Milk in the Chicago Regional and Other Marketing Areas; Decision on Proposed Amendments to Marketing Agreements and to Orders

7 CFR

Part Marketing area AO Nos.

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1030.... Chicago Regional............................ AO-361-A31

1065.... Nebraska-Western Iowa....................... AO-86-A50

1068.... Upper Midwest............................... AO-178-A48

1076.... Eastern South Dakota........................ AO-260-A32

1079.... Iowa........................................ AO-295-A44

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SUMMARY: This final decision adopts changes in the Federal milk

marketing orders for five north central marketing areas based on

industry proposals considered at a public hearing. The decision adopts

a plan for pricing milk on the basis of its protein and other nonfat

solids, as well as butterfat, components. The proposed plan includes

adjustments per hundredweight based on the somatic cell count of

producer milk used in Class II and Class III, and on payments to

producers of all pooled milk.

FOR FURTHER INFORMATION CONTACT: Constance M. Brenner, Marketing

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

2968, South Building, P.O. Box 96456, Washington, DC 20090-6456, (202)

720-2357.

SUPPLEMENTARY INFORMATION: This administrative action is governed by

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

Code and therefore is excluded from the requirements of Executive Order

12866.

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

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

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

Marketing Service has certified that this rule will not have a

significant economic impact on a substantial number of small entities.

The amended orders will promote more orderly marketing of milk by

producers and regulated handlers.

These proposed amendments have been reviewed under Executive Order

12778, Civil Justice Reform. This rule is not intended to have a

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

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

irreconcilable conflict with this rule.

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

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

exhausted before parties may file suit in court. Under section

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

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

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

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

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

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

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

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

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

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

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

Prior documents in this proceeding;

Notice of Hearing: Issued December 22, 1993; published January 4,

1994 (59 FR 260).

Extension of Time for Filing Briefs: Issued April 22, 1994;

published April 29, 1994 (59 FR 22138).

Recommended Decision: Issued October 25, 1994; published November

2, 1994 (59 FR 54952).

Extension of Time for Filing Exceptions: December 2, 1994;

published December 9, 1994 (59 FR 63733).

Preliminary Statement

A public hearing was held upon proposed amendments to the marketing

agreements and the orders regulating the handling of milk in the

Chicago Regional and certain other 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), at Bloomington,

Minnesota, on January 25-27, 1994. Notice of such hearing was issued on

December 22, 1993, and published January 4, 1994 (59 FR 260).

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

record thereof, the Administrator, on October 25, 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 following

modifications:

1. Under Issue 1, the last sentence in paragraph 1 is revised, the

second sentence in paragraph 23 is revised, a paragraph is added after

paragraph 34, and two paragraphs are added after paragraph 40.

2. Two paragraphs are added at the end of Issue 2.

3. Under Issue 3, one paragraph is added after paragraph 5, the

first sentence of paragraph 8 is revised, and a paragraph is added at

the end of Issue 3.

4. Under Issue 3a, a phrase is modified in paragraph 5, four

paragraphs are added after paragraph 25, and two paragraphs are added

at the end of Issue 3a.

5. Under Issue 3b, paragraph 1 is modified, one paragraph is added

after paragraph 7, one paragraph is added after paragraph 8, and one

paragraph is added at the end of Issue 3b.

6. Under Issue 3c, a sentence is added at the end of paragraph 3.

7. Under Issue 4, paragraph 1 is modified, paragraph 26 is modified

and expanded into three paragraphs, the last four sentences of

paragraph 34 and all of paragraphs 35 and 36 are deleted, and 34

paragraphs are added at the end of Issue 4.

[[Page 41834]]

8. Under Issue 5, paragraphs 1 and 4 are revised, paragraph 5 is

replaced by two new paragraphs, two paragraphs are added after

paragraph 12, paragraph 16 is revised, and two paragraphs are added at

the end of Issue 5.

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

1. Adoption of multiple component pricing.

2. Orders to be included.

3. Components and component prices.

a. Protein.

b. Other nonfat solids.

c. Butterfat.

d. Miscellaneous issues.

4. Somatic cell adjustment.

5. Conforming changes.

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. Adoption of multiple component pricing. Proposals to incorporate

multiple component pricing in the Chicago Regional (Order 30),

Nebraska-Western Iowa (Order 65), Upper Midwest (Order 68), Eastern

South Dakota (Order 76) and Iowa (Order 79) Federal milk marketing

orders (the five orders) should be adopted, with some modifications.

The pricing plan generally would be patterned after the multiple

component pricing plan proposed by National All-Jersey, Inc. and other

dairy organizations. Producers would be paid on the basis of the pounds

of butterfat, protein and other nonfat solids (solids-not-fat other

than protein) in their milk, and would share in the value of the pool's

Class I and Class II uses on a per hundredweight basis. Regulated

handlers would pay for the milk they receive on the basis of total

butterfat, the protein and other nonfat solids used in Classes II and

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

used in Classes I and II. In a modification from the recommended

decision, a somatic cell adjustment, per hundredweight, would apply to

the value of milk used in Classes II and III, but not in Class I, and

to the value of all producer milk. The change was necessary since the

record evidence as discussed later did not support including Class I.

At the present time, milk received by handlers under the five

orders is priced according to the pounds of producer milk allocated to

each class of use multiplied by the prices per hundredweight of milk

testing 3.5 percent butterfat, as determined under the orders for each

class of use. Adjustments for such items as overage, reclassified

inventory, location and other source milk allocated to Class I are

added to or subtracted from the classified use value of the milk. The

resulting amount is divided by the total producer milk in the pool to

calculate a price per hundredweight of milk testing 3.5 percent

butterfat to be paid to producers for the milk they have delivered to

handlers. The price paid to each producer is then adjusted according to

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

butterfat differential. The butterfat differential is computed by

multiplying the wholesale selling price of Grade A (92-score) bulk

butter per pound on the Chicago Mercantile Exchange, as reported for

the month by the U.S. Department of Agriculture, by 0.138 and

subtracting the Minnesota-Wisconsin price (the M-W price) at test, also

as reported by the U.S. Department of Agriculture, multiplied by .0028.

The multiple component pricing (MCP) plan was originally proposed

for Orders 30, 68 and 79 by National All-Jersey, Inc. (NAJ), and other

dairy organizations. In addition, Land O'Lakes, Inc., proposed that the

multiple component plan be considered for Orders 65 and 76. Most other

proposals considered at the hearing were modifications of the NAJ

proposal and are discussed below.

The first NAJ witness stated that the current milk pricing system

used in the five orders does not meet current marketing needs and

should be replaced with a multiple component pricing system. Much of

the general NAJ testimony in favor of multiple component pricing was

later reiterated by witnesses expert in the field of economics and

dairy chemistry testifying for NAJ, and a representative for Land

O'Lakes. Also testifying in favor of the NAJ proposal were two dairy

farmer members of the cooperative association Swiss Valley Farms

Company, a representative of the Brown Swiss Cattle Breeders

Association of U.S.A., Inc., and a representative of Tri-State Milk

Cooperative. It was indicated in testimony that Alto Dairy Cooperative

also supported the NAJ proposal.

The representative for the proponents said the intent of their

proposal was to:

1. Use the M-W price as the base;

2. Pay all producers on four factors--pounds of butterfat, pounds

of protein, pounds of other solids, and each producer's share of the

fluid differential on a per hundredweight basis;

3. Leave Class I handler obligations on a skim-butterfat basis;

4. Determine Class II and III handlers' obligations on the basis of

pounds of butterfat, protein, and other solids; and

5. Change only the order provisions needed to implement the NAJ

proposal.

The NAJ witness said that there were five reasons for replacing the

current milk pricing system with a multiple component pricing system.

The first reason, according to the NAJ witness, is that the current

skim-butterfat pricing system does not give dairy farmers economic

incentives to produce milk high in nonfat solids, especially protein.

He stated that under the current pricing system a pound of water

receives the same price as a pound of protein or other solids, yet it

is these solids that give milk its functional and nutritional value.

The second reason given by the NAJ witness for adopting MCP was

that over a period of years much of the value of milk has shifted from

butterfat to the skim portion of milk. The proponent's witness said

that in 1960, butterfat represented 77% of the value of the M-W price,

and skim represented 23%. By 1993, he testified, these values were

reversed, with butterfat representing only 23% of the value of the M-W,

while the skim portion of the milk represented 77%.

According to the NAJ witness, the shift in value from butterfat to

skim was partially caused by the USDA decision to decrease the support

price for butter and increase the support price for nonfat dry milk.

The support price for butter declined from $1.53 per pound in 1981 to

65 cents per pound in 1993, with most of the decrease occurring since

1989. Nonfat dry milk purchase prices under the support program

increased from 72.75 cents per pound in 1988 to $1.034 per pound in

1993. In addition, the witness said, the butterfat differential under

Federal orders has been dropping since the mid-1980s because of a

decline in the market price for butter. This drop was accelerated by a

change in the method of computing the butterfat differential,

implemented in 1990, that had the impact of reducing the butterfat

differential even more.

The third reason the witness gave for implementing multiple

component pricing was the shift in types of dairy products consumers

are purchasing. According to the witness, some of the decline in

butterfat value relative to skim value has been caused by a shift in

consumption from whole milk to lowfat and skim fluid milk products. The

witness presented data to show that from 1970 to 1991, national fluid

milk sales of lowfat and skim milk increased 232%, while sales of whole

milk declined 50%. In addition, he stated, consumption of lowfat

manufactured products is growing faster than

[[Page 41835]]

consumption of relatively high-fat manufactured products.

The NAJ witness discussed equity in Federal orders as the fourth

reason for implementing multiple component pricing. He said that the

current skim-butterfat pricing system is equitable for neither

producers nor handlers since it does not properly recognize the value

of protein, especially in manufactured products such as cheese. The

witness provided examples to show how a producer with high protein milk

may currently receive the same Federal order minimum price as a

producer with low protein milk. Similarly, a cheese maker who purchases

high protein milk could have a cost advantage at minimum order prices

over a cheese maker who purchases low protein milk.

The fifth reason presented by the NAJ witness was the existence of

a number of voluntary multiple component pricing plans in the areas

covered by the five orders. Data were presented to show that nearly all

producers in the five orders currently are eligible to be paid under

one of these voluntary multiple component pricing plans. The witness

stated that many of the plans have inadequacies which contribute to

disorderly marketing. According to the witness, these inadequacies

would be addressed by adopting the NAJ proposal.

A witness from Land O'Lakes, Inc. (LOL), testified in support of

the adoption of MCP in the five orders in general, and the NAJ proposal

specifically. He discussed how the NAJ multiple component pricing

proposal would better reflect the market value of nutrients in the milk

to the farmer. He stated that the proposed system, compared with the

current system, would essentially eliminate the value of milk used in

manufacturing that is currently associated with water which, he said,

has very little market value in dairy products. The witness said that

MCP would affect the cost of milk to LOL as a handler in that it will

come closer to equalizing the cost of milk relative to the value of the

products derived from the milk.

The LOL witness also described four major weaknesses in the

existing voluntary MCP plans. The first weakness, he said, was that the

current plans emphasize component test instead of component yield. He

said that the price paid to each producer should be tied more directly

to the value of the products that can be produced from the producer's

milk.

The second weakness described by the LOL witness is that many

existing plans do not provide for deductions for milk with low

component levels. This, he said, indicates that the plans recognize the

higher value of milk with more pounds of components, but do not

recognize that milk with fewer pounds of components is worth less. He

said that competitive, rather than economic, factors are the reason

deductions for low component levels generally do not exist, as many

producers do not like to see deductions on their milk checks.

According to the LOL witness, an inequitable feature of the

voluntary MCP plans is that they generally pay no component premiums

when the somatic cell count of the milk is above a fixed level,

resulting in high test producers losing their component premium because

of high somatic cells, while low test producers with high somatic cell

counts lose nothing.

The fourth weakness described by the witness is that some existing

MCP plans pay premiums for protein, while others pay premiums for

solids-not-fat. He said that most producers in Wisconsin receive

premiums based on protein, while most producers in Minnesota, Iowa,

Nebraska and South Dakota receive premiums based on solids-not-fat. The

witness claimed that the variety of payment plans currently in

existence do a poor job of transmitting market signals to the

producers, are not economically consistent, and lead to confusion among

farmers. He said that the NAJ proposal would address the deficiencies

in the current situation.

Most participants at the hearing advocated the introduction of MCP

for payments to producers and for milk delivered to handlers for Class

II and Class III use in the five orders. There was no support for

pricing Class I milk on other than the current butterfat and skim

basis.

In addition to NAJ and LOL, adoption of some form of multiple

component pricing in the five orders was supported by Central Milk

Producers Cooperative (CMPC), the Trade Association of Proprietary

Plants (TAPP), Farmers Union Milk Marketing Cooperative (FUMMC),

National Farmers Organization (NFO), Kraft General Foods (Kraft),

Associated Milk Producers, Inc., North Central Region (AMPI-North

Central), Wisconsin Cheese Makers Association (WCMA), Dean Foods, and

National Cheese Institute (NCI).

The CMPC witnesses strongly supported the need for implementing

multiple component pricing in the five orders and proposed a plan very

similar to that of NAJ. The fundamental difference between the two

plans is that the CMPC proposal would result in lower protein prices

than the NAJ proposal. The appropriate level of the protein price is

discussed under Issue 3a below.

The CMPC proposal was supported in testimony and in a post-hearing

brief by NFO. A witness for WCMA testified in support of the CMPC

proposal for multiple component pricing. A witness for Dean Foods

testified in support of the concept of MCP, and in response to a

question about which proposal he favored, he expressed support for the

CMPC proposal. AMPI North Central Region submitted a brief in support

of the CMPC proposal for multiple component pricing.

A witness for NCI testified in support of the CMPC multiple

component pricing proposal with one primary modification. The NCI

proposal would calculate a ``residual fluid price'' instead of another

solids price. This proposal is discussed further under Issue 3b below

in this decision. Kraft testified and submitted a brief in support of

the NCI proposal for multiple component pricing.

A witness for the Trade Association of Proprietary Plants (TAPP)

and Farmers Union Milk Marketing Cooperative (FUMMC) testified in

support of the TAPP proposal, a variation of the CMPC proposal that

would price both butterfat and protein on a differential basis, rather

than on a per-pound basis.

The five north central Federal milk orders included in this

proceeding should be amended to include multiple component pricing. On

the basis of the record of this proceeding, multiple component pricing

would entail pricing milk on the basis of the pounds of butterfat,

protein and other nonfat solids contained in the milk, with a somatic

cell adjustment to the hundredweight of milk used in Classes II and III

and to the producer price differential paid to producers. The record

indicates that a large percentage of the producers pooled under these

orders are already eligible for or receive some form of multiple

component pricing and that many of these component pricing plans use

protein as a pricing component.

The record also shows that the diverse component pricing programs

that currently exist promote disorderly and inefficient marketing

conditions in the procurement of milk supplies by competing handlers.

The different programs establish non-uniform bases of payments to

producers. The adoption of multiple component pricing will allow the

Orders to recognize the additional value of milk with a higher-than-

average solids content.

In the five orders included in this proceeding, the vast majority

of the milk pooled is utilized in manufactured products. The total

solids in the milk

[[Page 41836]]

used for manufacturing are the primary determinants of product yield.

In addition, it is the solids in fluid milk that give it its

nutritional value and taste. In both types of products, the current

pricing system used in the five orders does not properly recognize the

value of nonfat milk solids or encourage producers to increase the

quantity of nonfat milk solids in the milk they produce.

As a result of the shift in value in recent years from the

butterfat portion of milk to the skim portion, most of the value of

milk is determined on a volume basis without any consideration of the

value of the skim components. Adoption of the multiple component

pricing plan recommended in this decision will enable the market to

reflect the value of the skim components in milk to producers.

In addition to butterfat, protein is clearly the most appropriate

component of milk on which payment should be based. Most of the milk

pooled under these five orders is used for manufacturing, and 86% of

the milk used in manufacturing is used to produce cheese. Because

protein is a main determinant of cheese yield, and it is cheese that

determines the profitability for most of the dairy industry in the 5-

market area, the milk pricing system should recognize the value of the

protein component of milk as it is used in the manufacture of cheese.

Record evidence clearly shows that protein has a higher demand than

other components of milk because of its functional, nutritional and

economic value in the marketplace. The functional characteristics of

protein allow it to form the matrix in the production of cheese and

yogurt. Protein is also important to the air formation in the

manufacture of certain products and provides some required nutrients in

the human diet. Milk containing a higher percentage of protein will

result in greater yields of most manufactured products than milk with a

lower protein test. Additionally, handlers receiving milk that results

in greater volumes of finished products such as cheese and cottage

cheese than an equivalent volume of milk testing lower in protein

should be required to pay more for the higher-testing milk. At the same

time, the dairy farmer producing milk that yields greater amounts of

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

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

Thus, sending an economic signal to dairy farmers will encourage them

to maximize the production of those components which have the greatest

demand in the marketplace.

According to analysis of the record, proponents are correct that

attribution of all of the skim value of the M-W price to protein would

result in an overstatement of the value of protein used in cheese and

most other uses. In order to maintain fairly uniform prices between

orders for milk used in manufactured products, it is necessary to

assign the residual value of the M-W price minus the butterfat and

protein values to either other nonfat solids or a fluid carrier price.

The discussion of this residual component may be found in Issue 3b

below.

A witness for the Galloway Company testified in support of TAPP and

Galloway's own proposals to exclude sweetened condensed milk, ice cream

and ice cream mix from pricing under a multiple component pricing

system. The witness stated that such products should continue to be

priced under the current pricing system.

The Galloway witness said that some Class II manufactured products,

together with other products such as sour cream, whipping cream, half

and half, eggnog, yogurt, nonfat dry milk and butter, are not affected

in yield by the protein content of the milk from which the products are

manufactured. Instead, according to the witness, it is total skim

solids that affect the yield of these products. Accordingly, the

witness stated, it would not be equitable to price such products under

a multiple component pricing system which prices protein at a level

higher than the remaining skim solids in the milk. The witness argued

that these products should be left out of any MCP plan adopted.

The Galloway witness testified, and post-hearing briefs filed on

behalf of Anderson-Erickson (A-E) and Galloway asserted, that yields

are affected by the level of total skim solids rather than protein,

making the pricing of protein irrelevant for Class II pricing. The

Galloway witness testified that there have been months in which the

monthly average protein level and other nonfat solids level of milk

moved in opposite directions. In addition, the A-E and Galloway briefs

asserted that MCP would significantly increase the cost of Class II

milk, which would put them at an even greater disadvantage than

currently with respect to products made from nonfat dry milk priced at

the Class III-A price.

The Galloway witness stated that the primary product manufactured

by the Galloway Company is sweetened condensed milk. According to the

witness, this product competes on a national basis with other

manufacturers who do not have to procure their milk under Federal

orders with MCP provisions. The witness stated that it would be unfair

to force his organization to procure milk under a set of regulations

that differ from those regulating his competitors.

A portion of the TAPP proposal would require a classification

change for sweetened condensed milk from Class II to Class III.

Although the Galloway witness expressed strong concern over the impact

of multiple component pricing on his company, the effect of the

classification of sweetened condensed milk on the Galloway company is

not part of the MCP issue. Reclassification of this product is a

separate issue that was discussed thoroughly at a previous hearing, and

in the decision issued as a result of that hearing (58 FR 27774). No

new evidence was presented at this hearing that would justify

reclassifying sweetened condensed milk.

Comments filed in response to the recommended decision on behalf of

A-E excepted to the application of component pricing to certain Class

II products. A-E's opposition was based on two points: (1) The value of

the protein in certain Class II products cannot be recovered in the

marketplace, and (2) there was no evidence at the hearing to justify an

increase in the Class II price. Dean Foods' comments expressed concern

that MCP might jeopardize Class II product standing in the marketplace,

but didn't oppose or support inclusion of MCP for Class II.

Milk used to produce sweetened condensed milk, or any other Class

II product, should not be exempted from multiple component pricing. The

MCP plan recommended for adoption will cover all Class II and Class III

products.

Testimony at the hearing indicated that there are essentially two

groups of Class II products that differ with respect to the impact of

multiple component pricing on the handlers that make these products.

The first group of Class II products are those in which there generally

seemed to be agreement in the hearing record that yields are greatly

affected by the level of protein in the milk. These products include

the various cottage cheeses and other similar soft, high-moisture

cheeses. The handlers that make these products benefit directly from

higher levels of protein in milk and should be accountable to the pool

for this added benefit.

The second group of Class II products are those where there was

some disagreement in the record about the effect of protein on the

yield. These products include ice cream and frozen

[[Page 41837]]

desserts and mixes, fluid creams, sour creams, yogurt, sweetened

condensed milk and others. Considerable debate took place on whether it

was appropriate to include these products in a multiple component

pricing system.

Occurrences of average protein level and other nonfat solids level

of milk moving in opposite directions appear to be exceptions rather

than the rule. Evidence presented in ``Analysis of Component Levels and

Somatic Cell Counts in Individual Herd Milk at the Farm Level, 1992,

Upper Midwest Marketing Area'' indicates that about 60% of the

variation in solids-not-fat is caused by variation in protein, and that

higher protein levels are positively correlated with higher solids-not-

fat levels. Data presented in this and other documents show that the

level of other solids in milk tends to be relatively constant with,

generally, small month-to-month variation. Thus, when a handler

purchases milk with higher than average protein levels, he will also,

generally, be purchasing milk with higher than average levels of

solids-not-fat.

In addition, the sum of the value of the protein and other solids

under this recommended pricing plan equals the value of the total

nonfat solids. The value of total nonfat solids, therefore, is a

weighted average of the quantity and price of the protein and the

quantity and price of the other nonfat solids contained in the milk.

Analysis based on the average tests of the five markets shows that

under the recommended pricing plan, the value of total nonfat solids

would range from approximately $.002 per pound below the current value

to approximately $.008 per pound above the current value.

This estimated price difference is certainly not the significant

increase that is claimed in the briefs. In hearing testimony, the

Galloway witness stated that an analysis of the effect of the CMPC

proposal on the Galloway Company showed a nine-cent increase per

hundredweight in the cost of Galloway's milk only when the CMPC somatic

cell adjustment was included. Without the somatic cell adjustment, the

analysis showed that the cost of milk to Galloway would be reduced

under the CMPC multiple component pricing plan.

As explained above, protein is not the only component in skim milk.

Skim milk consists of protein and other solids which are combined in

this pricing plan to determine the value of skim milk. As was described

earlier, the total value of the nonfat solids under MCP ranges from

approximately $.002 per pound below to $.008 per pound above the

current value of nonfat solids in the skim portion of milk.

Contrary to claims in the A-E exception, the Class II price does

not change under the MCP pricing plan. The value of milk used in Class

II may change, depending on the level of solids contained in the milk.

However, the MCP value could be lower or higher than the current skim

value, not just higher as assumed by A-E.

It is appropriate to include all Class II products in the multiple

component pricing system being proposed here. All Class II products

derive benefit from butterfat, protein and/or other solids in the milk.

The benefit may be in enhanced yield, such as protein for cottage

cheese, or a combination of protein and other solids (i.e. the solids-

not-fat in the milk) in many of the other Class II products. Or, the

benefit may be in some other area. For example, the NAJ dairy chemist

witness testified about the importance of protein in the functionality

of many of these products, such as in ice cream, whipping cream, and

yogurt. Some testimony even went so far as to discuss the importance of

protein in fluid milk, in terms of the nutrient content and the mineral

carrying content of the milk. However, since there was no substantial

support for including Class I milk in the multiple component pricing

system being proposed here, only Class II and Class III products will

be priced on multiple components.

2. Orders to be included. A proposal to incorporate the multiple

component pricing plan adopted in this proceeding in the Nebraska-

Western Iowa and Eastern South Dakota Federal milk orders as well as in

the Chicago Regional, Iowa, and Upper Midwest orders should be adopted.

The witness for Land O'Lakes (LOL), proponent of the proposal,

listed a number of reasons for including the multiple component pricing

plan in the Nebraska-Western Iowa and Eastern South Dakota orders as

well as in the orders proposed by NAJ. The witness explained that all

five orders are similar in that their predominant use of milk is for

manufacturing Class III products. He testified that the primary

organizations that supply the Nebraska-Western Iowa and Eastern South

Dakota markets also are major participants in one or more of the

Chicago Regional, Iowa, and Upper Midwest order marketing areas. The

witness stated that inclusion of the Nebraska-Western Iowa and Eastern

South Dakota orders in the multiple component pricing plan would allow

those organizations that have producers and market milk in multiple

orders to standardize their payrolls and billings, thus maintaining

uniformity and reducing confusion among producers and handlers.

The decision to include additional orders in this decision should

not be made entirely on the basis of convenience to the parties

marketing milk on the various orders. The decision is based on whether

inclusion of the two orders would tend to effectuate the policy of the

Agricultural Marketing Agreement Act. Certainly, including the

Nebraska-Western Iowa and Eastern South Dakota orders in this decision

will contribute to orderly marketing.

The data supplied by the market administrators' offices describing

the milksheds of the various orders shows a considerable overlap of

milksheds. For example, many South Dakota counties have milk pooled on

three of the five orders during the same month. In the absence of

uniform pricing provisions between the five orders, disorderly

marketing could occur, particularly when orders have overlapping

milksheds, if one order were pricing milk on a skim and butterfat basis

while another order was pricing milk on the basis of its components. If

a producer's milk tests high for nonfat components but is pooled under

an order that prices milk on a skim-butterfat basis, the producer would

attempt to maximize returns by changing the market under which his milk

is pooled to benefit from his high component levels. The opposite

situation would occur if the milk of a producer testing below average

for nonfat components is pooled under an order with MCP provisions.

Such a producer would maximize returns by changing the order under

which his milk is pooled to one with skim-butterfat pricing. This

shuffling of producers in the same geographic area because of

nonuniform pricing provisions would not constitute orderly marketing.

Since the inclusion of the Nebraska-Western Iowa and Eastern South

Dakota orders in the multiple component pricing decision would tend to

reduce disorderly marketing in the region, benefit handlers by allowing

a standardized payroll, and there was no opposition to their inclusion,

multiple component pricing should be adopted for these two orders as

well as the other three.

In response to the recommended decision, NCI and TAPP filed

comments advocating a uniform national MCP plan. NCI stated that a

uniform MCP plan should be considered for all markets with a

significant quantity of manufacturing milk and production of a

significant quantity of cheese. TAPP's comments argued that emphasizing

the

[[Page 41838]]

value of protein in cheese is inappropriate if a national uniform

multiple component pricing plan is contemplated.

The multiple component pricing plans considered thus far for

inclusion in Federal milk orders have been developed and proposed by

the industry participants in the affected marketing areas. The plans

have tended to be modified from one proceeding to the next, with ideas

about the most appropriate provisions evolving as time goes on, and to

reflect individual marketing conditions. The evidence in the record of

this proceeding supports the pricing plan adopted in this decision for

these 5 markets. Implementation of a multiple component pricing plan

for these 5 markets should not be delayed because of the desire of some

market participants for a national plan.

3. Components and component prices. Unlike the multiple component

pricing plans adopted previously in other Federal milk marketing

orders, this decision recommends the adoption of a pricing plan for

milk based on three components rather than two. Under the five orders

involved in this decision, milk should be priced on the basis of its

protein, other nonfat solids, and butterfat components.

The protein price contained in this decision is based on the value

of protein in the manufacture of cheese, as determined by cheese market

prices, and is not a residual of the Minnesota-Wisconsin (M-W) price

minus butterfat value as is the case in other MCP plans. The butterfat

price would be based on the butter market, as it is in other multiple

component pricing systems. ``Other nonfat solids'' will be priced as a

residual of the M-W price minus protein value and butterfat value. The

butterfat, protein, and other nonfat solids prices shall be expressed

in dollars per pound carried to the fourth decimal place. In addition,

payments to each producer should reflect the value of participation in

the marketwide pools on a hundredweight basis.

As in other orders for which multiple component pricing has been

adopted, this decision maintains the relationship of the value of

producer milk to the M-W price. If the sum of the butterfat value and

the protein value is greater than the M-W price, a situation which

would result in a negative other nonfat solids price, the protein price

will be adjusted such that the other nonfat solids price will be zero.

In testimony and brief a witness for the Trade Association of

Proprietary Plants (TAPP) and Farmers Union Milk Marketing Cooperative

(FUMMC) presented a plan that would pay producers for protein above a

neutral zone of 3.00% to 3.29%, and provide deductions for protein

levels below the neutral zone. The level of adjustment would be tied to

the price of barrel cheddar cheese on the National Cheese Exchange, and

would be used to adjust pay prices to producers in a manner similar to

the current butterfat differential.

The witness said that milk traditionally has been purchased on a

per hundredweight basis, with differential adjustments for levels of

components. According to the witness, not only are producers usually

paid on a per hundredweight basis, but milk is measured on a per

hundredweight basis for purposes of plant accounting, payments between

plants and to haulers, and by breed associations and DHIA with

adjustments for percentages of components where necessary. The witness

also claimed that using differential pricing would be revenue neutral.

Comments filed by TAPP in response to the recommended decision

argued that the recommended pricing provisions would result in

excessive price deviations between current and projected producer

returns, and that a wide neutral zone of no adjustments for protein

content should be included. TAPP's comments, and those of the North

Dakota Milk Producers Association, reiterated the arguments for

continuing to price milk on a hundredweight basis, with differentials

for adjusting its value for protein and butterfat content. TAPP further

predicted that pricing components on a per-pound basis would lead to

discontinued use of the M-W price, as handlers of Grade B milk also

would shift their payments to producers to a component basis.

The TAPP/FUMMC testimony and comments are correct that switching

payments to producers from a per hundredweight system to one of pounds

of components, as adopted in this decision, is not a minor change. Some

expense will be incurred by handlers and producers in adapting to the

new system. However, the benefits to the industry in the affected areas

of adopting a uniform multiple component pricing system outweigh the

one-time costs of its adoption. The implication that everyone connected

with the dairy industry must adopt this system is not correct. Pounds

of milk must still be accounted for under the multiple component

pricing system. For example, nothing in this decision would prevent a

handler from continuing to pay haulers on a hundredweight basis. No

testimony at the hearing from witnesses that have producers pooled

under Federal orders that have already adopted multiple component

pricing indicated that moving to a pricing system that prices milk

components by the pound was an onerous burden. The transcript does

reveal disagreement with the level of the protein price under some

Federal orders with multiple component pricing, but little

dissatisfaction with the system itself, nor complaints about the

difficulty of switching to a component pricing system.

As to the argument that pricing protein and butterfat on the basis

of price differentials would be revenue neutral, the multiple component

pricing system recommended for adoption is designed neither to enhance

nor reduce total producer returns. The only changes in the total pool

value that may occur because of the recommended changes would result

from differences in the protein and other nonfat solids content between

milk pooled under the orders included in this proceeding and the milk

included in the Minnesota-Wisconsin survey. In addition, some

redistribution of the dollars involved in each pool can be expected

between producers, and between handlers.

The proposal by TAPP and FUMMC, and the exceptions filed by TAPP

and the North Dakota Milk Producers Association, to leave butterfat on

a differential pricing basis and to price protein on a differential

basis with a neutral range are not included in this decision. To

continue to pay producers for butterfat and to add payment for protein

on the ``traditional'' differential system would confuse and frustrate

producers in the understanding of their milk checks. Continued use of

differentials would perpetuate the volume-based pricing system with a

high value on water, and would fail to give producers a true price

signal of what the marketplace wants.

If, as predicted by TAPP's comments, pricing components on a per-

pound basis leads to discontinued use of the M-W price, such a shift

ought to be gradual enough to allow time for a new pricing structure to

be developed for milk used in manufactured products. As noted in the

recent M-W replacement decision, the recently-amended procedure for

determining the M-W price is not considered to be a long-term solution.

The use of differentials in pricing milk components is not widely

understood. There is no valid reason to continue an outmoded and

confusing pricing system in valuing milk components. Pricing components

on a

[[Page 41839]]

per-pound basis will allow producers to see clearly what components

have the most value, a result which plainly fits the goal of

encouraging producers to produce those components which have the

highest value in the marketplace. Per-pound pricing also makes clear to

producers that it is the pounds of components that result in payment,

rather than the percentages of those components in milk. Producers

would be better able to look at the cost of producing pounds of

components, and compare those costs with possible returns. Application

of a neutral zone would discourage producers from increasing protein

production marginally unless such an increase would raise the protein

level above the neutral range.

North Dakota Milk Producers Association objected that the

reliability of testing and questions about the variance of components

on a day-to-day basis would make the recommended pricing plan

inaccurate. There is nothing in the record of this proceeding that

provides a basis for concern about the ability of the market

administrators and handlers in these marketing areas to test milk for

the components that will be priced under this decision. In fact, the

record indicates that producers currently are being paid on the basis

of the component content of their milk.

a. Protein. The protein price for milk pooled under the five north

central Federal milk orders should be calculated by multiplying the

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

Exchange by 1.32, without including a value for whey protein.

No opposition was expressed at the hearing to pricing protein on

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

between participants came in determining the appropriate level of the

protein price.

A proposal submitted and supported by National All-Jersey, Inc.

(NAJ), and supported by a number of cooperative associations and other

dairy organizations, would calculate the protein price in two parts:

(1) Multiply the National Cheese Exchange monthly average 40-pound

block cheese price by 1.32, and (2) add the monthly average whey

protein concentrate price multiplied by .735. The sum of these two

values would equal the protein price.

The NAJ proponent witness explained that one of the objectives of

the NAJ proposal was to establish a protein price that was high enough

to give producers an incentive to produce protein. He added that a

second objective was to determine the protein price from market forces

rather than as a residual value, as is used in other Federal orders.

The witness explained that the 1.32 factor used in the NAJ proposal

comes from the modified Van Slyke cheese yield formula that is commonly

used by the industry. The 1.32 factor represents the pounds of 38-

percent moisture Cheddar cheese obtained from one pound of protein with

75 percent of the protein going into the cheese.

The witness gave four reasons for using the National Cheese

Exchange 40-pound cheddar block price (block price): (1) The majority

of the cheese in the five Federal orders is priced using the block

price as the base price, (2) the block price is used in determining the

somatic cell adjustment in the Eastern Ohio-Western Pennsylvania,

Indiana, and Ohio Valley orders, as well as being used in the

determination of the Class 4b price in California, (3) since there is

over twice as much American cheese manufactured in blocks as is made in

barrels, and the Wisconsin assembly point barrel cheese price is within

one cent of the block price, the block price represents a minimum

cheese price, and (4) the protein price determined pursuant to this

proposal gives a greater incentive to producers to produce protein and

is more equitable to handlers and producers than the (lower) protein

price contained in the other proposals.

The NAJ witness continued by explaining that the proposal included

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

protein in the milk would be accounted for. As explained by the

proponent witness, the .735 factor was determined by dividing 25

percent, which is the protein left in whey after making cheese, by 34

percent, which is the percent of protein in whey protein concentrate.

The resulting value, .735, is multiplied by the monthly average 34%

whey protein concentrate price to yield the whey contribution to the

protein price. The witness stated that the whey protein concentrate

price was selected because it is a better indicator of the value of the

protein contained in whey than is dry whey or animal feed whey.

An economist supporting the NAJ proposal testified that even though

the butterfat price is determined at its marginal value, that is, the

value of butterfat in butter, the protein price should be determined by

the value of protein in the most common use of protein in the five

markets included in this proceeding. The witness pointed out that the

most common use of protein is in the manufacture of cheese, with 85.9

percent of the milk marketed in 1992 in Wisconsin being used in the

manufacture of cheese. The witness testified that the appropriate

cheese price to be used in computing the protein price was the block

price because it is a ``conservative estimate of the price actually

received for block cheddar cheese.'' The witness went on to explain

that the reported block price is closer to what manufacturing plants

receive for barrel cheese than is the reported barrel price because

when the customary premiums are added to the reported barrel cheese

price the result is approximately equal to the block price.

The academic NAJ witness reiterated the NAJ position that the value

of whey protein should be included in the protein price because the

total value of the protein in producer milk would thus be reflected in

the protein price, giving producers an incentive to produce more

protein.

A witness for Central Milk Producers Cooperative (CMPC) explained

that the CMPC proposal would use the monthly average Green Bay Cheese

Exchange barrel price (barrel price) instead of the block price, and

would not include the value of whey protein. The witness for CMPC

testified that the barrel price better represents the value of cheese

than the block price because there is a greater volume of trading in

barrel cheese than in block cheese. The resulting protein price would

be lower than the protein price computed under the NAJ proposal. A

witness for CMPC explained that their proposed protein price was based

on the understanding that Federal order prices are minimum prices, and

that the CMPC proposal, using the barrel cheese price and not including

a value for whey protein, would result in a minimum price for protein.

The CMPC protein price proposal was supported at the hearing by

other hearing participants, including National Farmers Organization

(NFO), Kraft, Inc., Galloway Co., Wisconsin Cheese Makers Association

(WCMA), National Cheese Institute (NCI), Farmers Union Milk Marketing

Cooperative (FUMMC), and the Trade Association of Proprietary Plants

(TAPP). A witness for NCI explained that if the protein price is set at

too high a level, cheese manufacturers would experience a declining

gross margin as the price for protein increases above the return the

plant can obtain from additional protein. He explained that this would

be the case with the protein price as proposed by NAJ, but not with the

NCI and CMPC proposed protein price.

Other witnesses supporting a lower protein price than that proposed

by NAJ explained that protein should not be priced at a high level

because the higher

[[Page 41840]]

price may disadvantage handlers who do not manufacture cheese. They

testified that the higher protein price would not be recoverable in

certain products such as nonfat dry milk, condensed milk, or certain

Class II products, and that even though the lower protein price still

may not be recoverable, it offers the best alternative.

The Galloway witness stated that if a multiple component pricing

plan that derives a protein price from a cheese market value were

adopted, the protein price should represent a minimum value, should be

based on the barrel cheese market, and should not include a value for

whey protein concentrate. He argued that such a price would have the

impact of minimizing the difference between the protein and other

solids prices.

The TAPP/FUMMC witness testified that protein should be priced at a

level somewhat below its full value in cheddar cheese and whey for

several reasons. He said that too high a protein price could invite the

use of non-dairy protein, whey solids, and casein, and thereby cause an

increase in the production of imitation cheese. He also said that since

some Class II and III products do not recoup as much value from high

protein milk as cheese and cottage cheese, the protein price should be

set at a level less than its full value for cheese. The witness

expressed concern that too high a protein price could result in a zero

value for the residual component, or other solids. According to the

witness, a zero value for the residual would fail to reflect a

realistic value, and would not cover a make allowance.

In the post-hearing brief filed by NAJ, the position of using a

``justifiably high'' protein price to send a signal to producers that

protein is the most valuable component in milk was reiterated. In post

hearing briefs filed by CMPC, NFO, Kraft, NCI, TAPP and FUMMC,

Anderson-Erickson (A-E), and AMPI North Central Region, the computation

of the protein price as proposed by CMPC was supported. The reasons

given in testimony for using a lower protein price than that proposed

by NAJ were reiterated in briefs. In addition, A-E, Kraft and AMPI

North Central Region argued that the difference between the barrel

cheese price and the block cheese price is due to the cost of packaging

and other nonmilk factors, and therefore the barrel cheese price should

be used for determining the protein price.

In pure economic terms the price of a product represents the supply

and demand for that product as affected by place, form, and time. The

problem with determining a price for protein contained in milk is that

the protein is not marketed as a separate unique product, but is

marketed as an integral part of both fluid and manufactured dairy

products. Therefore, in determining an appropriate protein price, the

value of protein in dairy products is determined by using the value of

a product whose yield is a function of the protein content of the milk.

At this point in time no attempt is made to reflect the protein content

of milk in the value of milk used for fluid use. For this reason, the

component pricing plan recommended in this decision does not apply to

milk used for Class I purposes.

The level of protein in milk does have a measurable affect on the

value of milk used for manufacturing. This value varies among the

diverse manufactured products because of differences in the market

values of manufactured dairy products and in the contribution made by

protein to various finished products. For instance, testimony at the

hearing showed that for a one-pound change in protein in the

manufacture of cheddar cheese there is a 1.32 pound change in the

quantity of cheese produced, whereas in the production of milk powder a

one-pound change in the level of protein would change the amount of

powder produced by approximately one pound. Since the vast majority of

milk in the five orders included in this hearing is used to manufacture

cheese, the protein price will be based on the contribution made by

protein in the manufacture of cheese.

The 1.32 factor used in both methods proposed for the computation

of the protein price for these five orders is derived from a modified

Van Slyke cheese yield formula, where the casein is assumed to be 75

percent of the protein and the moisture content of the cheese is 38

percent. Assuming the butterfat is constant, a change of protein by one

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

Therefore, the 1.32 factor is appropriate for determining the order

protein price.

In determining the level of the protein price, the question of

whether to use the average block price versus the average barrel price

is a lesser issue than the question of whether or not whey protein

should be included in the computation of the protein price, as proposed

by NAJ. The average difference between the Green Bay Cheese Exchange

average block price and average barrel price during 1992 and 1993 was

$.0388 per pound. Multiplying this difference by the 1.32 factor

results in an average difference of $.05 per pound of protein between

the protein prices derived from the barrel and the block cheese prices.

Over the same 2 years the inclusion of whey protein in the computation

of the protein price would have increased the protein price by an

average of $.4265.

The principal issues that must be addressed in determining the

computation of the protein price are the factors that must be included

to arrive at a price that most accurately reflects the value of protein

in milk. In addition, the effect of the level of the protein price on

the other nonfat solids price must be considered. Since the other

nonfat solids price is computed as a residual of the Minnesota-

Wisconsin price, the other nonfat solids price is inversely related to

the protein price. In determining an appropriate protein price and

other nonfat solids price, the effects of both prices on payments to

producers and margins to handlers buying milk must be determined.

Inclusion of a protein price and an other solids price in

determining payments to producers gives producers an incentive to

increase their production of nonfat solids, especially protein. There

was no evidence in the hearing record to indicate the cost to producers

of increasing the protein content of milk. It is therefore difficult to

determine what the absolute level of the protein price, or its relative

level to the butterfat and other solids prices, must be to encourage

producers to increase the protein content of milk.

On average for the 21 months of data available in the record the

protein price recommended for adoption in this decision, at $1.6851 per

pound of protein, is twice both the $.6379 per pound average other

solids price and the $.8374 per pound average butterfat price.

Certainly, pricing protein at double the price of the other components

in milk gives producers a clear message that protein is the component

most desired in the marketplace without over-valuing that component.

The significant difference in prices between protein and the other

nonfat solids and butterfat components should give producers an

incentive to increase protein output.

Testimony by several proponents of component pricing explained that

component pricing would be more equitable to handlers than the current

skim-butterfat pricing system. The proponents explained that the

increased equity would be due to handlers paying for milk based more

closely on its economic value to them. This increased equity is

reflected in a narrower spread in margins between handlers making

cheese from low protein-low solids milk versus handlers making cheese

from high protein-high solids milk. Several

[[Page 41841]]

exhibits showed that handlers using ``average'' milk would experience

little if any change in their net margins. However, handlers using low-

testing milk would experience a higher net margin than under the

present pricing plan, while handlers using high-testing milk would

experience a lower net margin. This result, the narrowing of handlers'

net margins when compared to the skim-butterfat pricing system, would

occur no matter which of the proposed pricing plans is used to price

the components.

Analysis of data presented at the hearing, using price computations

based on each of the proposals and averaged over the 21 months of data

included in exhibits, shows a range of net manufacturing margins for

cheese using the recommended pricing system of $1.57 per hundredweight

compared with the $3.34 range in cheese manufacturing margins per

hundredweight of milk purchased attributable to the current skim-

butterfat pricing system. The three component pricing plans discussed

at the hearing would result in ranges in net cheese manufacturing

margins of $1.16 per hundredweight for the NAJ proposal, $1.62 per

hundredweight for the CMPC proposal, and $1.70 per hundredweight for

the NCI proposal.

Even though the NAJ proposal yielded the smallest spread in net

margins, further analysis of the NAJ results shows that the net margins

increase and then start to decline. The decline in margins occurs when

there is not enough butterfat in the milk to fully utilize the protein

available, thus reducing the increase in cheese yield as protein

content continues to increase. Accordingly, if the price of protein is

greater than the increased return from cheese, the net return will

start to decline.

The decline in net returns under the NAJ proposal indicates that

the NAJ proposal would overprice protein, at least when there is not

enough butterfat to fully utilize the protein. The result is that the

marginal return using the NAJ proposal peaks within the protein and

butterfat range of average milk while the marginal return using the

protein and other solids price as recommended in this decision

continues to increase, although at a decreasing rate. A mandated

pricing system should not set prices at levels that result in a

declining marginal return, particularly when the decline occurs at or

near average market component levels. Therefore, the whey protein

factor should not be included in the computation of the protein price.

Exceptions to the recommended protein price reflected the positions

that the respective parties expressed at the hearing and in post-

hearing briefs. NAJ and Swiss Valley reiterated their position that the

protein price should be computed by multiplying the block cheese price

by 1.32 and adding the result of multiplying the whey protein

concentrate price by .735. They stated that the higher protein price

that would result from this computation is appropriate since protein is

the highest-valued component in milk. They suggested that even though

the recommended decision was theoretically correct in its analysis, the

analysis was flawed because of the assumption that butterfat could be a

limiting factor in the yield-determining role of protein. They also

pointed out that by using a higher protein price the resulting other

solids price would be closer to the market value of lactose, the main

component in the other solids.

Although a manufacturer could purchase additional sources of

butterfat under the NAJ/Swiss Valley scenario, the cost would not be

the same as the original source of butterfat and would therefore have

to be included in the analysis of the manufacturer's returns. Since no

data was included in the hearing record to undertake this analysis, the

effect of the purchase of additional butterfat on net margins was not

computed. However, since the decline in net margins under the NAJ

proposal begins in the range of average testing milk, it is appropriate

to adopt a protein price that does not include the value of whey

protein.

CMPC, Mid-Am, WCMA, Dean Foods, Kraft, NFO, Independent Milk

Producers Cooperative, and Lakeshore Federated Dairy Cooperative also

opposed the recommended protein price computation in comments filed in

response to the recommended decision. They specifically opposed the use

of the block cheese price for computing the protein price. Their main

objection was that a protein price computed on the basis of the block

cheese price is not the lowest possible protein price that could be

adopted based on the proposals included in the notice of hearing. Their

exceptions reiterated their position that Federal order prices should

be minimum prices. Their comments also suggested that use of a lower

protein price and a correspondingly higher other solids price would

result in smaller changes in payments to producers.

Kraft, A-E and TAPP argued in exceptions that since the only

difference between the block and barrel cheese prices is packaging, the

higher protein price resulting from the use of the block cheese price

in the protein price computation is not warranted.

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

National Cheese Exchange in Green Bay, Wisconsin, is the appropriate

price to use for determining the protein price. Use of the block price

results in producers receiving a higher price for protein than if the

barrel price were used without handlers incurring any significantly

higher cost for milk. In addition, although the record showed that more

cars of barrel cheese were sold on the Exchange than block cheese, the

predominant cheese form in which American cheese is manufactured in the

five-market region is in 40-pound or 640-pound blocks.

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

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

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

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

establishing a sufficiently high protein price to accomplish the goal

of encouraging producers to produce protein without having a

detrimental impact on handlers, and does result in a narrower range of

manufacturing margins for cheese.

Over the period January 1992 through September 1993, a protein

price computed by multiplying the block price by 1.32 would have

resulted in an average protein price of $1.6851 per pound. The CMPC and

NCI proposals, using the barrel cheese price, would have resulted in an

average protein price of $1.6337 per pound of protein over the same

time period. A comparison of the net margins resulting from the

recommended protein price versus the CMPC and NCI proposals shows that

the slightly higher protein price and correspondingly lower other

solids price adopted herein have a negligible affect on net margins. In

fact, the spread between the highest and lowest cheese manufacturing

margin declines slightly while the margin per pound of cheese remains

virtually unchanged. At the same time, the producer is paid a higher

protein price and thereby has a greater incentive to increase protein

production.

The question to be addressed should be the level of protein price

that will best accomplish the goals of component pricing rather than

the magnitude of the protein price. Analysis of the data in this

decision shows that using the block cheese price results in a protein

price that accomplishes three goals: (1) Components will be priced at

levels that reflect their value in the marketplace,

[[Page 41842]]

(2) components will be priced at levels that inform producers about

which component has the greatest value and that make it worthwhile to

produce that component, and (3) components will be priced at a level

that will return a positive result to the manufacturing industry. All

three of these goals are constrained by the requirement that the total

value of the component prices must be equal to the Minnesota-Wisconsin

price. Further, a protein price slightly higher than one based on the

barrel cheese price will result in an other nonfat solids price that is

closer to the market price for lactose.

Since the protein price contained in this decision will be only 5

cents greater than the price that would be computed using the barrel

cheese price, rather than the 43-cent difference proposed by NAJ (using

the whey protein price), the impact on producers should be very similar

to the results shown in the exhibits presented by CMPC.

b. Other nonfat solids. The balance of the M-W price, after the

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

basis of ``other nonfat solids.'' The other nonfat solids price per

pound will be computed by subtracting from the M-W price, at test, the

butterfat price times the butterfat test of the milk in the M-W price

survey and the protein price times the protein test of the milk in the

M-W price survey. Because the computation of the other solids price is

based on a residual value, the other solids price could be negative

without further adjustments. Therefore, if computation of the other

solids price results in a negative price, the protein price will be

adjusted (downward) to result in a zero value for the other solids

price.

As a residual, a NAJ witness stated, the other nonfat solids price

would represent the value of lactose and ash, which are the primary

constituents of the other nonfat solids, and the difference in value

between a competitively set price for milk, the Minnesota-Wisconsin

price, and the value of that milk based strictly on product prices.

An expert witness for NAJ testified that a higher price for other

solids than would be computed by using a protein price lower than that

proposed by NAJ was not justified because a higher other nonfat solids

price would defeat the purpose of multiple component pricing: to give

producers an economic incentive to increase the protein content of

their milk. The witness also explained that since the ``other nonfat

solids'' consist primarily of lactose, for which there is a limited

market and cheaper substitutes, there is no reason to have a high other

nonfat solids price.

A witness for CMPC explained that the CMPC proposal would result in

a higher price for other nonfat solids than the NAJ proposal. The

witness testified that reduced emphasis on the protein price and

increased emphasis on the other solids price would reduce the impact of

multiple component pricing on handlers and producers. The witness

observed that the average difference in handlers' cost of milk between

the current skim-butterfat pricing system and the CMPC proposal was

less than one cent per hundredweight, while the NAJ proposal would

result in a difference of slightly over three cents per hundredweight.

The CMPC witness pointed out that the same relationship was

applicable to returns to producers. In fact, the witness stated, when

comparing the effect of the current skim-butterfat pricing system on

handlers' obligations with both the NAJ proposal and the CMPC proposal,

there is a narrower spread from the highest difference to the lowest

difference and a smaller standard deviation with the CMPC proposal than

the equivalent comparisons with the NAJ proposal.

An alternative residual price was proposed by NCI and supported by

Kraft. A witness for NCI testified that instead of placing the residual

value on the other nonfat solids, the residual value should be placed

on the remaining pounds of fluid milk. The witness explained that this

residual fluid price would be calculated by subtracting the value of

3.5 pounds of butterfat and the value of the protein based on the

protein test of the milk in the Minnesota-Wisconsin price survey from

the Minnesota-Wisconsin price. The resulting value would be divided by

100 minus 3.5 minus the protein test of the milk in the Minnesota-

Wisconsin price survey.

The NCI witness testified that placing the residual value on other

nonfat solids would yield an ``other nonfat solids'' price that could

not be recovered in the marketplace. In addition, he stated, although

the butterfat price is based on the butter market and the protein price

would be based on the return to cheese manufacture, the other nonfat

solids price would have no relationship to any particular established

market or component. The witness also testified that since another

nonfat solids test would not be needed for the NCI proposal,

administration of the pricing plan would be easier and less expensive

than the other pricing proposals.

NCI, Kraft and A-E excepted to the use of other nonfat solids as

the pricing factor to represent the residual value of the M-W price.

NCI suggested that the same argument used in the Southern Michigan

revised recommended decision (59 FR 64464) for the use of a fluid

carrier component to represent the residual value of the M-W price be

used in this final decision. Kraft and A-E also supported the use of a

fluid carrier component. In its exceptions, Kraft stated that use of a

fluid carrier would moderate pricing extremes between producers, and

that use of other solids to price the residual value of the Minnesota-

Wisconsin price overprices lactose and fails to recognize the value of

the fluid portion of milk.

The proposal by NCI to place the residual value on a ``fluid

carrier'' component has some merit in that it does not try to apply the

residual value to a component such as other solids, on which the market

may not place a value. The major drawback to the NCI proposal is that

it ignores one of the components of milk, other nonfat solids, which is

composed of lactose and ash.

Until a component pricing plan is developed that does not tie the

total value of the components to the M-W price, there will be a need to

adjust the price of at least one of the components from a product-based

value. As explained in this decision, and in the comments and

exceptions filed by various parties, the M-W price consists not only of

the base value of milk, but also various premiums, different pricing

systems, and probably most importantly, competition for milk supplies

in Minnesota and Wisconsin. Even though good arguments can be made for

using a fluid carrier to represent this residual value, the record of

this proceeding supports the use of other nonfat solids to represent

the residual value.

Although the other nonfat solids do not have as much market value

as either butterfat or protein, they are an important component of

milk. If a multiple component pricing system is to be effective it

should price as many of the components in milk as possible, preferably

based on the value of those components in the marketplace. There is,

however, no readily available measure of the market value of the other

nonfat solids. Since there was no testimony or any justification in the

record for departing from the Minnesota-Wisconsin price as a basic

price for milk, at least one of the components in the payment plan must

represent the difference between a competitively-set pay price (the M-

W) and the product-derived component prices. This residual value

therefore represents not only the value of the lactose and ash, but

also equates the

[[Page 41843]]

component values, some of which are determined by their market value,

with a competitively set producer pay price.

The prospect of lactose being added to milk by producers for the

purpose of benefitting from the other solids price was discussed by

several hearing participants. The incentive to adulterate milk with

added lactose should be no more of a problem than the current incentive

to adulterate milk with water. Testing to determine whether lactose has

been added should, in fact, be easier than testing for water since it

would be part of the testing necessary to determine producers'

payments. In addition, added lactose can be detected during normal

testing procedures currently conducted on milk.

NCI's concern that testing for total solids would increase

handlers' costs and difficulty of testing was not established in the

hearing record. In fact, testimony indicated that many handlers are

already testing for total solids. Hearing testimony also showed that

the testing for total solids is as accurate or more accurate than

testing for butterfat or protein. In addition, the infrared machines

that are used by most laboratories will test for total solids at the

same time the butterfat and protein tests are done. Therefore, there

should be no significant increase in testing cost or testing difficulty

with the implementation of the component pricing plan incorporated in

this decision.

LOL, in its comments on the recommended decision, pointed out a

``flaw'' in the formula used to compute the other solids price. LOL

noted that the M-W price is adjusted to a 3.5 percent butterfat test,

but that the skim component tests are left ``at test.'' What this means

is that the protein and other solids tests do not reflect the quantity

of protein or solids in milk of 3.5 percent butterfat, but rather the

quantity of protein and solids in the milk at test. Therefore, the

value of the protein that is deducted to arrive at the residual value

for computing the other solids price may be incorrect, thus resulting

in an incorrect other solids price. The problem could be magnified

because the other solids test does not reflect the correct quantity of

other solids in the remaining skim milk. The effect of this ``flaw'' is

relatively small; however, this decision adjusts the computation of the

other solids price to eliminate the shortcoming observed by LOL.

c. Butterfat. The value of butterfat in the amended orders will be

the same as under the current orders. There was no proposal or

testimony to change the way butterfat currently is valued. One expert

witness testified that the current system of basing the value of

butterfat on the value of butter is proper.

This decision continues the historical relationship of the values

of butterfat and butter. The difference between the pricing of

butterfat in the amended order and the current order is due to the way

that value is expressed. Currently the value of butterfat is expressed

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

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

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

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

However, by expressing the value on a per-pound basis instead of a

differential, the objective of demonstrating clearly to producers where

the value is in milk is easily achieved.

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

will be determined by multiplying the butterfat differential by 965 and

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

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

example, if the result of the computation is $0.73085, the announced

butterfat price would be $0.7309 per pound of butterfat.

d. Miscellaneous. The three component prices: butterfat, protein,

and the other solids, will be expressed on a per-pound basis with four

places to the right of the decimal. Analysis has shown that by

expressing these prices to the nearest one-hundredth of a cent, the

accuracy of the prices is significantly enhanced over expressing the

prices to the nearest cent. Additionally, the difference between what

is paid into the producer settlement fund and what is drawn from the

producer settlement fund is much closer to zero than when prices are

rounded to the nearest full cent.

In contrast to other orders that have multiple component pricing

provisions, this decision incorporates only one protein price as well

as one other nonfat solids price. The pooling of the components to

include the Class I skim portion is incorporated within the computation

of the producer price differential. This feature of the pricing plan

allows for the elimination of separate handler and producer protein

prices and separate handler and producer other solids prices, and

resulting confusion over which price, handler or producer, should be

used when. In addition, a handler's per-pound price for protein or

other solids is the same whether the handler is buying milk from

producers or from other handlers.

The producer price differential, which represents the additional

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

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

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

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

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

for shrinkage and overage, inventory reclassification, receipts of

other source milk allocated as Class I, receipts from unregulated

supply plants, location adjustments, and, in the Chicago Regional

order, transportation and assembly credits.

For the purpose of eliminating differences between handler and

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

values of the protein and other solids contained in the skim milk

allocated to Class II and Class III (and somatic cell adjustments) will

be added to, and the values of the protein and other solids contained

in all producer milk (and somatic cell adjustments to producer milk)

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

handlers is then adjusted by total producer location adjustments and

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

resulting value is then divided by the total pounds of producer milk in

the pool, and an amount not less than four cents nor more than five

cents is deducted. The result is the producer price differential to be

paid to producers on a per hundredweight basis.

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

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

of the Class I, II, or III-A differential prices may be negative and/or

the minus adjustments may be large enough to offset any positive

contribution from the differential price. A negative producer price

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

III price.

An issue that was not directly addressed in this proceeding

concerned testing for protein. The five orders included in this hearing

currently base protein testing on the standard Kjeldahl method, which

tests for nitrogen and then converts the nitrogen result to protein.

Since there is a certain amount of free nitrogen in milk this test

somewhat overstates the protein content of milk. Recent developments in

testing allow for testing for true protein which is a more accurate

reflection of protein content. In no way does this decision mandate a

specific testing procedure. However, when (or if) the industry does

move to testing for true protein, this

[[Page 41844]]

decision should not be viewed as a hindrance to that conversion. At the

time a change to testing for true protein may occur, a change in the

1.32 factor may be necessary.

4. Somatic Cell Adjustment. The producer price differential paid to

each producer should be adjusted on the basis of the somatic cell

content of the producer's milk. In a modification from the recommended

decision, handlers' value of milk used in Class II and Class III, but

not in Class I, also would be adjusted for somatic cell count (SCC).

The value adjustment per hundredweight for each 1,000 somatic cells

would be determined by multiplying .0005 times the monthly average

National Cheese Exchange 40-pound block cheese price. Each producer's

monthly average SCC, in thousands, would be subtracted from 350 and

multiplied by the value adjustment per 1,000 somatic cells. The

difference between somatic cell adjustments to handler value and to

producer value will be included in the computation of the producer

price differential.

A wide range of somatic cell or quality plans were included in the

notice of hearing and at the hearing itself. In general, all parties

agreed that high-quality milk is important to all segments of the dairy

industry. The major differences between the parties arose over the

questions of how and whether quality and/or somatic cell adjustments

should be included in the Federal order program.

A witness expert in the field of milk testing and quality testified

about the influence somatic cells have on milk and the resulting affect

on products made from milk. The witness explained that in normal

healthy cows the somatic cell count is around 50,000. When an infection

occurs in the udder of the cow white blood cells enter to fight the

bacterial infection. The SCC thus increases with the increasing number

of white blood cells. In fact, white blood cells and somatic cells are

synonymous in this context. The witness continued by explaining that

white blood cells contain enzymes that are designed to break down the

cell walls of the bacteria that are infecting the udder, but do not

distinguish between milk protein and bacteria. As a result, milk

protein is also degraded. The witness also stated that the enzyme

causes some deterioration in milkfat. The witness continued by

explaining that these white blood cells also cause to be activated a

proteolytic enzyme that is present in all milk.

The expert witness went on to explain that casein, which is the

functionally important protein in milk, is broken down into smaller

protein chains that cannot perform the same functions as the casein. In

fact, the witness explained, the destruction of the casein affects all

dairy products that rely on casein for structure or function. These

products include cheeses, whipped cream, yogurt, ice cream, and

condensed and dry products used in the manufacture of other products in

which casein is a functional necessity. The witness also explained that

higher SCC milks have a tendency to have a faster increase in ``acid

degree value'', which is a measure of rancidity and off flavors, than

milks with low SCCs. The witness testified that most of the damage

occurs in the udder of the cow, where conditions are ideal for the

various enzymes to work. Once the milk is removed from the udder and

cooled and stored properly, further deterioration does not stop but is

slowed down significantly, and further damage is minimized.

The expert witness discussed the effect that somatic cell counts

have on the manufacture of various dairy products, specifically cheese.

He explained that high SCC milk results in lower cheese yields as well

as problems with moisture control and the activity of the starter

culture. The increased somatic cells result in less casein in

relationship to the total protein so that less cheese is produced than

would be indicated by the amount of protein present. The degraded

protein ends up in the whey with the rest of the whey proteins. The

witness explained that in studies using individual cow's milk cheese

yield would drop dramatically as the somatic cell count went above

100,000, with the yield staying fairly constant as the somatic cell

count climbed to 1,000,000.

The witness pointed out that the cheese yield effect of somatic

cells differs when bulk tank milk is used instead of an individual

cow's milk. He explained that in the case of bulk tank milk the

relationship between cheese yield and somatic cell counts would be

linear, with cheese yields declining as SCCs increase. The witness

stated that the linear relationship is caused by the weighting of the

SCCs in the bulk tank. Bulk tank tests are weighted averages rather

than simple averages. For example, if 100 pounds of milk with a somatic

cell count of 50,000 and 400 pounds of milk with a somatic cell count

of 250,000 are added to the bulk tank the somatic cell count would be a

weighted average of 210,000 and not the simple average of 150,000.

The witness also testified that the effect of somatic cell levels

on fluid milk products is reflected in higher acid degree values that

indicate rancidity and off flavors, resulting in shorter shelf life.

The expert witness testified that routine testing for somatic cells

is conducted using a Foss-O-Matic infrared analyzer. The reference

method for testing is the direct microscope somatic cell count in which

the sample is stained and the somatic cells are counted using a

microscope. The witness explained that if the electronic instruments

are calibrated to the same reference samples the resulting test values

and standard deviations should be in close agreement. The witness

concluded that on a relative basis the results should be close to what

would be obtained using other analytical tests.

The notice of hearing contained a proposal by CMPC to include an

adjustment for somatic cells. However, at the hearing, a witness for

CMPC explained that CMPC had decided neither to support nor oppose the

inclusion of a somatic cell adjuster in the amended orders. The CMPC

witness testified that the individual members of CMPC were free to

support or oppose any of the somatic cell proposals as they saw fit.

As originally proposed by CMPC, the somatic cell adjustment would

be computed by multiplying the National Cheese Exchange barrel price

times .0005. The resulting quantity would be multiplied by 500 minus

the somatic cell count of the milk, in thousands. The resulting value

would be applied on a per hundredweight basis. As explained by a

witness for CMPC, the proposed somatic cell adjuster would apply to all

producer milk, including that purchased by Class I handlers. The

witness went on to explain that the effect of somatic cells on the

value of producer milk and milk used in Class II and Class III would be

included in the computation of the producer price differential. A

somatic cell adjustment on Class I milk would not be included in the

pool, and therefore would not affect Class I handlers' cost of milk.

A witness for WCMA quoted extensively from the MCP recommended

decisions for the Indiana, Ohio Valley, and Eastern Ohio-Western

Pennsylvania milk marketing orders, and for the Michigan milk order,

supporting the inclusion of an adjustment for somatic cells in Federal

orders. The witness supported the CMPC proposal, but suggested that the

somatic cell adjustment be applied to all milk; that is, Class I milk

would not be exempted from a somatic cell adjustment. In addition, he

proposed that the somatic cell adjustment be

[[Page 41845]]

applied to the protein price rather than on a hundredweight basis.

A witness for TAPP and FUMMC expressed support for including a

somatic cell adjustment in the amended orders. The TAPP-FUMMC brief

also supported such a provision. The witness stated that a somatic cell

adjustment would benefit producers, handlers, and consumers by

increasing the volume of milk marketed, improving yield, and supplying

consumers with more nutritious, better quality dairy products. The

TAPP/FUMMC witness explained that their proposal would have a neutral

range of 301,000 to 400,000 somatic cells with a one-cent positive

adjustment for each 50,000 somatic cell count below the neutral range

up to a maximum of a six cents as the somatic cell count declined, and

a one cent negative adjustment for each 50,000 somatic cell count above

the neutral range up to a maximum of ten cents as the somatic cell

count increased. The TAPP/FUMMC witness testified that under their

proposal the somatic cell adjustment would apply to all producer milk,

milk used in Class III, and, if the plan is to be revenue neutral, also

to milk used in Class II.

A witness for Swiss Valley Farms Company (Swiss Valley) testified

in support of including additions and subtractions for somatic cells in

the amended order. The Swiss Valley witness explained that somatic

cells add proteolytic and lipolytic enzymes to the milk, as well as a

plasmin enzyme that is extremely heat stable, such that it is not

deactivated during pasteurization. Therefore, the enzyme continues to

degrade the milk during storage. The witness added that low SCC milk is

important to the Swiss Valley bottling operations because it results in

fluid milk products of improved flavor, and to their cheese-making

operations because of the resulting higher casein and lower whey

protein content of the milk, which increases manufacturing returns.

The Swiss Valley witness proposed that the somatic cell adjustment

begin at 400,000, with a positive adjustment as the SCC declines, and a

negative adjustment as the SCC increases, from that level. The

adjustment would be five percent of the National Cheese Exchange block

price per 100,000 somatic cells. The Swiss Valley witness explained

that the adjustment for somatic cells should apply to all producer milk

and that Swiss Valley would support a somatic cell adjustment on Class

II and Class III milk for the handler.

In its post-hearing brief, Swiss Valley reiterated the testimony of

its witness in favor of including an adjustment for somatic cells in

the amended order. Besides supporting the position of the Swiss Valley

witness, Swiss Valley expressed general support for a somatic cell

adjustment.

Testimony by a fluid processor witness indicated that the handler

pays a quality premium when buying milk from producers and specifies

minimum quality standards on purchased tanker milk.

A witness for Mid-America Dairymen, Inc. (Mid-Am), testified that

Mid-Am favored the inclusion of an adjustment for somatic cells in the

amended order. The witness quoted from the Final Decision of the

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

to support the position of Mid-Am that an adjustment for somatic cells

should be included based on the effect somatic cells have on all milk.

The witness explained that quantifying the adjustment on an incremental

basis was difficult, and since not all milk is used in the manufacture

of cheese a moderate adjustment rate should be used. The witness

explained that the Mid-Am proposal would apply the somatic cell

adjustment to all producer milk, on a hundredweight basis, with a

positive adjustment for a somatic cell count below 400,000 and a

negative adjustment for SCCs above 400,000.

The witness explained that under the Mid-Am proposal, the somatic

cell adjustment would be computed by subtracting the monthly average

somatic cell count (in thousands) of the producer from 400 and then

multiplying the result by the National Cheese Exchange monthly average

barrel cheese price multiplied by .0005. He stated that since the

somatic cell adjustment would be included in the computation of the

producer price differential, on the producer side only, the total size

of the pool would not change but individual producers would receive

more or less, depending on whether their milk had a somatic cell count

above or below the average SCC of the market. The Mid-Am witness

continued by explaining that the Mid-Am proposal would be a

redistribution of money from high somatic cell testing producer milk to

the lower somatic cell testing milk, since there would be no additional

money in the pool from the somatic cell adjustments.

Instead of supporting the inclusion of somatic cell adjustment

provisions in the five Federal orders, witnesses testifying on behalf

of Land of Lakes, Inc., and NCI supported those organizations'

proposals to allow each handler to submit a somatic cell or quality

adjustment plan for payments to its own producers to the market

administrator.

A witness for LOL testified that with the LOL proposal a handler

could reduce a producer's payment by up to ten percent from that

required by the order if other producers of the handler received

positive adjustments to their payments, as long as the total payments

were equal to at least the minimum total order payment requirements.

The witness explained that LOL's proposal does not contain specific

criteria for quality and/or volume adjustments. Each handler would

submit an individual quality and/or volume adjustment plan to the

market administrator which the handler would be required to adhere to

until a new plan would be submitted. The witness testified that there

is general agreement among handlers for the need to adjust payments for

milk based on quality and volume. The witness continued by arguing that

since the industry has not yet reached a consensus on how to adjust for

quality and volume, it would be appropriate to allow each handler to

develop its own quality and volume plan with the approval of the market

administrator.

A witness for NCI testified that even though somatic cells affect

the quality of milk, particularly in the manufacture of cheese, it is

difficult to place a value on their effect. The witness explained that

the variability in somatic cell levels from day to day and producer to

producer makes determining an appropriate payment adjustment imprecise.

In addition, the witness pointed out that other factors affect milk

quality, and that placing a precise value on their effect is even more

difficult than in the case of somatic cells. The NCI witness explained

that the NCI proposal would allow each handler to establish and apply

its own somatic cell adjustment schedule, with the approval of the

market administrator, as long as the total payments to producers met or

exceeded the Federal order minimum value. The witness explained that

each handler could change its payment plan as conditions warranted.

A witness for Kraft emphasized the earlier testimony on the effect

of somatic cells on milk quality and cheese yields. The witness listed

several studies supporting the results testified to by the NAJ expert

witness. The Kraft witness testified that Kraft has, since the early

1980's, employed a quality payment program as part of its producer

payroll. The witness went on to state that the plethora of somatic cell

payment programs in use in the industry is strong evidence of the

industry's recognition that somatic cells

[[Page 41846]]

play a major role in milk quality. The Kraft witness explained that, in

order of preference, Kraft supports the proposal submitted by NCI,

followed by LOL's proposal and the TAPP/FUMMC proposal.

Kraft, in its post-hearing brief, reiterated its support for a

somatic cell adjustment to be included in the amended order. Kraft's

brief did not support a particular adjustment plan but preferred the

LOL-NCI concept. If that plan were not adopted, Kraft expressed support

for the proposal by Mid-Am or the original CMPC proposal. A brief

largely reiterative of NCI testimony was filed on behalf of NCI with

the Dairy Division rather than the Hearing Clerk, and was received more

than 3 weeks after the extended due date for filing briefs. The brief

is not considered in this decision.

In the Anderson-Erickson Dairy Company (A-E) post-hearing brief, A-

E opposed the application of an adjustment for somatic cells to Class I

milk. They contended that the Class I handler is unable to recover the

added cost of lower somatic cell count milk from the retail market.

This position was supported in the post-hearing brief filed by Lamers

Dairy and Hansen Dairy (Lamers). Lamers pointed to testimony that

indicated that the monetary effect of somatic cells on Class I milk

could not be quantified as it could be with the manufacture of cheese.

NFO, in its post-hearing brief, opposed the inclusion of any

somatic cell adjuster in the recommended order. NFO expressed the

opinion that support for a somatic cell adjuster was rather weak, with

none of the positions presented having strong support. As an example,

the NFO brief pointed to the neutral position taken by CMPC at the

hearing after including a somatic cell adjuster in the original CMPC

proposal. The NFO brief continued by explaining that testimony at the

hearing indicated that the relationship between somatic cell levels and

economic return is not a clear and definite relationship. The NFO brief

went on to point out that there was no consensus at the hearing on how

to apply a somatic cell adjuster.

There is ample testimony and evidence to support the inclusion of a

somatic cell adjuster in these amended orders. The recommended decision

proposed that a somatic cell adjustment be applied to all producer

milk, regardless of the class in which it is used. Such an application

would have avoided including the difference between the handler and

producer somatic cell adjustments in the computation of the producer

price differential; a procedure that, during some months, could result

in a significant adjustment in the producer price per hundredweight.

The recommended application also would have assured that all handlers'

obligations would reflect the quality of the milk they receive.

The somatic cell adjuster per hundredweight per 1,000 somatic cells

will be calculated by multiplying .0005 times the monthly average

National Cheese Exchange 40-pound block cheese price. To determine the

value for an individual producer, the producer's monthly average

somatic cell count (in thousands) will be subtracted from 350 and

multiplied by the somatic cell adjuster. The value of Class II and

Class III milk will be adjusted by the same formula. However, for the

purpose of adjusting handlers' values, 350 will be subtracted from the

best available source of the somatic cell test. This information may

be, but would not necessarily be limited to, load tests, farm tests,

and monthly average tests.

The value of the somatic cell adjustment will be applied on a per

hundredweight basis in the handlers' payments to producers and in

payment for Class II and Class III milk. Somatic cell counts will be

reported with the report of receipts and utilization for all producer

milk and on Class II and Class III milk.

The application of the somatic cell adjustment contained herein

will promote orderly marketing. As pointed out by several witnesses

testifying at the hearing, producers in these markets are faced with a

wide array of quality premium programs. These programs have no standard

basis or standard value that is applied between handlers. Therefore a

producer is faced with trying to decide which premium program will give

the producer the greatest return without a standard with which to

compare. Inconsistent premium programs also result in producers with

identical milk receiving different prices for that milk depending on

which handler is procuring the milk. The inclusion of this somatic cell

adjustment will tend to effectuate the declared policy of the Act by

encouraging orderly marketing through the standardization of the basis

for payment on the level of somatic cells in the milk and the

standardization and checking of the testing and test procedures used

for determining the somatic cell counts.

As was stated earlier, all parties agreed that high quality milk is

important to all segments of the dairy industry. In fact, there was

little opposition at the hearing to the inclusion of an adjustment for

quality in the amended orders. Even though testimony indicated that

there are other quality factors that are important in overall milk

quality, there was no determination of their effect on milk quality or

any attempt to compute a relevant associated value. Therefore, somatic

cell count will be used as the quality adjustment factor in this

decision.

There are two basic reasons to apply the somatic cell adjustment

rate on a hundredweight basis rather than to adjust the protein price.

First, the somatic cell adjustment reflects the quality of milk in many

uses rather than just cheese, and second, application of the somatic

cell adjustment on a hundredweight basis makes it very clear to

producers and to handlers that quality affects milk used in all

products. Although testimony clearly showed that somatic cells affect

the quality of milk in all uses, a value determined on the basis of the

effect of somatic cells on cheese reflects the most prevalent use of

milk in these markets and is the easiest way to determine a value for

payment to producers.

A lack of agreement among hearing participants occurred in trying

to determine the application of a somatic cell adjustment. There was a

general consensus that an adjustment should be made in the producer pay

price for quality and/or somatic cells. The rate at which such

adjustment should be made varied by proposal, but was tied to the

reduction in cheese yield that occurs as somatic cell counts increase.

Several witnesses testified that the somatic cell adjustment rate

should be set at a moderate level. Testimony indicated that most of the

decline in cheese yield occurs as the SCC increases from below 100,000

to above 100,000, with a much slower decline in yield as the somatic

cell count increases to one million. However, testimony also showed

that declines in yield are much more linear when somatic cell tests and

cheese yield studies are done with bulk tank milk than with the milk of

individual cows. Several proposals suggested using a factor of .0005

times the cheese price in determining the value of the somatic cell

adjustment per 1,000 somatic cells. This factor is derived from the

approximately four percent decline in cheese yield as the somatic cell

count increases from 100,000 to one million. This is the same

adjustment that is used in other Federal orders in which a somatic cell

adjuster is included.

The formula used to determine the somatic cell adjuster reflects

the changes in the yield of cheese as the levels of somatic cells

change. The formula also ties the adjustment to the

[[Page 41847]]

value of the milk by using the block cheese price to determine the

value per 1,000 somatic cells. However, since record evidence clearly

shows that the effect of somatic cells on Class I and Class II products

is related more to the quality of the finished product than to the

yield of the product, the formula should reflect less than the full

value of the effect of somatic cells on cheese yield. Using the

recommended formula, the somatic cell adjustment for the average

producer under the Chicago Regional order would be a plus three cents

per hundredweight, far below the 25 cents per hundredweight average

quality premium that is shown in hearing exhibits as being paid

currently.

The corresponding somatic cell adjustments for average producers

under the four orders in addition to Chicago are: Upper Midwest, zero

cents; Iowa, minus one cent; Nebraska-Western Iowa, minus six cents;

and Eastern South Dakota, minus three cents. The formula results in an

estimated range of forty-eight cents per hundredweight from a somatic

cell count of 1,000 to a somatic cell count of 750,000, or a positive

twenty-two cents to a minus twenty-six cents, although there is no

limit on the deduction that may be made since there is no limit on the

maximum SCC in this decision.

The use of a neutral point was supported by various proponents of a

somatic cell adjuster. Several others suggested a neutral range. The

record contains numerous references to a neutral range or point around

a somatic cell count of 400,000. One witness expressed the opinion that

the base level for the somatic cell adjustment should be near the

average for the five markets. Another witness explained that their

proposal used 400,000 SCC because that is where their present quality

program begins. Based on data included in the hearing record, the

average SCC for producers whose milk is pooled under the five orders is

367,000. Therefore, a neutral point of 350,000 is appropriate. It is

close to the average for the markets, and not substantially different

from the values that witnesses found appropriate. Also, by using the

formula included herein, proponents of both a neutral point or a

neutral range are accommodated because the formula yields no value

adjustment for approximately plus or minus 7,000 SCC around 350,000.

The formula will give producers an incentive to reduce their SCCs

while minimizing the effect of the somatic cell adjuster on those

products in which somatic cells have a quality effect rather than a

yield effect.

Neither the quality proposal by LOL nor the somatic cell proposal

by NCI, in which each handler would be allowed to submit an individual

quality or somatic cell payment plan to the market administrator, is

included in this decision. Although the Agricultural Marketing

Agreement Act in 7 U.S.C. 608c(5) does allow for adjustments to minimum

pay prices on the basis of quality, such adjustments should be at a

uniform rate for all producers in the market. Allowing each handler to

have its own payment schedule would defeat the concept of uniform

pricing to producers, eliminate the purpose of allowing quality

adjustments under the order, and lead to disorderly marketing.

Producers with identical milk shipping to different handlers within the

same market could, and probably would, have different minimum order pay

prices if each handler had its own quality or somatic cell payment

plan.

A number of witnesses testified that the profusion of payment plans

currently in effect in the market today are causing disorderly

marketing, and that one of the benefits of incorporating multiple

component pricing with a somatic cell adjustment in the five orders

would be to reduce or at least standardize the vast array of producer

payment plans currently in effect in the region. In view of such

testimony, adoption of the LOL or NCI quality adjustment proposals

would serve no purpose.

Support for the inclusion of a somatic cell adjuster in the amended

orders was expressed in comments filed in response to the recommended

decision by several parties including LOL, Cass-Clay Creamery, Mid-Am,

Grande Cheese, WCMA, Kraft, AMPI-Morning Glory Farms, TAPP, and Swiss

Valley.

Mid-Am, Grande, WCMA, Kraft, and Swiss Valley expressed unequivocal

support for the inclusion of a somatic cell adjuster. Mid-Am stated

that higher SCCs decrease cheese yields and also affect fluid products.

Grande and WCMA expressed the view that the recognition of the

importance of quality is long overdue, particularly on all classes of

milk, and that producers should be rewarded for producing quality milk.

Kraft, in support of the somatic cell adjustment, explained that high

SCCs have a direct and measurable adverse impact on cheese yields and,

in fact, on all dairy products. Kraft's comments explained that even

though the SCC is not the only quality factor, it is a good indicator

of overall milk quality. Kraft also said that if the somatic cell

adjustment is not applied to all milk, disorderly marketing could

occur, with fluid handlers trying to switch supplies to take advantage

of the economics of procuring a low-SCC milk supply at no additional

cost.

Swiss Valley, with two bottling plants in the marketing areas

covered by this decision, expressed support for the inclusion of a

somatic cell adjustment. Swiss Valley particularly expressed support

for the application of a somatic cell adjustment to fluid milk, stating

that a somatic cell adjuster will help insure quality milk for fluid

handlers that will result in improved flavor and longer shelf life for

fluid milk. They explained that the inclusion of a somatic cell

adjustment under the Federal order program would eliminate the wide

array of somatic cell programs currently in the marketplace and that

even though the somatic cell adjustment is not large it is economically

sound.

The remainder of the comments favoring a somatic cell adjuster

included some qualifiers or suggested modifications to the recommended

decision. LOL and Cass-Clay Creamery suggested that if a somatic cell

adjuster is included in the final decision, it should not apply to

movements of milk between handlers but only to payments to producers.

LOL added that a somatic cell adjustment on milk movements between

handlers was not included in the notice of hearing.

In exceptions filed by AMPI-Morning Glory Farms, the cooperative

supported the somatic cell adjuster on all milk, but suggested that the

``break point'' be at a somatic cell count of 400,000 versus the

350,000 contained in the recommended decision. AMPI also stated that

there should not be a somatic cell adjuster if it is not applied to all

milk, because a somatic cell adjuster on only Class II and Class III

milk would cause disorderly marketing.

TAPP's exception supporting a somatic cell adjuster recommended

several changes. TAPP's comments expressed the belief that the amount

of the recommended somatic cell adjustment is too large, causing too

great a spread in value between the lowest and highest somatic cell

tests. TAPP also suggested that there be a larger neutral range, and

that the somatic cell adjustment should remain constant rather than

changing each month based on the cheese market.

The Milk Industry Foundation (MIF), along with many fluid handlers

without plants in the affected marketing areas, filed comments opposing

the inclusion of a somatic cell adjustment on Class I milk in the final

decision. They all gave the same six reasons for their opposition: (1)

There was not enough evidence at the hearing to support a somatic cell

adjustment on Class I milk,

[[Page 41848]]

and, in fact, that a Class I handler testifying at the hearing opposed

a somatic cell adjustment on Class I milk; (2) somatic cells are not

the only quality factors that should be included; (3) a somatic cell

adjustment on Class I milk would cause disruptive and inequitable

marketing conditions for fluid handlers, both between and within

marketing areas; (4) fluid handlers cannot recover the added cost of

the somatic cell adjustment from the marketplace; (5) a somatic cell

adjustment would eliminate advance Class I pricing; and (6) Federal

orders should not be involved in quality issues.

Anderson-Erickson (A-E), Dean Foods, and Marigold, who are fluid

handlers regulated under one or more of the affected orders, opposed

the inclusion of a somatic cell adjustment on Class I milk. They gave

the same arguments as MIF, et al., plus several more. A-E comments

stated that a somatic cell adjustment based on the effect of somatic

cells on cheese has no bearing on the effect of somatic cells on Class

I milk, and therefore does not reflect an appropriate value adjustment.

Marigold explained in its exceptions that there is no evidence that

specific levels of somatic cells can be discerned in fluid milk by

consumers, and therefore a value cannot be placed on varying levels of

somatic cells in Class I milk. Dean's comments expressed the belief

that value adjustments based on quality should be determined by

competition rather than by Federal orders.

Wells Blue Bunny, NCI, and Independent Milk Producers Cooperative

filed comments opposing the inclusion of any somatic cell adjustment in

the amended order.

Lakeshore Federated Cooperative (Lakeshore), consisting of

Manitowoc Milk Producers, Mid-West Dairymen's Company, and Milwaukee

Cooperative Milk Producers were joined in their exceptions to the

recommended decision by FUMMC, Muller Pinehurst Dairy, Prairie Farms,

Woodstock Progressive Milk Producers, and the Galloway Company in

opposing any inclusion of a somatic cell adjustment in this decision.

In addition to the same arguments that were put forth by the fluid

handlers, Lakeshore's opposition was directed toward the need for an

additional cost of testing for somatic cells. Lakeshore's comments

pointed out that the State of Wisconsin requires one test a month for

somatic cells, which also satisfies the requirements for the PMO

(Pasteurized Milk Ordinance) and IMS (Interstate Milk Shippers)

certification. The comments stated that a requirement by the market

administrators that producer milk be tested for somatic cells four

times per month for payment purposes, or an additional 40 tests per

year, would create a burden on cooperative associations that do not do

so much testing at the present time. Lakeshore went on to argue that

the recommended decision would conflict with state regulations with

regard to somatic cells, and asserted that because somatic cell testing

is adequately monitored by the states there is no need for additional

monitoring by market administrators.

Lakeshore claimed that including a somatic cell adjuster would

cause its members to sustain a financial loss due to the cost of

testing for somatic cells. Lakeshore claimed that testing for somatic

cells would increase the costs of labor, computer programming, paper

work, compliance with bureaucratic regulations, and the cost of

additional laboratory equipment, which could not be recovered.

Lakeshore also claimed that a recent increase in the Chicago Regional

assessment was due to somatic cell testing in the Indiana marketing

area, but there is no record evidence supporting this claim.

Lakeshore also stated that because the relationship between cheese

yields and somatic cell count is not a straight-line relationship, no

value can be placed on somatic cell counts of differing levels.

FUMMC and Prairie Farms filed exceptions of their own. FUMMC

expressed its opposition because its proposal for a wide neutral range

where there would be no adjustment was not adopted. FUMMC also claimed

that somatic cell test results are variable and inaccurate, making the

recommended decision impractical and unworkable.

Prairie Farms expressed the opinion that a somatic cell adjustment

would cause disorderly marketing conditions between orders with a

somatic cell adjuster and those without one. Prairie Farms also

expressed the belief that sanitary and quality standards are beyond the

scope of Federal orders.

NFO filed exceptions opposing the recommended somatic cell

adjustment in its entirety, for a number of reasons. NFO claimed that

support for inclusion of a somatic cell adjustment in the Federal

orders was limited at the hearing and in post-hearing briefs, and

argued that major changes of the magnitude of a somatic cell adjustment

have not previously been made with such limited support. NFO asserted

that the premise that inclusion of a somatic cell adjuster would

contribute to orderly marketing would not be fulfilled.

NFO's comments further claimed that the recommended somatic cell

adjustment would result in less revenue to dairy farmers because the

350,000 base point for the adjustment is higher than average producer

milk in four out of five of the affected markets. NFO argued that any

somatic cell base point (the somatic cell level from which producer

prices are adjusted up and down) should reflect the somatic cell count

of the Grade B milk in the Minnesota-Wisconsin price survey. NFO also

argued that a somatic cell adjuster would reduce over-order premiums

and thus reduce dairy farmer incomes.

Finally, NFO argued that the record does not support a linear

relationship between cheese yields and somatic cell counts, and that

the decision did not take into account the extra cost of testing.

Although NFO's comments opposed adoption of a somatic cell

adjuster, the cooperative did support application of such an adjuster

to all milk, including Class I, if the somatic cell adjustment is

included in the final decision.

Comments filed in response to the recommended decision contained

significant support for inclusion of the somatic cell adjustment as

contained in the recommended decision. The comments received also

reflected substantial opposition from fluid milk handlers to the aspect

of the somatic cell adjustment that would have applied to all producer

milk, including Class I.

On the basis of the exceptions received, this decision has been

changed from the recommended decision to include an adjustment to the

value of milk based on the level of somatic cells contained in all

producer milk and in Class II and Class III milk. As a result, the

somatic cell adjustment will be included in the pool process, so

handlers will have to report somatic cell count information with their

reports of receipts and utilization.

The decision to exclude handlers' Class I milk from application of

a somatic cell adjustment is based on several factors. As observed by

exceptors, the hearing record contained little if any testimony or

evidence to quantify the economic effect of varying somatic cell levels

on Class I milk, although there was considerable testimony as to the

effect somatic cells have on shelf life, off flavors and rancidity in

fluid milk products. Since no specific data about the value of using

high-quality milk in fluid products was presented and opposition to the

application of a somatic cell adjustment on Class I milk was so strong,

the somatic cell adjustment will not be applied to milk used in Class I

as a result of this proceeding.

Monitoring of somatic cell testing, which already clearly affects

the

[[Page 41849]]

payments made to most of the producers pooled under these five orders,

by market administrators will assure as much uniformity and accuracy as

possible in the testing procedures. Also, since 70-80 percent of the

milk pooled under these orders is used in Classes II and III,

application of a somatic cell adjustment to that proportion of the milk

used by handlers will doubtless result in a favorable effect on the

general quality of the milk in the marketing areas.

Kraft and AMP's concerns about the ability of fluid milk handlers

to procure supplies of milk with low somatic cell counts at no extra

cost are unlikely to materialize. According to the record, many fluid

handlers already pay premiums for high-quality milk. There is nothing

in the provisions of the amended orders that would prevent the

continuation of the payment of such premiums. In fact, the requirement

that the value of milk used in Classes II and III be adjusted for its

somatic cell content will most likely necessitate equivalent payments

by fluid handlers in order to assure that the supplies of milk they

receive are of at least average quality.

LOL may be correct that having to account for somatic cells in

transfers and diversions could cause additional administrative effort.

This requirement is included, however, so that the market

administrators can ensure that proper payment is made for milk

purchased from producers and cooperatives. There is no difference in

this requirement other than the accounting for protein, other solids

and butterfat in transfers and diversions.

The suggestions by TAPP that the decision contain a larger neutral

range and a constant somatic cell adjuster will not be included in this

decision. A larger neutral range, particularly around the mean, would

provide producers little incentive to reduce herd somatic cell counts

below the neutral zone. Depending on the size of the neutral zone, this

could be a reduction of 100,000 or more. The somatic cell adjustment

provisions adopted in this decision will result in a neutral range of

approximately a plus and minus 7,000 somatic cell count from 350,000.

The economic rationale for a somatic cell adjustment is the effect

that somatic cells have on protein and the resulting cheese yield.

Therefore, it is logical and appropriate to adjust the somatic cell

adjustment rate according to changes in the value of cheese. The

somatic cell adjustment rate in this decision is moderated in that it

does not reflect the value of the entire change in cheese yield that

occurs as somatic cell counts in milk change.

The assertion by some exceptors that there is not a straight-line

relationship between cheese yield and somatic cell count is not

supported by the hearing record. A witness who has done research in

such areas testified that on an individual cow basis the relationship

is not linear, but that when the milk of multiple cows and farms is

intermingled in a bulk tank, the relationship becomes a linear, or

straight-line, relationship.

Use of a somatic cell count base point of 350,000 is appropriate,

especially because the somatic cell adjustments on the handler and

producer sides will be pooled. The 350,000 base point is very close to

the average somatic cell count for these markets. The smaller the value

of the somatic cell adjustment, the less effect the pooling of somatic

cells will have on the producer price differential. Contrary to the

exceptions filed by NFO, the effect of the somatic cell adjustment on

the average Chicago Regional milk producers was computed to be a plus 3

cents per hundredweight rather than a negative 3 cents.

Concerns were expressed by several of those filing comments that

inclusion of a somatic cell adjuster under the orders would reduce

current quality premiums prevalent in the marketplace. This decision in

no way discourages a handler from paying premiums for quality at

whatever rate the handler deems appropriate, as long as producers are

paid the minimum Federal order price. In fact, the rate of adjustment

for somatic cell count included in the orders is not intended to

represent the entire value of the somatic cell effect on milk. In

addition, administration of an SCC adjustment under the orders should

result in greater handler and producer confidence in the accuracy of

the somatic cell counts on which such premium payments are based.

The objection by many of the parties filing exceptions to the

somatic cell adjustment that the cost of testing and reporting somatic

cell counts would be an excessive burden on producers and their

cooperative associations is difficult to understand. According to the

record, handlers are already testing widely for somatic cells and

adjusting producers' payments on the basis of those tests.

Several parties argued that a somatic cell adjustment should not be

included because the Federal milk orders should not be involved in

quality issues. However, the Agricultural Marketing Agreement Act in

section 8c(5) 7 U.S.C. 608c(5) specifically authorizes adjustments to

prices paid to producers for ``the grade or quality of the milk

delivered.'' The record of this hearing clearly shows that the presence

of somatic cells directly affects the economic value of producer milk.

The somatic cell adjustment provisions adopted herein do not

establish standards, such as the Grade A standard under the PMO, but

only serve to reflect some of the value to handlers of the level of

somatic cells in milk. Although testing for somatic cell counts on a

once-per-month basis may be sufficient for the purpose of assuring that

a dairy farm is consistently below the maximum allowed level for Grade

A status, testing for payment purposes must be done more often. As

noted by several exceptors, somatic cell counts are more variable than

other characteristics for which milk is commonly tested. More frequent

samples and tests are necessary for payment purposes than for the

purpose of assuring compliance with health standards to assure that the

most accurate possible picture of each producer's production is

obtained. The testing monitored by market administrators will cause no

conflict with state testing programs because it will not be used to

determine compliance with the Grade A standard.

There is no disagreement that somatic cell testing is more variable

than butterfat testing. However, the record shows that most producers

whose milk is pooled under these orders currently are having

adjustments made to their milk checks on the basis of such testing. The

hearing record supports the idea that the reliability and accuracy of

somatic cell testing are within acceptable tolerances when testing

instruments are calibrated correctly. It is expected that these aspects

of somatic cell testing will be improved under the supervision of the

market administrators for these orders.

The contention that the inclusion of a somatic cell adjuster in

these five orders will cause disorderly marketing conditions between

these and neighboring orders has no basis. There currently is not, nor

ever has been, perfect coordination of pricing between the orders. Even

though attempts are made to align prices between orders through

location adjustments, other variables such as Class I utilization tend

to result in different uniform prices in overlapping procurement areas.

The limited magnitude of the somatic cell adjustment will not create

any more distortion than already may occur in these marketing areas.

5. Conforming changes. To accommodate multiple component pricing a

number of changes need to be made in the current order provisions of

the five orders in this decision. To

[[Page 41850]]

compute a handler's obligation and the producer price differential,

several prices need to be defined. The Class I differential price

should be defined as the difference between the current month's Class I

price and the current month's Class III price. The Class II

differential price should be defined as the difference between the

current month's Class II price and the current month's Class III price.

These differential prices should not be confused with the fixed values

that are added to the Minnesota-Wisconsin price for the second

preceding month to arrive at the Class I and Class II prices for the

current month. The Class III-A differential price should be defined as

the difference between the current month's Class III-A price and the

current month's Class III price. It should also be pointed out that

these differential prices may be negative, which currently happens when

the Minnesota-Wisconsin price is greater than any of these prices. The

skim milk price will be calculated by subtracting from the Class III

price the value determined by multiplying the butterfat differential by

35. The skim milk price will be expressed on a per hundredweight basis

with two places to the right of the decimal.

Since producer location adjustments are not changed in this

decision, the application of such adjustments to the producer price

differential remains unchanged. In some of the orders the uniform price

is ``snubbed'' at the Class III price when producer location

adjustments are applied. In these orders, the producer price

differential will be adjusted for location until the producer price

differential is zero if the producer price differential at the zero

zone is zero or greater. However, if the producer price differential is

negative, no minus producer location adjustment will be applied. Plus

adjustments to a negative producer price differential would be made. In

those orders in which the uniform price is not ``snubbed'' to the Class

III price, producer location adjustments will be applied as they are

currently.

For the Market Administrator to compute the producer price

differential handlers will need to supply additional information on

their monthly reports of receipts and utilization. In addition to the

product pounds and butterfat currently reported, handlers will be

required to report pounds of protein, pounds of other solids, and

somatic cell information. This data will be required from each handler

for all producer receipts, including milk diverted by the handler,

receipts from cooperatives as 9(c) handlers; and, in some cases,

receipts of bulk milk received by transfer or diversion.

The recommended decision proposed that for the Upper Midwest order

only, the due date for handlers to submit reports of receipts and

utilization be changed from the 10th of the month to the 8th of the

month to allow a longer period of time for the processing of data and

the announcement of the producer price differential. A number of Upper

Midwest handlers filed vehement exceptions to the proposal on the basis

that they would need all the time they were accustomed to having to

prepare their handler reports and make evaluations with respect to

which milk should be pooled or depooled.

As a result of the comments filed by a number of handlers, the

reporting date for the Upper Midwest order will remain the 10th.

However, as suggested in the comments filed by AMPI North Central

Region and Schroeder Milk Company, Inc., the market administrator will

be given additional time (1 day, until the 12th) to complete the

pooling process and announce the uniform price.

In addition to allowing an additional day for the market

administrator to compute the producer price differential, the order is

amended to maintain the amount of time currently allowed handlers to

make payments into the producer-settlement fund by moving the date by

which such payments must be made from the 15th to the 16th of the

month. The date for making payments to the administrative and marketing

services funds will also be changed from the 15th to the 16th. The date

by which the market administrator must make payments from the producer-

settlement fund will remain the 17th.

For purposes of allocation of producer receipts the assumption will

be made that the protein and other solids cannot easily be separated

from skim milk. The protein and other solids will therefore be

allocated proportionately with the skim milk based on the percentage of

protein and other solids in the skim milk received from producers.

The implementation of this multiple component pricing decision will

require several changes in the way handlers pay for milk. Partial

payment at the Class III price for the previous month for milk

deliveries during the first 15 days of a month was proposed by both NAJ

and CMPC. Although no objections to the proposal were expressed, there

was no testimony supporting or opposing the proposal. Therefore, there

is no basis in the record of the proceeding to make substantive changes

in the payment provisions of the orders that provide for partial

payments at a significantly different level.

Currently, the Nebraska-Western Iowa order, the Upper Midwest

order, and the Iowa order require partial payments to be based on the

prior month's uniform price. Since this component pricing plan does not

contain a uniform price, these three orders will be changed to require

the partial payments to be made at the ``statistical uniform price'',

announced by the market administrator on or before the 12th day of the

month for which partial payment is to be made.

The Chicago Regional order will also be changed from the current

requirement that the partial payment be based on the lowest class price

for the prior month to a partial payment based on the prior month's

Class III price. The Eastern South Dakota order does not need to be

changed.

Final payment to producers will be determined by the total

hundredweight of milk times the producer price differential adjusted by

the applicable location adjustment, plus or minus the total

hundredweight of milk times the adjustment for somatic cells, plus the

pounds of protein times the protein price, plus the pounds of other

solids times the other solids price, plus the pounds of butterfat times

the butterfat price, minus any authorized deductions currently allowed.

Handlers purchasing milk from cooperative pool plants will pay for

Class I milk at the Class I differential price plus the pounds of skim

milk in Class I at the skim milk price plus the pounds of butterfat at

the butterfat price; for Class II and Class III-A milk at the Class II

and Class III-A differential prices, respectively, plus the pounds of

protein at the protein price, plus the pounds of other solids at the

other solids price, plus the pounds of butterfat at the butterfat

price; and for Class III milk at the protein pounds times the protein

price, plus the pounds of other solids at the other solids price, plus

the pounds of butterfat at the butterfat price. The value of milk used

in Class II and Class III will be adjusted by the appropriate somatic

cell adjustment. Payment for 9(c) milk will be based on the producer

price differential adjusted for location at the plant of receipt and

somatic cells, plus the value of protein, other solids, and butterfat

contained in the milk.

Since producers will be receiving payments based on the component

levels of their milk, the payroll reports that handlers supply to

producers must reflect the basis for such payment. Therefore the

handler will be required to supply the producer not only with the

information currently supplied, but

[[Page 41851]]

also: (a) The pounds of butterfat, the pounds of protein, and the

pounds of other solids contained in the producer's milk, as well as the

producer's average somatic cell count, and (b) the minimum rates that

are required for payment for each pricing factor and, if a different

rate is paid, the effective rate also.

Land O'Lakes, AMPI North Central Region, and Cass-Clay Creamery

filed comments excepting to the requirement that handlers report to

their producers the pounds and prices of components for which the

producers are being paid. LOL and Cass-Clay stated that there is not

enough room on producer checks to report such information. AMPI

observed that co-ops can reblend returns to producers, and that it

would be confusing to producers to see both minimum component rates and

possibly reblended rates on the same pay statement.

The requirement that payment factors be reported to producers when

producers are paid currently exists in all of these orders. Addition of

the component information is purely a conforming change, and should not

be changed from the recommended decision. Administration of these

provisions should not change from current practices.

The handler's value of milk will be determined by combining: (a)

The pounds of producer milk in Class I times the Class I differential

price, (b) the pounds of producer milk in Class II times the Class II

differential price, (c) the value of overage, (d) the value of

inventory reclassification, (e) the value, at the Class I minus Class

III price difference, of other source receipts and receipts from

unregulated supply plants allocated to Class I, (g) the value of

handler location adjustments, (h) Class III-A credits, (i) the pounds

of skim milk in Class I times the skim milk price, (j) the pounds of

protein in Class II and Class III times the protein price, (k) the

pounds of other solids in Class II and Class III times the other solids

price, and (l) the somatic cell count of milk used in Classes II and

III.

The pounds of protein and other solids in Class II and Class III

will be determined by multiplying the percent protein or percent other

solids in the skim milk of the total producer milk received by the

handler times the pounds of skim milk allocated to Class II and Class

III.

Handlers' obligations to the producer settlement fund will be

determined by subtracting from the handler's value of milk the

following: (a) The total pounds of each handler's producer milk times

the producer price differential adjusted for location, (b) the total

pounds of protein contained in the producer milk times the protein

price, (c) the total pounds of other solids contained in the producer

milk times the other solids price, (d) the total value of somatic cell

adjustments to the handler's producer milk, and (e) the value of other

source milk at the producer price differential with any applicable

location adjustment at the plant from which the milk was shipped

deducted from the handler's value of milk.

The amendments to order language accompanying this decision are

based on the current language of the five orders, which include any

changes to the orders made necessary by the two national amendatory

proceedings (Class II pricing and the M-W replacement) that were

completed in March and April 1995.

A number of the handlers who filed comments on the recommended

decision expressed a desire for additional time between approval of the

final decision and the effective date of the amendments to allow the

industry affected by the order amendments to make a more orderly

transition to the new payment system and conduct the necessary

informational meetings. They expressed a need for caution and

gradualism in effecting the proposed ``revolutionary'' changes in the

historic method of pricing milk.

The request for additional time to implement the changes that will

be necessary in computer programs, administrative systems and

laboratory arrangements is reasonable, and should be accommodated.

Accordingly, there will be a longer-than-usual interval between

approval of the orders as amended and the effective date of the final

order.

Rulings on Proposed Findings and Conclusions

Briefs and proposed findings and conclusions were filed on behalf

of certain interested parties. These briefs, proposed findings and

conclusions and the evidence in the record were considered in making

the findings and conclusions set forth above. To the extent that the

suggested findings and conclusions filed by interested parties are

inconsistent with the findings and conclusions set forth herein, the

requests to make such findings or reach such conclusions are denied for

the reasons previously stated in this decision.

General Findings

The findings and determinations hereinafter set forth supplement

those that were made when the Chicago Regional and certain other orders

were first issued and when they were amended. The previous findings and

determinations are hereby ratified and confirmed, except where they may

conflict with those set forth herein.

(a) The tentative marketing agreements and the orders, as hereby

proposed to be amended, and all of the terms and conditions thereof,

will tend to effectuate the declared policy of the Act;

(b) The parity prices of milk as determined pursuant to section 2

of the Act are not reasonable in view of the price of feeds, available

supplies of feeds, and other economic conditions which affect market

supply and demand for milk in the marketing area, and the minimum

prices specified in the tentative marketing agreements and the orders,

as hereby proposed to be amended, are such prices as will reflect the

aforesaid factors, insure a sufficient quantity of pure and wholesome

milk, and be in the public interest; and

(c) The tentative marketing agreements and the orders, as hereby

proposed to be amended, will regulate the handling of milk in the same

manner as, and will be applicable only to persons in the respective

classes of industrial and commercial activity specified in, marketing

agreements upon which a hearing has been held.

Rulings on Exceptions

In arriving at the findings and conclusions, and the regulatory

provisions of this decision, each of the exceptions received was

carefully and fully considered in conjunction with the record evidence.

To the extent that the findings and conclusions and the regulatory

provisions of this decision are at variance with any of the exceptions,

such exceptions are hereby overruled for the reasons previously stated

in this decision.

Marketing Agreement and Order

Annexed hereto and made a part hereof are two documents, a

Marketing Agreement regulating the handling of milk, and an Order

amending the orders regulating the handling of milk in the Chicago

Regional and certain other marketing areas, which have been decided

upon as the detailed and appropriate means of effectuating the

foregoing conclusions.

It is hereby ordered that this entire decision and the two

documents annexed hereto be published in the Federal Register.

[[Page 41852]]

Determination of Producer Approval and Representative Period

December 1994 is hereby determined to be the representative period

for the purpose of ascertaining whether the issuance of the orders, as

amended and as hereby proposed to be amended, regulating the handling

of milk in the Chicago Regional and certain other marketing areas is

approved or favored by producers, as defined under the terms of the

orders (as amended and as hereby proposed to be amended), who during

such representative period were engaged in the production of milk for

sale within the aforesaid marketing areas.

List of Subjects in 7 CFR Parts 1030, 1065, 1068, 1076 and 1079

Milk marketing orders.

Dated: August 3, 1995.

Patricia Jensen,

Acting Assistant Secretary, Marketing and Regulatory Programs.

Order Amending the Orders Regulating the Handling of Milk in the

Chicago Regional and Certain Other Marketing Areas

(This order shall not become effective unless and until the

requirements of Sec. 900.14 of the rules of practice and procedure

governing proceedings to formulate marketing agreements and marketing

orders have been met.)

Findings and Determinations

The findings and determinations hereinafter set forth supplement

those that were made when the orders were first issued and when they

were amended. The previous findings and determinations are hereby

ratified and confirmed, except where they may conflict with those set

forth herein.

(a) Findings. A public hearing was held upon certain proposed

amendments to the tentative marketing agreement and to the orders

regulating the handling of milk in the Chicago Regional and certain

other 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 and procedure (7

CFR part 900).

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

record thereof, it is found that:

(1) The said orders as hereby amended, and all of the terms and

conditions thereof, will tend to effectuate the declared policy of the

Act;

(2) The parity prices of milk, as determined pursuant to section 2

of the Act, are not reasonable in view of the price of feeds, available

supplies of feeds, and other economic conditions which affect market

supply and demand for milk in the aforesaid marketing areas. The

minimum prices specified in the orders as hereby amended are such

prices as will reflect the aforesaid factors, insure a sufficient

quantity of pure and wholesome milk, and be in the public interest; and

(3) The said orders as hereby amended regulate the handling of milk

in the same manner as, and is applicable only to persons in the

respective classes of industrial or commercial activity specified in,

marketing agreements upon which a hearing has been held.

Order Relative to Handling

It is therefore ordered, that on and after the effective date

hereof, the handling of milk in the Chicago Regional and certain other

marketing areas shall be in conformity to and in compliance with the

terms and conditions of the order, as amended, and as hereby amended,

as follows:

The provisions of the proposed marketing agreement and order

amending the orders contained in the recommended decision issued by the

Administrator, Agricultural Marketing Service, on October 25, 1994, and

published in the Federal Register on November 2, 1994 (59 FR 54952),

shall be and are the terms and provisions of this order, amending the

orders, and are set forth in full herein, subject to the following

modifications:

a. Changes in the treatment of somatic cell adjustments require

modifications of reporting requirements in Sec. 1030.30(a)(1) and the

corresponding sections of the other 4 orders.

b. Additional changes due to the treatment of the somatic cell

adjustment have been made in Secs. 1030.50(l), 1030.53(i),

1030.60(a)(6), 1030.61(a)(2), 1030.62(e), 1030.71(a)(2)(iv),

1030.73(c)(2)(vi), and the corresponding sections of the other 4

orders.

c. Changes in the computation of the Other Solids Price have been

made in Sec. 1030.50(k), and in the corresponding sections of the other

4 orders.

d. Changes for the purpose of more easily accommodating Class III-A

provisions have been made by adding Secs. 1030.50(g) and 1030.60(a)(7),

deleting 1030.61(a)(3), and making the same changes in the other 3

orders that have Class III-A provisions.

e. Changes for the purpose of conforming with changes to the orders

resulting from the Class II pricing proceeding have been made in

Secs. 1030.53(b) and the corresponding sections of the other 4 orders.

f. Changes for the purpose of conforming with changes to the orders

resulting from the M-W replacement proceeding have been made in

Sec. 1030.74 and the corresponding sections of the other 4 orders.

g. Changes for the purpose of clarifying the amended order have

been made in Secs. 1030.71(a)(2)(v) and 1030.75(b) and the

corresponding sections of those orders for which such changes are

appropriate.

h. Changes in the Upper Midwest reporting date, the date for

announcing the producer price differential and the date by which

payments must be made to the producer-settlement fund have been made in

Secs. 1068.30, 1068.62, 1068.71(a), 1068.85 and 1068.86.

Accordingly, this decision proposes 7 CFR chapter X be amended as

follows:

1. The authority citation for 7 CFR parts 1030, 1065, 1068, 1076

and 1079 continues to read as follows:

Authority: Secs. 1-19, 48 Stat. 31, as amended; 7 U.S.C. 601-

674.

PART 1030--MILK IN THE CHICAGO REGIONAL MARKETING AREA

1. Section 1030.30 is amended by revising paragraphs (a) and (c)

and removing paragraph (d), to read as follows:

Sec. 1030.30 Reports of receipts and utilization.

* * * * *

(a) Each handler described in Sec. 1030.9(a) shall report for each

plant of the handler (except if a handler requests and the request is

approved by the market administrator, a handler may file a consolidated

report for supply plants and a consolidated report for distributing

plants); and each handler described in Sec. 1030.9(b) and (c) shall

report the following information:

(1) Product pounds, pounds of butterfat, pounds of protein, pounds

of solids-not-fat other than protein (other solids), and the value of

the somatic cell adjustment contained in or represented by:

(i) Receipts of producer milk, including producer milk diverted by

the handler from the pool plant to other plants; and

(ii) Receipts of milk from handlers described in Sec. 1030.9(c).

(2) Product pounds and pounds of butterfat contained in:

(i) Receipts by transfer or diversion of bulk fluid milk products

from pool plants, including a separate statement of the net receipts

from each supply plant computed pursuant to Sec. 1030.7(b)(4);

(ii) Receipts of fluid milk products not included in paragraph

(a)(1) or (a)(2)(i)

[[Page 41853]]

of this section and bulk fluid cream products from any source;

(iii) Receipts of other source milk; and

(iv) Inventories at the beginning and end of the month of fluid

milk products and products specified in Sec. 1030.40(b)(1).

(3) The utilization or disposition of all milk, filled milk, and

milk products required to be reported pursuant to this paragraph.

(4) Such other information with respect to the receipts and

utilization of skim milk, butterfat, milk protein, other nonfat solids,

and somatic cell information, as the market administrator may

prescribe.

* * * * *

(c) Each handler not specified in paragraphs (a) and (b) of this

section shall report with respect to its receipts and utilization of

milk, filled milk, and milk products in such manner as the market

administrator may prescribe.

2. Section 1030.31 is amended by revising paragraph (a) to read as

follows:

Sec. 1030.31 Payroll reports.

(a) On or before the 25th day after the end of each month, each

handler described in Sec. 1030.9(a), (b), and (c) shall report to the

market administrator its producer payroll for such month, in the detail

prescribed by the market administrator, showing for each producer the

information specified in Sec. 1030.73(e).

* * * * *

3. Section 1030.50 is amended by revising the section heading,

introductory text and paragraph (a), and adding paragraphs (e) through

(l) to read as follows:

Sec. 1030.50 Class and component prices.

Subject to the provisions of Sec. 1030.52, the class prices per

hundredweight of milk containing 3.5 percent butterfat and the

component prices for the month shall be as follows:

(a) Class I price. The Class I price for the month per

hundredweight of milk containing 3.5 percent butterfat shall be the

basic formula price for the second preceding month plus $1.40.

* * * * *

(e) Class I differential price. The Class I differential price

shall be the difference between the current month's Class I and Class

III prices (this price may be negative).

(f) Class II differential price. The Class II differential price

shall be the difference between the current month's Class II and Class

III prices (this price may be negative).

(g) Class III-A differential price. The Class III-A differential

price shall be the difference between the current month's Class III and

Class III-A prices (this price may be negative).

(h) Skim milk price. The skim milk price per hundredweight, rounded

to the nearest cent, shall be the Class III price less an amount

computed by multiplying the butterfat differential by 35.

(i) Butterfat price. The butterfat price per pound, rounded to the

nearest one-hundredth cent, shall be the Class III price plus an amount

computed by multiplying the butterfat differential by 965 and dividing

the resulting amount by one hundred.

(j) Protein price. The protein price per pound, rounded to the

nearest one-hundredth cent, shall be 1.32 times the average monthly

price per pound for 40-pound block Cheddar cheese on the National

Cheese Exchange as reported by the Department.

(k) Other solids price. Other solids are herein defined as solids-

not-fat other than protein. The other solids price per pound, rounded

to the nearest one-hundredth cent, shall be the basic formula price at

test less the average butterfat test of the basic formula price as

reported by the Department times the butterfat price, less the average

protein test of the basic formula price as reported by the Department

for the month times the protein price, and dividing the resulting

amount by the average other solids test of the basic formula price as

reported by the Department. If the resulting price is less than zero,

then the protein price will be reduced so that the other solids price

equals zero.

(l) Somatic cell adjustment. (1) The somatic cell adjustment rate

per 1,000 somatic cells, rounded to five decimal places, shall be

computed by multiplying .0005 times the monthly cheddar cheese price as

defined in paragraph (j) of this section.

(2) The somatic cell adjustment, per hundredweight, shall be

determined by subtracting from 350 the somatic cell count (in

thousands) of the milk, multiplying the difference by the somatic cell

adjustment rate, and rounding to the nearest full cent.

4. Section 1030.53, including the section heading, is revised to

read as follows:

Sec. 1030.53 Announcement of class and component prices.

On or before the 5th day of the month, the market administrator

shall announce the following prices:

(a) The Class I price for the following month;

(b) The Class II price for the following month;

(c) The Class III price for the preceding month;

(d) The Class III-A price for the preceding month;

(e) The skim milk price for the preceding month;

(f) The butterfat price for the preceding month;

(g) The protein price for the preceding month;

(h) The other solids price for the preceding month;

(i) The somatic cell adjustment rate for the preceding month; and

(j) The butterfat differential for the preceding month.

5. The section heading in Sec. 1030.60 and the undesignated

centerheading preceding it, the introductory text, and paragraphs (a)

and (f) are revised to read as follows:

Producer Price Differential

Sec. 1030.60 Handler's value of milk.

For the purpose of computing a handler's obligation for producer

milk, the market administrator shall determine for each month the value

of milk of each handler described in Sec. 1030.9(a), (b), and (c), as

follows:

(a) Calculate the following values:

(1) Multiply the total hundredweight of producer milk in Class I as

determined pursuant to Sec. 1030.44(c) by the Class I differential

price for the month;

(2) Add an amount obtained by multiplying the total hundredweight

of producer milk in Class II as determined pursuant to Sec. 1030.44(c)

by the Class II differential price for the month;

(3) Add an amount obtained by multiplying the hundredweight of skim

milk in Class I as determined pursuant to Sec. 1030.44(a) by the skim

milk price;

(4) Add an amount obtained by multiplying the pounds of skim milk

in Class II and Class III as determined pursuant to Sec. 1030.44(a) by

the average protein content of producer skim milk received by the

handler, and multiplying the resulting pounds of protein by the protein

price;

(5) Add an amount obtained by multiplying the pounds of skim milk

in Class II and Class III as determined pursuant to Sec. 1030.44(a) by

the average other solids content of producer skim milk received by the

handler, and multiplying the resulting pounds of other solids by the

other solids price;

(6) Add an adjustment for somatic cell content determined by

multiplying the value reported pursuant to Sec. 1030.30(a)(1) by the

percentage of the total producer milk allocated pursuant to

Sec. 1030.44(c) that is allocated to Class II and Class III; and

[[Page 41854]]

(7) Add an amount obtained by multiplying the total hundredweight

of producer milk eligible to be priced as Class III-A by the Class III-

A differential price for the month.

* * * * *

(f) Add the amount obtained from multiplying the Class I

differential price applicable at the location of the nearest

unregulated supply plants from which an equivalent volume was received

by the pounds of skim milk and butterfat in receipts of concentrated

fluid milk products assigned to Class I pursuant to Sec. 1030.43(d) and

Sec. 1030.44(a)(7)(i) and the pounds of skim milk and butterfat

subtracted from Class I pursuant to Sec. 1030.44(a)(11) and the

corresponding steps of Sec. 1030.44(b), excluding such skim milk and

butterfat in receipts of bulk fluid milk products from an unregulated

supply plant to the extent that an equivalent amount of skim milk or

butterfat disposed of to such plant by handlers fully regulated under

any Federal milk order is classified and priced as Class I milk and is

not used as an offset for any other payment obligation under any order;

* * * * *

6. Section 1030.61 is amended by revising the section heading,

introductory text, and paragraph (a) to read as follows:

Sec. 1030.61 Producer price differential.

For each month the market administrator shall compute a producer

price differential per hundredweight for Zone 1. If the unreserved cash

balance in the producer settlement fund to be included in the

computation is less than 2 cents per hundredweight of producer milk on

all reports, the report of any handler who has not made the payments

required pursuant to Sec. 1030.71 for the preceding month shall not be

included in the computation of the producer price differential. The

report of such handler shall not be included in the computation for

succeeding months until the handler has made full payment of

outstanding monthly obligations. Subject to the aforementioned

conditions, the market administrator shall compute the producer price

differential in the following manner:

(a) Combine into one total for all handlers:

(1) The values computed pursuant to Sec. 1030.60(a)(1), (a)(2),

(a)(7), and (b) through (k) for all handlers; and

(2) Add values computed pursuant to Sec. 1030.60(a)(3), (a)(4),

(a)(5) and (a)(6); and subtract the values obtained by multiplying the

handlers' total pounds of protein and total pounds of other solids

contained in such milk by their respective prices, and the total value

of the somatic cell adjustment.

* * * * *

7. Section 1030.62 is revised to read as follows:

Sec. 1030.62 Announcement of producer prices.

On or before the 14th day after the end of each month, the market

administrator shall announce the following prices and information:

(a) The producer price differential;

(b) The protein price;

(c) The other solids price;

(d) The butterfat price;

(e) The somatic cell adjustment rate:

(f) The average butterfat, protein and other solids content of

producer milk; and

(g) The statistical uniform price for milk containing 3.5 percent

butterfat, computed by combining the Class III price and the producer

price differential.

8. Section 1030.71 is amended by revising paragraph (a)(2) to read

as follows:

Sec. 1030.71 Payments to the producer-settlement fund.

(a) * * *

(2) The sum of:

(i) An amount obtained by multiplying the total hundredweight of

producer milk as determined pursuant to Sec. 1030.44(c) by the producer

price differential as adjusted pursuant to Sec. 1030.75;

(ii) An amount obtained by multiplying the total pounds of protein

contained in producer milk by the protein price;

(iii) An amount obtained by multiplying the total pounds of other

solids contained in producer milk by the other solids price;

(iv) The total value of the somatic cell adjustment to producer

milk; and

(v) An amount obtained

This text is long and has been trimmed here. Open the source document for the complete record.