Corporation.

19.............. Shoals Cheese........ Florence, AL........ 5

20.............. Dasi Products, Inc... Decatur, AL......... 5

21.............. Meadow Gold Dairies, Huntsville, AL...... 5

Inc.

22.............. Barber Pure Milk Oxford, AL.......... 7

Company.

23.............. Baker and Sons Dairy. Birmingham, AL...... 7

24.............. Barber Pure Milk Birmingham, AL...... 7

Company.

25.............. Barber Ice Cream..... Birmingham, AL...... 7

26.............. Flav-O-Rich Ice Cream Sylacauga, AL....... 7

27.............. Dairy Fresh Ice Cream Greensboro, AL...... 8

28.............. McClendon Cheese..... Uniontown, AL....... 7

29.............. Superbrand Dairy Montgomery, AL...... 9

Products.

30.............. Barber Pure Milk Montgomery, AL...... 9

Company.

31.............. Dairy Fresh Cowarts, AL......... 10

Corporation.

32.............. Barber Pure Milk Mobile, AL.......... 12

Company.

33.............. Dairy Fresh Prichard, AL........ 12

Corporation.

34.............. Southern Ice Cream... Marrietta, GA....... 7

35.............. Kraft General Foods.. Atlanta, GA......... 7

36.............. Peeler Jersey Farms.. Athens, GA.......... 7

37.............. New Atlanta Dairies, Atlanta, GA......... 7

Inc.

38.............. Publix Supermarkets, Atlanta, GA......... 7

Inc.

39.............. Borden, Inc.......... Macon, GA........... 8

40.............. Kinnett Dairies, Inc. Columbus, GA........ 8

41.............. Kinnett Ice Cream.... Columbus, GA........ 8

42.............. Hershey Chocolate, Savannah, GA........ 10

USA.

43.............. Fleming Companies, Nashville, TN....... 1

Inc.

44.............. Purity Dairies, Inc.. Nashville, TN....... 1

45.............. Cumberland Creamery, Antioch, TN......... 1

Inc.

46.............. Heritage Farms Dairy. Murfreesboro, TN.... 2

47.............. Mid-America Dairymen, Lewisburg, TN....... 2

Inc.

48.............. Turner Dairies....... Covington, TN....... 3

49.............. Forest Hill Dairy.... Memphis, TN......... 4

50.............. Harbin Mix........... Memphis, TN......... 4

51.............. Borden, Inc.......... Little Rock, AR..... 4

52.............. Coleman Dairy........ Little Rock, AR..... 4

53.............. Gold Star Dairy, Inc. Little Rock, AR..... 4

54.............. Humphrey's Dairy..... Hot Springs, AR..... 4

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

The marketing area proposed herein is a combination of several of

the proposals presented at the hearing. A group of four cooperative

associations, comprised of Dairymen, Inc., Gulf Dairy Association,

Inc.,2 Southern Milk Sales, Inc., and Carolina Virginia Milk

Producers Association, Inc., proposed the merger of the marketing areas

of Orders 7, 93, 94, 96, together with the former Nashville, Tennessee

(Order 98), marketing area,3 and the four unregulated Tennessee

counties of Franklin, Lincoln, Moore, and Van Buren. In this decision,

these cooperatives will be referred to as the ``cooperative

coalition,'' and their proposal will be referred to as Proposal No. 1.

At the time of the hearing, these groups represented approximately 54

percent of the producers and 55 percent of the milk pooled under Orders

7, 93, 94, and 96.

\2\Effective March 1, 1994, September 1, 1994, and February 1,

1995, respectively, Gulf Dairy Association, Dairymen, Inc., and

Southern Milk Sales became part of Mid-America Dairymen, Inc. (Mid-

Am).

\3\Official notice is taken of the termination of the former

Memphis, Tennessee (Part 1097), and Nashville, Tennessee (Part 1098)

Federal milk marketing orders effective July 31, 1993. The marketing

areas of these former orders may be found in Secs. 1097.2 and 1098.2

of 7 CFR, revised as of January 1, 1992 and 1993, respectively.

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Malone & Hyde Dairy (aka Fleming Dairy), Nashville, Tennessee,

proposed expanding the area proposed by the cooperative coalition by

including the one remaining unregulated county in

[[Page 25018]] Georgia (i.e., Rabun County), the six unregulated

counties between the Tennessee Valley marketing area and the former

Nashville marketing area (four of which were also included in Proposal

No. 1), the former Memphis, Tennessee (Order 97), marketing area, and

the remaining unregulated Tennessee counties that are bordered on the

east by former Order 98, on the west by former Order 97, on the north

by Order 99, and on the south by Order 94. Malone & Hyde Dairy

hereinafter will be referred to as ``Fleming Dairy,'' and their

proposal will be referred to as Proposal No. 9.

Arkansas Dairy Cooperative Association, Inc., which also will be

referred to as ``ADCA,'' proposed including the Central Arkansas

marketing area and the former Memphis marketing area in the merged

order proposed by the cooperative coalition. Their proposal will be

referred to as Proposal No. 2.

Finally, Associated Milk Producers, Inc., or ``AMPI,'' proposed and

testified in support of a proposal (i.e., Proposal No. 13) to merge the

former Memphis marketing area with the Paducah, Kentucky, and Central

Arkansas marketing areas to form a ``Mid-South'' marketing area. Under

this proposal, the marketing area also would include all presently

unregulated counties in Arkansas, the unregulated Missouri county of

Dunklin, and the two unregulated Texas counties of Bowie and Cass.

Testimony in support of Proposal No. 1. The Vice President of

Dairymen, Inc., testified on behalf of the cooperative coalition in

support of Proposal No. 1.

The thrust of his testimony was that fluid milk processors in the

proposed merged marketing area had increasingly expanded their

distribution to serve larger geographic areas and, as a result, a

larger order is now needed to maintain market stability, to insure that

producers in the proposed marketing area would be able to share pro

rata in the classified uses of their milk, and to provide assurance to

handlers that their competitors were paying at least the order's

minimum prices regardless of where their milk supply originated.

He also stated that a merged order was in the public's interest

because it would establish orderly marketing conditions for producers

and handlers in the marketing area and assure a continuing, adequate

supply of high-quality milk.

The Chairman of the Louisiana Dairy Advisory Committee of the

Louisiana Farm Bureau Federation testified that the proposal was

significant because it could eliminate price disparities among

producers in the Southeast, facilitate the movement of milk to where it

is needed, and provide a more equitable sharing among producers of

higher-valued fluid milk sales.

The division manager for milk procurement for The Kroger Company

testified that Heritage Farms Dairy, a Kroger Company plant located in

Murfreesboro, Tennessee, also expressed qualified support for the

merger of milk orders in the Southeast, but said that Proposal No. 1

fell short of addressing all the problems or answering all the

questions facing Federal milk marketing orders in the Southeast. He

said that markets not contained in this proceeding present challenges

that need to be addressed at a future hearing.

Testimony in opposition to Proposal No. 1. A consultant for Barber

Pure Milk Company and Dairy Fresh Corporation testified that Barber

Pure Milk Company, a handler under Orders 7, 93, and 94, and Dairy

Fresh Corporation, a handler under Orders 7, 93, 94, and 96, opposed

Proposal No. 1 because it did not include Orders 5 (Carolina) and 11

(Tennessee Valley). He stated that, in May 1993, 52 percent of all

Class I sales in the Order 7 marketing area were made by plants pooled

on other orders, with 26.4 percent and 11.6 percent from Orders 5 and

11, respectively.

With respect to raw milk procurement, the Barber/Dairy Fresh

spokesman testified that Order 7 and 93 handlers competed with Order 5

and 11 handlers for their milk supply. Because of the intermingling of

producers among these orders, the milk of some producers is shipped

alternatively between Orders 7 and 5 handlers, he said, and differences

in utilization in these markets result in different pay prices for milk

of neighboring producers, creating instability in the milk supply.

Further, to create a large marketing area including most of five or six

states with small orders nearby could lead to undesirable pooling

practices, he added.

A representative for Kinnett Dairies (Kinnett) in Columbus,

Georgia, testified that Kinnett purchased raw milk from a group of

independent producers located in Georgia, Alabama, and Tennessee and

also purchased a portion of its raw milk needs from Carolina-Virginia

Milk Producers Association, Charlotte, North Carolina. He stated that

while Kinnett generally supported the concept of merging Federal Orders

7, 93, 94, and 96, with the area covered by the terminated Nashville

order, it was opposed to Proposal No. 1 because it did not include the

Tennessee Valley and Carolina orders (Orders 11 and 5, respectively).

He explained that in August 1993--after the Kroger plant at

Murfreesboro, Tennessee, and the Fleming Dairy plant at Nashville,

Tennessee, became regulated under Order 7--35.4 percent of the Class I

disposition on Order 7 was marketed by other order distributing plants.

He pointed out that this was a higher percentage of other order Class I

sales than that accounted for by any of the other orders involved in

the merger proceeding.

Testimony in support of Proposal No. 9. The assistant operations

manager for Fleming Dairy, Nashville, Tennessee, testified in support

of Proposal No. 9. He explained that the Fleming Company operated two

distributing plants: One plant located in Nashville, Tennessee, and a

second plant located in Baker, Louisiana, which is jointly owned with

Dairy Fresh of Alabama.

The Fleming spokesman testified that Fleming's Nashville plant

distributed approximately 25 million pounds of Class I and Class II

dairy products per month in the former Nashville and Memphis Federal

order marketing areas, as well as in the marketing areas of Order 46

(Louisville-Lexington-Evansville), Order 99 (Paducah), Order 108

(Central Arkansas), Order 106 (Southwest Plains), Order 94 (New

Orleans-Mississippi), Order 93 (Alabama-West Florida), Order 6 (Upper

Florida), Order 7 (Georgia), Order 5 (Carolina), and Order 11

(Tennessee Valley). He stated that Fleming procured most of its raw

milk supply from dairy farmers located in central Tennessee and south

central Kentucky, with approximately 55 percent of Fleming's raw milk

supply purchased from Kentucky dairy farmers and 45 percent purchased

from Tennessee dairy farmers. In addition to purchasing milk from

independent producers, Fleming purchases raw milk from Carolina-

Virginia Milk Producers and other dairy cooperatives and proprietary

handlers, he added.

The witness testified that a southeast merger which does not

include the Chattanooga area will result in blend price differences

between the Tennessee Valley order and the new Southeast order which

will cause problems where the two orders' procurement areas overlap. He

said the Department should address this potential problem of blend

price differences by considering the merger of the Louisville order

with the Tennessee Valley order and possibly the Carolina order in the

very near future and that the implementation of such a merger should

coincide with the merger of other Federal orders in the Southeast.

The Fleming spokesman stated that the former Memphis marketing area

should be included in the merged order [[Page 25019]] because Fleming

Dairy has significant sales in that area. However, the merged order

should not include several Kentucky counties in former Order 98, he

said, because those counties do not have a significant level of milk

sales from Nashville distributing plants. He stated there were no

distributing plants in that area, but there was a cheese plant there

that could attach unnecessary milk to the market if that plant were in

the marketing area.

Testimony in support of Proposal No. 2 and in opposition to

Proposal 13. The general manager of the Arkansas Dairy Cooperative

Association, Incorporated, testified that ADCA, which has 113 dairy

farmer members located within the State of Arkansas, was formed in 1991

by its members to provide an alternative to Associated Milk Producers,

Inc. (AMPI), the only outlet then available for their milk. He

indicated that ADCA sold its milk to the Borden, Incorporated, plant in

Little Rock, the Turner Dairies plants in Memphis and Covington,

Tennessee, and the Turner Dairy plant in Fulton, Kentucky.

The witness stated that ADCA supported the merger of Orders 7, 93,

94, 96, 97, 98, and 108, and that ADCA also supported the inclusion of

presently unregulated counties south and west of the present Central

Arkansas marketing area, as well as two unregulated Arkansas counties

(Mississippi and Crittenden) on the eastern edge of the Central

Arkansas marketing area. He said that the sales of Little Rock plants

in the former Memphis area and the overlap of procurement areas for the

two markets supported the adoption of ADCA's proposal.

The ADCA spokesman indicated that a larger merged market would

provide market and regulatory stability for ADCA in the future. He

emphasized that since ADCA's formation, AMPI had successfully

terminated the Memphis order, attempted to terminate the Paducah order,

terminated the base-excess plan on Order 108, and now was attempting to

establish a new Mid-South order which it could dominate.

The witness stated that with AMPI's proposed Mid-South order, ADCA

would be at the whim of AMPI management with respect to whether there

would be an order at all, or for how long there would be an order. He

said that situation would be intolerable for ADCA and would create

highly disorderly marketing conditions. He concluded that a seven-

market (i.e., including former Orders 97 and 98) merged order would

eliminate this problem.

A dairy farmer from Guy, Arkansas, who farms 300 acres and milks

200 cows, also testified in support of the inclusion of Central

Arkansas in the merged southeastern order and in opposition the AMPI's

proposal to form a Mid-South order. The witness, who is the immediate

past president of the Board of Directors of Arkansas Dairy Cooperative

Association, Inc., stated that he was speaking on behalf of himself,

the ADCA Board of Directors, and the 113 members of ADCA.

Testimony in support of Proposal No. 13. A spokesman representing

the Associated Milk Producers, Incorporated, Southern Region,

Arlington, Texas, stated that his testimony in support of Proposal No.

13 was on behalf of the Southern Region of AMPI, Mid-America Dairymen,

Inc. (Mid-Am), and Dairymen, Inc. (DI), co-proponents of Proposals 13,

14, and 15.

The AMPI spokesman testified that in September 1993 AMPI pooled

18.4 million pounds of milk in the Central Arkansas market, a quantity

which represented 50.1 percent of the milk pooled on the order during

that month. He said the 387 AMPI members who produced that milk

represented about 69 percent of the total number of dairy farmers on

the market during September.

According to the witness, AMPI supplied the Turner Dairy Covington

plant, which, since the termination of Order 97, had been a partially

regulated distributing plant. He said that in September 1993 AMPI

supplied about 3.2 million pounds of milk to the Covington plant but

could not divert the milk of any producer from the plant because it was

not a fully regulated facility.

The witness also testified that AMPI provided supplemental milk to

the Turner plant in Fulton, Kentucky, jointly with D.I. and Mid-Am.

During September 1993, he said the three cooperatives supplied about

5.2 million pounds of the milk required by Turner to operate the Fulton

facility.

The AMPI representative said that the supply situation at the

Fulton facility had changed significantly in recent years. He noted

that through 1982 the plant was completely supplied and balanced by

cooperative milk and that beginning in 1983 a total of 4.41 percent of

the milk came from independent producers. The percentage of supply to

the Fulton facility increased every year since then, he said, except

for 1986. For the first 10 months of 1993, the percentage of

independent supply was almost 47 percent of the handlers' needs, he

added. He stressed that although the Turner plant had changed its

source of supply over the last 10 years, the facility continued to rely

on cooperative associations to balance its supply.

The AMPI witness pointed out that throughout 1993 most of the

Fulton supply originated from Kentucky, Missouri, and Tennessee. In

September 1993, he noted, 93.5 percent of the Fulton supply came from

these areas.

The spokesman also observed that Exhibits 5 and 31, which contain

data introduced by the market administrators of the respective orders,

indicate a significant overlap in procurement among the areas proposed

for merger. He noted that in May 1993, for instance, 8.2 million pounds

of the 22.1 million pounds of producer milk pooled on the Memphis order

came from Arkansas producers (just over 37 percent) and that another 30

percent came from nearby Tennessee counties from which 6.6 million

pounds of milk were pooled on the Central Arkansas order.

With respect to the Central Arkansas order, the witness testified

that in May 1993 about 6.5 percent of the producer milk originated in

nearby counties in Kentucky and Tennessee while 69.1 percent of the

producer milk pooled on the order originated in Arkansas. Most of the

remainder of the milk originated in Missouri and Texas, he said.

The AMPI spokesman testified that route disposition in the Memphis

area has generally consisted of fluid milk products from about ten

handlers under other Federal orders. He said that handlers regulated

under Orders 99 and 108 consistently distribute fluid milk products on

routes in the Memphis area.

In Central Arkansas, route disposition from handlers regulated

under other Federal orders, including Memphis and Paducah, has ranged

from 28.7 percent in January 1990 to 49.6 percent in March 1993,

according to the witness. He noted that specific percentages for route

disposition by Order 97 and 99 handlers cannot be included because less

than three handlers are involved.

With respect to the Paducah order, the witness said that at the

current time the order operates as an individual-handler pool and that,

as such, the order promotes instability among similarly situated

producers because blend prices under the Paducah order exceed

significantly those of surrounding orders. Surrounding markets must

carry the burden of balancing the supply of the single plant operator

under that order, he said.

The witness testified that blend prices generated under the Paducah

order are unreasonable given the significant overlap of supply and

distribution patterns that exists today. He said the

[[Page 25020]] situation was very similar to that of the Milwaukee

individual handler pool prior to its inclusion in the Chicago Regional

pool in 1968 and referenced the final decision (33 FR 7516) in that

proceeding.

The AMPI spokesman testified that a situation similar to that

described in the 1968 decision is currently at play in the Paducah milk

market. He said that under the proposed Mid-South order, however,

producers will share pro rata in the returns from the sale of milk

utilized in all classes; all producers will carry their fair share of

lower prices of reserve milk not needed at any particular time for

fluid purposes.

The witness indicated that the fluid sector of the dairy industry

has evolved to fewer but larger handlers who distribute their products

over an increasingly larger territory. He predicted that this trend

will likely continue in the future. He concluded that whenever

consolidation of areas is considered, the Department must look at the

area where the significant majority of the overlap occurs in sources

and in distribution to delineate merged marketing areas.

Testimony in opposition to Proposal No. 13. Two dairy farmers from

Martin, Tennessee (Weakley County), testified in opposition to the

merger of Order 99 with any other order. Both of these witnesses

indicated that they were independent dairy farmers delivering their

milk to the Turner plant in Fulton, Kentucky. They stated that they

were opposed to making any change to Order 99 because it would lower

the price to dairy farmers delivering milk to the Fulton plant.

Testimony in support of other merger combinations. A consultant

appearing on behalf of Southern Foods Group, Inc. (SFG), testified that

SFG supported the widest possible merger of orders under consideration.

He said the proposed marketing area should include not only the area

covered by Proposal 1, but also the marketing area proposed for

inclusion by both Proposals 2 and 9. He stated that there was ample

evidence of milk handlers from those additional areas (i.e., former

Order 97 and Order 108) competing with handlers in the marketing area

encompassed by Proposal 1 to support the inclusion of those areas in

the merged order.

This witness testified that SFG owns and operates six fluid

processing plants in Texas and Louisiana. The plants owned by SFG in

Louisiana are the Foremost operation in Shreveport (regulated under

Order 96) and the Brown's Velvet plant in New Orleans, which is

regulated by Order 94.

The witness introduced a table showing the ratio of other order and

partially regulated plants to pool distributing plants. He pointed out

that the table showed that the ratio is greater than 2:1 for all of the

present orders under consideration at this hearing, except for Greater

Louisiana. The Georgia order had a better than 6:1 ratio, he said,

while Memphis and Central Arkansas had 5:1 and 3:1 ratios,

respectively.

The SFG spokesman stated that there was ample justification for a

single large order based solely on the existing inter-order handler

competition, the ratio of nonpool to pool plants in the separate

orders, and the volume of out-of-area shipments of packaged products as

shown in hearing exhibits. He said the Department should not create a

new merged order without including all areas which are logically part

of it, particularly if that would leave small orders right on the

border of the new large order.

The witness also focused on the ability of the market administrator

to collect and disseminate meaningful statistical data as a basis for

supporting a merger of orders. He pointed out that confidentiality

rules do not permit the market administrator to publish data for a zone

or an order if less than three regulated handlers are included in that

zone or order. More meaningful data and less cumbersome data can be

released for a merged marketing area, he concluded.

The witness remarked that while SFG did not contest the idea of

including Shreveport, Lake Charles, and the rest of western Louisiana

in the new merged marketing area, it was important to note that

handlers in Shreveport and Lake Charles sell significant quantities of

milk into east Texas in competition with east Texas handlers and that

east Texas handlers sell significant quantities of milk into western

Louisiana.

He also pointed out that the record data showed that significant

quantities of bulk milk from Texas were received at Louisiana plants

and that the surplus Texas milk was available for reserve use in

Louisiana. The existence of that reserve supply, he said, is a factor

in the analysis of proper pricing in the new proposed order.

A spokesman testifying on behalf of Gold Star Dairy, Little Rock,

Arkansas, stated that Gold Star supported the merger of the Federal

orders based on the proposals before the Secretary. He emphasized that

the proposed mergers in this hearing ``were not big enough for Gold

Star,'' commenting that Gold Star's flexibility would be limited if it

were not included in a much larger order.

Goldstar's representative said that based upon September

marketings, Gold Star would be pooled under the Texas order in the

event of a five-order merger and would be regulated under the proposed

Gulf States order in the event of a seven-market merger. It would not

be pooled under the proposed Mid-South order based upon sales, he

added. He cautioned, however, that much of Gold Star's sales are to

wholesalers so that the loss of one customer could determine under

which order the plant is regulated.

The witness stated that Gold Star has a manufacturing plant in

Clovis, New Mexico, in addition to its bottling plant in Little Rock.

He said that the company also has a bottling agreement with the Flav-O-

Rich Company to distribute products out of their Atlanta, Georgia,

facility.

The witness indicated that Gold Star did not wish to be a high-

utilization plant regulated and pooled in a low-utilization order

because eventually it would be required to pay more for its milk. He

added that Gold Star does not wish to be part of an order with a base-

excess plan because it would limit Gold Star's flexibility in obtaining

supplemental supplies during the base-excess months. He said that the

proposed base-excess plan, coupled with the proposed ``dairy farmer for

other markets'' provision, potentially builds barriers to the movement

of milk. Gold Star's unique location outside the marketing area makes

it vulnerable to those barriers, he said. He remarked that the fact

that such provisions are needed to protect year-round supplies from

pool riders indicates that the merger is too small.

The record supports a Southeast Federal milk marketing order. The

evidence in this record clearly indicates the need to merge all but one

of the separate orders in this proceeding into a ``Southeast'' order

that will encompass all of the existing marketing areas of these orders

as well as the presently unregulated territory specified at the outset

of this discussion. The basis for reaching this conclusion is

threefold: (a) There is a clear overlap in milk production areas--not

between every order with every other order, but significant enough to

link the orders together; (b) there is a clear overlap in the

distribution of packaged fluid milk products by handlers regulated

under the individual orders; and (c) there is an obvious need to insure

marketing stability for all producers within the proposed marketing

area. Since there was overwhelming support for the merger of Orders 7,

93, 94, 96, and former Order 98, and a clear unanimity

[[Page 25021]] of opinion expressed with regard to the overlap of milk

production and sales in those areas, this discussion will focus

primarily on the need to combine Proposals 1, 2, 9, and 13 to form one

order comprised of existing orders 7, 93, 94, 96, and 108, the two

orders terminated in 1993 (Orders 97 and 98), and the unregulated

territory in Georgia, Tennessee, and Arkansas.

a. Overlap in Milk Production Areas

The overlap in milk production areas among two or more orders often

results in producer unrest and market instability when blend prices

differ to any extent between the orders. This happens because producers

are generally aware of the prices being received by their neighbors and

seek to find the most lucrative market for themselves. Sometimes, this

may result in a producer leaving the cooperative association with which

he or she has been associated or switching from one proprietary handler

to another. It may also result in producers entering into business

relationships with handlers of questionable financial stability, which

could lead to the problem of handler defaults described on the hearing

record.

The difference in two orders' blend prices at a particular location

may be caused by a variety of factors, including order provisions,

institutional factors, and the location of surplus manufacturing

facilities, as well as obvious differences in class prices.

In the States of Louisiana, Mississippi, Alabama, and Georgia, the

blend prices are greatly influenced by the presence of DI's butter-

powder manufacturing plant at Franklinton, Louisiana, and Mid-America

Dairymen Association's cheese plant at Kentwood, Louisiana, both of

which are Order 94 pool plants that process surplus milk into lower-

valued Class III and III-A products. The influence of these plants on

blend prices in this region is evident when comparing the difference in

Class I utilization between Order 94 and its neighbors: Orders 7, 96,

and 93. As can be seen from Table 2, in 1991 the average Class I

utilization for Order 94 was 69.7 percent, compared to 74.6 percent for

Order 7, 80.4 percent for Order 96, and 79.7 percent for Order 93. A

similar comparison of the utilization percentages contained in Table 2

shows that this pattern continued in 1992 and during the first seven

months of 1993.

Table 2.--Percent Class I Utilization of Producer Milk by Federal Order, 1991-93

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

Order 7 Order 93 Order 94 Order 96 Order 97 Order 98 Order 99 Order 108

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

1991............................................ 74.6 79.7 69.7 80.4 73.7 80.2 78.6 73.3

1992............................................ 76.5 76.9 68.2 78.9 69.2 80.8 82.6 63.9

1993\1\......................................... 80.4 76.1 59.1 69.9 59.8 80.4 87.4 58.7

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

\1\January-July.

The extremely high utilization of the Paducah market (Order 99),

which increased from 78.6 percent in 1991 to 87.4 percent during the

first nine months of 1993, can be attributed to the fact that there is

only one handler, Turner Dairy, with a pool plant under that order and

to the institutional changes that have occurred in that market,

particularly the growth of a non-member milk supply and a corresponding

reduction in cooperative association milk. Consequently, the single

plant operator in that market has an incentive to keep the utilization

as high as possible so as to generate a high blend price for its non-

member producers. From a different perspective, it means keeping any

reserve supplies associated with the plant to a minimum. This situation

is far different from a market with manufacturing facilities, such as

Order 94, which is handling a disproportionate share of the region's

reserve supplies. It is noteworthy that as the Class I utilization of

the Paducah order increased by 19 points from 1991 to 1993, the Class I

utilizations of the neighboring Central Arkansas and Memphis orders

dropped by 14 points.

The differences in blend prices resulting from these utilizations

can be seen in Table 3, which compares average blend prices for 1991,

1992, and the first 7 months of 1993. With respect to Orders 97, 99,

and 108, it should be noted that the higher Class I utilization for the

Paducah order more than offset the fact that its Class I price was 38

cents lower than the Class I price for Orders 108 and 97.

Table 3.--Blend Prices by Federal Order 1991-93

[In dollars]

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

Order 7 Order 93 Order 94 Order 96 Order 97 Order 98 Order 99 Order 108

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

1991............................................ \1\13.35 \1\13.71 13.51 \1\$13.84 12.88 12.75 12.67 12.90

1992............................................ \1\14.64 \1\14.83 14.63 \1\15.01 13.94 13.99 14.02 13.86

1993\2\......................................... \1\14.37 \1\14.52 14.05 \1\14.32 13.31 14.03 13.62 13.32

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

\1\Order 7 price adjusted to southern zone, Order 93 price adjusted to Zone IV, and Order 96 price adjusted to Zone III to be comparable to Order 94,

which is reported for the highest-priced, southernmost zone.

\2\January-July.

The blend prices shown in Table 3 for Orders 7, 93, and 96 were

adjusted to the highest-priced, southernmost zone, to be comparable

with the Order 94 blend price, which is reported in that way. The lower

utilization of Order 94 is evidenced by its blend price, which is far

below that of Order 93 on the east or Order 96 on the west.

When price differences are related to location, there may be

adequate grounds for justifying such differences. When they occur

within a common production area, however, they cause market

instability. Data in this record show many common production areas

which are subject to significantly different blend prices.

Production data in the record shows a heavy production area in

southern Mississippi and in the ``Florida parishes'' of Louisiana north

of New Orleans. Milk from this area moves to Orders 96, 94, and 93. The

record also indicates there is a very pronounced overlap in production

areas between Orders 7 and 93 throughout northern

[[Page 25022]] Georgia. The production area for the Georgia market also

overlaps the procurement area for the former Nashville market in

southeastern Tennessee. In addition, the counties throughout central

Tennessee provide a significant share of the milk supply for Order 93

as well as former Order 98.

Table 4 shows the number of counties in various States from which

producer milk was supplied to various combinations of orders. The table

shows, for example, that in May 1993 there were 14 Arkansas counties

from which producer milk was supplied to Orders 97 and 108; that the

Memphis and Paducah orders shared a common supply area in four

Tennessee counties, four Kentucky counties, three Arkansas counties,

and four counties in south central Missouri; and that, in aggregate,

the production area for Orders 93 and 98 overlapped in 38 counties in

four different States. Order combinations that were left out of the

table--for example, 108/96--had no production counties in common.

In each of the overlapping production areas referenced above, a

pricing disparity problem either presently exists or potentially could

exist as a result of the difference in the blend prices prevailing in

those areas. A single merged marketing area will largely eliminate this

problem, but it will, of course, persist to some extent wherever the

merged marketing area abuts a neighboring marketing area (i.e., the

Texas order, the Southwest Plains order, the Louisville-Lexington-

Evansville order, the Tennessee Valley order, the Carolina order, and

the Upper Florida order).

Table 4: Number of Counties in Designated States Providing Milk to Specified Federal Order Markets in May 1993

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

State 97/108 97/98 97/99 97/94 108/94 108/99 7/93 93/94 94/96 93/98 7/98

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

Arizona................................... 14 ........ 3 3 3 3 ........ ........ ........ ........ ........

Missouri.................................. 8 ........ 4 4 5 4 ........ ........ ........ ........ ........

Tennessee................................. ........ 1 4 2 ........ ........ ........ 1 ........ 26 5

Kentucky.................................. ........ ........ 4 2 ........ ........ ........ ........ ........ 2 ........

Massachusetts............................. ........ ........ ........ 2 ........ ........ ........ 20 7 ........ ........

Georgia................................... ........ ........ ........ ........ ........ ........ 33 ........ ........ 6 14

Alabama................................... ........ ........ ........ ........ ........ ........ ........ 2 ........ 4 ........

Florida................................... ........ ........ ........ ........ ........ ........ ........ 1 ........ ........ ........

Louisana.................................. ........ ........ ........ ........ ........ ........ ........ 1 19 ........ ........

Texas..................................... ........ ........ ........ ........ ........ ........ ........ ........ 1 ........ ........

Total................................... 22 1 15 13 8 7 33 25 27 38 19

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

b. Overlap in Sales Distribution Areas

Market instability may occur when handlers in one marketing area

have significant distribution in another order's marketing area.

Problems may arise because of Class I price misalignment between orders

resulting in an undue price advantage for a handler in another market.

Problems also arise when a handler in one marketing area has enough

sales in another order's marketing area to become regulated under such

other order. If the blend prices differ significantly at the plant's

location, the handler may be forced to pay over-order charges to

maintain its local milk supply, which, in turn, could put it at a

competitive disadvantage vis-a-vis its competitors in the marketing

area where it is located.

Data in the record indicate a significant overlap in distribution

areas within the proposed Southeast marketing area.

In August 1993, 37.5 percent of the route disposition in Order 108

came from plants regulated under Orders 7, 49 (Indiana), 99, 106, and

126. These sales came from the following plants:

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

Federal

Plant/location order

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

Fleming Dairy, Nashville, Tennessee....................... 7.

Heritage Farms, Murfreesboro, Tennessee................... 7.

Gold Star Dairy, Little Rock, Arkansas.................... 126.

Turner Dairies, Fulton, Kentucky.......................... 99.

Others.................................................... 106, 126,

49.

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

In July 1993, during the last month of the Memphis order, the

percentage of route disposition represented by other order plants was

30 percent of the total route disposition in the marketing area. These

sales came from the following plants:

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

Federal

Plant/location order

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

Fleming Dairy, Nashville, Tennessee....................... 98.

Heritage Farms, Murfreesboro, Tennessee................... 98.

Gold Star Dairy, Little Rock, Arkansas.................... 126.

Turner Dairies, Fulton, Kentucky.......................... 99.

Avents Dairy, Oxford, Mississippi......................... 94.

Borden, Inc., Little Rock, Arkansas....................... 108.

Others.................................................... 106, 126,

49.

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

The Paducah market also has an extremely high ratio of Class I

sales represented by other order and partially regulated plants. In

July 1993, 67 percent of the Class I sales in the Paducah marketing

area originated from other order and partially regulated plants. These

sales came from the following plants:

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

Federal

Plant/location order

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

Fleming Dairy, Nashville, Tennessee....................... 98.

Heritage Farms, Murfreesboro, Tennessee................... 98.

Purity Dairies, Nashville, Tennessee...................... 98.

Others.................................................... 32, 46, 49.

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

In the Georgia marketing area, other order and partially regulated

distributing plants accounted for nearly 34 million pounds of Class I

sales in August 1993. These sales, which represented roughly 28 percent

of the total Class I sales that month, came from the following plants:

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

Federal

Plant/location order

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

Baker and Sons Dairy, Inc., Birmingham, AL................ 93.

Barber Pure Milk Company, Birmingham, AL.................. 93.

Barber Pure Milk Company, Mobile, AL...................... 93.

[[Page 25023]]

Dairy Fresh Corporation, Cowarts, AL...................... 93.

Flav-O-Rich, Inc., Montgomery, AL......................... 93.

Meadow Gold Dairies, Inc., Gadsden, AL.................... 93.

Superbrand Dairy Products, Montgomery, AL................. 93.

Gold Star Dairy, Inc., Little Rock, AR.................... 126.

Others.................................................... 2, 5, 6, 11,

13, 49,

131.

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

In the Alabama-West Florida market, Class I sales accounted for by

other order and partially regulated plants in August 1993 totaled 15.4

million pounds or 17 percent of total Class I sales that month. These

sales came from the following plants:

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

Federal

Plant/location order

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

Borden, Inc., Macon, Georgia.............................. 7.

Flav-O-Rich, Inc., Atlanta, GA............................ 7.

Fleming Companies, Inc., Nashville, TN.................... 7.

Heritage Farms Dairy, Murfreesboro, TN.................... 7.

Flav-O-Rich, Inc., Atlanta, GA............................ 7.

Kinnett Dairies, Inc., Columbus, GA....................... 7.

Superbrand Dairy Products, Inc., Greenville, SC........... 7.

Avent's Dairy, Inc., Oxford, MS........................... 94.

Barber Pure Milk Company, Tupelo, MS...................... 94.

Borden, Inc., Jackson, MS................................. 94.

Turner Dairies, Fulton, Kentucky.......................... 99.

Gold Star Dairy, Inc., Little Rock, AR.................... 126.

Others.................................................... 11, 46, 49,

131.

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

Class I sales by other order and partially regulated distributing

plants in August 1993 accounted for 12 million pounds of Class I sales

in the New Orleans-Mississippi marketing area or roughly 22 percent of

the total Class I sales that month. These sales came from the following

plants:

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

Federal

Plant/location order

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

Fleming Companies, Inc., Nashville, TN.................... 7.

Heritage Farms Dairy, Inc., Murfreesboro, TN.............. 7.

Barber Pure Milk Company, Mobile, AL...................... 93.

Brookshire Dairy Products Co., Columbus, MS............... 93.

Dairy Fresh Corporation, Prichard, AL..................... 93.

Flav-O-Rich, Montgomery, AL............................... 93.

Meadow Gold Dairies, Inc., Huntsville, AL................. 93.

Superbrand Dairy Products, Montgomery, AL................. 93.

Borden, Inc., Lafayette, Louisiana........................ 96.

Dairy Fresh of LA, Baker, LA.............................. 96.

Kleinpeter Farms Dairy, Baton Rouge, LA................... 96.

Turner Dairies, Fulton, KY................................ 99.

Forest Hill Dairy, Memphis, TN............................ 108.

Gold Star Dairy, Inc., Little Rock, AR.................... 126.

Others.................................................... 13, 49, 139.

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

Finally, in August 1993, other order and partially regulated

distributing plants accounted for 16.3 million pounds of Class I sales

in the Greater Louisiana marketing area or roughly 40 percent of the

total Class I sales that month. These sales came from the following

plants:

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

Federal

Plant/location order

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

Borden, Inc., Baton Rouge, LA............................. 94.

Borden, Inc., Jackson, MS................................. 94.

Brown's Velvet Dairy Prod., Inc., New Orleans, LA......... 94.

Dairy Fresh Corp., Hattiesburg, MS........................ 94.

Superbrand Dairy Products, Inc., Hammond, LA.............. 94.

Borden, Inc., Conroe, TX.................................. 126.

Borden, Inc., Tyler, TX................................... 126.

Gold Star Dairy, Inc., Little Rock, AR.................... 126.

Southwest Dairy, Tyler, TX................................ 126.

Vandervoorts Dairy, Fort Worth, TX........................ 126.

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

The Class I sales data discussed above indicate clearly that each

of the markets involved in this proceeding is closely integrated with

neighboring Federal order markets. However, it still leaves open the

question of how best to combine these orders because sales data alone

do not provide sufficient guidance to answer this question.

c. Market Stability

The third factor that must be considered in determining the

appropriate marketing area is the need to insure market stability, a

prime objective of the Agricultural Marketing Agreement Act.

The record testimony paints a picture of a rapidly evolving

industry. The marketing of milk products continues to change with ever-

wider distribution areas, centralized operations, inter-handler

marketing agreements, two-way containers, back-hauling arrangements,

plant closings, and changes in ownership, among others. As handlers

widen their distribution patterns, blend prices are buffeted by the

changing Class I utilization that a large plant can cause in a

marketwide pool. The shifting of a plant from one order to another can,

and does, result in handlers being placed in a position where they can

no longer hold on to their milk supply. Most of these changes were

described in the record; some were not. Official notice is taken of the

closing of Guth Dairy in Lake Charles, Louisiana; Acadia Dairy in

Thibodaux, Louisiana; and Walker Resources in Metairie, Louisiana; and

the minority financial interest acquired by Mid-America Dairymen, Inc.,

in Southern Foods Group effective February 17, 1994.

On the producer side, there have also been significant changes in

marketing arrangements. Producers have left their cooperative

associations, formed new cooperative associations, and merged existing

cooperatives. Official notice was previously taken of the merger of

Gulf Dairy Cooperative Association and Mid-America Dairymen, Inc.,

effective March 1, 1994.

The record evidence in this proceeding--specifically, the overlap

of procurement and sales areas, together with the need for stability in

a rapidly changing marketing environment--lead us to conclude that

orderly marketing will best be served by a market that is large enough

to equitably share the region's reserve supplies, to provide regulatory

stability for the plants in this area, and to provide producers with

the freedom to market their milk in whatever manner and to whomever

they wish.

Although there are many instances of plants that are located in one

market, but regulated in another market, there are also many price

alignment problems that result from these situations.4 It is best,

if possible, to avoid them. The Gold Star plant would enjoy a more

stable marketing environment if it were located in the Southeast

marketing area, instead of the Mid-South marketing area proposed by

AMPI.

\4\ Official notice is taken of the suspension of certain

provisions of the Greater Louisiana order effective November 1,

1993, (58 FR 63031) to keep a Lake Charles, Louisiana, plant from

becoming regulated under the Texas order, under which the plant

would have experienced a sharp reduction in its blend price.

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

The larger Southeast market will give producers in the Central

Arkansas and former Memphis markets more choices in marketing their

milk. At present, there are a limited number of distributing plants

available to producers in those markets and those that are available

are primarily supplied [[Page 25024]] by AMPI. Under the merged order,

however, producers will have a choice of many different handlers and

cooperatives through which to market their milk. With a uniform set of

regulations applicable to the larger market, it will be easier for

producers to supply different handlers at different times of the year

without fear of being shut out of the market because of separate base

and excess plans that are now, or have in the past, been applicable to

several of the individual orders involved in the merger.

As indicated in the record, the Paducah market is, for all intents

and purposes, an individual handler pool. Producers that are fortunate

enough to have a market with Turner Dairies enjoy extremely high blend

prices and a stable marketing environment. Their neighbors, on the

other hand, who are not part of Turner Dairies' nonmember supply but

instead belong to cooperative associations such as AMPI, Mid-Am, or

ADCA, must move their milk to whatever market is available to them and,

according to the testimony of Turner producers who have compared milk

checks, receive less money for their milk. This is not the essence of a

marketwide pool: To preserve a market for one group of producers, while

their neighbors, who balance the Class I needs of the market, must ship

their milk hundreds of miles away and receive lower prices for it. In

fact, the fluid market and the reserve market should be shared equally

among all producers in a marketwide pool.

The Paducah market is not equitably distributing returns to

producers supplying that market and should be considered for

incorporation within a larger market, but it should not be incorporated

in the proposed Southeast market. An analysis of the Federal order

exhibits entered into the record indicates that in August 1993 there

were 11.5 million pounds of milk pooled under Order 99, of which 88.4

percent was Class I. Since Turner Dairies' Fulton, Kentucky, plant was

the only pool plant that month, its Class I sales were approximately

10.2 million pounds (i.e., .884 x 11.5). The exhibits also show that

there were 2.0 million pounds of Class I sales in the marketing area

from the Fulton plant, leaving about 8.2 million which were distributed

in other marketing areas. Although the exact distribution of these 8.2

million pounds was not shown in the record, it is known from the

exhibits that there was distribution from this plant into the Central

Arkansas, Memphis, New Orleans-Mississippi, and Alabama-West Florida

marketing areas. If this pattern of distribution were to continue under

the proposed Southeast order, the Fulton, Kentucky, plant would become

regulated under that order.

According to the data in the hearing record, in July 1993--the most

recent month in which separate data for the Nashville market was

available--33 percent of the Class I sales in the Paducah marketing

area were made by Turner Dairies, Fulton, Kentucky; 22 percent of the

sales were made by handlers regulated under Order 32; 18 percent of the

Class I sales were made by Nashville area plants; and the remaining 27

percent of Class I sales were made by plants that were regulated under

Orders 46 or 49 (Indiana), or by handlers that were partially regulated

or unregulated. With this distribution pattern, the Paducah marketing

area may fit more appropriately with one of these other orders than it

does with the proposed Southeast marketing area.

The Memphis market in July 1993, its last month of operation,

resembled the Paducah market in having only Turner Dairies plants. In

addition to its Memphis plant, Turner Dairies also operated a plant at

Covington, Tennessee, 36 miles northeast of Memphis. Unlike the Paducah

market, a majority of the other order sales in the Memphis market are

from handlers that would be regulated under the proposed Southeast

order. Also, there is a significant overlap in procurement areas

between the Memphis order and the Central Arkansas and New Orleans-

Mississippi orders. There is clearly sufficient evidence in the record

to warrant regulation of the Memphis area as part of the Southeast

marketing area.

In August 1993, the Central Arkansas market had four fully

regulated distributing plants: The Borden, Inc., plant in Little Rock;

the Forest Hill Dairy Plant (i.e., Turner Dairies) that was regulated

under the Memphis order in July 1993; Coleman Dairy, Inc., in Little

Rock; and Humphrey's Dairy in Hot Springs, 55 miles southwest of Little

Rock.

Before it shifted to the Texas order in January 1993, the Gold Star

plant also was regulated under the Central Arkansas order. During

December, its last month under Order 108, there were 49.1 million

pounds of producer milk pooled under that order; in January the pounds

of producer milk dropped to 24.9 million pounds. There was a similar

drop in Class I producer milk, from 30.2 million pounds in December

1992 to 15.4 million pounds in January 1993.

In August 1993, there were 38.4 million pounds of producer milk

pooled under the Central Arkansas order, including the producer milk of

Forest Hill Dairy (i.e., Turner Dairies), which had been pooled under

Order 97. Combining this amount with the 11.5 million pounds of

producer milk pooled under the Paducah market that month yields a

combined total of approximately 50 million pounds, which would have

made it one of the smallest Federal order markets that month.

The point of this comparison is to show that, if the AMPI proposal

had been adopted, it would have created a market that would not have

provided the marketing stability that is needed in this area. In fact,

it is very likely that the proposed Mid-South market would have been

the subject of another lengthy merger proceeding within the near

future.

AMPI and Mid-Am filed exceptions objecting to the denial of the

proposal for a Mid-South marketing area. Mid-Am stated that there is

very little overlap of distribution and procurement between the

proposed Mid-South marketing area and the other areas included in the

Southeast marketing area. In addition, Mid-Am argues that the minimal

overlap in distribution between Central Arkansas and the rest of the

Southeast marketing area is from two plants: the Gold Star plant in

Little Rock that distributes into the Greater Louisiana and New

Orleans-Mississippi marketing areas and the Fleming Dairies plant in

Nashville that distributes into the Central Arkansas and former Memphis

marketing areas.

The findings in this decision specifically note that the Gold Star

plant has distribution in the Georgia marketing area and the Alabama-

West Florida marketing area, in addition to the Greater Louisiana and

New Orleans-Mississippi marketing areas. The former Memphis market not

only receives distribution from the Fleming Dairies plant at Nashville,

but also from the Heritage Farms plant at Murfreesboro, Tennessee

(Order 7), and Avents Dairy at Oxford, Mississippi (Order 94). Finally,

the Heritage plant and the Fleming plant distribute fluid milk products

into the Central Arkansas marketing area.

The overlap in procurement between Orders 7, 93, 94, and 96 with

Orders 108, 97, and 99 is not as great as it is among other marketing

areas being merged. Nevertheless, there is an overlap in procurement

between Order 94 and former Order 97 (13 counties in May 1993) and

between Orders 94 and 108 (8 counties in May 1993). Moreover, the need

to merge these marketing areas is justified by a combination of factors

(distribution, procurement, and [[Page 25025]] marketing stability)

that justifies the inclusion of Central Arkansas and Memphis in the

Southeast marketing area.

The Southeast marketing area adopted in this decision encompasses

all of the areas involved in this proceeding, with the exception of the

Kentucky portion of the former Nashville, Tennessee, order, the Texas

counties of Cass and Bowie, the Missouri county of Dunklin, and the

Paducah marketing area. This excluded area (other than the already

discussed Paducah area), and the previously unregulated area in

Tennessee, Georgia, and Arkansas that has been included are discussed

below.

Kentucky portion of former Nashville marketing area. The Kentucky

counties of Allen, Barren, Metcalf, Monroe, Simpson, and Warren, and

the Fort Campbell military reservation should not be included in the

Southeast marketing area.

Proponents of Proposal No. 1 indicated that they had included these

counties in their proposal because they had been in the previously

regulated Nashville marketing area.

There are no plants in these counties, except the Glasgow Cheese

Plant, which, according to the record, is not capable of supplying the

market because it does not have a Grade A receiving facility.

These counties are surrounded on three sides by the Louisville-

Lexington-Evansville order. There are no distributing plants in these

counties, and there are no significant population centers, other than

Bowling Green (population: 42,017) and Fort Campbell. According to the

witness for Fleming Dairy in Nashville, there are no significant sales

in these counties from Nashville distributing plants.

In view of their northernmost location and their proximity to the

Order 46 marketing area, the Fort Campbell Military Reservation and the

six Kentucky counties that were part of the Nashville marketing area

should not be included in the Southeast marketing area, but instead

should be left unregulated at this time. There are no plants that would

be unregulated by their exclusion from the marketing area.

The Georgia county of Rabun. This county, in the extreme northeast

portion of the State of Georgia within the Chattahoochee National

Forest, is surrounded on the west and south by the Georgia marketing

area and on the east and north by the Carolina marketing area. There

are no milk plants located within the county and no change in the

regulatory status of any plant would occur as a result of its inclusion

in the Southeast marketing area. It should be included in the marketing

area for administrative convenience.

The Tennessee counties of Van Buren, Bledsoe, Grundy, Franklin,

Lincoln, and Moore. These previously unregulated counties are located

between the Tennessee Valley marketing area on the east, the terminated

Nashville marketing area on the west, and the Alabama-West Florida

marketing area on the south. This is a sparsely populated area from

which milk is produced for the Nashville and Alabama-West Florida

markets. There are no milk plants in these counties and no currently-

unregulated plants outside of these counties would be regulated by the

inclusion of these counties in the marketing area. This area should

also be included in the proposed marketing area.

The Tennessee counties of Henry, Carroll, Benton, Decatur,

Henderson, Chester, and McNairy. These seven counties, bordered on all

sides by the proposed Southeast marketing area, should also be part of

the marketing area. There are no milk plants in this area, nor are

there any plants that would become regulated as a result of their

addition to the marketing area. Since they would be bordered on all

sides by other parts of the marketing area, no useful purpose would be

served in leaving them out of the marketing area.

The unregulated Arkansas counties. These counties, which were

proposed by AMPI for inclusion in the Mid-South marketing area, should

be included in the Southeast marketing area. There are no distributing

plants in these counties, and no new plants will become regulated as a

result of the inclusion of these counties in the marketing area.

The unregulated Texas counties of Bowie and Cass. The Texas

counties of Bowie and Cass should not be included in the Southeast

marketing area. The apparent reason for including these counties in the

proposed Mid-South marketing area was for administrative convenience

since these two unregulated Texas counties would have been surrounded

by regulated area. This is a good reason to include these two counties,

but they may, in fact, be more closely associated with the Texas

market. Rather than introduce the State of Texas into the Southeast

marketing area for the sake of two counties that do not include any

distributing plants, the counties of Bowie and Cass should be left

unregulated for possible inclusion in the Texas marketing area when the

opportunity presents itself.

Similarly, since the Paducah marketing area has not been included

in the Southeast marketing area, there is no point in adding one

Missouri county to the marketing area for the sake of map-drawing

convenience. Therefore, Dunklin County, Missouri, should not be part of

the Southeast marketing area.

2(a). Milk to be priced and pooled.\5\ It is necessary to designate

what milk and which persons would be subject to the merged order. This

is accomplished by providing definitions to describe the persons,

plants, and milk to which the applicable provisions of the order

relate.

\5\The findings and conclusions in this section are identical to

those of the recommended decision, except for ``lock-in provision,''

``unit pooling,'' ``supply plants,'' ``producer-handler,''

``producer,'' and ``producer milk.''

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The definitions included in the order serve to identify the

specific types of milk and milk products to be subject to regulation

and the persons and facilities involved with the handling of such milk

and milk products. Definitions relating to handling and facilities are

``route disposition,'' ``plant,'' ``distributing plant,'' ``supply

plant,'' ``pool plant,'' and ``nonpool plant.'' Definitions of persons

include ``handler,'' ``producer-handler,'' ``producer,'' and

``cooperative association.'' Definitions relating to milk and milk

products include ``producer milk,'' ``other source milk,'' ``fluid milk

product,'' ``fluid cream product,'' and ``filled milk.''

Several of these definitions were of particular issue at the

hearing: i.e., ``route disposition,'' ``pool plant,'' ``producer-

handler,'' and ``producer.'' All of the remaining definitions are

patterned after those contained in one or more of the orders involved

in this proceeding. Official notice of the final decisions setting

forth the need and basis of such provisions was taken at the hearing. A

discussion of those definitions that were of particular issue at the

hearing, as well as those that involve substantive modifications, is

set forth below.

Route disposition: Sec. 1007.3. The route disposition definition

sets forth the type of deliveries that are considered in determining

whether a distributing plant qualifies for pooling under the order.

As proposed in Proposal No. 1, route disposition means any delivery

to a retail or wholesale outlet (except to a plant) either direct or

through any distribution facility (including disposition from a plant

store, vendor or vending machine) of a fluid milk product classified as

Class I milk. This definition should be modified slightly to include,

for the limited purpose of determining pool plant qualification,

packaged fluid milk products that are transferred from a plant with

route disposition in the marketing area to a

[[Page 25026]] distributing plant if such transfers are classified as

Class I milk.

This language, which is also included in the Eastern Colorado

Federal milk order (See Sec. 1137.3) is necessary to preclude a plant

from becoming partially regulated because it ships significant

quantities of packaged fluid milk products to another distributing

plant, which then distributes those fluid milk products to retail and

wholesale outlets. This precise situation has occurred in the

neighboring Southwest Plains order, where a previously fully regulated

plant failed to qualify as a pool plant because it shipped more than 50

percent of its packaged fluid milk products to a distributing plant

which it operated in another city.6 As a partially regulated plant

with a Class I utilization higher than the market average, the handler

was in a position to pay its producers a price in excess of the order's

blend price. In addition, during one month AMPI was required to depool

milk that it had diverted from the plant in order to insure that the

plant qualified as a pool plant. This resulted in financial loss to the

cooperative.

\6\Official notice is taken of the suspension of certain

provisions of the Southwest Plains order effective February 1, 1994

(59 FR 11180).

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

To prevent this situation from occurring in the Southeast marketing

area, the route disposition definition should include, for the limited

purpose of determining pool plant qualification, packaged fluid milk

products that are transferred from a plant with route disposition in

the marketing area to a distributing plant if such transfers are

classified as Class I milk.

As a general application of the order, packaged fluid milk products

that are transferred from one handler to another will be treated as an

interhandler transfer. Thus, each transaction should be properly

identified and specifically reported as such to the market

administrator. This will facilitate orderly operations and eliminate

ambiguous or dual reports.

The modified route disposition definition adopted herein will not

change this treatment. It merely provides that such transfers, which

are classified as Class I and emanate from a plant with route

disposition in the marketing area, shall be considered as route

disposition from the transferor plant, rather than the transferee

plant, for the single purpose of qualifying the transferor plant as a

pool distributing plant under Sec. 1007.7(a).

Plant: Sec. 1007.4. A plant definition should be included in the

merged order to remove any uncertainty with respect to what constitutes

a plant and what constitutes a reload point.

The cooperative coalition's proposed plant definition is identical

to the definition now found in Order 93. Order 96 contains a slightly

different plant definition, while Orders 7, 94, and 108 do not define

this term.

The cooperatives' proposed definition should be adopted for the

merged order. The proposal defines plant as the land, buildings,

facilities, and equipment constituting a single operating unit or

establishment at which milk or milk products, including filled milk,

are received, processed, or packaged. Separate facilities without

stationary storage tanks and used only as reload points for

transferring bulk milk from one tank truck to another or separate

facilities used only as distribution points for storing packaged fluid

milk products in transit for route disposition would not be plants

under this definition.

There was no opposition to this proposal at the hearing or in the

briefs that were filed. This definition is widely used in other Federal

orders and is familiar to the industry. It should be included in the

merged order.

Pool plants: Sec. 1007.7. Essential to the operation of a

marketwide pool is the establishment of minimum performance standards

to distinguish between those plants substantially engaged in serving

the fluid needs of the regulated market and those plants that do not

serve the market in a way or to a degree that warrants their sharing in

the Class I utilization of the market. The pooling standards that are

contained in the attached order would carry out this concept under

present marketing conditions.

Distributing plants: Sec. 1007.7(a). To be pooled under the merged

order, a distributing plant's total route disposition each month must

be equal to 50 percent or more of the fluid milk products physically

received at the plant or diverted from the plant during the month. In

addition, the plant's daily average route disposition in the marketing

area must be equal to at least 1,500 pounds per day or 10 percent of

the plant's receipts of fluid milk products, except filled milk,

physically received at the plant or diverted from it during the month.

Citing an expected Class I utilization under the merged order that

is likely to exceed 68 percent during all months of the year, the

cooperative coalition proposed a total route disposition requirement of

50 percent each month of the year and an in-area route disposition

requirement of 10 percent. These requirements are similar to those of

the five existing markets, except for the Georgia market, which has a

15 percent in-area requirement. These standards are reasonable and

should be adopted for the merged order.

Lock-in provision: Sec. 1007.7(d). With a 10 percent in-area route

disposition requirement, it is possible that a distributing plant may

meet the pooling standards of more than one order. A question then

arises concerning under which order the plant should be regulated.

Under Proposal No. 1, a distributing plant that met the order's pooling

standards would be regulated under the Southeast order if the plant is

located in the Southeast marketing area. This is a sensible provision

to have in this area and should be adopted.

Testifying in support of the lock-in provision, the spokesman for

the cooperative coalition stated that this provision differs slightly

from the traditional Federal order method of determining where a

distributing plant should be regulated when the plant qualifies for

pooling under more than one order. He explained that the traditional

method provides that a plant should be pooled under the order in which

it has the most sales. The principle behind that rule, he added, was to

insure that all handlers having sales in an order area were subject to

the same price and other regulatory provisions as their competition.

The coalition's witness stated that with the advent of processing

plants with sales distribution over wide geographic areas, the

traditional method of pooling distributing plants is outdated. He said

that another, and equally important, reason for adopting a lock-in

provision is to minimize any inequities which may occur between

producers located within the same geographic supply area. These

inequities are created when a distributing plant is located within one

marketing area and obtains its milk supply within that marketing area,

but is regulated by another Federal order.

The witness referred to an exhibit which compared blend prices

under the Greater Louisiana and the adjacent Texas orders. He noted

that the Greater Louisiana order blend prices, f.o.b. Lake Charles and

Shreveport, Louisiana, have been substantially above the Texas order

prices at similar locations. He said that the 73 to 77 cents per

hundredweight average difference in blend prices between the two

orders, considering the overlap of supply for both plants, would create

unstable and disruptive marketing conditions in the proposed merged

order supply area and that these differences in producer pay prices

would create difficulties in maintaining [[Page 25027]] sales and

attracting adequate supplies of milk for handlers under the merged

order.

In its brief, Southern Foods Group urged the Secretary to reject

any lock-in provisions, arguing that it was philosophically opposed to

a lock-in provision unless the provision is designed to avoid switching

the regulation of a plant from one market to another on a frequent

basis. It stated that ``in general, a plant should be regulated where

it has a plurality of its milk distribution since that is where it is

competing the most against other regulated handlers.'' The brief also

stated that the problem experienced by Guth Dairy, Lake Charles,

Louisiana, is irrelevant because that plant has gone out of business.

Finally, focusing on Gold Star Dairy in Little Rock, SFG argued that if

that plant has greater sales in the Texas marketing area than in the

Southeast marketing area it should be regulated under the Texas order.

The question of where to regulate a plant that meets the standards

of more than one order may actually depend upon the circumstances

involved. While SFG holds that the plant should be regulated in the

market in which it mostly competes for sales, problems that have

surfaced in the past year in the Greater Louisiana, Tennessee Valley,

and Louisville-Lexington-Evansville orders would indicate that a

handler's procurement area may be more important than its distribution

area in determining where the plant should be regulated.

Given proper Class I price alignment between two orders (i.e., the

same Class I price at a given location regardless of which order a

plant is regulated under), a plant which meets the pooling standards of

more than one order will be in a better position to procure a milk

supply by being regulated in the marketing area in which it is located

unless it is shipping milk into a market which is generating a higher

blend price at the plant's location. Even with the higher blend price

under the other order, however, it may still not be appropriate to

regulate the plant under the higher-priced market if, in doing so, it

causes disorderly marketing conditions in the market where the plant is

located.

With the exception of the Upper Florida market, the Southeast

marketing area is surrounded by markets with equal or lower prices. In

addition, it is expected that the Class I utilization of the Southeast

market will exceed the utilization of these surrounding markets with

the exception of the Upper Florida market. Consequently, the blend

price at any location within the Southeast marketing area is likely to

be higher than the blend price at that location under any of the

surrounding orders.

As indicated, the sole exception to this statement is in southern

Georgia or southern Alabama, where there are no plants at the present

time that would qualify for pool status in the Upper Florida market. In

view of this, the lock-in provision proposed for the Southeast market

is a prudent measure that will avoid the disorderly marketing

conditions that result when a plant becomes regulated in a lower blend

price market or switches back and forth between two orders.

Under the proposed Southeast order, a plant that qualifies as a

pool distributing plant and which is located within the marketing area

will be regulated under this order even if it has greater sales in

another order's marketing area. The adjacent Texas, Southwest Plains,

Paducah, Louisville-Lexington-Evansville, and Upper Florida orders

contain provisions (Secs. 1126.7(f)(4), 1106.7(f)(2), 1099.7(c)(3),

1046.7(e)(3), and 1006.7(d)(3), respectively) that will conform to this

provision by yielding regulation of the plant to the Southeast order.

However, Secs. 1005.7(d)(3) and 1011.7(d)(3) of the Carolina and

Tennessee Valley orders, respectively, do not contain this type of

provision, setting up a potential conflict with Sec. 1007.7(d), which

will only release a plant that has more sales in another marketing area

if the plant is not located in the Southeast marketing area.

At the present time, there is no distributing plant in the

Southeast marketing area that has, or is likely to have, more sales in

the Carolina or Tennessee Valley marketing areas than in the Southeast

marketing area. Should this situation change, however, and a plant

located in the Southeast marketing area does develop more route

disposition under Order 5 or 11 than under Order 7, the plant should

remain regulated under Order 7 notwithstanding the provisions of Orders

5 and 11.

The Southeast order should also contain a provision releasing a

plant from regulation if the other order contains a provision that

requires regulation of the plant because of its location within that

order's marketing area. For example, the Louisville-Lexington-

Evansville order, in Sec. 1046.7(e)(2)(ii), requires regulation of a

distributing plant if the plant meets the pooling standards of

Sec. 1046.7(a), is located in the marketing area, and is subject to a

Class I price under Order 46 that is not less than the Class I price

under another order in which it also qualifies as a pool plant and in

which marketing area it has more route disposition. Accordingly, a

paragraph is included in the proposed Southeast order,

Sec. 1007.7(e)(4), which recognizes the jurisdiction of Order 46 to

regulate such a plant.

A new paragraph--Sec. 1007.7(d)--has been added to the pool plant

rules in this final decision to clarify the application of the lock-in

provision. Although the order language would clearly regulate such a

plant by not releasing it to another order in either Sec. 1007.7(g) (3)

or (4), the inclusion of the new paragraph (d) leaves no doubt about

the matter.

Multiple order pooling. At the hearing, Gold Star suggested another

way of handling a plant with sales in more than one market. It

suggested prorating the plant's sales among the markets in which it

qualifies for pooling and in which it has at least 25 percent of its

sales. Producers supplying the plant would receive a weighted average

price based upon the blend prices of the various markets in which the

plant so qualifies.

This proposal should not be adopted. It would result in paying

producers different prices in a common supply area--one of the problems

cited for merging these orders--and it would be cumbersome to

administer. With this merger and perhaps others to follow, the

regulatory problems experienced with large plants distributing over

wide areas should be significantly diminished.

Unit pooling: Sec. 1007.7(e). Barber Pure Milk Company (Barber) and

Dairy Fresh Corporation (Dairy Fresh) proposed the ``unit pooling'' of

a distributing plant and one or more other plants. Under their

proposal, a unit consisting of one distributing plant and one or more

additional plants of a handler at which Class I and/or Class II

products only are processed and packaged would be considered as one

plant for the purpose of meeting the pool distributing plant

requirements if all of the plants in the unit were located within the

marketing area, and if, prior to the first of the month, the handler

operating such plants filed a written request for unit pooling with the

market administrator. The proposal would permit only one unit per

handler, require that all plants in a unit be located in the marketing

area, and exclude plants producing frozen desserts from being part of a

unit.

Barber's spokesman testified that Barber Pure Milk Company operates

two non-pool plants that process and package Class II products, one

located in Montgomery, Alabama, and the other located in Oxford,

Alabama. The Montgomery plant processes dessert and [[Page 25028]] ice

cream mix and buttermilk for baking and currently receives about

700,000 pounds of milk from producers per month. The Oxford plant

processes and packages cottage cheese, sour cream, and sour cream dip

and receives about 400,000 pounds of milk from producers each month.

The witness stated that, up until early 1992, Barber operated four

plants on the Alabama-West Florida order, located at Birmingham,

Mobile, Montgomery, and Oxford, Alabama, which is 60 miles east of

Birmingham. Each of the four plants engaged in the manufacture of Class

II products in varying degrees. He said that, for efficiency purposes,

the Class I processing and packaging at the Montgomery and Oxford

plants was moved to the Birmingham and Mobile plants, while the Class

II processing and packaging at the Birmingham and Mobile plants was

moved to the Montgomery and Oxford plants.

The Barber witness stated that to accommodate this economical

specialization of plant operations and not create any chaos in the

marketplace, it was necessary to make some changes in the order. If the

unit pooling proposal is not adopted, he said, it will become necessary

to incur unnecessary costs of moving milk to pool distributing plants,

unloading the milk, reloading the milk, and transporting it back to the

Class II specialty plants. He noted that the diversion provisions will

accommodate the movement of some of the needed milk directly from the

farm to the Class II plants, but not all of the milk required.

The Barber witness testified that the milk supply for the Oxford

plant comes from six producers located in the Alabama counties of

Calhoun, Etowah, and Talladega who produce approximately 500,000 pounds

of milk per month or about 80 percent of the plant's requirements. He

said that without the unit pooling provision, about two-thirds of this

milk could be diverted to the Oxford plant, but the remaining third

would have to be delivered to the Birmingham pool plant, unloaded at

the plant, reloaded, and hauled the 60 miles back to Oxford. The

additional cost involved in this, he estimated, was approximately 47

cents per hundredweight or $225 per load.

This witness also testified that milk to supply the Montgomery

plant of approximately 700,000 pounds per month is located in northern

Alabama and Tennessee and must be transported through the city of

Birmingham on its way to Montgomery. There is no additional hauling

cost if the milk is received at Birmingham; however, the cost of

receiving the milk, washing the truck, and reloading the milk adds an

additional .20 cents per hundredweight to the cost of the milk at

Montgomery or an additional $95 for each load of milk received at

Birmingham and then transferred to Montgomery.

The witness stated that unit pooling should not be rejected because

of concerns about attracting additional supplies of milk to the market

for Class II products. He said that the production of Class II products

was demand driven and that no additional quantity beyond the demand

would be produced by the specialized plants. Nevertheless, to allay any

concerns that these plants would be used for surplus disposal, he said

the proposal restricts unit pooling to plants which produce Class I and

II products only, excluding ice cream.

In its proposal concerning the proposed Mid-South marketing area,

AMPI also proposed the unit pooling of plants that are located within

the marketing area. Unlike the Barber/Dairy Fresh proposal, the AMPI

proposal did not exclude plants making ice cream from the unit.

In its post-hearing brief, the Fleming Companies urged that unit

pooling be rejected. It stated that pool performance standards should

be fixed so that each producer, each plant, and each supply

organization demonstrate a close association with the Class I

requirements of the market.

The unit pooling proposals make economic sense and should be

adopted for the merged marketing area, but with certain restrictions.

The order's pooling standards insure that each distributing plant

and each unit of plants consisting of at least one distributing plant

perform at the same minimum level to be eligible for pool plant status.

The total route disposition requirement--50 percent each month of the

year--recognizes that not all of the plant's receipts will be needed

for Class I use. That standard permits up to 50 percent of the plant's

receipts to be used in Class II, III, or III-A products.

If Handler A chooses to operate one large distributing plant in

which 40 percent of the plant's receipts are used in Class II products,

while Handler B chooses to operate a distributing plant exclusively for

fluid use and another plant exclusively for Class II products and the

Class I utilization of both plants added together is 60 percent, it

makes no sense to preclude Handler B from separating the operations.

Both handlers are performing at precisely the same levels; they simply

differ in their modes of operation. They should be permitted to operate

in whatever manner they deem most efficient.

As proposed by Barber and Dairy Fresh, a unit should be restricted

to plants located in the marketing area that make only Class I or Class

II products. If a handler wishes to add or remove plants from the unit,

the handler would have to file a request with the market administrator

before the first day of the month in which the change is to be

effective.

The provision adopted here deviates from the Barber/Dairy Fresh

proposal by permitting plants that make frozen desserts to be included

in a unit. No convincing rationale was given for excluding ice cream or

other frozen dessert plants from a unit. This restriction would be

unfair to a handler who makes ice cream in a separate plant, as

compared to another handler who bottles milk and makes ice cream in the

same plant. It also would require a set of standards to determine what

is a frozen dessert plant and what is not. For example, if 50 percent

of a manufacturing plant's milk was used to make cottage cheese and 50

percent was used to make ice cream, one would have to determine whether

this plant was a cottage cheese plant or a frozen dessert plant. There

is no basis for distinguishing frozen desserts from other Class II

products for the purpose of unit pooling. Accordingly, this part of the

Barber/Dairy Fresh proposal is not adopted.

One additional restriction should be added to the proposal,

however. It would be inappropriate to permit a Class II operation in a

higher-priced zone to unit pool with a distributing plant in a lower-

priced zone. An example will illustrate the point.

If a handler with a plant in Montgomery, Alabama, processed 6

million pounds into Class I products and 4 million pounds into Class II

products, it would pay into the pool--based on prices proposed in this

decision--a Class I location adjustment of $12,000 (i.e., 6 million

pounds x $.20 per cwt.), but in paying producers supplying the plant,

the handler would draw out of the pool a location adjustment value of

$20,000 (i.e., 10 million pounds x $.20 per cwt.). In effect, the

handler would take out of the pool in location value $8,000 more than

it contributed.

It is universally true that a handler in a higher-priced zone will

draw out of the pool more location value in the blend price to its

producers than it contributes on the basis of its location adjustment

for Class I milk. This is because the pooling standards do not require

a handler to use all its milk in Class I. Because the market for Class

II products is more of a regional market, [[Page 25029]] location value

has not been added to Class II products. The pool, in effect, absorbs a

certain amount of transportation cost to provide a handler with milk

for Class II use. When both the Class I and II products are processed

at the same plant, this subsidization is limited by the amount of milk

that may be used in Class II at that location.

Under the unit pooling proposal of Barber and Dairy Fresh, it would

be possible to unit pool a Class I distributing plant in a lower-priced

zone (e.g., Montgomery, Alabama) with a Class II operation in a higher-

priced zone (e.g., Franklinton, Louisiana). Assuming that in this unit,

the Montgomery plant processed 6 million pounds of Class I milk, while

the Franklinton plant processed 4 million pounds of Class II milk, the

handler would contribute $12,000 to the pool in location value on Class

I milk, but it would draw out of the pool $32,000 (i.e., 6 million

pounds x $.20 in Montgomery plus 4 million pounds x $.50 cents in

Franklinton). In other words, it would take out of the pool $20,000

more than it contributed in location value.

It would not be fair to expect all of the market's producers to

subsidize the delivery of milk for Class II use in the Montgomery/

Franklinton unit example described above. As previously noted, a

certain amount of subsidization will always occur to the extent that

Class I route disposition requirements are less than 100 percent and no

location value is attached to the Class II price. However, the

opportunity to take advantage of this situation is equally available to

all of the market's handlers. On the other hand, under the Barber/Dairy

Fresh unit pooling proposal large handlers with multiple plants would

be able to take a disproportionate share of location value out of the

pool if their Class II operation were located in a higher-priced zone

than their Class I operation.

To correct this inequity, the composition of units should be

further restricted. Specifically, in a unit consisting of two or more

plants, any plant that, by itself, would not qualify as a pool plant

must be located in a pricing zone providing the same or a lower Class I

price than the price applicable at the unit distributing plant that

would, by itself, qualify as a pool plant. Thus, for example, a Class

II operation in Nashville may unit pool with a Class I operation in

Atlanta, but a Class II operation in Atlanta may not unit pool with a

Class I operation in Nashville.

This additional restriction on unit pooling will insure a degree of

fairness to all of the market's handlers in processing Class II

products and to all of the market's producers in the distribution of

pool funds. It also will tend to encourage milk in lower-priced areas

to be used in lower-valued products while encouraging milk to move to

the market's higher-priced areas for use in Class I.

In their exceptions, Barber Pure Milk Company (Birmingham, Alabama)

and Dairy Fresh Corporation (Greensboro, Alabama) objected to the

additional unit pooling restriction. They contend that any handler can

accomplish the same result--i.e., pool milk at a higher-priced

location--by diverting milk to a Class II plant located in the higher-

priced zone. They argue that it is more efficient to permit unit

pooling for Class II plants located in higher-priced zones than the

pricing zone of the qualifying distributing plant and urge that the

restriction be removed.

First of all, it is not possible to accomplish the exact same

result by diverting milk to a Class II plant in a higher-priced zone.

The Barber witness testified that some milk could be pooled in this

manner, but not all of the milk that might be required. Before a

handler can divert milk, the milk to be diverted must become eligible

for diversion. This is accomplished by delivering the milk to a pool

plant for a minimum number of days. Under the Southeast order, at least

10 days' production (4 days' production during January through June)

must be received at a pool plant during the months of July through

December.

Because of this requirement, there is a practical limit on where

milk will be diverted in relation to the pool plant from which

diverted. For example, it is unlikely that a handler in Nashville will

divert milk to a nonpool plant in Hattiesburg. With unit pooling,

however, milk going to a Class II operation may have no association

with a Class I operation that is hundreds of miles away.

There is no indication of how the removal of this restriction would

promote greater efficiencies. However, the decision clearly sets forth

the reasons for the restriction: to promote a degree of fairness to all

market handlers, whether their Class I and Class II uses are in the

same or separate facilities, and to the market's producers in the

distribution of pool funds.

Supply plants: Sec. 1007.7(b). A supply plant should be defined as

a plant that is approved by a duly constituted regulatory agency for

the handling of Grade A milk and from which fluid milk products are

transferred during the month to a pool distributing plant. This is the

definition now included in Orders 93 and 108 and proposed by the

cooperative coalition for the merged order.

To qualify as a pool plant, a supply plant should be required to

transfer a certain portion of its receipts each month to a pool

distributing plant. In that way, it will be contributing to the fluid

needs of the market.

As proposed by the cooperative coalition, a supply plant would have

to transfer 60 percent of its receipts to pool distributing plants

during each of the months of July through November and 40 percent

during each of the months of December through June. The supply plant's

``receipts'' would include milk that is diverted from the plant as

``producer milk,'' but would exclude milk that is diverted to the

supply plant from another pool plant. In addition, receipts would

include not only the milk received from individual dairy farmers, but

also the milk received from a cooperative association acting as a

handler on milk delivered directly from producer-members' farms (i.e.,

pursuant to Sec. 1007.9(c) of the order).

At the hearing, a spokesman for Kraft Foods testified that a pool

supply plant should be allowed to use the most efficient form of milk

movement to meet supply plant shipping requirements. He said that in

addition to including transfers from the plant, diversions to pool

distributing plants directly from producers' farms also should be

counted in meeting those pooling requirements. In its Proposal No. 9,

the Fleming Companies also proposed that diversions be used to meet a

supply plant's shipping requirement.

The record indicates that distributing plants in the Southeast

marketing area are supplied with milk that comes directly from

producers' farms. Pool supply plants, as defined in Section 7(b) of the

individual orders, have not been a factor in this area for many years.

To the extent that any plant milk is transferred to distributing

plants, such milk generally comes from cooperative association

``balancing plants,'' which qualify as pool plants based on the

cooperatives' total deliveries of milk to pool distributing plants, as

opposed to individual plant performance. Such deliveries may include

transfers of plant milk but, as a general rule, the milk comes directly

from producers' farms without being first delivered to the

cooperative's plant.

Despite the fact that this market may have little need for true

supply plants, the merged order should continue to accommodate the

possible pooling of such plants in case plant milk from a distant

location is needed to [[Page 25030]] supplement locally-produced milk.

However, there is no reason to facilitate the pooling of manufacturing

plants as ``pool supply plants'' by allowing such plants to qualify on

the basis of direct deliveries from the farm when the very fact that

such deliveries can be economically made belies the need for the

``supply plant'' in the first place. For this reason, the Kraft and

Fleming proposals to permit diversions to be used as qualifying

shipments for a supply plant should not be adopted.

Balancing plants: Sec. 1007.7(c). While the term ``balancing

plant'' is not actually used in the order, as described in

Sec. 1007.7(c) of the proposed Southeast order it means a plant located

in the marketing area and operated by a cooperative association which

delivers 60 percent of the producer milk of its members to pool

distributing plants during each of the months of July through November

and 40 percent during each of the months of December through June. The

deliveries to pool distributing plants may include deliveries directly

from the farms of producer members of the association as well as

transfers from the cooperative's plant.

To be eligible for pool status, the plant must not qualify as a

pool distributing plant or a pool supply plant under the Southeast

order or any other Federal order. Also, the plant must be approved to

handle Grade A milk by a duly constituted regulatory agency.

This provision is essentially the same as the proposal of the

cooperative coalition, except that it requires a plant that qualifies

under this paragraph to be located within the Southeast marketing area.

The plants that are likely to become cooperative balancing plants under

the Southeast order are DI's plants in Franklinton, Louisiana, and

Lewisburg, Tennessee, and Mid-America Dairymen's plant in Kentwood,

Louisiana. Therefore, the in-area location requirement should not

affect the regulatory status of any plant that is expected to be pooled

as a balancing plant under this order.

Unlike a supply plant, which must incur the cost of shipping milk

to the market, a balancing plant could be located in New Mexico,

Arizona, or some other distant location and not incur the cost of

shipping milk from those locations to the market. Such a plant could

qualify based on the direct deliveries of locally-produced milk. For

this reason, it would be imprudent not to require a balancing plant to

have some association with the Southeast marketing area, as urged by

the Fleming Companies, Barber, and Dairy Fresh in their briefs.

In its joint brief, Barber and Dairy Fresh urged the Secretary to

not only require a balancing plant to be located in the marketing area,

but also to require the plant to transfer 10 percent of the plant's

receipts to pool distributing plants each month. The Fleming Companies

made a similar plea in its brief.

These handlers provided no convincing reason why any shipments from

a balancing plant that is located within the marketing area are needed.

Such plants, in fact, provide a service to the market in balancing its

reserve supplies. The performance standards applicable to the

cooperatives which operate these plants assure that milk will be made

available to meet the Class I needs of the market. Therefore, in the

absence of a compelling reason for adopting these seemingly unnecessary

milk handling and transportation requirements, the request for specific

performance from such a plant is denied.

The Fleming Companies, Kraft General Foods, and Southern Foods

Group urged that consideration be given to establishing pooling

provisions for proprietary handlers that are the same as those for

cooperatives. They contend that the cooperatives are able to attach

milk supplies to the market which are devoted exclusively for

manufacturing use, but that proprietary manufacturing plants and fluid

milk handlers are prohibited from doing the same thing. Specifically,

they stated that cooperative association ``balancing'' plants are

allowed to pool based on the organizational performance of the

cooperative, an option that obviously is not available to proprietary

handlers. Instead, proprietary handlers would have to rely on supply

plants that are required to receive, unload, reload, and transfer

producer milk to distributing plants in order to qualify as pool supply

plants. The issue, they argue, is not one of ``need'' for supply plant

milk to supply the fluid market, but whether the order should permit

the dominant cooperative to service the market efficiently while

requiring non-cooperative sources of milk to be encumbered with great

inefficiency.

It is questionable how the ability of proprietary handlers to

attach additional supplies of milk for manufacturing use with the

market promotes inefficiencies in supplying the fluid milk needs of the

market. The primary objective of pooling provisions is to provide the

incentive to supply the fluid milk needs of the market and to

accommodate the pooling of the reserve supplies of milk that are

available and are necessary to serve or balance the fluid milk needs.

To the extent that supply plants are necessary, the pooling

standards are the same for cooperatives and proprietary handlers. The

shipping standards are set at a level to ensure a sufficient

association with the fluid market to warrant a share in the Class I use

of the market.

Cooperative association ``balancing plants'' serve a different

role. These plants are the outlets of last resort. When surplus milk

has no other place to go on weekends or during the spring and summer

months, it is manufactured into storable products at Mid-Am's

manufacturing plants in Franklinton and Kentwood, Louisiana, and

Lewisburg, Tennessee. When production decreases, these plants may shut

down completely or operate at minimal capacity. There has to be some

place for surplus milk to go and dairy farmers, through their

cooperative associations, have assumed the burden of processing this

surplus milk. At the same time, the overall pooling standards ensure

that milk is supplied for fluid use, which is a primary objective of

the cooperative associations supplying the market.

A proprietary cheese plant operates on a different premise. The

primary objective of a proprietary cheese plant operator is to produce

as much cheese as possible as efficiently as possible. Ideally, such

plants prefer to operate at full operating capacity all the time. To

give up any more milk than is absolutely necessary is to forgo profits.

There is no basis for incorporating order provisions in this market

that would encourage additional cheese production by making it easier

to pool cheese plants. In an area such as the Southeast marketing area

that has a high Class I price to assure an adequate supply of milk for

fluid use, the adoption of provisions to facilitate the proliferation

of cheese plants is unwarranted. There is no shortage of milk for

cheese in the United States, and there is no reason to encourage

additional milk production for cheese plants in the Southeast. Fluid

milk processors in the Southeast pay relatively high Class I prices to

assure an adequate supply of milk for fluid use, and the blend prices

resulting from those Class I prices should not be reduced by

encouraging additional production destined for Class III use.

Revisions of pooling standards: Sec. 1007.7(f). Kraft Foods

proposed that the market administrator be given the authority to adjust

pool supply plant shipping standards. The Kraft witness stated that

this will afford the Department more flexibility in meeting the

changing needs of the market. The [[Page 25031]] witness cited the

lengthy delays that are now frequently incurred in suspending

regulations when market conditions change. He also noted that while

some orders permit the Director of the Dairy Division to issue

revisions of shipping standards, this process is also a lengthy

procedure.

The Kraft proposal should be adopted, but it should be modified to

include the distributing plant route disposition standards in

Sec. 1007.7(a), the supply plant shipping standards in Sec. 1007.7(b),

the cooperative ``balancing plant'' performance standards in

Sec. 1007.7(c), the ``touch base'' standards in Sec. 1007.13(d) (1) and

(2), and the diversion limitations in Sec. 1007.13(d) (3) and (4). The

authority to increase or decrease a percentage performance level should

be restricted to not more than 10 percentage points above or below the

levels established in the order. The authority to increase or decrease

the producer ``touch base'' standards in Sec. 1007.13(d) (1) and (2)

should be restricted to 50 percent of the standard specified in the

order.

Most milk order actions involve temporary adjustments to pooling

standards to recognize changes in supply and demand conditions. These

adjustments are accomplished in most orders by ``suspending'' certain

language from a provision of the order so as to reduce the regulatory

burden on handlers and assure the continued pooling of milk that has

been historically associated with a market without the need for making

costly and inefficient movements of milk. A large percentage of these

suspensions could be avoided by permitting the order's pooling

standards to be adjusted slightly at the direction of the market

administrator, who is the person delegated by the Secretary to

administer the order.

Suspension actions only provide a means for reducing pooling

standards. These actions cannot be used to increase pooling standards

in the event that additional supplies of milk are needed. A few orders

provide authorization for the Director of the Dairy Division to either

increase or decrease pooling standards as a result of changes in supply

and demand conditions. This authority is intended to provide a greater

degree of flexibility to adjust performance standards to the varying

needs of the market. However, the process for implementing the changes

has made it extremely difficult to respond as expeditiously as is

necessary to reflect frequent and rapid changes in marketing

conditions.

As proposed herein, the authority to modify pooling standards and

diversion limitations would be restricted to not more than 10

percentage points up or down. Following a written request to make such

an adjustment, the market administrator will notify all parties in the

market who would have an interest in the request. This would include,

at a minimum, every handler and every cooperative association

representing producers in the market. In addition, the market

administrator will notify the Director of the Dairy Division,

Agricultural Marketing Service, of the request. The market

administrator will provide at least seven days for the submission of

written comments, which may be faxed or mailed, before making a

decision concerning the request. Prior to making such a decision, the

market administrator will confer with the Director of the Dairy

Division.

The flexibility accorded in the order by this provision should be

helpful in meeting any fluctuating needs of the market in a timely

manner.

Nonpool plant: Sec. 1007.8. The nonpool plant definition proposed

for the merged order should be adopted. The plants defined as nonpool

plants include other order plants, plants of producer-handlers,

partially regulated distributing plants, unregulated supply plants, and

exempt plants. With the exception of the exempt plant definition, these

terms are standard among the separate markets involved in this

proceeding.

The exempt plant definition proposed by the cooperative coalition

includes, in addition to a plant operated by a governmental agency, a

plant with monthly route disposition of less than 100,000 pounds.

At the hearing, the cooperative coalition spokesman indicated that

if the two small producer-handlers now in the Georgia market--Etowah

Maid Dairies, Inc., at Canton, Georgia, and Sheppard Brothers Dairy

Farm at Stone Mountain, Georgia--were not exempt from regulation under

the producer-handler provisions proposed for the merged order, they

would be under the proposed exempt plant definition. Although neither

producer-handler testified at the hearing or filed a post-hearing

brief, it is not certain that they would, in fact, be exempt from

regulation under the proposed exempt plant definition.

According to the cooperatives' witness, the purpose of the 100,000-

pound exemption ``is to exempt from pricing and pooling those producer-

handlers who are fairly small in size, whether or not they might

otherwise qualify as a producer-handler.'' As written and as explained

at the hearing, however, this provision would apply to any plant with

monthly route disposition under 100,000 pounds, whether or not the

handler otherwise meets the criteria for being a producer-handler.

The proposed exemption from regulation based on monthly route

disposition should be adopted. As a practical matter, the exemption of

plants of this size would pose no threat to the order's regulated

handlers. In addition, the regulatory burden on a handler of this size

is much greater than it is on an average size handler. Although it is

not certain that the two producer-handlers in this market would be

exempt under this provision, it should nevertheless be included in the

order to preclude the regulation of any small handler who may

distribute fluid milk products in the Southeast marketing area.

Handler: Sec. 1007.9. The impact of regulation under a Federal

order is primarily on handlers. A handler definition is therefore

necessary to identify those persons from whom the market administrator

must receive reports, or who have a financial responsibility for

payment for milk in accordance with its classified use value. This will

assure that all information necessary to determine a person's status

under the order can be readily determined by the market administrator.

As proposed by the cooperative coalition, the handler definition

should include the operator of a pool plant, a cooperative association

that diverts milk to nonpool plants or delivers milk to pool plants for

its account, a producer-handler, and any person who operates a

partially regulated distributing plant, an-other order plant, an

unregulated supply plant, or an exempt plant.

With the exception of the operator of an exempt plant, these terms

are standard definitions, which are included in virtually all Federal

milk orders. The inclusion of the operator of an exempt plant in the

handler definition is somewhat unusual. Although most of the individual

orders, except Order 108, exempt government plants from regulation,

none of them include the exemption for a plant based on minimum route

disposition. Because of this additional basis for exemption, the

operator of an exempt plant should be included in the handler

definition. Although the operator of an exempt plant is, as the name

implies, exempt from full regulation under the order, the plant

operator must still file reports with the market administrator so that

the basis for exemption can be determined and milk handled by the plant

can be properly classified. For this reason, it is logical to include

an exempt plant operator in the handler definition. [[Page 25032]]

Producer-handler: Sec. 1007.10. The merged order should exempt a

producer-handler from regulation if the producer-handler meets certain

specified requirements. The only two producer-handlers now operating in

the proposed marketing area have been subject to the provisions of the

Georgia order. Since this provision is short, simple, easily understood

and virtually identical to the producer-handler provisions contained in

the separate orders, it should be adopted for the merged order.

The cooperative coalition's proposed producer-handler provision

defines a producer-handler as a person who is engaged in the production

of milk and also operates a plant from which during the month fluid

milk products are disposed of directly to consumers through home

delivery retail routes or through a retail store located on the same

property as the plant. A person meeting all of the other requirements

for a producer-handler, but who disposes of fluid milk products through

wholesale outlets, jobbers, independent route distributors, or retail

outlets other than a plant store would not qualify as a producer-

handler.

As described by the cooperatives' spokesman, the retail-wholesale

distinction is designed to address the point at which the pricing

advantage granted to producer-handlers contributes to disorderly

marketing. The witness testified that a producer of medium farm size

who bottles his or her own product and sells to his/her neighbors is

not a serious threat to orderly marketing. While such a person still

has the same buying advantage, such savings are less than the

additional cost inherent with small size.

The cooperatives' spokesman also stated that even a producer-

handler of substantial size who develops home-delivery routes will

probably not pose a serious threat to orderly marketing under current

economic circumstances. He noted that where such distribution does

exist, it is far less price sensitive than sales from supermarket

shelves. Although the producer-handler would have a cost advantage by

exemption from pricing and pooling, this advantage would be eroded

through the cost associated with the manner of distribution, according

to the witness.

The witness also testified that a producer-handler who distributes

fluid milk products through a plant store does not pose a serious

threat to orderly marketing since the consumer must come to the

producer-handler's place of operation. Moreover, the product is not in

the regular price-sensitive channels of distribution.

The witness said that most fluid milk product disposition now takes

place through wholesale distribution to multiple store outlets. These

wholesale accounts are generally high volume in nature and highly

sensitive to price differentials, he added, and those handlers who

engage in trade through wholesale channels should not be exempt from

pricing and pooling, even if such handler deals exclusively with its

own raw milk production.

The spokesman argued that the purpose of Federal orders is to

insure an adequate amount of pure and wholesome milk for consumers by

establishing a regulatory scheme that insures equitable treatment of

all handlers and producers. Unless there is a very good reason to

exempt a plant from regulation under an order, each handler should be

subject to the same pricing and pooling provisions to insure the

integrity of the regulatory scheme, he said.

The witness also claimed that while Congress intended to exempt

small family production/distribution units from regulation under an

order, it did not envision the large, multi-million pound units that

now compete in the wholesale milk trade in many parts of the country.

For this reason, he said, the cooperatives' proposed language was

designed to insure that any single person, partnership, or corporation

that establishes a production/distribution unit of this magnitude and

which competes in the wholesale market would come under full

regulation.

Experience in the markets involved in this proceeding indicates

that effective regulation can be achieved without adopting the type of

overly restrictive producer-handler provision proposed by the

cooperative coalition. In particular, there is no basis for absolutely

precluding a producer-handler from having wholesale customers.

As adopted in this decision, a producer-handler is any person who

operates a dairy farm and a distributing plant which has route

disposition of more than 100,000 pounds per month and who receives no

Class I milk from sources other than his/her own farm production and

pool plants. The producer-handler must provide proof satisfactory to

the market administrator that the care and management of the dairy

animals and other resources necessary to produce all Class I milk

handled and the operation of the processing and packaging business are

his/her personal enterprise and risk.

In conjunction with their proposal to revise the producer-handler

definition, the cooperative coalition proposed that the administrative

assessment that is applied to other handlers also apply to producer-

handlers. The coalition spokesman testified that the market

administrator must audit producer-handlers and may do so for no other

reason than to determine that the handler is, in fact, eligible under

the provisions of the order to be exempt from pricing and pooling. He

said that if producer-handlers do not pay their pro-rata share of

administrative expenses, the total cost would unjustly fall on the

remaining handlers under the order.

Currently, under each of the separate orders, the administrative

assessment is applied to handlers on their receipts of producer milk

and on other receipts on which there is a pool obligation. Producer-

handlers, on the other hand, who have no receipts of producer milk or

any pool obligation, are not subject to an administrative assessment.

To the extent that administrative costs are incurred in

administering the producer-handler provisions, fully and partially

regulated handlers who bear the administrative costs associated with

this activity are assured that producer-handlers continue to operate in

the manner provided under the order. This insures that producer-

handlers are not able to transfer the costs and risks of their

operation to others and, consequently, are not able to gain an

advantage relative to other producers or handlers. Despite proponents'

testimony, there is no basis for the payment of administrative

assessments by producer-handlers and, therefore, must deny the

proposal.

Mid-Am filed an exception to the producer-handler provisions

contending that there was no basis for denying its producer-handler

proposal. It reiterated its arguments that effective regulation of

producer-handlers cannot be achieved without the adoption of its

proposal and that producer-handlers should have to pay the

administrative assessment that is applied to other handlers.

Mid-Am's arguments do not provide a basis for altering the findings

and conclusions on this issue. There is no indication in the record

that producer-handlers are causing marketing problems in the proposed

marketing area. This demonstrates that effective regulation of

producer-handlers can be achieved without the unduly restrictive

regulations proposed by Mid-Am. Also, there is not a sufficient basis

to conclude that there is a need for producer-handlers to pay an

administrative assessment.

Producer: Sec. 1007.12. The term producer defines those dairy

farmers who constitute the regular source of supply for the order.

Under the [[Page 25033]] Southeast order, producer status should be

provided for any dairy farmer who produces milk approved by a duly

constituted regulatory agency for fluid consumption as Grade A milk and

whose milk is received at a pool plant directly from the producer's

farm or is picked up at the farm by a cooperative as a bulk tank milk

handler for delivery to a pool plant.

Producer status should also be accorded to a dairy farmer who has

an established association with the market and whose milk is diverted

from a pool plant to a nonpool plant by a cooperative association or a

pool plant operator. To establish an association with the market, a

dairy farmer's milk must be delivered to a pool plant each month to be

eligible to be diverted to a nonpool plant as ``producer milk.'' These

delivery requirements will be explained further under the discussion of

producer milk.

Since producer-handlers and exempt plants are not subject to the

order's pricing and pooling provisions, milk which is in excess of the

needs of such operators will not be treated as producer milk when it is

moved directly from the farms of such operations to a pool plant. Any

such milk delivered to a pool plant would be ``other source milk.''

A dairy farmer should not be a producer under two Federal orders

with respect to the same milk. The producer definition should exclude a

dairy farmer with respect to milk which is received at a pool plant

under the Southeast order by diversion from a pool plant under another

Federal order if the dairy farmer is a producer under the other order

with respect to the milk and the milk is allocated to Class II or Class

III use under the Southeast order. Also, as proposed by the cooperative

coalition, the producer definition would exclude a dairy farmer with

respect to milk which is diverted to a pool plant under another Federal

order if any portion of such person's milk is assigned to Class I milk

under the other Federal order.

In its proposed producer definition, the cooperative coalition

included a paragraph dealing with a ``dairy farmer for other markets.''

This provision would exclude from the producer definition during the

flush production months a dairy farmer who delivered more than one-

fifth of his/her milk to plants as other than producer milk during the

short season. Specifically, if during the immediately preceding months

of August through December more than one-fifth of the milk from the

same farm was caused to be delivered to plants as other than producer

milk, then no milk of such a dairy farmer would be considered to be

producer milk during the following months of January through July.

The cooperative coalition's spokesman explained that this provision

was designed to prevent producers of other Federal order markets from

pooling their milk on the merged order during the flush spring months

[perhaps because the blend price was more attractive] when such milk

was not pooled on the merged order during the fall months [when the

milk may have been needed]. This provision was supported by Barber Pure

Milk Company, Dairy Fresh Corporation, and the Arkansas Dairy

Cooperative Association. It was opposed by Southern Foods Group and

Gold Star Dairy.

In its post-hearing brief, Southern Foods Group stated that it

strongly opposed this provision because it would make it impossible for

milk from nearby areas to be pooled on the Southeast order except in

extraordinary circumstances. SFG acknowledged that it had brought Texas

milk into the Greater Louisiana market to provide an independent milk

supply from nearby areas. It stated that the flexibility to deliver a

producer's milk to different plants during the month avoids uneconomic

shipments of milk and has permitted SFG flexibility in providing milk

to a deficit market.

The dairy farmer for other markets provision was also opposed by

Gold Star Dairy, which characterized the provision as a ``trade

barrier.'' Gold Star stated that it will interfere with the seamless

movement of milk between the new order and neighboring orders and noted

that it was inappropriate to penalize a producer for not delivering

milk to the market when it was not needed.

The ``dairy farmer for other markets'' provision should not be

adopted for the merged order. As discussed later in this decision, the

proposed order contains a base-excess plan which will substantially

remove the incentive for a dairy farmer who has been associated with

another market during the base-building months to become a producer

under the Southeast market during the base-paying months. In addition,

this order has stringent pool plant performance standards and fairly

tight diversion limitations. In order to be eligible for diversion

during the months of July through November (December through June), 10

days' (4 days') production of a producer's milk must be received at a

pool plant. This ``touch-base'' requirement will help to keep distant

milk from associating with this market when the milk is not really

needed at a pool distributing plant. Finally, with the flexibility

accorded the market administrator in this order, the pooling standards

and diversion limitations can be adjusted quickly to forestall any

abuse of the order should it occur. For these reasons, there is no need

to adopt the dairy farmer for other markets provision in this market.

Mid-Am filed an exception to the denial of a ``dairy farmer for

other markets'' provision. Mid-Am contends that even though the

proposed Southeast order contains a base-excess plan, ``this does not

substantially remove the incentive for a dairy farmer who has been

associated with another market during the base-forming months to become

a producer under the Southeast market during other months of the

year.''

The record does not support the adoption of a ``dairy farmer for

other markets'' provision. As indicated, there was considerable

opposition to this provision both at the hearing and in post-hearing

briefs. Those opposed to the provision argued that it was a barrier

that would remove a handler's flexibility to shift milk economically

between plants.

The amount of milk that may be pooled under the Southeast order is

dictated by the order's pooling standards and diversion limits. The

market cannot be flooded with outside milk during the months of January

through July because four days' production of a producer's milk must be

received at a pool plant during the month, and during the months of

December through June only 50 percent of the producer milk physically

received at a plant may be diverted to nonpool plants.

The need for marketing flexibility outweighs the concerns of Mid-Am

regarding the possibility of surplus milk pooling on the Southeast

market. The ``dairy farmer for other markets'' provision should not be

adopted.

Producer Milk:7 Sec. 1007.13. The producer milk definition of

the proposed Southeast order defines the milk that will be priced and

pooled under the order. The provisions proposed by the cooperative

coalition, and adopted, with some modifications, in this decision,

would require that each individual producer deliver at least 4 days'

production to a pool plant in each of the months of December through

June and 10 days' production in each of the months of July through

November. This requirement will insure that each

[[Page 25034]] producer has a direct association with a pool plant each

month of the year.

\7\As explained in the last two paragraphs at the end of this

section, the diversion limits applicable to pool plant units which

are qualified pursuant to Sec. 1007.7(e) have been changed from

those contained in the recommended decision.

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

Without a ``touch base'' requirement of this nature, milk of a

producer could be pooled without ever having to come to a pool plant.

With the provision, however, there is certainty that the milk of that

producer is at least partially associated with a pool plant of the

order every month.

So long as the touch-base requirement has been met during the

month, all of the other milk of a producer that is not needed at a pool

plant may be diverted directly from the farm to a nonpool plant if it

is not needed at the pool plant. In aggregate, however, the total

quantity of milk of all producers so diverted should be restricted to

50 percent during the months of December through June and 33 percent

during the months of July through November.

Ten days' production is a reasonable minimum number of days for

associating an individual producer's milk with this market during the

short production months. Based on data in the record, the Class I

utilization in this market is expected to exceed 80 percent during the

months of July through November and should range from 65 to 75 percent

during the months of December through June. These projections support a

10-day delivery requirement for the short production season. If at

least 10 days' production of a producer's milk is not delivered to a

pool plant during the summer and fall months, the milk cannot be

considered to be a part of the regular source of supply for the fluid

milk market and should not share fully in the Class I utilization of

the marketwide pool.

In addition to performance by an individual producer, the producer

milk section of the order also sets specific limits on the total amount

of producer milk which may be diverted by the operator of a pool plant

or a cooperative association to nonpool plants during the month. As

proposed and adopted here, diversions to nonpool plants by a pool plant

operator would be limited to 33 percent during the months of July

through November, and 50 percent during the months of December through

June, of the producer milk that is physically received at pool plants

as producer milk of such handler during the month. In the case of a

cooperative association, these percentages would be based on the

producer milk that the cooperative association caused to be delivered

to, and physically received at, pool plants during the month.

For efficiency in the delivery of producer milk to pool plants, the

proposed order provides for the diversion of producer milk from one

pool plant to another pool plant. There is no limit on this type of

diversion.

The proposed order also provides a procedure to be followed for

determining the pool status of milk if a pool plant operator or a

cooperative association diverts milk in excess of the percentage

allowances specified in the order. In this case, the excess quantity of

milk would not qualify as producer milk and would not be priced under

the order. The diverting handler would be required to designate the

dairy farmer deliveries that should not be considered producer milk.

Absent such a designation, no milk diverted by the handler will be

producer milk.

A parallel situation occurs when a cooperative association's

diversions from a pool plant to nonpool plants would cause the pool

plant to lose its pool status. In such a case, the cooperative will be

responsible for identifying which dairy farmers' milk will not be

producer milk. If the cooperative fails to designate the dairy farmers'

deliveries that are to be excluded as producer milk, then no milk

diverted by the cooperative to nonpool plants will be considered

producer milk.

Milk that is diverted from a pool plant to a nonpool plant should

be priced at the location of the nonpool plant where the milk is

physically received. Diverted milk is presently priced under the

individual orders in this manner and should continue to be so priced

under the merged order.

As discussed above (with reference to pool plants), the market

administrator, upon request of a handler in the market and following

the submission of data, views, and arguments, should be permitted

limited flexibility to adjust pooling standards and diversion

limitations. With respect to diversion limitations, the market

administrator should be permitted to increase or decrease diversion

limitations by 10 percentage points. For example, the 33 percent

limitation could be decreased to 23 percent or increased to 43 percent.

In the case of the touch-base requirement, the market administrator

should be permitted to increase or decrease these requirements by up to

50 percent. Accordingly, the requirement that each producer deliver 10

days' production of milk to a pool plant before being eligible for

diversion to a nonpool plant may be increased to 15 days or decreased

to five days. During the months of December through June, when a four

day touch-base requirement applies, the touch base requirement could be

increased to six days or decreased to two days. This flexibility will

allow the market administrator to respond quickly to changing market

conditions.

In their exceptions, Barber Pure Milk Company and Dairy Fresh

Corporation (Greensboro, Alabama) reiterated the request initially made

in their hearing proposal to be permitted to combine all of the milk

physically received at all of their pool plants in determining their

diversion limits rather than compute diversion limits based on each

plant's receipts.

This modification should be adopted for handlers that unit pool

their plants. Like unit pooling, unit diverting also will allow

handlers to operate their plants in a more efficient manner. Rather

than having to juggle milk between two pool plants to meet touch-base

requirements, handlers will be able to divert milk from the plant that

normally receives it. This provision, in conjunction with unit pooling,

will provide handlers great flexibility in the operation of their

plants.

Other Source Milk: Sec. 1007.14. The other source milk definition

has been a standard definition included in all milk orders since 1974,

when a uniform classification plan was instituted for all milk orders.

The definition included in the proposed Southeast order is identical to

those included in the individual orders.

In addition to milk received from producers, a regulated pool plant

may receive milk or milk products from sources other than producers.

The other source milk definition identifies those other sources.

Specifically, ``other source milk'' means all skim milk and

butterfat in a handler's receipts of fluid milk products or bulk fluid

cream products from any source other than producers, cooperative

association handlers, or pool plants. It also includes a handler's

receipts of fluid cream products in packaged form from other plants. In

addition, any milk products (other than fluid milk products, fluid

cream products, and products produced at the plant in the same month)

from any source which are reprocessed, converted into, or combined with

another product in a handler's plant during the month would be

considered a receipt of other source milk. Finally, receipts of milk

products (other than fluid milk products or fluid cream products) for

which a handler fails to establish a disposition would also be included

under the other source milk definition.

Unlike packaged fluid cream products, which are Class II products

and therefore not included in the fluid milk product definition, bulk

fluid cream products are treated in the same manner as fluid milk

products for the [[Page 25035]] purpose of applying the other source

milk definition. This facilitates the application of the other

provisions of the order. Accordingly, receipts of fluid cream products

in packaged form from other plants are considered other source milk.

Although no handler obligation is involved with these receipts, it

is desirable for accounting purposes that such receipts be defined as

other source milk. This accounting technique precludes the record-

keeping difficulties that might otherwise be experienced in accounting

separately for inventories and sales of Class II products processed in

the handler's plant versus those received at the plant in packaged form

from other plants. Such receipts are allocated directly to the

handler's Class II utilization.

Manufactured products from any source that are reprocessed,

converted into, or combined with another product in the plant also are

considered as other source milk. Such products include dry curd cottage

cheese received at a pool plant to which cream is added before

distribution. Such receipts are allocated to a handler's Class II or

III utilization, depending upon the use of the product. No handler

obligation is applicable.

Products manufactured in a pool plant during the month and then

reprocessed, converted into, or combined with another product in the

same plant during the same month are not other source milk. Under this

situation, producer milk is considered as having been used to produce

the final product.

Disappearance of manufactured milk products for which the handler

fails to establish a disposition is considered as other source milk.

Each handler is required to account for all milk and milk products

received or processed at the handler's plant. Otherwise, a handler may

have an opportunity to gain a competitive advantage over competitors.

Treating the unexplained disappearance of manufactured milk products as

other source milk contributes to a uniform application of the

provisions to all handlers.

Fluid Milk Product/Fluid Cream Product: Secs. 1007.15 and 1007.16.

The terms fluid milk product and fluid cream product are standard

definitions in all milk orders and were proposed for inclusion in the

merged order. There was little discussion at the hearing concerning

these definitions and no opposition to their inclusion in the merged

order.

The fluid milk product and fluid cream product definitions were

most recently revised in a national decision involving all Federal milk

orders that was issued on February 5, 1993 (58 FR 12634), and which

became effective on July 1, 1993. Official notice is taken of that

decision, including the reasons set forth for the standards adopted in

these definitions. They are incorporated by reference in this decision.

Filled Milk: Sec. 1007.17. The term filled milk also is identical

in all milk orders and was proposed for inclusion in the merged order.

There was no opposition to this provision.

Filled milk is defined as any combination of nonmilk fat (or oil)

with skim milk (whether fresh, cultured, reconstituted, or modified by

the addition of nonfat milk solids), with or without butterfat, so that

the product (including stabilizers, emulsifiers, or flavoring)

resembles milk or any other fluid milk product, and contains less than

six (6) percent nonmilk fat (or oil). In determining the classification

of filled products, the same competitive criteria should apply to these

products as to fluid milk products.

The filled milk definition stems from the Assistant Secretary's

decision for all Federal orders issued October 13, 1969 (34 FR 16881).

That decision is incorporated by reference in this decision.

Commercial food processing establishment: Sec. 1007.19. A standard

definition for commercial food processing establishment was added to

all orders on July 1, 1993. The definition contained in the Assistant

Secretary's February 5, 1993, decision (58 FR 12675) is just as

appropriate for the merged Southeast order as it is for the individual

orders of which it is comprised.

Product prices: Sec. 1007.20. A final decision amending the Class

II price under all Federal orders was issued January 27, 1995, and

published February 2, 1995 (60 FR 6606). The decision changed the

computation of the Class II price in a manner that removed the need for

a section dealing with ``product prices.'' Since the amended language

of the Class II decision is applicable to the merged order proposed in

this proceeding, Sec. 1007.20 has been removed.

2(b). Classification of Milk: Secs. 1007.40 through 1007.45. Under

a Federal milk order, milk is priced according to the form or manner in

which it is used. Section 40 of the proposed order discusses the four

classes of utilization under the order. Section 41 discusses how to

classify ``shrinkage,'' the disappearance of skim and butterfat that

occurs through handling, transporting, and processing milk. Section 42

sets forth rules for classifying skim milk and butterfat that is

transferred or diverted between plants. Section 43 contains general

rules pertaining to the classification of producer milk, and Section

1007.44, ``classification of producer milk,'' describes how to classify

producer milk by allocating a handler's receipts of skim milk and

butterfat to the handler's utilization of such receipts. Finally,

Sec. 1007.45 describes the market administrator's reports and

announcements concerning classification.

The classification scheme proposed for the Southeast order is

identical to the uniform classification plan now in use in the five

individual orders and in most other Federal order markets. A detailed

explanation of the purpose and application of these provisions is

contained in the Department's final decisions that were issued February

19, 1974 (39 FR 9012), July 17, 1975 (40 FR 30119), and February 5,

1993 (58 FR 12634). Because these provisions deal with inter-order, as

well as intra-order, movements of milk, they should be essentially

uniform with the surrounding orders and adopted, with only a slight

modification, for the merged order.

Under the present Georgia order, the application of Sec. 1007.42(c)

has been unclear with respect to the transfer or diversion of bulk

fluid milk products to an exempt governmental agency plant. At present,

if bulk milk is transferred to an exempt plant, it is automatically

classified as Class I, based on the presumption that the transferred

milk is needed only to supplement the own-farm production of the exempt

handler. However, where the exempt handler has no own-farm production,

this presumption has resulted in a Class I classification for milk

that, in fact, was used in a Class II product. Therefore, this

paragraph should be modified to provide an automatic Class I

classification for transfers or diversions of fluid milk products to a

producer-handler. It should also provide for a Class I classification

for a packaged fluid milk product transferred to an exempt governmental

agency plant defined in Sec. 1007.8(e). However, in the case of bulk

fluid milk products or fluid cream products transferred or diverted to

an exempt plant, the classification should be based on the exempt

plant's utilization as determined by the market administrator.

2(c). Pricing of Milk:8 Secs. 1007.50-1007.54. Milk pooled

under most [[Page 25036]] Federal orders is now priced in four use

classifications: Class I, Class II, Class III, and Class III-A. Class I

milk, which is generally milk consumed as a beverage, competes for

sales on a local or regional basis; Class II milk products, which

include soft dairy products such as cottage cheese, ice cream, and

dips, compete on a regional basis, and Class III milk products (hard

cheese and butter) and Class III-A products (nonfat dry milk) are

products which can be stored for extended periods of time and compete

for sales on a national basis.

\8\ Several changes in pricing have been made in this final

decision. Changes in Class II and III prices are the result of

national decisions amending all Federal order Class II and III

prices. In addition, plant location adjustments have been changed as

a result of the comments received.

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There are several issues to be discussed in connection with the

pricing of milk: Class III and III-A prices, the Class II price, the

seasonal adjustment proposed for the Class III and III-A prices, the

Class I price level, and the location adjustments that are needed for

the new order.

The Class III-A price: Sec. 1007.50(d). The present Class III-A

price that is applicable to each of the individual orders should be

continued for the Southeast marketing area. This price is based on a

product formula, specified in Sec. 1007.50(d), that is defined as the

average Central States nonfat dry milk price for the month, as reported

by the Department, less 12.5 cents, times an amount computed by

subtracting from 9 an amount calculated by dividing 0.4 by such nonfat

dry milk price, plus the butterfat differential value per hundredweight

of 3.5 percent milk and rounded to the nearest cent.

Class III-A pricing was added to the individual orders on December

1, 1993. The reasons for moving nonfat dry milk from Class III to Class

III-A and for adopting the product formula described above were

thoroughly explained in a final decision issued October 20, 1993, and

published in the Federal Register on October 29, 1993 (58 FR 58112).

The findings and conclusions of that decision are incorporated by

reference in this decision. There was no opposition to a continuation

of this price under the merged order.

The Class III price: Sec. 1007.50(c). The Class III price for the

Southeast order should be the ``basic formula price,'' as defined in

Sec. 1007.51(a) and as adopted for all Federal milk orders in a final

decision issued January 27, 1995, and published on February 7, 1995 (60

FR 7290). The basic formula price is the preceding month's average pay

price for manufacturing grade milk in Minnesota and Wisconsin using the

``base month'' series, as reported by the Department for the month,

adjusted to a 3.5 percent butterfat basis using the butterfat

differential for the preceding month computed pursuant to Sec. 1007.74

and rounded to the nearest cent, plus or minus the change in gross

value yield by the butter-nonfat dry milk and Cheddar cheese product

price. This price will be used in each of the individual orders

involved in this proceeding and in every other Federal order. It

reflects the value of manufacturing grade milk used to produce hard

cheese and butter and is equally appropriate for the Southeast

marketing area.

Seasonal Adjustment to Class III and III-A Prices. The cooperative

coalition proposal to seasonally adjust the Class III and III-A prices

should not be adopted.

The proposal would reduce Class III and III-A prices by 10 cents

during the months of December, January, and February and by 30 cents

during the months of March, April, and May; it would increase these

prices by 10 cents in June, 20 cents in July, 25 cents in August

through October, and 15 cents in November.

The cooperative coalition's spokesman testified that there is

considerable cost involved in balancing the seasonal excess supply of

the proposed marketing area. The cooperative coalition proposal, he

testified, is designed to relieve the handlers of some of the cost

involved in assuming this role.

This proposal was opposed by a handler and a regional cooperative

association in post-hearing briefs. Baker & Sons Dairy stated in its

brief that while the simple average of the proposed seasonal

adjustments would be mathematically neutral, they are far from neutral

on a weighted average basis and would substantially reduce the blend

price and producer income during the months of December through May.

The handler also argued that this proposal undermines the principle of

pricing Class III and III-A products on a national and international

basis, and instead would give one area of the country an advantage over

other areas.

Milk Marketing, Inc., a

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